Level 1 Corporate and Securities Law Flashcards
Level 1 Corporate and Securities Law
Blue Sky laws
State securities laws and usually require compliance in all jurisdictions where the offer of sale of securities is made. Usually a company needs to verify compliance not only in the state where the issuance is made, but also in each state where the employee is making an investment decision, i.e., where the employee resides.
RSU vs RSA voting rights
Stock Awards is actually issued for restricted stock awards at the time of grant, all shares are eligible for voting even before they vest.
Restricted Stock Units are not settled in issued stock until the units vest, so no voting rights attach to the units.
‘34 Act – Regulation S-K Proxy Statement Disclosures: Summary Compensation Table items reported
- Base salary earned
- Bonus earned
- Value of stock awards granted
- Value of non-equity incentive plan compensation
- Change in present value of accumulated benefit under defined benefit and actuarial pension plans; above-market or preferential earnings on nonqualified deferred compensation
- All other compensation not includable in another column
- Total compensation
How do former officers and directors report
Must report Non-exempt Transactions that occur after they are no longer subject to Section 16, but only if those transactions occur within six months of non-exempt, opposite-way transactions that occurred while they were subject to Section 16. This requirement does not apply to 10% owners.
Shareholder Approval of Equity Plans
Companies that are listed on the NYSE or Nasdaq must obtain shareholder approval of their equity plans and material revisions or amendments to such plans.
Approval must be obtained from shareholders within 12 months of the date the board approves the first grant under those plans.
Street Name Issuance
The registration of a security in the name of a securities brokerage firm as a nominee for the beneficial owner of the securities. Securities are often held in “street name” to expedite transfers of the securities when the securities are sold, since no delivery of the certificate or signature of transfer by the beneficial owner is required.
Shares CANNOT be voted by proxy by the brokers unless they have EXPLICATE instructions from the shareholder
Registered Owner
A shareholder who holds shares directly, i.e., whose name is recorded in a security issuer’s register as the security’s owner (also called the “record holder”). A registered owner is entitled to receive a proxy and cast votes directly with the issuer.
Composition of Plan Administration Committee
Typically an equity plan will identify the body authorized to administer the plan and will also set forth certain guidelines for the committee’s composition and operation. Most equity plans provide that the company’s board of directors or a committee of the board, such as the compensation committee, is responsible for administering the plan.
Stock option grants may be approved by a committee of two or more “non-employee” directors.
Attributes of Restricted Stock Purchase
Same as an RSA - purchase price
- Price is typically equal to market value at grant.
- Shares are issued at grant and held in escrow until vested.
- Underlying shares are considered issued and outstanding before vesting.
- Recipient has voting rights even before vesting.
- Recipient typically receives dividends on unvested shares.
Attributes of Restricted Stock Award
- Price is typically $0 or a nominal amount.
- Shares are issued at grant and held in escrow until vested.
- Underlying shares are considered issued and outstanding before vesting.
- Recipient generally has voting rights even before vesting.
- Recipient typically receives dividends on unvested shares.
Attributes of Restricted Stock Units
- Price is typically $0 or a nominal amount.
- Shares are not issued until distribution.
- Underlying shares are not considered issued and outstanding until distribution.
- Recipient does not have voting rights until distribution.
Federal Reserve Act – Fundamentals of Regulation T
IRS Regulation on Broker Same-Day-Sale Transactions
- Funds may be advanced (as an extension of credit) to cover the exercise price and withholding taxes
- Optionee must deliver notice of exercise and irrevocable instructions to the broker
- Option plan must be registered on Form S-8
- Includes employee optionees and non-employee optionees
Sarbanes-Oxley Act of 2002
Established sweeping auditing and financial regulations for public companies. Lawmakers created the legislation to help protect shareholders, employees and the public from accounting errors and fraudulent financial practices.
- Financial reporting controls (aka Internal Controls)
- Accelerated Section 16 reporting deadlines
- Prohibits personal loans to executive officers and directors
- Insider Trading
- Compensation and stock sale profit clawbacks from CEO and CFO if financials are restated because of misconduct
- Auditor conflict of interest
- Corporate governance and director conflicts
Sarbanes-Oxley Act of 2002: Section 404
Internal Controls, requires annual review by management & external auditors, including:
- Third-party administrators (SSAE 16)
- IT controls for administration database, with matrix security
- Segregation of duties
- Approval process (board, shareholder, awards, transactions) and audit to database
- Communications with external partners and internal stakeholders
- Financial expense calculations
- SEC reporting
Securities Act of 1933
’33 “Register Me”
Controls the registration of securities with SEC and national stock markets.
Created the requirement for all publicly sold stock to be registered with the federal government – before the 33 Act, regulation of securities was primarily governed by state laws. State registration laws are still in effect, they’re called blue sky laws
Securities Exchange Act of 1934
’34 “Tell Me More”
Require that investors receive financial and other significant information concerning securities being offered for public sale; and. prohibit deceit, misrepresentations, and other fraud in the sale of securities.
‘33 Act – Affiliates Definition
Defined as any person in a relationship of control with the issuer, such as a director, executive officer, or large shareholder. The question of which persons are in a relationship of control such that they should properly be considered affiliates is a fact-specific inquiry that should be addressed by each company and its counsel.
