The following summary of significant U.S. legal and regulatory developments during 2008 may be of interest to our Canadian clients and friends.  

  1. New Oil and Gas Reserves Reporting: In December 2008, the SEC approved new rules amending its oil and gas reporting regulations to better reflect technological advances and changes in the industry. The rules expand the types of technologies that companies may use to establish proved reserves so long as those technologies have been empirically shown to lead to reliable conclusions about reserves volumes. The rules permit but do not require companies to disclose probable and possible reserves in addition to proved reserves. In addition, the rules require companies to report the independence and qualifications of a reserves preparer or auditor and to report reserves using an average price based upon the previous 12-month period rather than yearend prices. The new rules must be reflected in filed reports starting January 1, 2010. The proposed rules (which were adopted substantially as proposed) are summarized at http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2008.  
  2. Fair Value Accounting: In December 2008, the SEC delivered a report based on its mandated study of mark-to-market accounting standards. The report recommends against suspension of fair value accounting, but sets forth eight sets of recommendations for the improvement of the practice of fair value accounting. Prominent among these is the recommendation that the models for accounting for financial assets impairment be re-assessed and streamlined. The report is described in detail at http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2148.

Earlier, in September and October 2008, the SEC and the Financial Accounting Standards Board (“FASB”) issued guidance addressing fair value accounting standards, including specific guidance on Statement of Financial Accounting Standards No. 157 (“SFAS 157”). The guidance discusses, among other things, “mark-to-market” accounting for assets and liabilities. Mark-to-market accounting requires that a company, in valuing its assets and liabilities, use values that it would receive to sell an asset or pay to transfer a liability “in an orderly transaction”—in other words, what a company would receive in the most advantageous market for the asset or liability. The guidance seeks to clarify how SFAS 157 should be used in inactive markets and discusses how securities may be valued when observable inputs for fair value do not exist. The FASB releases are available at http://www.fasb.org/st/summary/stsum157.shtml.

  1. New Rules on Rating Agencies: In December 2008, the SEC announced its approval of proposed changes to increase transparency and accountability at credit rating agencies and to ensure those firms provide “more meaningful ratings and enhanced disclosure to investors.” According to the SEC press release announcing the approval of the new rules, the proposed amendments will include, among other things, new record keeping requirements and will prohibit specified conflicts. The proposed rules have not yet been released on the SEC’s website.  
  2. IFRS Roadmap: In November 2008, the SEC published its roadmap (the “Roadmap”) for the eventual adoption of International Financial Reporting Standards (“IFRS”) as the required accounting standard for all U.S. public companies. Under the Roadmap, U.S. public companies would be required to publish financial statements using IFRS between 2014 and 2016. U.S. public companies that are among the 20 largest companies globally in a particular industry, where IFRS is used as the basis of financial reporting more often than any other basis of financial reporting, would be eligible to “early adopt” IFRS with SEC approval. The Roadmap indicates that a final decision whether to mandate use of IFRS for all U.S. public companies will be made in 2011. Pursuant to an SEC release in December 2007, non-U.S. companies required to report with the SEC are permitted to file financial statements using IFRS without reconciliation to U.S. GAAP. For additional information on the SEC release permitting non-U.S. companies to use IFRS financial statements without reconciliation to U.S. GAAP see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=1688.  
  3. Exon-Florio Regulations: In November 2008, the U.S. Treasury issued final regulations implementing the “Exon-Florio Amendment” to the Foreign Investment and National Security Act of 2007. Exon-Florio provides the President with the authority to investigate and, where necessary, block or unwind mergers and acquisitions by non-U.S. persons that could threaten U.S. national security. The new regulations increase significantly the scope of transactions subject to Exon-Florio review. Although Exon-Florio provides the President with the power to investigate “mergers, acquisitions, and takeovers... by or with foreign persons which could result in foreign control of persons engaged in interstate commerce in the United States,” the proposed regulations apply review powers to transactions that would not normally be thought of as a merger, acquisition, or takeover or as conveying control to a non-U.S. person. Moreover, the proposed regulations indicate that multiple parties can have “control,” and that a non-U.S. minority shareholder can obtain “control” even when there is a U.S. majority shareholder, depending on the level and nature of blocking powers held by that minority shareholder. Additionally, by requiring more information and certifications than previously required and by establishing civil penalties for violations, the new regulations increase the burdens and risks associated with making an Exon-Florio filing. For additional information on the new Exon-Florio regulations see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2114.   
