United States: Securities Update - March 2014


By Brian J. Lynch and Kelly D. Martin

The SEC Staff Chooses to Propose Reform of Regulation S-K for all Public Companies Over Simplification for Emerging Growth Company Offerings

In December 2013, the Staff of the Securities and Exchange Commission's Division of Corporation Finance issued to Congress its "Report on Review of Disclosure Requirements in Regulation S-K" (the S-K Study) that originally was mandated by the JOBS Act. The S-K Study can be found at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.

The S-K Study went beyond the JOBS Act mandate, which tasked the Staff with determining how Regulation S-K requirements "can be updated to modernize and simplify the registration process and reduce the costs and other burdens associated with these requirements for issuers who are emerging growth companies." (emphasis added). The Staff instead focused its proposed reform efforts on virtually every aspect of disclosure affecting all public companies, rather than focusing attention solely on the registration process for emerging growth companies (EGCs). The Staff noted in its report that it "believes that a comprehensive inventory of the Commission's disclosure regulations that identifies the origin and purpose of existing disclosure requirements and sets forth the history of updates to those requirements is an essential first step in formulating recommendations with respect to modernizing and simplifying disclosure."

Further Market Input and Economic Analysis are Required

The Staff concluded that it requires more information from market participants and further economic analysis before specific S-K Study recommendations can be formulated. However, it did identify certain key principles and objectives to be considered for disclosure reform, including:

  • "Improving and maintaining the informativeness of disclosure to existing security holders, potential investors and the marketplace . . ."
  • "Maintenance of the Commission's ability to conduct an effective enforcement program and deter fraud . . ." and
  • "... maintaining investor confidence in the reliability of public company information, in order to, among other things, encourage capital formation."

A potential framework for change could involve Staff consideration of the historical objectives of a given rule, which would be evaluated in conjunction with:

  • Consideration of any specific disclosure gaps that have arisen since adoption;
  • Whether policy objectives or other conditions at adoption are still applicable;
  • Whether scaling back or eliminating disclosure requirements is appropriate; and
  • Whether the information provided by a given rule is already available outside of SEC filings on a non-discriminatory basis from reliable sources.

Specific EGC considerations that will be evaluated by the Staff include:

  • "The extent to which a given disclosure requirement entails high administrative and compliance costs . . ." and
  • "The extent to which disclosure of a company's proprietary information may have competitive or other economic costs . . ."

Potential Fundamental Changes

The Staff's preliminary suggestions for revisiting existing requirements are likely to focus on the following potential fundamental disclosure changes:

  • Emphasizing a principles-based approach as an overarching component of the disclosure framework, while preserving the benefits of a rules-based system, similar to the current rules and guidance for MD&A disclosure; and
  • Evaluating information delivery and presentation both through EDGAR and otherwise; such a potential approach could be premised on a somewhat novel disclosure framework consisting of a shift to:

    • A "core" disclosure or a "company profile" filing that would contain information that could change infrequently;
    • Periodic filings and current disclosure filings with information that changes from period to period; and
    • Transactional filings that have information relating to specific offerings or shareholder solicitations.

The Staff is also (1) considering ways to present information to improve readability and navigability of disclosure documents through the use of technology, including, for example, dynamic cross-referencing (such as hyperlinks), and (2) reevaluating quantitative thresholds of materiality incorporated into disclosure rules, including the express thresholds contained in disclosure of legal proceedings (S-K Item 103), related party transactions (S-K Item 404) and interests of experts and counsel (S-K Item 509).

What Does the Commission Think of the Staff's Study?

The S-K Study is technically the work-product of the Staff. In fact, the cover page of the study clearly discloses that the Commission expresses no view on the S-K Study. Despite this disclaimer, recent speeches by Commissioners suggest that the Staff and Commission are aligned on certain substantive materiality-based disclosure approaches set forth in the S-K Study. Speaking before the National Association of Corporate Directors Leadership Conference 2013 (the 2013 Leadership Speech), SEC Chair Mary Jo White explained:

I am raising the question here and internally at the SEC as to whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us. When disclosure gets to be "too much" or strays from its core purpose, it could lead to what some have called "information overload" ... The Supreme Court addressed this overload concern over 35 years ago in TSC Industries when it ... held that a fact is "material" if "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."

Citing Commission decision-making shortly prior to the TSC decision, Chair White concurred with the Commission's prior findings in Release No. 33-5627 that "disclosure should generally be tethered to the concept of materiality ..."

