© 2016 Winston & Strawn LLP

Recent Trends and Legal Developments You Should Consider in 2016: Part II – Securities

and Corporate Governance

May 25, 2016

Today’s Speakers

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Joel Rubinstein Partner +1 212-294-5336 jrubinstein@winston.com

Karen Weber Partner +1 (312) 558-8794 kweber@winston.com

Christina Roupas Associate +1 (312) 558-3722 croupas@winston.com

Overview

• New Structures in Special Purpose Acquisition Company (SPAC) IPOs and Business Combinations

• SEC Focus on Non-GAAP Disclosure • Debt Restructurings and Indenture Amendments in Light of

Recent Trust Indenture Act Cases • 2016 Shareholder Proposal Hot Topics • Modernizing Regulation S-K Disclosure Requirements

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New Structures in Special Purpose Acquisition Company (SPAC) IPOs and

Business Combinations

What is a SPAC?

• Blank check company formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses

• Formed by sponsors with experience and reputations to allow them to identify and complete a business combination with one or more target businesses that will be a successful public company

• Sponsors ideally are individuals who have demonstrated success in identifying, acquiring and operating growing businesses, and who also have experience in the public company setting

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Target Business Focus

• Some SPACs are focused on targets in specific industries while others have no such focus

• When a SPAC is focused on targets in specific industries, members of its management typically have significant experience and reputations in those industries

• Even when a SPAC has an industry focus, it generally also has an "escape hatch" which allows it to consummate a business combination with a target in another industry

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SPAC IPO

• SPAC conducts an IPO to raise capital from institutional and retail investors

• Typically, 100% of the cash raised in the IPO is placed in a trust account and not released until: • Completion of a business combination, when it is used to pay for any

redemptions by public shareholders, to pay any cash purchase price and expenses, with the balance used for working capital

• A specified outside date if the SPAC fails to complete a business combination by such date, when it is distributed pro rata to public shareholders

• Some SPACs have an "overfunded" trust account, i.e., more than 100% of the cash raised in the IPO is placed into the trust account

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Sponsor Private Placement

• In a private placement concurrent with the IPO, sponsors invest an amount equal to the IPO expenses plus a specified amount to be held outside the trust account for future expenses plus, if applicable, the amount by which the trust account is overfunded, in exchange for warrants • In some cases, the sponsors receive common stock or units instead of

warrants

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SPAC Capital Structure

• A SPAC generally offers units, each comprised of one share of common stock and a warrant (or portion of a warrant) to purchase common stock

• The warrant portion of the unit is intended to compensate investors for agreeing to have their capital held in the trust account until the SPAC consummates a business combination or liquidates

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Warrant Terms

• Depending on size, prominence/track record of sponsors, and investment bank leading IPO, each warrant may be exercisable for: • A full share of common stock • One-half of one share of common stock, or • One-third of one share of common stock

• Warrants are almost always struck "out of the money" • Warrants are redeemable by the SPAC post-business

combination for $0.01 if the trading price reaches a specified threshold

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SPAC Capital Structure - Variations

• Where a SPAC IPO includes warrants, units become separable shortly after the IPO, and the warrants and common stock can trade separately alongside the unseparated units

• Warrants become exercisable only if the SPAC completes a business combination • The exercise of the shares underlying the warrants is registered at the

time of the business combination

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Sponsor "Promote"

• In connection with the formation of the SPAC, the SPAC’s sponsors acquire founder shares for nominal consideration

• Typically results in the SPAC’s sponsors owning 20% of outstanding common stock post-IPO

• Generally subject to lock-up for one year following business combination, subject to earlier release if trading price of post-business combination company reaches certain thresholds or upon extraordinary transaction

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Size and Dilution

• IPO raise typically about 1/4 to 1/3 third of expected enterprise value of target to minimize effect of dilution resulting from founder shares and warrants

• SPAC may sell additional equity or equity-linked securities at time of business combination

• SPAC may also raise debt financing

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IPO Process

• Registered on Form S-1 • Emerging growth company under Section 2(a)(19) of Securities Act • Confidential submission under Section 6(e) of Securities Act

