Debevoise Digest: Securities Law Synopsis – October 2023

October 2023

SEC Amends Section 13 Reporting Requirements

On October 10, 2023, the Securities and Exchange Commission (“SEC”) adopted significant amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. The amendments are intended to update reporting requirements for modern markets and reduce information asymmetries between large shareholders and the public. Significant amendments and related guidance from the SEC in the adopting release include:

  • generally accelerating the filing deadlines for Schedule 13D and Schedule 13G and altering the amendment triggers for Schedule 13G filings;
  • clarifying the disclosure requirements for derivative securities, including cash-settled derivative instruments;
  • describing the circumstances under which two or more persons have formed a “group” that would be subject to the beneficial ownership reporting requirements; and
  • requiring Schedules 13D and 13G to be filed using a structured, machine-readable data language.

The amendments will become effective 90 days following publication of the adopting release in the Federal Register; however, the SEC’s guidance included in the adopting release has immediate effect. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the new structured data requirement for Schedules 13D and 13G will be required beginning on December 18, 2024 (with voluntary compliance permitted beginning December 18, 2023).

As a result of the SEC’s adopted amendments, investors will be subject to earlier initial Schedule 13G and Schedule 13D filing deadlines and, in certain circumstances, more frequent amendments to those filings. Market participants should evaluate their internal policies and procedures to ensure that systems and controls are in place to facilitate compliance with the new reporting requirements.

For more information, see Debevoise Insights and the adopting release.

NYSE Proposes Relaxed Shareholder Approval Requirements for Sales to Substantial Security Holders

On September 26, 2023, the New York Stock Exchange (the “NYSE”) proposed an amendment to the requirements for when listed companies are obligated to obtain shareholder approval for the sale of securities to a “substantial” (5% or more) security holder of the company.

Currently, Section 312.03(b)(i) of the NYSE’s Listed Company Manual requires shareholder approval before a company issues common stock to a director, officer or substantial security holder of the company if the number of shares of common stock issued exceeds either one percent of the shares of common stock or one percent of the voting power outstanding prior to the issuance (subject to an exception for cash sales that meet a minimum price requirement). The proposed amendment to Section 312.03(b)(i) would limit the application of the requirement to nonpassive parties who are part of a listed company’s “control group” (as defined in Exchange Act Rule 13d-5 and disclosed on Form 13D or 13G).

As a result of this proposed amendment, companies would be permitted to raise capital from their passive substantial stockholders without the delay and costs imposed by a shareholder vote. Comments on the proposed amendment are due by November 18, 2023.

For more information, see Debevoise Insights and the proposed amendment.

SEC Chair Testifies on the Climate Disclosure Rule

On September 27, 2023, Chair of the SEC, Gary Gensler, testified before the U.S. House Committee on Financial Services regarding several issues, including feedback to the proposed climate disclosure rule. Chair Gensler noted that the SEC received many comments concerned about the inclusion of Scope 3 emissions within the proposed climate disclosure rule. Scope 3 emissions result from an organization’s value chain and do not include emissions arising from activities of assets owned or controlled by the organization. Chair Gensler noted that tracking and measuring of Scope 3 emissions is less developed and data may not be reliable.

Companies also raised concerns on how the rules will affect small businesses. Although the draft rule only applies to public companies and, as currently drafted, will exempt smaller companies from the Scope 3 reporting obligation, these companies may be pressured into gathering and providing emissions data to suppliers or purchasers that have to report on the emissions of the whole value chain. As a result, Chair Gensler confirmed that the SEC is closely examining its proposal with respect to Scope 3 emissions disclosures, but did not provide an update on when the final climate disclosure rule will be released.

For more information, see Debevoise Insights from April 2022, March 2023 and earlier this month. Chair Gensler’s testimony may be found here.

SDNY Denies SEC’s Motion to Immediately Appeal Portions of Prior Decision on Cryptocurrency

On October 3, 2023, the U.S. District Court for the Southern District of New York denied the SEC’s attempt to immediately appeal the ruling of SEC v. Ripple Labs, Inc. On July 13, 2023, Judge Analisa Torres held that the XRP tokens sold by Ripple Labs, Inc. are not inherently securities but qualified as securities when sold to institutional investors (as a sale of an investment contract). However, Judge Torres also held that Ripple’s XRP tokens were not securities when sold to retail investors or provided to Ripple’s employees as payment for services.

The SEC moved to certify for an interlocutory appeal on the holdings that Ripple’s sales to retail investors could not lead investors to reasonably expect profits from the efforts of others, and that Ripple’s payment of XRP for services was legally insufficient to constitute an investment of money. Judge Torres found that the SEC did not present a pure question of law that the appellate court could decide quickly and cleanly without having to study the record. The case is set for trial on April 23, 2024.

For more information, see the Order and the August Debevoise Digest.