Will "Streamlining" Produce Less Disclosure, or Will "Less" Be More?

At face value, potential proposed changes incorporating a broader principles-based approach could result in greater disclosure challenges and burdens for issuers. For a further explanation of what "principles-based requirements" means, the Staff cited the Commission's 2003 MD&A Interpretive Release No. 33-8350 and emphasized that these types of

... requirements are intended to satisfy three principal objectives: (1) to provide a narrative explanation of a company ... that enables investors to see the company through the eyes of management, (2) to enhance the overall ... disclosure and provide the context within which ... information should be analyzed, and (3) to provide information about the quality of, and potential variability of, a company's earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.

A potential expansion of principles-based disclosure requirements could affect existing descriptions of material properties or asset classes. Rather than continuing to focus on real estate ownership and lease holdings, the Staff inquired whether a larger focus on intellectual property owned by third parties or service agreements with third parties are a more appropriate focus of disclosure, especially given the decline in brick and mortar assets for many public companies today as compared to when Regulation S-K was first adopted, in the early eighties. The Staff also indicated that principles-based approaches could be extended to securities offering disclosures (e.g., for use of proceeds, securities offered and offering expense disclosures) as well as securities information (e.g., disclosures concerning share dilution, overall shares available for future sale and shares reserved for issuance under option plans, warrants and equity linked securities).

The Staff also identified (1) a potential systematic review of Regulation S-K with Regulation S-X, which governs the form and content of financial statements presented in an SEC filing, and (2) a potential re-evaluation of risk-related disclosures, including the possibility of rewriting and consolidating disclosures concerning risk factors, legal proceedings, qualitative and quantitative market risk and potentially other risk-related disclosures.

If an expanded principles-based approach is advanced through new rulemaking initiatives, ideally the Staff should concurrently reduce certain existing prescriptive, line-item disclosure requirements, including current requirements that Chair White indicated could be inconsistent with the reasonable investor materiality standards expressed in the TSC ruling. This type of balancing approach could, in fact, elicit more meaningful, company-specific disclosures for the benefit of investors. Ultimate disclosure reform success for the benefit of investors will depend on the total mix of changes. However, barring a meaningful streamlining of existing line-item requirements, it is possible that an enhanced principles-based approach may produce neither overall disclosure simplification for issuers nor a reduction in issuer costs and burdens.

If an overall more burdensome principles-based disclosure proposal surfaces following the S-K Study, without meaningful prescriptive rule streamlining, issuers and practitioners should petition Congress and provide comments in opposition to any such rulemaking proposal, since this burden would be excessive when layered on top of recent Dodd-Frank and Sarbanes Oxley disclosure obligations.

Variables That Could Affect the Relative Success of SEC S-K Reform

If the end result of the S-K Study is that disclosure reform primarily produces obligations that focus on matters that a reasonable shareholder would consider important in deciding how to invest, there is the potential for a net positive result. However, the wild card in this outcome is the body that directed the S-K Study in the first case – Congress. If Congress either embraces the Staff findings, or at least gives the Staff deference to propose rules based on the approach it laid out in the S-K Study, potential good could ensue. However, this is not a given. Quoting from the Commission's Release No. 33-5627 in her 2013 Leadership Speech, Chair White noted, "As a practical matter, it is impossible to provide every item of information that might be of interest to some investor in making investment and voting decisions." White also suggested, "In some cases, lengthy and complex disclosure may indeed be a direct result of the Commission's rules. Or, it may stem from legislative mandates."

In fact, any ultimate success in advancing the S-K Study may depend on the Staff's relative ability to have certain outdated requirements and "legislative mandates" streamlined out of the existing disclosure rules, particularly those that have little to do with what a reasonable investor would find useful in making an investment decision under the TSC disclosure framework. If public companies were to become obligated to provide more qualitative information and principles-based disclosures, it stands to reason that non-core prescriptive obligations (e.g., resource extraction and conflicts minerals requirements) and non-material obligations (e.g., CEO pay ratio disclosures) should be removed to promote the delivery of high-quality information to investors. This would further serve the purpose promoted by Chair White, to avoid an avalanche of useless investor information, or investor "overload."

On January 24, 2014, Commissioner Daniel M. Gallagher likewise emphasized that disclosure reform should be focused primarily on material investor-driven information. He also made the following observation regarding recent Congressionally-mandated disclosure obligations:

We must also recognize politically-motivated disclosure mandates as the ill-advised anomalies they are and, as an independent, bipartisan agency, express our opposition to the use of the securities disclosure regime to advance policy objectives unrelated to providing investors with information material to investment decisions.

