U.S. Listed Company Regulation: Selected Topics from the Sarbanes-Oxley Act to the JOBS Act

1. U.S. Listed Company Regulation: Selected Topics from the Sarbanes-Oxley Act to the JOBS Act October 2013

2. Overview Sarbanes-Oxley Act (“SOX”): Reliability of Financial Statements and Corporate Governance Reform Post-SOX Era: Exemptions, Accommodation and Non-U.S. Issuers Dodd-Frank Act: Financial Crisis Reforms and Public Companies IV. JOBS Act: Technology and Capital Raising in the Post-Reform Period

3. I. Sarbanes-Oxley Act: History and Principal Themes • Widely publicized securities market scandals arose in late 2001 and 2002 • Egregious financial fraud uncovered at numerous large public companies • Enron, WorldCom, others • Fraudulent activity, self-dealing • Loss of jobs, savings, and stock market values • High-profile audit failures • Abuse of off balance sheet arrangements; increasingly aggressive structures • Concerns about auditor independence and self regulation • Congress considered swift and comprehensive legislation essential to reestablish market confidence • In 2002, Congress enacted SOX • Focused on enhanced accountability • Made directors and management stronger representatives of shareholders interests • Strengthened the hand of the SEC, an independent government agency, in overseeing corporations and corporate gatekeepers

4. I. Sarbanes-Oxley Act: Key Provisions • Strengthened powers of the audit committee • Audit committee members must be “independent” from company management, as defined by SEC • Must disclose whether at least one member of the audit committee is a “financial expert” • Required reports by independent auditors • Responsible for appointing, compensating, and overseeing the company’s independent audit firm • Mandated that U.S. stock exchanges adopt listing standards on the composition and function of the audit committee of listed companies • Created oversight of the auditing profession • Created the Public Company Accounting Oversight Board (“PCAOB”) to oversee the accounting profession and public company audits • Increased flow of critical information to senior management and board • Internal control requirements • Mandatory certification by CEO and CFO to adequacy of internal controls and disclosure process • Established whistleblower procedures to allow anonymous reporting by employees on questionable accounting or auditing matters • Strengthened SEC resources and sanctioning power • Increased criminal and civil penalties • Officer and director bars • New requirements governing research reports and “gatekeepers”

5. I. Sarbanes-Oxley Act: Initial Impact • SOX did not, generally speaking, seek to impose extensive new substantive rules of conduct on public companies • Notable exceptions • Prohibition on loans to executive officers and directors • Pension plan blackout date provisions • The Act did not, in explicit fashion, modify basic charter and fiduciary obligations established under the law of U.S. states or non-U.S. chartering authorities • Despite active efforts to obtain exclusions for non-U.S. issuers, Congress gave no indication that the new regulatory regime generally should not apply equally to all participants in U.S. capital markets, even those principally operated outside the U.S. • Domestic and non-U.S. companies were, from the outset, apprehensive about the procedural costs of complying with SOX

6. II. Post-SOX Era: Exemptions and Accommodation • Issuers found numerous provisions of SOX costly and otherwise burdensome in the early years, particularly requirement for auditor attestation of internal controls under Section 404(b) • SEC did not establish significant exemptions for U.S. issuers, although it repeatedly delayed application of Section 404(b) requirements to smaller public companies (“non-accelerated filers”) • Even in the absence of a legislative mandate to exempt non-U.S. issuers, SEC identified mechanisms to accommodate some non-U.S. issuer concerns, including through delayed application of Section 404 attestation requirement • The SEC accommodated non-U.S. standards of independence for audit committees • For example, incorporated necessary changes to accommodate Germany’s requirement that non-management employees’ serve as members of a company’s supervisory board • Also exemptions for other countries (e.g., Italian standard for audit committee independence) • Accommodated the practice where foreign governments sit on audit committees, even if they do not satisfy SEC independence requirements • However, a non-U.S. issuer must disclose to U.S. investors its utilization of an exemption to SOX’s audit committee independence requirements • The SEC has accepted inspection programs of qualified non-U.S. auditor oversight entities • SOX subjects public accounting firms that audit SEC-registered issuers to PCAOB oversight • Accommodation rules permit PCAOB to rely on inspections of non-U.S. supervisory institutions located in the home countries of registered non-U.S. audit firms, based upon the level of independence, transparency, and rigor of those supervisory institutions (cf. China)