• At the time of its IPO, SPAC cannot have identified a business combination target; otherwise, it would have to provide disclosure regarding that target

• Ineligible issuer not entitled to use a free writing prospectus • Cannot use a Form S-8 until 60 days after completing a

business combination • Rule 144 unavailable until 1 year after filing of current "Form

10" information

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NASDAQ Considerations

• SPACs typically list on NASDAQ • Initial business combination must be with one or more

businesses having an aggregate fair market value of at least 80% of the value of the trust account

• Must have at least 300 round lot shareholders upon listing • Must maintain at least 300 public shareholders after listing

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Process Leading to a Business Combination

• Until closing of the IPO, SPAC cannot hold substantive discussions with a business combination target

• Post-IPO, SPAC begins to search for a target business • If unable to complete a business combination within a

specified timeframe, often 24 months from the closing of the IPO, it must return all money in the trust account to the SPAC's public shareholders, and the founder shares and warrants will be worthless

• May seek a shareholder vote to extend its lifespan • In connection with any extension, must offer public shareholders right

to redeem shares for a pro rata portion of the cash held in the trust account

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Benefits of the SPAC Structure • For Target Business:

• Gain access to public markets

• Ability to go public during period of market instability

• Obtain access to capital to fund operations or growth

• For Investors: • Opportunity to co-invest with successful founders

• Liquidity of investment

• Downside protection

• For Founders: • Broader base of potential investors/greater ease in capital raising

• Platform to monetize proprietary deal flow

• Potentially very attractive upside

• Possible serial issuances

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Evolution of SPAC Market

• SPACs first appeared in the 1990s, but then disappeared with the surge in traditional capital markets activity for small-cap issues in the late 1990s

• SPACs reappeared in 2003 for a strong run • In 2007, there were 66 SPAC IPOs raising a total of $12.1

billion (SPAC Analytics) • In early 2008 the SPAC IPO market closed • In 2010, SPACs reappeared with significantly altered terms • In 2015, there were 20 SPAC IPOs raising a total of $3.9

billion, the biggest year since 2008 (SPAC Analytics)

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Trends in SPAC IPO Terms

• SPACs sponsored by prominent teams may only include 1/2 or even 1/3 of a warrant in their units

• If less than a full warrant is included in the unit, the warrant redemption price is sometimes increased to $24

• Dual-class structure • Founder shares are separate class that automatically converts upon

closing of business combination to equal 20% of shares, including shares issued in connection with business combination

• Flat 24-month term rather than 18 months with potential extension upon entry into a non-binding letter of intent

• Obtain hard or soft backstop commitments prior to IPO

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Trends in Business Combinations

• Some recent SPACs have traded well above $10 after announcing but before completing their business combinations and have had zero redemptions

• Sponsors of SPACs that have significant redemption requests may enter into arrangements with certain of such investors so that they withdraw their requests

• Obtain backstop commitments to offset redemptions or provide additional capital

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Trends in Business Combinations • Some SPACs have sought warrantholder approval of a

proposal to amend the terms of the warrants so that the warrants are mandatorily exchanged at the closing of the business combination for cash and/or stock • In response to this trend, some recent SPACs contain restrictions in

their charters on the nature of such amendments

• Historically, SPACs required public shareholders to vote against the business combination transaction in order to redeem their shares; currently, SPACs permit a shareholder to redeem its shares even if it votes in favor of the business combination transaction • Some SPACs have required a shareholder to vote in order to redeem

its shares

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Case Study: CF Corporation

• $600 million IPO and $510 million forward purchase agreements from anchor investors • Anchor investors enter into agreements pre-IPO but do not fund until

time of the business combination • Anchor investors will pay same purchase price of $10 per unit, but receive

only 1/3 of a warrant vs. 1/2 of a warrant for IPO investors

• Anchor investors share in the "promote" • Anchor investment intended to ensure that a minimum amount of

capital will be available at time of business combination

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SEC Focus on Non-GAAP Disclosure

Non-GAAP Refresher

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• A non-GAAP financial measure is a measure of a company’s future or historical financial performance, financial position or cash flows that includes or exclude amounts from the most directly comparable GAAP measure