  4. U.S. Initiatives in Response to Credit Crisis: Beginning in October 2008, in response to the credit crisis and global market turmoil, the U.S. Congress, the Treasury and the Federal Reserve have undertaken a series of initiatives designed to stabilize the economy generally and U.S. financial institutions in particular. These several initiatives are described in detail at http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2089.
  5. Cross-Border Tender Offer Rules: In October 2008, the SEC adopted amendments to its rules governing cross-border exchange offers, tender offers, rights offerings and business combinations. The revised rules expand the coverage and availability of the so-called Tier I and Tier II exemptions under the current U.S. tender offer rules. Specifically, the rules have been amended to allow the bidder, in negotiated transactions, to calculate a non-U.S. target’s U.S. beneficial ownership (to determine whether an exemption is available) as of a date within a range of dates that are no more than 60 days before, and not more than 30 days after, public announcement of a transaction. Further, the holdings of persons holding greater than 10% of target securities (except the bidder) will no longer be excluded from the calculation of U.S. ownership. For additional information on the cross-border revised tender offer rules see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2107.  
  6. 2008 Enforcement Actions: In October 2008, the SEC announced that 2008 saw the second highest number of SEC enforcement actions ever. To that date, the SEC had brought 671 enforcement actions, with a record number of insider trading and market manipulation cases. The increase in enforcement actions is, in part, attributable to the SEC’s vigorous enforcement of the Foreign Corrupt Practices Act (“FCPA”), which prohibits bribes by companies, U.S. or non-U.S., with securities listed on U.S. exchanges. Recent examples include the settlement of the SEC’s enforcement action against Siemens Aktiengesellschaft (“Siemens”). The U.S. Department of Justice also filed a separate action against Siemens, resulting in a total of US$800 million in fines, penalties and disgorgements of profits paid to U.S. authorities. Other important FCPA enforcements in 2008 included cases against Fiat S.p.A. and AB Volvo.  
  7. Regulation of Short Selling: In 2008, the SEC placed new regulatory restrictions on short selling. In October 2008, the SEC adopted a new rule under the Exchange Act that expressly targets “naked” short selling, i.e., selling an equity security short without owning or having borrowed the security. Under new Rule 10b-21, the seller of an equity security is liable for securities fraud if it deceives a purchaser about its intention or ability to deliver the security on or before the settlement date and the seller fails to deliver the security by such date. Also, the SEC adopted other significant although still temporary rules relating to short selling. One requires large institutional investment managers to report short sales of publicly traded securities on a new “Form SH” on a weekly basis. This interim rule will expire if the SEC has not adopted a final rule by August 1, 2009. These initiatives are described in detail at http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2091
  8. Guidance on Company Web Sites: In August 2008, in response to advances in communications technology and the pervasive use of the internet by market participants and investors, the SEC published an interpretative release to provide guidance to SEC registrants regarding the use of corporate web sites. The guidance falls into two principal categories: (1) practices designed to avoid selective disclosure under Regulation FD and (2) antifraud considerations. The guidance is directly applicable to U.S. companies. Non-U.S. companies are not subject to Regulation FD, but some follow U.S. practices based on Regulation FD concepts, and both U.S. and non-U.S. companies should review the guidance relating to antifraud considerations. For additional information on the web site guidance see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2040.
  9. 21st Century Disclosure Initiative: In June 2008, the SEC announced its “21st Century Disclosure Initiative,” an effort to examine its disclosure process for reporting companies and the way in which information is made available to investors and the markets. The ongoing SEC study will focus on how to match the capabilities of current information technology with the SEC’s regulatory aims and the needs of investors. Interactive Data Applications (“IDEA”), the successor to the EDGAR database, and eXtensible Business Reporting Language (“XBRL”) were recently implemented under the initiative to help modernize the SEC’s disclosure systems. The SEC intends to publish in early 2009 a report setting forth the elements of its disclosure initiative plan.  