Based on the logic of the Supreme Court decision in TSC and public statements of certain current members of the Commission, S-K disclosure obligations should, in fact, be more closely "tethered to the concept of materiality."

Will the S-K Study Keep JOBS Act Objectives in "Neutral" for Long?

While Vegas oddsmakers are likely to be too busy currently covering March Madness to quote "over and under" odds on a timetable for Regulation S-K reform, I would venture a bet, for the reasons discussed below, that a number 14 seed could win the NCAA basketball tournament before the comprehensive approach identified in the S-K Study is formally proposed and adopted.

It is notable that the Staff selected a comprehensive review for all issuers over a targeted review for EGC offerings, despite acknowledging that this approach would be far more time-consuming and tap resources across the entire Commission. This is surprising given recent history concerning Dodd-Frank rulemaking delays at the Commission that have been attributed to insufficient Staff resources. While current leadership at the Commission (Chair White and Corporation Finance Division Director Keith Higgins) may not be at direct fault for past delays, the fact remains that 60 SEC rules mandated by the Dodd-Frank Act still have yet to be completed as we approach the fourth anniversary of that Act's adoption.

As Commissioner Gallagher noted in a February 2014 speech at the annual "SEC Speaks" conference, "... if we simply put our heads down and rotely implement each and every remaining Dodd-Frank mandate, it would take us over five years even at an unprecedentedly aggressive rulemaking pace." Given this backlog, it really does not make sense to do a comprehensive review of Regulation S-K affecting all issuers. If that isn't enough already, it's fair to say that comprehensive Commission reform efforts in recent decades have either failed to get past preliminary conceptual stages or have sunk under the weight of considerable complexity or opposition (e.g., the "Aircraft Carrier Release").

Thus, barring an unexpected Cinderella effort by Congress to embrace the S-K Study and support the streamlining of non-core and non-material disclosure obligations, it is hard to be optimistic about fundamentally positive disclosure reforms being implemented as contemplated by the S-K Study. Given the complexities and potential for uphill opposition, it is fair to say that long-shots like 14 seeds and the S-K Study are a lot of fun to root for, but they rarely (if ever) succeed.

What Reforms Could Stand a Better Chance of Passing SEC and Congressional Review?

The JOBS Act requested recommendations to simplify the registration process and reduce the cost and complexity of the offering process for EGCs. Given the level of interest already expressed by Congress on this front, it would make more sense for the Staff to take the S-K Study out of neutral and jumpstart reform by focusing on certain aspects of the offering process already identified by the Staff in the S-K Study and advancing an offering-focused rulemaking proposal relative to EGCs only. This would be far less time-consuming than trying to (1) harmonize Regulation S-K and Regulation S-X (which would require additional input and buy-in from other constituencies, such as the FASB and the accounting profession); and (2) propose and adopt new disclosure rules for an extremely wide variety of applications beyond the offering process (e.g., ongoing reporting, shareholder communications, mergers and acquisitions, shareholder solicitations and governance).

Any new offering requirements adopted by the Commission for EGCs could be tested through the R&D laboratory of the Staff's principles-based review of, and comment process concerning, post-reform EGC registration statements. This testing ground could serve as a foundational basis to test new principles-based requirements against a dynamic group of EGC issuers and transactions. EGC IPO issuers would have the added benefit and flexibility of pursuing such offerings within the confines of confidential Staff reviews, as already permitted by the JOBS Act. Additional SEC consideration should be given to enabling all EGCs, and if appropriate smaller reporting companies, to elect to confidentially file all registration statements (i.e., follow-on offerings, secondary offerings and shelf offerings, not simply IPO filings) for a limited period of time (e.g., 12-18 months) after implementation of such new offering process rules.

This type of new approach could in fact be patterned after and build off of the past successes of the Staff in using its confidential and focused review processes to promote positive change (e.g., the Plain English Initiative). More importantly, this type of approach could advance two larger purposes. First, it could enable an additional jumpstart to accelerate EGC growth through a more streamlined and efficient offering process, rather than leaving EGCs to idle in neutral while waiting for comprehensive reform affecting all public companies across substantially all disclosure forums, as is currently proposed by the Staff. In addition, findings from EGC offering reform and subsequent Staff reviews of EGC registration statements could be used to further refine and define larger disclosure reform for all public companies. As a consequence, the first wave of EGC offering reform could serve as a foundation to enable the Staff, along with mature public companies, to chart a course for overall disclosure reform based upon Staff-tested principles-based disclosure practices that could be developed against the important backdrop of dynamic capital markets practices.