• Regulation G and Item 10(e) of Regulation S-K govern the use of non-GAAP financial measures by reporting companies • Regulation G – all public disclosures by Exchange Act reporting companies

(including press releases, conference calls, etc.) • When providing a non-GAAP financial measure, must (i) present the most directly

comparable GAAP measure and (ii) provide a reconciliation between the non-GAAP financial measure and such comparable GAAP measure

• Item 10(e) – all filings made pursuant to the Securities Act or the Exchange Act • In addition to the requirements of Regulation G, a registrant must (i) disclose the

reasons that management believes the non-GAAP measure is useful to investors and (ii) to the extent material, disclose the additional purposes for which management uses such non-GAAP measure

Non-GAAP Refresher

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• Non-GAAP Prohibitions: • May not exclude charges or liabilities from liquidity measures (other than EBITDA

and EBIT) that require cash settlement, absent an ability to settle in another manner

• Cannot adjust a non-GAAP measure to eliminate or smooth a non-recurring or infrequent or unusual items where such items reasonably is likely to recur within two years or there has been a similar charge or gain within the prior two years

• May not use titles or descriptions of non-GAAP measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures

• When taken together with the information accompanying the non-GAAP measure and any other accompanying disclosure, such non-GAAP measure may not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the presentation of the non-GAAP financial measure in light of the circumstances in which it is presented, misleading

Renewed Focus on Non-GAAP • SEC Comment Letters

• According to an Audit Analytics study, while the overall number of comment letters on Form 10-K and Form 10-Q that have been issued by the SEC has declined since 2013, the number of non-GAAP comments as a percentage of total comments has increased

• Focus on "undue prominence" given to non-GAAP metrics • SEC pushing companies using non-GAAP measures in earnings releases and investor

presentations to include those metrics in SEC filings for consistent messaging (and new approach by the SEC of reviewing non-filed communications)

• Media Focus • NY Times, Wall Street Journal and Bloomberg calling attention to use of non-GAAP

metrics by public companies • According to FactSet, non-GAAP EPS reported by members of the Dow Jones

Industrial Average in 2015 30% higher than GAAP EPS • According to The Analysts’ Accounting Observers, 90% of companies in the S&P 500

reporting non-GAAP results in 2015, up from 72% in 2009 • Focus on loss companies showing non-GAAP profits

• SEC’s Warning Shots

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New SEC Guidance

• On May 17, 2016, the SEC issued new and revised Compliance and Disclosure Interpretations (C&DIs) on the use of non-GAAP financial measures • 6 new C&DIs • Revisions to 6 existing C&DIs

• Particular focus by the Staff on: • Undue prominence of non-GAAP measures • Potentially misleading non-GAAP measures

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Undue Prominence of Non-GAAP Measures • Item 10(e)(1)(i)(A) – When a registrant presents a non-GAAP measure,

it must present the most directly comparable GAAP measure with equal or greater prominence

• C&DI 102.10 – Ultimately, a facts and circumstances analysis but the SEC provided specific examples of violating the "equal or greater prominence" rule:

• Presenting a full income statement of non-GAAP measures or including a full non-GAAP income statement as part of the GAAP reconciliation

• Including only non-GAAP measures in earnings release headlines or captions or having such non-GAAP measure precede the GAAP measure • Only include a non-GAAP measure in a headline or caption if a GAAP measure is also

included and the GAAP measure appears first

• Presenting a non-GAAP measure using a style presentation (i.e. bold, italics, larger font) that emphasizes the non-GAAP measure over the GAAP measure

• Providing tabular disclosure of only non-GAAP financial measures • If non-GAAP measures are presented in a table, comparable GAAP measures must also be

included or be placed in a separate table with equal or greater prominence

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Undue Prominence of Non-GAAP Measures • Specific examples of violating the "equal or greater prominence" rule, cont’d:

• Providing a qualitative description of performance on a non-GAAP basis without an equally prominent description of performance on a GAAP basis • For example, describing a non-GAAP measure as "record performance" or "exceptional" is not

ok without providing at least an equally prominent descriptive characterization of the comparable GAAP measure

• Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the "unreasonable efforts" exception without appropriate disclosure • Item 10(e)(1)(i)(B) requires companies to include a reconciliation for forward-looking non-GAAP

information "to the extent available without unreasonable efforts" • Many companies have relied upon this language to omit a reconciliation • Now, companies relying on this language must explicitly disclose that they are doing so and also

identify the information unavailable for the reconciliation and its probable significance • Disclosure must be given equal or greater prominence

• Providing discussion and analysis of a non-GAAP measure without a similar discussion of the GAAP measure • If an earnings release or other filing discusses and analyzes a non-GAAP measure, an equally

prominent discussion and analysis of the comparable GAAP measure is required

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Potentially Misleading Non-GAAP Measures • Four new C&DIs specifically address the requirement that non-GAAP

measures not be misleading • Even when a non-GAAP measure includes an adjustment that is not

explicitly prohibited, the presentation of such non-GAAP measure may still be misleading

• Specific examples of non-GAAP adjustments that may be misleading: • Excluding normal, recurring, cash operating expenses necessary to operate

a company’s business

• Adjustments that are presented inconsistently between periods • For example, when a particular charge or gain is adjusted in the current period but

other, similar charges or gains were not also adjusted in prior periods

• Disclose the change between periods to avoid being misleading

• Describe the reason for the change

• If the change is significant enough, consider recasting prior measures to conform to the current presentation and provide context

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Potentially Misleading Non-GAAP Measures • Specific examples of non-GAAP adjustments that may be

misleading, cont’d: • Excluding charges but not gains

• It could be misleading to exclude non-recurring charges when non-recurring gains occurred during the same period and are not excluded

• Individually tailored recognition and measurement methods for financial statement line items • For example, where GAAP requires an issuer to recognize revenue over

the term of a contract, such issuer should not provide a non-GAAP measure that accelerates revenue recognition as though it earned revenue when customers are billed

• The Staff has cautioned against using non-GAAP measures to substitute GAAP accounting principles for a company’s own accounting principles

• Non-GAAP can’t be used as a method of adjusting the way items are accounted for under GAAP

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Presenting Liquidity Measures on a Per Share Basis • Non-GAAP per share performance measures may be presented and should be

reconciled to GAAP EPS • Non-GAAP liquidity measures that measure cash generated may not be

presented on a per share basis • Free cash flow cannot be presented on a per share basis

• Is a measure a liquidity measure? • Nature of the adjustments included in the measure • Whether, based on the substance of the measure, the measure can be used as a

liquidity measure, even if management characterizes such measure solely as a performance measure

• SEC will focus on the substance of the non-GAAP measure and not management’s characterization of the measure

• Explicit prohibition of showing EBIT or EBITDA on a per share basis even if it is presented as a performance measure • If EBIT or EBITDA is presented as a performance measure, should be reconciled to net

income, not operating income

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Income Tax Effects Related to Adjustments

• Adjustments to arrive at a non-GAAP measure should not be presented "net of tax" • Income taxes should be shown as separate adjustments and clearly

explained

• Income tax effects on non-GAAP measures should be provided depending on the nature of the measures • Liquidity measure– If the measure includes income taxes, it may be

acceptable to adjust GAAP taxes to show taxes paid in cash • Performance measure – Include current and deferred income tax

expense

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Key Takeaways

• In advance of Q2 earnings, companies should review earnings releases, investor decks and SEC filings to ensure compliance with new guidance

• In particular, companies should focus on: • Not giving greater prominence to non-GAAP measures than the

corresponding GAAP measures (including in headlines, captions and tables)

• Presenting non-GAAP measures consistently across periods

• Confirming per share non-GAAP measures are presented only for performance measures

• Additionally, audit committees should be focused on non-GAAP measures and the related disclosures and processes followed to consider both how appropriate and reliable such measures are

• Companies should consider how disclosure controls and procedures apply to non-GAAP financial measures

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Debt Restructurings and Indenture Amendments in Light of Recent

Trust Indenture Act Cases

Trust Indenture Act • The Trust Indenture Act of 1939 ("TIA") established statutory standards

for trust indentures that govern debt securities that are offered to the public.

• The TIA also set requirements for indenture trustees, and required financial reports by issuers.

