The following is our summary of significant U.S. legal and regulatory developments during the first quarter of 2018 of interest to Canadian companies and their advisors.

1. SEC Issues Updated Guidance on Cybersecurity Disclosure

On February 21, 2018, the SEC issued an interpretive release providing guidance to assist public companies in preparing disclosures concerning cybersecurity risks and incidents. The release supplements guidance provided by the SEC in October 2011, and emphasizes the need for comprehensive policies and procedures related to cybersecurity risks and incidents in order to ensure compliance with disclosure obligations and to prevent insider trading. Items addressed include disclosure obligations relating to materiality, risk factors, MD&A, description of business, legal proceedings, financial statements and board risk oversight. The interpretive guidance also addressed disclosure controls and procedures and selective disclosure.

For the full text of the SEC’s interpretive release, please see: https://www.sec.gov/rules/interp/2018/33-10459.pdf

For the full text of our memorandum, please see: https://www.paulweiss.com/practices/litigation/white-collar-regulatory-defense/publications/sec-issues-updated-guidance-on-cybersecurity-disclosure?id=26032

2. SEC Approves NYSE Rule Change to Facilitate Listing Without an Initial Public Offering

On February 2, 2018, the SEC approved a change to the New York Stock Exchange (“NYSE”) listing standards designed to facilitate the direct listing of a company’s shares without conducting an initial public offering. Prior to the rule change, a company that had not previously had its common equity securities registered under the Exchange Act could list without conducting an IPO, at the discretion of the NYSE, if the value of its publicly held shares was at least $100 million, based on the lesser of an independent third-party valuation of the company and the most recent trading price for the company’s shares in another trading market. The rule change eliminates the requirement to have another trading market trading price if there is a valuation from an independent third party of at least $250 million in market value of publicly held shares.

Under the amended rule, a direct listing will require a company to file a resale registration statement for its outstanding shares previously issued in private placements, which will be subject to SEC review and comment. Accordingly, as with listings in connection with IPOs, companies making a direct listing will be subject to restrictions on publicity and the liability provisions of the Securities Act of 1933, as amended (“Securities Act”). However, direct listing would eliminate the underwriters’ discounts and commissions of a traditional IPO, would avoid dilution of existing shareholders (as there would be no new issuance at the time of initial listing) and would eliminate the contractual restrictions (lock-ups) on resales imposed by underwriters.

For the SEC’s approval of the proposed rule change, please see: https://www.sec.gov/comments/sr-nyse-2017-30/nyse201730-2782322-161654.pdf

For the full text of our memorandum, please see: https://www.paulweiss.com/practices/transactional/capital-markets-securities/publications/sec-approves-nyse-rule-change-to-facilitate-listing-without-an-initial-public-offering?id=25987

3. Delaware Court of Chancery Uses DCF Analysis to Appraise Merger Target below Deal Price

On February 23, 2018, in In re Appraisal of AOL Inc., the Delaware Court of Chancery, in an opinion by Vice Chancellor Glasscock, relied solely on its own discounted cash flow (“DCF”) analysis to appraise the fair value of AOL Inc. below the deal price paid in its acquisition by Verizon Communications Inc. While reiterating that deal price is the best evidence of fair value, and must be taken into account, when appraising “Dellcompliant” transactions (i.e., those where “(i) information was sufficiently disseminated to potential bidders, so that (ii) an informed sale could take place, (iii) without undue impediments imposed by the deal structure itself”), the court held that this was not such a transaction. The court found that certain of the deal protections combined with informational disparities between potential bidders and certain actions of the parties were preclusive to other bidders, and therefore, the court assigned no weight to deal price in its fair value determination. Applying its own DCF analysis, the court ultimately determined fair value to be approximately 3% lower than the deal price (possibly due to synergies), thus continuing a string of recent appraisal decisions finding fair value at or below deal price.