7. II. Post-SOX Era: Deregistration and IFRS • In March 2007, the SEC adopted rules making it easier for non-U.S. private issuers to deregister and terminate their SEC reporting obligations • Under the previous rule, a non-U.S. issuer’s ability to deregister depended primarily on a showing that its subject securities were held by less than 300 residents in the U.S. • Made it difficult to exit even though little U.S. investor interest/suspended, but did not terminate reporting duty • The deregistration rule allows non-U.S. issuers with relatively low U.S. market interest to terminate their Exchange act registration and reporting, by meeting a quantitative benchmark • Under the new benchmark, a company can deregister equity securities if its average U.S. trading volume over a 12-month period represents 5% or less of its worldwide trading volume and it is: • Listed in one or two non-U.S. markets that represent together at least 55% of the non-U.S. issuer’s worldwide trading for a year prior to deregistration • Has not sold securities in an SEC-registered offering for at least a year prior to deregistration • Has at least one-year SEC reporting history at the time of deregistration • Has made deregistration possible for a large number of non-U.S. issuers (In 2007, about 125 non-U.S. registrants filed for deregistration, while about 75 new non-U.S. issuers filed for registration) • In November 2007, the SEC voted to remove its requirement that non-U.S. companies using International Financial Reporting Standards (“IFRS”) reconcile to U.S. GAAP • The rules, adopted in December 2007, allow non-U.S. private issuers to prepare financial statements in their SEC filings using IFRS without reconciling to U.S. GAAP

8. II. Post-SOX Era: Class Actions and the Courts • A number of significant judicial decisions, principally at the U.S. Supreme Court, had an impact on the class action landscape in the post-SOX era. • Scope of primary liability • Pleading standards • Antitrust pre-emption • For non-U.S. issuers, the most significant decision affecting class actions came In Morrison v. National Australia Bank (“Morrison”) • Morrison overturned the longstanding “conduct and effects” test for establishing when a plaintiff may bring an action against a non-U.S. issuer in the United States • Court articulated new standard based on whether – • Securities are listed on a U.S. market; or • Transaction occurred in the United States • Post-Morrison Litigation Continues to Focus Attention on Territorial Scope Issues • In re UBS: Transactions in non-U.S. markets involving dual listed securities • Porsche litigation: Actions based on swaps and other derivatives • Absolute Activitist: Defining “domestic” securities transactions

9. III. Dodd-Frank Act: Overview of Financial Crisis Reforms • In 2010, in response to the financial crisis, the U.S Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act • Broad legislation affecting nearly every aspect of U.S. regulation of financial institutions and financial markets • Reflected loss of confidence in financial institution and regulatory oversight of risk management, as well as numerous disparate concerns regarding elements of the markets previously subject to limited regulatory oversight (e.g., hedge fund advisers, over-the-counter derivatives) • No single unifying theme and not readily summarized; seeks to address among other things – • Systemic risk oversight • Orderly liquidation of financial institutions • Derivatives market reform • Corporate governance and executive compensation • Credit rating agencies and securitization • Strengthened investor protection • Hedge fund reforms • Consumer protection • Insurance reforms • Implementation calls for significant rule making by numerous regulatory agencies, much of which is still in progress

10. III. Dodd-Frank Act: Selected Provisions Affecting Listed Companies • Executive Compensation Reforms. In addition to enhanced compensation and hedging disclosure, the Act establishes numerous executive compensation reforms • “Say on Pay” and “Say when on Pay.” U.S. domestic public companies required to have non-binding “say on pay” votes on at least a triennial basis and votes at least every six years on the frequency thereafter • Say on “Golden Parachutes.” Domestic companies require to include non-binding “say on golden parachutes” vote in any proxy seeking approval for a merger or similar transaction • Broker Non-Votes. “Executive compensation” votes are non-routine matters on which brokers cannot vote without instructions from shareholders • Compensation committee and consultant independence. New requirements, including foreign private issuers in the absence of certain disclosures, on independence. • Clawbacks. Listed issuers required to establish compensation clawback policy in the event of certain restatements. • Pay Ratio Disclosure. In September 2013, the SEC proposed rules to implement required disclosure of the ratio of median employee pay to CEO pay • Proxy Access. The Act provided clear authority, but did not require, the SEC to issue rules permitting shareholder use of an issuer’s proxy materials for certain purposes • The SEC subsequently adopted rules on the issue, which were struck down by the D.C. Circuit Court of Appeals and which are not currently expected to be re-proposed

11. III. Dodd-Frank Act: Key Provisions for Non-U.S. Issuers • Whistleblower Protections and Incentives. The Act provided strengthened protection for “whistleblowers” and established new financial incentives for whistleblowers whose information leads to enforcement actions. • Whistleblowers whose information results in a monetary award of at least $1 million receive a minimum of 10 percent and as much as 30 percent of the amount recovered. • Limited exclusion for compliance programs -- in many instances, legal and compliance personnel may qualify • International scope: applies regardless of whether information is received from an employee or other person in the United States • Conflict Minerals. The Act mandated new disclosure rules regarding the use by reporting companies of “conflict minerals” (i.e., minerals obtained in war zones or areas affected by human rights violations) from the Congo and neighboring countries. • SEC adopted rules in August of 2012 to become effective no later than May 31, 2014 • Foreign private issuers and smaller reporting companies are covered by the rules • A District Court rejected a legal challenge to the SEC’s rules in July 2013, although an appeal of that decision is pending