• Recently, the application of recent judicial opinions relating to Section 316(b) of TIA has come under question.

• Section 316(b) of the TIA provides, in part: • "Notwithstanding any other provision of the indenture to be qualified, the right

of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder, …"

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Situations Where Section 316(b) Applies

• TIA Section 316(b) is implicated if: • (a) there is an amendment to an indenture that affects "core terms" – that is,

payment terms; or

• (b) there is collective action on the part of the issuer and some or all of its creditors that constitutes a "debt restructuring" (also referred to in the cases as a "debt readjustment plan" or an "out-of-court debt reorganization") that has the effect of impairing the ability of the issuer to make all future payments of principal and interest to non-consenting noteholders when due.

• According to the legislative history, the purpose of § 316(b) is to "prohibit provisions authorizing a majority to force a non-consenting security holder to accept a reduction of his claim."

• Under Section 316(b), core terms cannot, as a practical matter, be amended without the consent of each holder.

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Trust Indenture Act – Section 316(b) –Marblegate and Ceasars

• Two Decisions: • Marblegate Asset Management v. Education Management Corp., 2014

WL 7399041, 75 F.Supp. 3d 592 (S.D.N.Y. 2014); Marblegate Asset Management v. Education Management Corp., 2015 WL 3867643 (S.D.N.Y. 2015).

• Meehancombs Global Credit Opportunity Funds, LP v. Caesars Entertainment Corp., 2015 WL 221055, 80 F.Supp. 3d 507 (S.D.N.Y. 2015); BOKF, N.A. v. Caesars Entertainment Corp., 2015 WL 5076785 (S.D.N.Y. 2015) ("Caesars II").

• These cases contain language that suggests a significant departure from the widely understood meaning of TIA Section 316(b) that has prevailed among practitioners for decades.

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Trust Indenture Act – Section 316(b) –Marblegate and Ceasars • Historically, practitioners have interpreted Section 316(b) as prohibiting

amendments that affect the contractual right to receive payments (for example, amendments that reduce interest rates or principal amounts or change the time for payment).

• By contrast, these recent judicial decisions have interpreted Section 316(b) as prohibiting amendments that impair the actual ability of the issuer to make those payments (for example, amendments that release collateral or guarantees or that transfer income producing assets to entities that are not obligors or guarantors under the indenture).

• For example, in Marblegate, the amendment stripped a guarantee which was the principal source of repayment for the notes.

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Trust Indenture Act – Section 316(b) –Marblegate and Ceasars • At the heart of the debate is whether § 316(b) operates to protect

noteholders of an insolvent or nearly insolvent company where majority action is taken that does not violate any covenant of the indenture but has the practical effect of making repayment to the non-consenting holders impossible.

• Amendments are typically conditioned on the delivery of an opinion of counsel to the effect that the proposed amendments comply with the indenture (including Section 316(b) and other TIA provisions that are included in or, for TIA-qualified indentures, deemed to be part of the indenture).

• The recent decisions have called into question whether those opinions can be delivered in connection with a debt restructuring or in circumstances where the issuer may be in financial distress.

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Marblegate and Ceasars – Implications

• Marblegate and Caesars could have broad implications on future efforts to achieve out-of-court-restructurings.

• Investors could have greater bargaining power when negotiating with financially distressed companies and with the majority bondholders.

• Continued litigation regarding the interpretation of 316(b). • There could be an increase in the number of bankruptcy

filings (prepackaged or otherwise), and decrease in out-of-court restructurings, as minority bondholders refuse to consent to amendments negatively affecting their payment rights.

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White Paper

• On April 25, 2016, a group of nationally recognized law firms promulgated an Opinion White Paper is to provide guidance to practitioners in their consideration of the application of recent judicial opinions relating to Section 316(b) of the TIA.

• The White Paper focused on opinion practices for law firms and provided some guidance as to what amendments to non-core terms would include.

• The White Paper stated that proposed amendments to "non-core" indenture terms—that is, terms that do not pertain to payment-related issues—include amendments to material covenants, that: • are not effected in connection with a debt restructuring; or

• are effected in connection with a debt restructuring, however, after giving effect to all related transactions, "the issuer will likely be able to make all future payments of principal and interest to non-consenting noteholders when due.