For the full text of our memorandum, please see: https://www.paulweiss.com/practices/transactional/mergers-acquisitions/publications/delaware-court-of-chancery-uses-dcf-analysis-to-appraise-merger-target-below-deal-price?id=26039

4. Senate Passes Act Limiting Scope of Dodd-Frank Act

On March 14, 2018, the Senate voted 67-31 in favor of the Economic Growth, Regulatory Relief and Consumer Protection Act. The legislation, if enacted into law, would represent one of the most significant changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act since its adoption in 2010 in response to the 2007-2009 financial crisis.

Among other things, the legislation would exempt banks with assets valued at less than $10 billion from the “Volcker Rule,” which prohibits insured depository institutions, companies that control insured depository institutions, and companies that are treated as bank holding companies or are an affiliate or subsidiary thereof from engaging in proprietary trading or entering into certain relationships with hedge funds and private-equity funds. The legislation would also raise the threshold for designation of a bank holding company as a Systemically Important Financial Institution (“SIFI”) from $50 billion in assets to $250 billion in assets. Banks designated as SIFIs must, among other requirements, adhere to stricter rules and oversight and produce “living wills” describing how they would liquidate their assets in the event of a bankruptcy.

The legislation is now subject to reconciliation and a vote in the House of Representatives.

For the full text of the legislation, please see: https://www.congress.gov/bill/115th-congress/senate-bill/2155/text

For the full text of our memorandum, please see: https://www.paulweiss.com/practices/transactional/capital-markets-securities/publications/senate-passes-act-limiting-scope-of-dodd-frank-act?id=26135

5. SEC Provides Guidance for Disclosure and Accounting Implications of Tax Cuts and Jobs Act

On December 22, 2017, the SEC published new guidance for SEC reporting companies, auditors and others to help ensure timely public disclosures of the accounting impacts of the Tax Cuts and Jobs Act (the “Act”), which was signed into law the same day. The staffs of the Office of the Chief Accountant and of the Division of Corporation Finance issued the following two interpretations:

  • Compliance and Disclosure Interpretation (“C&DI”) 110.02, which provides guidance on how to comply with obligations under Item 2.06 of Form 8-K with respect to reporting the impact of a change in tax rate or tax laws pursuant to the Act, and clarifies that the accounting consequences of the Act generally will not trigger this reporting obligation, and
  • Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance regarding the application of U.S. generally accepted accounting principles when preparing an initial accounting of the income tax effects of the Act and provides an accommodation for companies unable to assess the full effects of the Act during a financial reporting period.

This guidance is consistent with statements made by members of the SEC staff at the 2017 AICPA Conference on PCAOB and SEC Current Developments at which they acknowledged the potential operational and accounting challenges companies could face if U.S. tax reforms were enacted before the end of the year.

For the full text of the SEC’s C&DI 110.02, please see: https://www.sec.gov/divisions/corpfin/guidance/8-kinterp.htm#110.02

For the full text of the SEC’s SAB No. 118, please see: https://www.sec.gov/interps/account/staff-accounting-bulletin-118.htm

For the full text of our memorandum, please see: https://www.paulweiss.com/practices/transactional/capital-markets-securities/publications/sec-provides-guidance-for-disclosure-and-accounting-implications-of-tax-cuts-and-jobs-act?id=25804

6. U.S. Supreme Court Confirms State Court Jurisdiction Over Securities Act Class Actions

On March 20, 2018, the United States Supreme Court held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not divest state courts of jurisdiction over class actions asserting claims under the Securities Act. The Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund ruled that the language of the statute did not alter the historic scheme granting concurrent jurisdiction over claims under the Securities Act to state courts. In addition, the Court held that SLUSA did not alter the bar on removal of cases under the Securities Act from state to federal court. In light of this decision, we expect that shareholders will continue to file class actions asserting only claims under the Securities Act in state courts across the country.

For the full text of our memorandum, please see: https://www.paulweiss.com/media/3977681/23mar18-cyan.pdf

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For a discussion of certain other developments not highlighted above, please see our memoranda available at: http://www.paulweiss.com/practices/region/canada.aspx

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Associate Jason M. Brisebois contributed to this Client Memorandum.