By Joseph C. Schoell

In Kahn v. M&F Worldwide Corp., --- A.3d ---, No. 334, 2013 (Del. March 14, 2014), the Delaware Supreme Court upheld the finding of the Delaware Court of Chancery that, in certain circumstances, a transaction with a controlling stockholder may be protected by the business judgment rule, if the transaction is approved and recommended by a special committee of independent directors and is subject to the approval of a majority of the minority of stockholders.


It is a fundamental principle of Delaware law that where a fiduciary engages in a self-dealing transaction, the fiduciary will be required to show that the transaction is "entirely fair." In the context of a merger of a Delaware corporation with a controlling stockholder, the principle requires that a controlling stockholder that effects a merger – for instance, a "going private" transaction where public stockholders are eliminated – must establish that the transaction is entirely fair to the corporation and the non-controlling stockholders. In contrast, a merger or other significant transaction with an unrelated third party is subject to the business judgment rule, and courts are loathe to second-guess the judgment of directors. "Entire fairness" encompasses components of "fair dealing" and "fair price" and can be a very demanding standard for a controlling stockholder to meet in litigation.

Two procedural devices are regularly used in interested stockholder transactions to establish the fairness of a deal. Corporations have appointed special committees of disinterested directors to negotiate with the controlling stockholder and pass upon deal terms. They also sometimes condition the deal on approval of a majority of stockholders not affiliated with a controlling stockholder (in shorthand, a "majority-of-the-minority" condition). When effectively used, either a special committee or a majority-of-the-minority condition has been held to shift the burden in litigation challenging the transaction. That is, a plaintiff challenging the transaction would need to prove it to be substantively unfair, instead of defendants being obliged to establish entire fairness.

While it had long been observed that either using a special negotiating committee or conditioning a transaction on a majority-of-the-minority approval could serve as evidence of procedural fairness, and might serve as a basis to shift the burden of persuasion to a plaintiff to establish that the transaction was substantively unfair, only recently have the Delaware courts confronted circumstances where a controlling stockholder transaction is conditioned at the outset on the use of both procedural devices. That is the issue decided in Kahn v. M&F Worldwide. The Supreme Court determined (as had the Court of Chancery) that effective use of both a special committee and majority-of-the-minority condition could justify the application of the business judgment rule. Stated differently, a transaction properly employing both procedural devices would be reviewed the same way that a third-party arm's length transaction is reviewed.

The M&F Worldwide Transaction

Prior to the merger at issue, MacAndrews & Forbes, Inc. (MacAndrews) owned approximately 43% of the outstanding shares of M&F Worldwide Corp. (MFW), a public company. MacAndrews was controlled by Ronald Perelman. In June 2011, MacAndrews proposed to purchase the outstanding MFW shares it did not own for $24 per share. MacAndrews' proposal expressly contemplated that a deal would be negotiated by a special committee of independent MFW directors and would be further conditioned upon the approval of a majority MFW stockholders not affiliated with MacAndrews.

The MFW board established a special committee of directors to negotiate a potential transaction. The special committee promptly retained independent legal counsel and an independent financial advisor to assist with the review and negotiation of the transaction and met eight times during the summer of 2011. The special committee's financial advisor found that MFW's shares had a value in the range of $15 to $45 per share, and thus MacAndrews' initial proposal was in a range that the committee's advisor deemed fair. In August 2011, the committee countered the MacAndrews' $24 per share proposal with a proposed price of $30 per share, and MacAndrews responded with a "best and final offer" of $25 per share. The committee accepted the $25 per share proposal on September 10, 2011. The merger closed in December 2011, having been approved by 65.4% of MFW stockholders unaffiliated with MacAndrews.