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White Paper • The White Paper provided a non-exclusive list of circumstances under

which a law firm should be able, absent unusual circumstances, to deliver an unqualified opinion in connection with indenture amendments.

• As a result, some of the uncertainty created by these decisions has been mitigated. In other words, absent unusual circumstances, amendments to proceed where the opinion requirement may have previously been an impediment.

• Of course, the White Paper is not binding on a court and, if an indenture amendment is challenged, there is no guarantee that a court will find that the transaction in question complies with Section 316(b) or similar contractual language.

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2016 Shareholder Proposal Hot Topics

Proxy Access Background

• 2015 Proxy Access Proposals: • 121 shareholder proxy access resolutions • 91 proposals voted on • 55 proposals received majority support

• Through March 2016, 210 companies have adopted proxy access, including 155 S&P 500 companies

• Most common proxy access formulation: 3/3/20/20 • 3% ownership level • 3-year holding period • 20-shareholder aggregation limit • 20% board seat cap

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2016 Proxy Access Updates • NYC Comptroller’s Office Boardroom Accountability Project

• 72 companies received proposals in 2016, primarily in the S&P 500 • 36 new targets

• 36 companies that received proposals in 2015 that have not yet enacted or agreed to enact at 3%/3-year proxy access bylaws and companies that implemented "unworkable" bylaws with a 5% ownership threshold

• Will withdraw proposals at companies that adopted or agreed to adopt 3%/3-year bylaws, even if they include the 20 shareholder aggregation limit and 20% board seat cap

• Retail investors • John Chevedden and Kenneth and William Steiner are new to proxy access

proposals

• 3%/3-year formulation with unrestricted aggregation and 25% board seat cap

• Less inclined to withdraw proposals if bylaw adopted contains aggregation limit or a board seat cap of less than 20%

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2015 Proxy Access Exclusion • In 2015, companies sought to use 14a-8(i)(9) (conflicts with

management proposal) to exclude a shareholder proposal by agreeing to present to its shareholders a modified version of proxy access with more company-friendly provisions

• SEC guidance (October 2015) • Two proposals directly conflict only "if a reasonable shareholder could not

logically vote in favor of both proposals, i.e. a vote for one proposal is tantamount to a vote against the other proposal" • For example, a shareholder proposal to separate a company’s chairman and CEO

positions would directly conflict with a company proposal to require the CEO to be the company’s chairman

• Shareholders could logically vote for two different non-binding proxy access proposals because they generally seek the same objective

• Take-away: 14a-8(i)(9) is no longer a viable basis upon which to exclude proxy access proposals

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2016 Proxy Access Exclusion • Substantial implementation – 14a-8(i)(10) • No-action guidance that issuers may exclude proxy access shareholder

proposals on the basis of substantial implementation if the issuer adopts a proxy access bylaw with reasonable terms within the bounds of current market practice

• Factors to consider: • Ownership threshold

• No-action relief granted to companies that implemented proxy access a 3% ownership threshold with shareholder proposal requesting the same threshold

• Companies denied relief implemented proxy access with a 5% ownership threshold

• Board Aggregation / Capped Representation • SEC granted no-action relief where the company bylaw had a 20 shareholder aggregation and

20% director seat cap and the shareholder proposal requested unlimited aggregation and 25% director seat cap

• Market practice • The ability of shareholders to challenge reasonable secondary provisions (i.e. provisions other

than ownership percentage and duration thresholds) may be limited to the extent the Company implemented bylaw contains acceptable market terms

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Other Hot Button Shareholder Proposal Topics in 2016 • Splitting the Role of CEO and Chairman

• 7 proposals considered by Fortune 250 companies in April 2016

• Sponsored by Gerald Armstrong, John Chevedden and Kenneth Steiner

• All proposals failed

• Political Spending and Lobbying • 11 proposals considered by 10 Fortune 250 companies in April 2016

• Sponsored by a mix of pension funds and social investing vehicles

• All proposals failed

• Environmental Issues • 4 proposals considered by Fortune 250 companies in April 2016

• Varied topics: climate change, environmental accident-risk reduction, deforestation

