& Securities

The upcoming transition from T+3 to T+2 settlement will have a number of practical implications for public companies that should not be overlooked. These include changes to ex-dividend dates and the meaning of “prompt payment” as well as timing and process implications for certain registered securities offerings.

Compliance with the amendment of Rule 15c6-1(a) of the Securities Exchange Act of 1934 to shorten the “regular way” settlement cycle for most stock transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2), and conforming changes to the related NYSE and Nasdaq rules, will be required beginning on September 5, 2017. As U.S. financial services industry participants diligently coordinate their efforts to ensure a smooth technical implementation of T+2, companies and their finance teams should also be sure to address any expected collateral effects related to T+2.

• Later Ex-Dividend Date. When a company declares a dividend on its shares, it must also announce the record date used to determine the shareholders entitled to receive the dividend. Many companies also include the “ex-dividend date” in their dividend press releases. The ex-dividend date, which is set by stock exchange rules, is a date prior to the record date before which a buyer must purchase shares in order to permit the transaction to settle so that the buyer is reflected as the owner of the purchased shares on the record date. Shares bought on or after the ex-dividend date are not entitled to receive the dividend. Currently, NYSE Rule 235 and Nasdaq Rule 11140 set the ex-dividend date two business days prior to the record date (consistent with T+3) for ordinary dividends. NYSE and Nasdaq have amended their rules (consistent with T+2) so that the ex-dividend date will be just one business day prior to the record date. This means that the company will experience the effects of the ex-dividend date, such as a drop in stock price by the amount of the expected dividend, one business day later than usual. Companies that choose to disclose the ex-dividend date with their dividend record date/payment date announcement should be sure to adjust for the new ex-dividend rules.
• Prompter “Prompt Payment” of Tender Offer Consideration. Exchange Act Rule 14e-1(c) provides that at the conclusion of a tender offer, whether made by an issuer or a third party, the offeror either must pay the consideration offered or return the securities tendered by shareholders promptly after termination or withdrawal, respectively, of the tender offer. The SEC Staff currently views “promptly” to mean “within three business days” (which is consistent with the T+3 settlement cycle). SEC Release 34-16384 (Nov. 29, 1979) stated that the “prompt payment” standard may be determined by the practices of the financial community, including current settlement practices. As a result, after September 5, 2017, the date by which consideration must be paid or securities returned likely will be accelerated because “prompt” can be expected to mean “within two business days.”
• Earlier Prospectus Delivery for Registered Securities Offerings. If a registered offering is not eligible for “access equals delivery” under Rule 172 of the Securities Act of 1933, physical prospectuses generally must be delivered to investors before the completion of the T+2 settlement. This shortens an already quick turnaround time for physical delivery of a prospectus to investors leaving no room for any unforeseen operational issues to arise that may delay delivery. However, to mitigate the risk of any such issues arising, as currently permitted by Rule 15c6-1(a), parties may affirmatively agree on a longer settlement cycle in most cash-only, firm commitment underwritten offerings. Therefore, companies and their underwriters may continue to settle the issuance of securities on a T+3 or T+4 basis. However, similar to current practice, it will be prudent for issuers to disclose in the prospectus the settlement window for the offering, particularly any deviation from the T+2 standard, so that secondary trading does not occur before the settlement of the initial transactions and result in failed transactions. In addition, similar considerations should be taken into account for exchange offers, redemptions and other offerings with respect to guaranteed delivery, which will also face an additional time crunch as a result of the transition to T+2.