The Court of Chancery Decision

Stockholders brought claims challenging the merger in the Delaware Court of Chancery. In re MFW S'holders Litig., 67 A.3d 496 (Del. Ch. 2013). Following discovery, defendants moved for summary judgment and then-Chancellor Strine granted their motion. The Court of Chancery's decision focused on "a novel question of law" – "what standard of review should apply to a going private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority-of-the-minority vote...." The Court found that the business judgment rule should apply where both procedural devices are effectively used, subject to specific criteria. The Court of Chancery focused on the fact that allowing the possibility of business judgment review worked as a useful incentive for controlling stockholders to employ both procedural protections and effectively would give minority stockholders opportunities for transactions that closely resemble third party mergers. After exhaustively evaluating the record, the Court determined that the prerequisites for application of the business judgment rule were shown and granted summary judgment to defendants.

The Supreme Court's Analysis

On appeal, an en banc panel of the Delaware Supreme Court unanimously affirmed the Court of Chancery's grant of summary judgment, and explained the use of the "dual procedural protections" of an independent committee and majority-of-the-minority approval. Justice Holland rendered the Court's opinion. The Court largely adopted the business judgment rule standard, but made clear that the standard could be invoked only where the use of the protections is clearly effective, to the point where the effectiveness can be established, as a matter of law, in advance of trial.

The Court noted that the entire fairness standard is intentionally the highest standard of review in corporate law, and found that such a high standard is not required where a controlling stockholder "irrevocably and publicly disables itself from using its control to dictate the outcome of the negotiations and the shareholder vote..." Echoing the public policy incentives discussed at length by the Court of Chancery, the Supreme Court stated that the "dual procedural protection" structure optimally protects minority stockholders in controller buyouts." The Court recognized that the "ability to say no" both at the special committee level and at the stockholder level renders the transaction "fundamentally different" from a controlled transaction. The Court also observed that a dual protection structure would achieve a fair transaction price, inasmuch as an independent committee and the minority stockholders would review and pass upon the fairness of price.

The Court adopted a six-part test for invoking the business judgment rule for a transaction with a controlling stockholder:

To summarize our holding, in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.

(emphasis in original). Most notably, the Supreme Court left open the possibility that a court could accept evidence that the price is substantively unfair as a ground not to apply business judgment rule review.

The Supreme Court made clear that, even if a controlling stockholder is not irrevocably bound to establish the entire fairness of the transaction, it will be difficult for a controlling stockholder transaction to be judged under the lenient business judgment rule standard of review. If a plaintiff can allege "a reasonably conceivable set of facts showing that any or all of those [six] enumerated conditions did not exist," then the plaintiff's complaint will state a claim and the case will proceed to discovery. Further, if after discovery there remain triable issues concerning whether the factors required under the six-part analysis are demonstrated, the case will proceed to trial on an entire fairness review. Functionally, even where a controlling stockholder conditions a deal on both special committee approval and majority-of-the-minority approval, it may be difficult to prevail on a motion to dismiss. Moreover, where a claim can survive a motion to dismiss, the controlling stockholder and other defendants will be required to establish each of the six prerequisite elements (including that the special committee negotiated a "fair price") to avoid a trial under the entire fairness test. The Court observed that plaintiffs' complaint in MFW S'holders Litig. would have been sufficient to survive a motion to dismiss had it been brought. Among other things, plaintiffs alleged that: (i) the MacAndrews' offer was below metrics against which the deal should be judged, such as multiples of five times cash flow; (ii) commentators viewed MacAndrews' offer as "surprisingly low;" and (iii) MFW's stock was temporarily depressed due to specific market conditions.

Having explained the test for business judgment protection, the Court considered whether it had been satisfied on the record before the Court of Chancery. The Court affirmed the Court of Chancery's holding that the directors who served on MFW's special committee were independent, despite allegations that they had prior business relationships with MacAndrews or other Perelman affiliates.

The Court also affirmed that the MFW special committee was properly empowered. The committee had authority to, and did, engage its own legal and financial advisors to assist it with the transaction. Further, the committee was empowered to consider, negotiate and recommend a deal that was fair. It was not simply a committee formed to "evaluate" the deal. Most importantly, the committee had the power to "say no" to a MacAndrews-proposed transaction. Indeed, the authority to "say no" was underscored by MacAndrews' initial approach, wherein MacAndrews emphasized that it would only proceed with a transaction recommended by a special committee and if no transaction were recommended, MacAndrews would continue on as a long term investor in MFW.

The Court emphasized the fact that the deal approved was one that the directors deemed fair and one that was within the committee's financial advisor's suggested range of fair value. While the committee process increased the value of the proposed deal by only $1 per share (from $24 to $25) and the committee's advisor posited a fairness range including values well above $25, the Court recognized that the committee carefully considered MFW's business and prospects, including significant declines and projected declines in some key business units. The Court also held that the majority of stockholders unaffiliated with MacAndrews approved the deal in a fair vote. Among other things, the proxy statement on the merger fully disclosed the negotiating history and the committee's $30 counter offer.