• All proposals failed 50

Modernizing Regulation S-K Disclosure Requirements

Disclosure Effectiveness Background • JOBS Act (2012)

• Gave the SEC the mandate to analyze Regulation S-K to determine how disclosure requirements could be "updated and modernized" to simplify the registration process and reduce the costs and burdens for emerging growth companies

• FAST Act (2015) • Requires the SEC to conduct a study to determine how to modernize and simply

disclosure requirements of Regulation S-K and determine how best to modernize and imply disclosure requirements

• Report must be delivered by December 2016 with rulemaking to follow by December 2017

• SEC focus is on financial statements and business disclosures contained in Forms 10-K, 10-Q and 8-K • September 2015 – SEC seeks public comment on the effectiveness of financial

disclosure requirements in Regulation S-X

• April 2016 – Regulation S-K concept release

• Subsequent phases will focus on compensation and governance information included in proxy statements

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SEC Concept Release

• Organized around three areas: • Disclosure framework • Specific disclosure requirements • Presentation of information

• 341 pages long, 340 requests for comment • No actual changes or proposed changes to any rules or

regulations • Provides the SEC’s comments on possible future revisions

and rulemaking and seeks public comment on these points • If any of the suggestions in the release are implemented,

would result in significant changes to Regulation S-K disclosure requirements

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SEC Concept Release – Disclosure Framework • Principles-Based vs. Rules-Based Disclosure

• Principles-based (management judgment) - disclosure of information "material" to investor, which requires management to evaluate the significance of information in the context of the registrant’s overall business and financial circumstances and determine whether disclosure is necessary

• Rules-based (bright-line tests) – disclosure of information that meets objective, quantitative thresholds or disclosure of information in all instances

• Limiting rules-based disclosure in favor of principles-based disclosure would reduce the amount of disclosure that may be irrelevant, outdated or immaterial, but, on the other hand, reducing rules-based disclosure may limit the comparability, consistency and completeness of disclosure

• Materiality Standard • Current standard: a reasonable investor would consider the information important in

deciding how to vote or make an investment decision

• Potential new standard: information that may be "important or useful" to investors, regardless of whether it meets the current "reasonable investor" standard

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SEC Concept Release – Disclosure Requirements • Business Disclosures – comments requested on specific requirements:

• Core business information

• Company performance and financial information • SEC may consider eliminating requirements that overlap with S-X requirements, i.e. selected

financial data and supplementary financial data

• Risk factors and related disclosures • Considering possibility of disclosing the probability of adverse outcomes

• Summary of most significant risks

• "Capturing emerging risks" – i.e. cybersecurity, climate change and arctic drilling

• Company securities and holders • Potential additional disclosure related to share repurchase programs

• Public policy and sustainability • Climate change, political spending and lobbying activities, resource scarcity, corporate social

responsibility, carbon asset risks and stranded asset risks may be important or significant to voting and investment decisions, even if it doesn’t meet the "reasonable investor" test

• Frequency of interim reporting 55

SEC Concept Release – Presentation of Information • SEC is considering how to improve readability and navigability of SEC filings,

including: • Use of cross-references • Incorporation by reference • Company website • Hyperlinks • Standardized formatting requirements • Layered reporting

• Using summaries and overview sections with references and links to more detailed disclosure elsewhere

• Structured data • Possible increase in XBRL tagging in MD&A and other narrative disclosures

• Scaled Disclosure • Can / should disclosure requirements be further scaled to eliminate burdens on EGCs,

accelerated filers, smaller reporting companies and other smaller issuers?

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SEC Concept Release – Takeaways

• Comments due by July 21, 2016 • Rulemaking will take significant time after comments are

processed, not expected until late 2017 • Potential sweeping changes for disclosure regime in the

future • May highlight areas of focus for current SEC reviews • Executive compensation and governance concept release is

expected to come in the future

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Questions?

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Joel Rubinstein Partner +1 212-294-5336 jrubinstein@winston.com

Karen Weber Partner +1 (312) 558-8794 kweber@winston.com

Christina Roupas Associate +1 (312) 558-3722 croupas@winston.com

© 2016 Winston & Strawn LLP

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