12. III. Dodd-Frank Act: Key Provisions for Non-U.S. Issuers (cont.) • Resource Extraction Payments. The Act mandated new disclosure rules regarding payments to governments by reporting companies engaged in resource extraction (i.e., commercial extraction of oil, gas or minerals). • SEC adopted rules in August 2012, generally becoming effective in phases for fiscal years ending after September 30, 2013 • Foreign private issuers and smaller reporting companies were covered by the rules • In July 2013, a District Court effectively vacated and invalidated the SEC rules as adopted. • The SEC has determined not to appeal that ruling and is working to develop revised rules. • Extraterritorial Application of U.S. Securities Laws. The Act also modified the standard for extraterritorial application of the U.S. securities laws established in Morrison. • The Act sought to re-establish a standard similar to the traditional “conduct and effects” test for actions brought by the government. • The Act did not modify the new Supreme Court standard for private actions (including class actions), but called for an SEC study, whose recommendations were inconclusive.

13. IV. JOBS Act: Overview of Key Provisions • Principal Objectives • Enacted in 2012, the JOBs Act (the Jumpstart Our Business Startups Act ) was principally intended to facilitate capital formation in U.S. markets. • Emerging Growth Companies. The Act creates a new category of issuer, emerging growth companies (“EGCs”) • EGC is defined as an issuer with total annual gross revenue of less than $1 billion in its most recent fiscal year • The Act provides for scaled disclosure requirements for EGCs in IPO registration statements and other exemptions • Removes certain SOX restrictions on preparation of research analyst involvement in IPOs of EGCs • Liberalizes the ability to provide research reports to investors in connection with IPOs of EGCs • The Act also takes a number of other steps to facilitate offerings by EGCs, including in connection with certain auditor and accounting issues, “testing the waters” in anticipation of offerings and confidential review of filings • Public Company Registration Thresholds. • The Act increases and modifies the thresholds for mandatory registration as a reporting company under the Securities Exchange Act of 1934

14. IV. JOBS Act: Overview of Key Provisions (cont.) • Small Issuer Exemption. • The Act modified the small issuer exemption in Regulation A under the Securities Act to permit offerings of up to $50 million in a 12-month period and made related statutory modifications • General Solicitation and Advertising Prohibitions. • The Act directed the SEC to revise its rules to remove existing prohibitions on general solicitation or advertising for offerings under Rule 506, a regulatory private placement exemption and to make related modifications affecting offerings pursuant to Rule 144A • In July 2013, the SEC adopted rules to address general solicitation and advertising for Rule 506 offering and “bad actor” disqualifications for certain offerings; it also proposed additional new requirements for Rule 506 offerings. • Crowdfunding. • The Act established a number of new exemptions and provisions designed to facilitate “crowdfunding” (i.e., capital formation in which groups of people pool money, typically in small individual amounts, to make investments, typically via internet platforms), including – • Exemption from Securities Act registration for “crowdfunding” offerings in which the aggregate amount of securities sold by the issuer within the previous 12 months is $1 million or less, where the amount sold to any one investor within that period falls below certain thresholds of the investors income or net worth, not to exceed $100,000 • Provisions to require use of SEC registered funding portals and to address related liability and state law issues.

15. IV. JOBS Act: Implications for Non-U.S. Companies • EGC Provisions. Non-U.S. issuers may qualify as EGCs and lighter IPO process • Non-U.S. issuers already qualified in some cases for confidential pre-offering review may not always benefit from the more limited (two year) requirement for pre-IPO financial statements (e.g., if dual listed in home country) • Liberalization of rules governing research reports and “testing the waters” may be of interest to non-U.S. issuers, although some potential liability concerns should be taken into account • Benefits of IPO for issuer listed outside the United States may need to be balanced against offerings under Rule 144A • Relaxation of general solicitation and advertising requirements • Non-U.S. issuers, while potentially eligible to benefit from these provisions, should consider the implications carefully in light of potential liability concerns and technical consideration affecting dual U.S./non-U.S. offerings • Small offering exemption and changes in registration requirements • While potentially applicable to non-U.S. issuers, it is not clear that these new provisions will, in practice, offer significant benefits to non-U.S. issuers given (in the case of the small offering exemption) the potential relative costs of an offering in the United States and (in the case of the revised registration requirements) the potential availability to non-U.S. issuers of the exemption under Rule 12g3-2(b) • Crowdfunding • The new exemption for crowdfunding transactions is not available to non-U.S. companies.