The Court concluded that defendants established that the merger transaction had been approved by an independent and empowered special committee and an uncoerced informed vote of MFW's minority stockholders; the Court further concluded that those conditions had been "undisputably established prior to trial." (emphasis in original). Therefore, the Court held it was appropriate for the Court of Chancery to apply the business judgment rule and affirmed the grant of summary judgment to defendants.


The Supreme Court's affirmance in Kahn v. M&F Worldwide Corp. is a useful decision for any corporation considering a major transaction with a controlling stockholder. The Court has sanctioned the availability of a business judgment rule test in certain types of transactions with controlling stockholders. The Supreme Court's formulation of the six-part standard, however, leaves open a judge's ability to review a transaction for substantive (and arguably subjective) notions of fairness in determining what standard of review will be used. Its decision also emphasizes that high standards will be applied and suggests that business judgment rule review will be difficult to achieve. Regardless of whether a transaction can meet the demanding requirements for business judgment rule review, the case illustrates the types of procedural devices that can establish the fairness of a transaction with a controlling stockholder.


By Kimberly K. Rubel and Jennifer J. Card

ISS has released a modified governance ratings methodology called QuickScore 2.0. QuickScore analyzes and quantifies corporate governance under four pillars: board structure; shareholder rights; executive compensation; and audit. Companies are assessed a numerical rating from one to ten among each of the four pillars and are also given a comprehensive numerical rating. A score of one indicates lower governance risk, and a score of ten indicates higher governance risk. QuickScore reports are included in ISS proxy reports and are available on Yahoo! Finance. In a change from its past practice, ISS is now updating company governance ratings on an ongoing basis based on company disclosure.

QuickScore 2.0 includes a number of new governance factors, listed below:

  1. Director Tenure: QuickScore now considers tenure of more than nine years to be excessive because, in ISS's view, extended tenure may compromise a director's independence from management.
  2. Director Approval Rates: QuickScore considers the percentage of directors who received less than 95% shareholder approval.
  3. Director Compensation: QuickScore collects data on the prior year's average outside director's pay (based on total compensation reported for each director in the proxy statement) as a multiple of median pay of an ISS-determined comparison group for the same period.
  4. Pay for Performance: QuickScore considers the relative degree of alignment between a company's annualized three-year pay percentile rank, relative to peers, and its three-year annualized total shareholder return rank, relative to peers.
  5. Say-on-Pay: QuickScore considers the level of shareholder support on a company's most recent say-on-pay proposal as compared to an industry level index.

ISS is also collecting data on the number of directors on the board, the number and percentage of women on the board and the number of audit committee financial experts, although these factors do not impact the governance scoring model and are included for informational purposes only.

QuickScore covers 4,100 companies worldwide, including companies in the U.S. Russell 3000 and in certain global markets. Companies covered by QuickScore can review, verify and provide feedback on the information underlying their numerical ratings through ISS's online platform. It is important to note that data verification is not available during the period between the filing of a company's proxy statement and ISS's publication of its proxy analysis for a company's annual meeting, so data should be verified at least annually as part of a company's preparation for its annual meeting and before filing its proxy statement. In addition, companies may consider evaluating their governance practices, particularly in areas where they are ranked a higher governance risk, to determine whether changes may be desirable to conform to best practices or whether enhanced disclosure would be helpful to highlight existing governance practices.


By Elizabeth A. Diffley

Listed Company Certifications

NASDAQ is requiring that listed companies submit a Compensation Committee Certification to certify compliance with the amended compensation committee requirements in NASDAQ Listing Rule 5605(d) and IM-5605-6. The certification must be submitted to NASDAQ no later than 30 days after a listed company's first annual shareholder meeting occurring after January 15, 2014, or October 31, 2014, whichever is earlier. Listed companies must login to NASDAQ's Listing Center to complete the certification online. A preview version of the form can be viewed at:

The New York Stock Exchange has updated its Annual Written Affirmation form to reflect its new compensation committee independence requirements. Section 303A of the NYSE Listed Company manual requires domestic companies to submit the affirmation annually within 30 days of its annual shareholder meeting. The form is available at: https://usequities.nyx.com/sites/usequities.nyx.com/files/final_domestic_company_annual_written_affirmation_1_16_14_0.pdf

Form SD and Conflict Minerals Reports: Deadline for First Reports Fast Approaching

It's been almost two years since the Securities and Exchange Commission adopted the Conflict Minerals Rule, Rule 13p-1 of the Securities Exchange Act of 1934, as amended, to require companies to publicly disclose their use of conflict minerals (including tantalum, tin, gold, or tungsten) that originated in the Democratic Republic of the Congo or an adjoining country (Covered Countries). Now the deadline to file the first reports is fast approaching: June 2, 2014.