  10. XBRL Initiative: In May 2008, the SEC proposed rules that would require U.S. reporting companies to provide to the SEC financial statements in an interactive data format containing eXtensible Business Reporting Language (“XBRL”). In the first year of implementation, XBRL filings would be required for fiscal periods ending on or after December 15, 2008 for U.S. large accelerated filers and non-U.S. large accelerated filers who prepare their financial statements in accordance with U.S. GAAP and have a public float exceeding US$5 billion. In the second year, all other U.S. large accelerated filers and non-U.S. large accelerated filers who use U.S. GAAP would be required to comply with the proposed rules. Finally, in the third year, XBRL reporting would be mandatory for all remaining companies who use U.S. GAAP and all non-U.S. private issuers who prepare their financial statements in accordance with IFRS. Of importance to Canadian companies that file reports with the SEC, the proposed XBRL amendments do not as currently proposed apply to filings by Canadian issuers using the MJDS system. However, the proposing rules do ask for comment on whether the XBRL requirements should be extended to Form 40-F. On December 18, 2008, the SEC issued a press release announcing the approval of the XBRL rules. The final rules have not yet been released on the SEC’s website. For additional information on the XBRL Initiative see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2018.   
  11. Mutual Recognition Initiative: In March 2008, the SEC announced its intention to fully implement its “mutual recognition initiative,” that would enable foreign exchanges and broker-dealers in certain non-U.S. countries to have direct access to U.S. markets and investors. In return, under the initiative, U.S. exchanges and broker-dealers would be provided with the same broadened access to the non-U.S. country’s market and investors. In August 2008, the SEC agreed to implement the mutual recognition initiative with Australia. The SEC had previously announced it was working on the initiative with the Canadian Securities Administrators, but no agreement has yet been reached. Additionally, the SEC has proposed amendments to broaden Rule 15a-6 that permit non-U.S. broker-dealers to conduct selling activities in the United States without triggering the broker-dealer registration requirements under the Securities Exchange Act of 1934 (the “Exchange Act”). A detailed description of the proposed amendments to Rule 15a-6 is at http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2011.  
  12. Final Rules on Shareholder Forums: In February 2008, the SEC published final rules to promote shareholder communications via electronic forums by creating a proxy solicitation exemption for such communications. Specifically, the Exchange Act has been amended to exempt from the U.S. proxy rules certain communications made in an electronic shareholder forum as long as the person making the communication is not seeking directly or indirectly any proxies. For additional information on the new rules on shareholder forums see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=1809.  
  13. 15. Shareholder Activism Update (“Say on Pay”): In 2008, the trend towards “say on pay” shareholder resolutions, which require companies to seek nonbinding shareholder ratification of executive compensation packages, has gained additional impetus, as an increased number of companies are being met with shareholder proposals for “say on pay” resolutions. Riskmetrics Group, which issues vote recommendations on executive compensation packages that many institutional investors strictly follow, recommends adopting “say on pay” shareholder resolutions to confirm that pay packages are in line with shareholder expectations. Additionally, in April 2008, partly on account of criticism of financial institutions’ compensation schemes, the U.S. House of Representatives passed a “say on pay” bill requiring public companies to give shareholders a non-binding vote on executive compensation. The bill is now being considered by the Senate.  
  14. Notable Cases: A number of court decisions in the U.S. decided in 2008 may be of interest.  
  • In Hexion Specialty Chemicals v. Huntsman, the Delaware courts continue to set a high threshold for finding a material adverse effect (“MAE”) that would excuse a buyer from completing its acquisition of a target. For additional information on Hexion see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=2077.  
  • CSX Corporation v. The Children’s Investment Fund Management (UK) LLP, et al. has significant implications for investors who may be considered a “group” for disclosure purposes under Section 13(d)(3) of the Exchange Act where the circumstantial evidence concerning communications between them indicates they are working together. The case is now on appeal before the United States Court of Appeals for the Second Circuit. For additional information on CSX see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=1995.   
  • Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. rejects the theory of “scheme liability” in securities fraud litigation—the argument that any party who participates in a scheme to defraud should be held liable — holding that private plaintiffs may state securities fraud claims under the Exchange Act only against defendants upon whose representations they relied. For additional information on Stoneridge see http://www.paulweiss.com/resources/pubs/detail.aspx?publication=1757.