‘33 Act – Sale by Affiliates
As a result of their control relationship with the employer, affiliates may be deemed to be acting as the corporate issuer when they sell the issuer’s stock. Thus, although stock issued pursuant to an equity compensation plan may be registered on Form S-8, an affiliate may not freely sell such stock unless an exemption applies or unless the affiliate’s sale itself is registered. In most cases, resales by affiliates are made pursuant to the exemption
‘33 Act – Rule 144 Control Securities/Stock
Stock held by affiliates.
Does not matter how the stock was purchased, what matters is the control of the owner of that stock has in regards to the issuing company. Pertains to publicly traded securities and unregistered securities
- Any issuer stock directly owned by an affiliate.
- Any issuer stock owned by a household relative of an affiliate.
- Any stock held by a corporation or trust in which the affiliate has a 10% ownership or beneficial interest.
Securities Act Rule 144
Provides an exemption and permits the public resale of unregistered, restricted or control securities without having to comply with SEC requirements if a number of conditions are met, including:
- How long the securities are held
- The way in which they are sold
- The amount that can be sold at any one time
But even if you’ve met the conditions of the rule, you can’t sell your restricted securities to the public until you’ve gotten a transfer agent to remove the legend.
Rule 144 – “Restricted Securities”
Legal context:
- Refers to the registration status of the stock under the Securities Act of 1933 or the affiliate status of the stockholder under the Securities Exchange Act of 1934
- Restricted Stock (RS) is not a ‘class’ of stock, in the sense of “multiple classes of stock”
- Restricted stock can be any class of stock (common, preferred, etc.)
Rule 144 – “Restricted Securities”
Administrative context:
- Stock that has restrictions imposed by the company (e.g. vesting, resale, transfer) for example Restricted Stock Awards or Restricted Stock Units
Section 5 of the Securities Act of 1933
Says it’s illegal to trade in securities for which no registration statement has been filed, unless there is an exemption.
Failure to comply with requirements may result in the rescission rights to the purchaser.
Securities Act of 1933 – Rule 701
Constitutes an exemption of registration under the 1933 act. Securities must comply with:
- Shares must be issued as a form of compensation.
- Recipient must be natural person.
- Issuer, parent or subsidiary company
- Issuer can’t be reporting company under the 1934 Act, and can’t be registered investment company.
- No SEC notice necessary.
- Issuance must be made under written plan.
- Recipients must receive a copy of the plan.
- Securties are “Restricted” because they are not registered
- Other exemptions may be claimed, too.
- Strictly federal.
Who can receive stock under Rule 701?
- Employees
- Directors and Officers
- General partners
- Trustees
- Consultants and advisors—as long as they are people who provide bona fide services to the issuer, parent company, or majority owned subsidiary
- Family members who get securities through gifts or domestic relations orders
Who cannot receive stock under Rule 701?
- Anyone whose services are inherently capital-raising or promotional, including brokers.
- Independent agents, franchisees, and salespeople who aren’t employees.
- Service provider firms (must be “natural person”)
Rule 144 Decision Tree
three-point decision tree may be used as an initial step in determining how (or whether) Rule 144 applies
Stock Options Book, section 8.2
• Restricted or unrestricted securities
• Affiliates or non-affiliates
• Public sale or private sale
Sales of unrestricted securities by a non-affiliate will never be required to comply with Rule 144
Rule 701
Provides a safe harbor exemption from registration under the 1933 Act for non-reporting companies with respect to offers and sales of restricted securities to participants under an employee stock plan
Rule 701 –Test Sheet
SEC published test that determines Safe Harbor eligibility, must pass one to be eligible:
- Dollar cap test
- Assets test
- Outstanding stock test
At end of section 8.2 Stock Options Book
Insider Trading
Under the federal securities laws, any person, including an insider, possessing “material nonpublic information” about a company must refrain from engaging in transactions in the company’s securities until adequate public disclosure of this information has been made.
Rule 10b5-1 of the Securities Exchange Act of 1934
Prohibits trading in securities by a person having “material non-public” information.
Allows company insiders to set up a predetermined plan to sell company stocks in accordance with insider trading laws. The price, amount, and sales dates must be specified in advance and determined by a formula or metrics.
Avoids Insider Trading Liability
Also especially useful to exempt the vesting of restricted stock during blackout periods.
10b5-1, Affirmative defense against insider trading laws
Affirmative defense against trading while knowing inside information if:
• Binding contract entered into during a window period before the person became aware of the material nonpublic information
• Expressly provides a written formula for the amount, price, and date of the transaction
• Can demonstrate the transaction in question was pursuant to the plan
Trading Windows and Blackouts
A typical trading policy will restrict transactions in the company’s stock to certain designated periods following the release of quarterly financial information about the company. These trading periods are commonly referred to as “window” periods. (Similarly, the periods when trading is not permitted are commonly referred to as “blackout” periods.)
‘34 Act – Regulation S-K Proxy Statement Disclosures
Any special compensation arrangements for a departing Section 16 Reporting Person may have to be disclosed in the company’s proxy statement for the ensuing year, depending on whether that person fits the definition of “named executive officer” in S-K Item 402.