As companies focus on filing their first reports for 2013, it is important to remember that the Conflict Minerals Rule requires reporting on a calendar year basis, meaning the 2014 compliance year has started. Accordingly, we encourage public companies not to lose focus on 2014 and instead continue look for ways to improve the efficiency of their process and the effectiveness of their compliance programs. Though many companies should be able to make use of the temporary status "DRC conflict undeterminable" for the reports they file in 2014 and 2015 (and smaller reporting companies will have two more years to benefit from this status) and therefore not need to obtain an independent private sector audit (IPSA) for those reports, now is the time to start preparing for expiration of this status and potential future IPSAs. The American Institute of Certified Public Accountants (AICPA) has published guidance for certified public accountants performing IPSAs (available on its website: http://www.aicpa.org/interestareas/frc/pages/aicpaconflictmineralsresources.aspx) and the Auditing Roundtable has also provided guidance, which it indicates was developed particularly for those conducting IPSA audits in the environmental, health, safety, sustainability and social responsibility auditing areas and is meant to be consistent with the AICPA guidance (available on its website: http://www.auditing-roundtable.org/conflict-mineral-guidance).

For more information about the specific requirements of the Conflict Minerals Rule and the disclosure requirements for Form SD and, if applicable, the Conflict Minerals Report exhibit to Form SD, please review our previous alerts on this topic. We previously discussed the adoption of the Conflict Minerals Rule in a September 2012 Client Alert (available at: http://www.drinkerbiddle.com/resources/publications/2012/SEC-Adopts-Final-Conflict-Mineral-Rules) and FAQs released by the Staff of the Commission's Division of Corporation Finance in a June 2013 Securities Update (available at: http://www.drinkerbiddle.com/resources/publications/2013/Securities-Update-June-2013).

New COSO Framework

In May 2013, the Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of the Internal Control-Integrated Framework and announced that it will consider the older framework from 1992 superseded as of December 15, 2014. The new framework is intended to assist companies in the design and implementation of controls, broaden the application of internal control, and aid assessment of effectiveness of controls. Members of the Staff of the Securities and Exchange Commission's Division of Corporation Finance have publicly stated that they will monitor the transition to use of the new model and also indicated that companies using the 1992 framework after December 15, 2014 may receive Staff comments inquiring whether continued use of the 1992 framework satisfies the requirements to use a suitable, recognized framework to assess the effectiveness of the company's internal control over financial reporting (ICFR).

More generally, the Commission and the Public Company Accounting Oversight Board have identified management's assessments of ICFR and audits of ICFR as priorities in 2014. Accordingly, public companies, and their boards of directors and audit committees, should be focused on the review of the design of the internal controls systems and transitioning to the new COSO framework during 2014. Further, companies are reminded that they are required to disclose any material changes in ICFR in each quarterly and annual report.


Drinker Biddle is proud to announce the launch of SECurities Law Perspectives, a blog created to provide timely and insightful analyses on noteworthy trends in SEC enforcement and regulatory activity. This blog is led by partners Mary Hansen and William Carr. Mary is a former Assistant Director in the Division of Enforcement of the U.S. Securities & Exchange Commission and William focuses his practice on regulatory investigations and enforcement actions, including by the SEC, the CFTC, and the PCAOB.

In the wake of the 2008 financial crisis, an increased regulatory regime established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and a reenergized and empowered SEC, has had a great effect on the oversight and supervision of financial institutions, public and private corporations, and directors, officers and employees of those entities. Companies are experiencing a surge of regulatory investigations and enforcement proceedings, criminal sanctions, and private civil actions. Our team has substantial experience handling these regulatory, criminal, and civil actions, and we actively monitor enforcement activity in these areas. SECurities Law Perspectives will report on important cases, developments, and trends that are most likely to have an impact on business and individual liability.

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.

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Kelly D. Martin
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Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.