By Mark S. Nelson, J.D.
The SEC’s Division of Corporation Finance has issued two new, unrelated Compliance and Disclosure Interpretations (C&DIs) covering executive compensation related to the COVID-19 pandemic and the Form S-3 eligibility requirements in the context of shells and special purpose acquisition companies (SPACs). The executive compensation C&DI suggests when accommodations made to executives due to the pandemic must be disclosed as benefits or perquisites under Regulation S-K. The C&DI addressing shell/SPAC combinations with private operating companies provides timely guidance in an era when such combinations have significantly grown in number and now often have celebrity-like backers, such as Executive Network Partnering Corporation, which is backed by former House Speaker Paul Ryan. While any such entities initially register under other SEC forms, some of them will later seek to make streamlined offerings under Form S-3.
Executive compensation and COVID-19. New C&DI Question 219.05 addresses issues regarding executive compensation disclosures under Items 402(a) and (c) of Regulation S-K. Item 402(c)(2)(ix)(A) requires disclosure of perquisites and other personal benefits, the aggregate amount of which is $10,000 or more. The C&DI further address executives who are named executive officers under Item 402(a)(3)(iii) and (iv), that is, subject to some qualifications, the three highest paid executives (other than the PEO and PFO) plus up to two more individuals who would have been subject disclosure but who were not serving as executive officers.
The C&DI begins by reaffirming that SEC Release No. 33-8732A applies to the determination of benefits and perquisites. As result, an item is not a benefit or perquisite if it is integrally and directly related to job performance, an evaluation that depends on the particular facts and circumstances. However, an item is a benefit or perquisite if it confers a benefit that has a personal aspect, unless the item is generally available on a non-discriminatory basis to all employees. With respect to COVID-19, the C&DI explains in detail how these principles might apply:
"In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees."
Shells and SPACs. Form S-3 is used for a variety of offerings, such as shelf offerings, by companies that meet the registrant eligibility requirements set forth in General Instructions I.A.1 through I.A.7. of the form. As a result, a company may use Form S-3 if: (1) it is organized and has its principal business operations in the U.S. or U.S. territories; (2) its securities are registered under Exchange Act Sections 12(b) or 12(g) or it files reports under Exchange Act Section 15(d); (3) it is subject to and meets Exchange Act reporting requirements for 12 calendar months before filing the registration statement; (4) has not failed to pay dividends or sinking funds and it has not defaulted on its debts or material leases; and (5) it has made all required electronic filings and has submitted all interactive data files to the Commission. Special provisions apply to successor registrants and foreign issuers.
New Securities Act C&DI Question 115.18 asks whether the combined entity resulting from the merger of a private operating company into a reporting shell (e.g., a SPAC) can rely on the shell’s pre-combination reporting history to establish eligibility to use Form S-3. Form S-3, General Instruction I.A.6 provides that certain of the eligibility requirements can be met if the combination was accomplished primarily to change the predecessor’s state of incorporation or to form a holding company such that the successor’s assets and liabilities at the time of the succession were substantially the same as the predecessor’s. Alternatively, General Instruction I.A.6 provides that eligibility can be established if all predecessors met the requirements of Form S-3 at the time of the succession and the registrant has met those requirements since the succession.
According to the SEC staff, the hypothetical merger would not likely meet the eligibility requirements for Form S-3. First, a new entity would need 12 calendar months of Exchange Act reports to satisfy General Instruction I.A.3. Second, a successor registrant would not meet General Instruction I.A.6.(a) because the merger is not primarily to change the predecessor’s state of incorporation or create a holding company; likewise, the predecessor(s) would not satisfy General Instruction I.A.6.(b)’s requirement that all predecessors meet the requirements of Form S-3 at the time of the succession because, not being a new entity or successor registrant, the combined entity would have fewer than 12 calendar months of post-combination reporting history.
The C&DI further explained the rationale behind Form S-3’s registrant requirements and the consequences of not satisfying those requirements: "Form S-3 is premised on the widespread dissemination to the marketplace of an issuer’s Exchange Act reports over at least a 12-month period. Accordingly, in situations where the combined entity lacks a 12-month history of Exchange Act reporting, the staff is unlikely to be able to accelerate effectiveness."