SEC Issues Additional Interpretative Guidance on Pay-versus-Performance Disclosures

On September 27, 2023, the staff of the Division of Corporation Finance of the SEC released nine additional Compliance & Disclosure Interpretations (“C&DIs”) regarding the pay-versus-performance disclosures required by Item 402(v) of Regulation S-K. The new C&DIs interpret several provisions related to equity award calculations required for determining “compensation actually paid” under the pay-versus-performance rules, including the treatment of awards granted prior to an IPO or other equity restructurings, the meaning of “vesting” and the appropriate valuation techniques:

  • Awards Granted Prior to an IPO – Changes in the fair value of a company’s stock and option awards granted before a Company’s IPO should be based on their fair value at the end of the prior fiscal year, not the IPO date.
  • Awards Modified in Connection with an Equity Restructuring – Outstanding, unvested stock and option awards granted prior to an equity restructuring, and modified or retained following such transaction, should be included in the calculation of compensation actually paid.
  • Retirement Eligibility as the Sole Vesting Condition for Stock or Option Awards – If retirement eligibility is the only vesting condition for a stock or option award, the vesting condition will be considered satisfied once the holder becomes retirement eligible. However, if the award has additional substantive conditions, those other conditions must be considered to determine when an award has vested.
  • Compensation Committee Certification as a Vesting Condition – In the event that certification by an entity, such as the compensation committee, is an additional substantive condition for the vesting of an award (e.g., if the employee must be employed on the date of certification to vest in the award), then such award will not be considered vested until such certification occurs, even if performance conditions are earlier met.
  • Market Conditions as a Vesting Condition – Market conditions should be reflected in the fair value calculation of share-based awards with such a condition. In addition, with respect to the table required by Item 402(v)(1) of Regulation S-K, the market conditions should be considered when determining whether the vesting conditions of a share-based award have been met.
  • Awards Failing to Meet Vesting Conditions – If an award does not meet the vesting conditions in a given year because of performance or market conditions, and such award remains outstanding, then such award should not have its fair value subtracted when calculating compensation actually paid.
  • Multiple Valuation Techniques – A registrant may use a valuation technique that differs from the one used to determine the grant date fair value of options or other equity-based awards so long as the valuation technique is permitted under FASB ASC topic 718, including meeting the criteria for a valuation technique and the fair value measurement objective. Disclosure is required under Item 402(v)(4) of a change in the valuation technique from the grant and the reason for the change.
  • No Valuation Not Prescribed by GAAP – A registrant may not compute the fair value of stock and options awards using a methodology inconsistent with FASB ASC Topic 718.
  • Confidentiality Protection of Performance Conditions – A registrant is not required to disclose detailed quantitative or qualitative performance conditions for awards under Item 402(v)(4) to the extent such information is subject to the confidentiality protections of Instruction 4 to Item 402(b). However, the registrant is required to provide as much information as possible that is responsive to Item 402(v)(4), such as the range of outcomes or how a performance condition impacted an awards fair value. In addition, a registrant should discuss how material differences in the assumption affect how difficult it will be for the executive or how likely it will be for the registrant to achieve the undisclosed target levels.

For more information, including the text of the new C&DIs, see Debevoise Insights.

UK Taskforces Established to Increase UK Competitiveness

The UK government has continued its push to reform the regulatory framework of the UK capital markets regime to make UK markets more attractive and competitive in global public markets. This has included the UK Financial Conduct Authority’s ongoing review of the UK’s primary listing regime and the publication of draft legislation to the UK’s updated prospectus regime. More recently, the UK government has set up two taskforces to focus on potential developments on the digitization of shareholdings and the settlement process for the trading of publicly-listed securities.

The Digitisation Taskforce is aiming to reduce reliance on physical paperwork (namely, share certificates) and ensure that beneficial owners of shares are able to exercise the rights held by intermediaries on their behalf. The Taskforce has received positive feedback on their interim report. Feedback on this report was accepted up until the end of September, with a final report due in Q1 2024 and legislation expected to be in place by Q2 2024.

Meanwhile, the Accelerated Settlement Taskforce is aiming to accelerate the settlement process to T+1. The transition will require significant investment in back office infrastructure to increase efficiencies. Such investment creates a hurdle, since it is the buy side that will bear the burdens of any costs, yet the benefits will largely accrue to the sell side. Aligning the incentives of stakeholders to produce changes that are for the advantage of all is one of the key policy issues the Taskforce faces. An interim report is due in December 2023, with a full report expected a year later. Any legislative proposals would likely be implemented in 2025.

Finally, the FCA has published a consultation paper on significant reforms to the UK listing regime for share issuers. The proposals will drastically change the listing framework, leading to increased flexibility for both issuers and investors with the ultimate goal of making the UK a more competitive listing location. Feedback on the consultation paper was submitted over the summer, and full draft listing rules are expected to be published later this year, with the new rules expected to come into force in Q1 2024.