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Volume 26 Number 9, September 2012 SEC Adopts Conflict DEPARTMENTS Minerals Rule Page 2 LAURA D. RICHMAN, SYDNEY H. MINTZER, MICHAEL L. HERMSEN, and DAVID A. SCHUETTE of Mayer Brown LLP examine the SEC’s new confl icts mineral rule and the three-step process that it requires companies to follow to deter- mine whether, and if so, how, they must make confl ict minerals Disclosure of SEC Wells notices… ........................ disclosures. Page 30 Initial Public Offerings, Forecasts, and Selective Disclosure Page 11 KEITH HIGGINS of Ropes & Gray LLP explores the ques- Valuable, practical advice… ... Page 33 tions that have been raised about the initial public offering pro- cess, particularly SEC rules on the dissemination of information and the disclosure of projections. Director Equity Awards to PE Fund Representatives Page 18 CAROL ANNE HUFF and ELISABETH MARTIN of Kirkland & Ellis LLP discuss the issues that arise when board Dialogue with the SEC representatives of private equity funds are compensated for their Division of Corporation services in the form of equity awards. Finance Director… ................ Page 37 SECURITIES DISCLOSURE SEC Adopts Final Conflict Determining whether, and to what extent, a company is required to make confl ict minerals Minerals Disclosure Rule disclosure involves a three-step process. The fi rst step involves an analysis of whether a company The SEC’s new confl ict minerals rule imposes is subject to the rule. If so, the second step is to a three-step process for companies to follow to conduct a reasonable country of origin inquiry determine whether, and if so, how, they must make to determine whether the confl ict minerals disclosures about any confl ict minerals contained originated in the DRC or an adjoining country. in products they manufacture or contract to man- Depending upon the outcome of that inquiry, the ufacture. The fi rst disclosures are not required to company may be required to proceed to the third be made until May 2014, but signifi cant advance step, which involves supply chain due diligence preparation is required. and may require the preparation of a Confl ict Minerals Report. By Laura D. Richman, Sydney H. Mintzer, Michael L. Hermsen, and David A. Schuette Conflict Minerals On August 22, 2012, and as mandated by the Dodd-Frank Wall Street Reform and Consumer “Confl ict minerals” are specifi cally defi ned in Protection Act, the US Securities and Exchange the rule to include: Commission adopted the fi nal rule regarding dis- closure of the use of confl ict minerals that origi- • Columbite-tantalite (coltan); nated in the Democratic Republic of the Congo (DRC) or an adjoining country.1 The rule was • Cassiterite; originally proposed on December 15, 2010.2 • Gold; and The centerpiece of the fi nal confl ict minerals rule is Form SD, a new form created specifi cally • Wolframite. for specialized disclosures. The text of the SEC’s confl ict minerals disclosure requirements is Derivatives of the foregoing, limited to tantalum, contained in Section 1 of Form SD. (Form SD tin, and tungsten, also fall within the defi nition of also is being used for the purpose of the new confl ict minerals. The Secretary of State may expand resource extraction payment disclosures.3) the confl ict minerals defi nition by determining that additional minerals or derivatives are fi nancing con- fl ict in the DRC or an adjoining country. Laura D. Richman is counsel, and Michael L. Hermsen and David A. Schuette are partners, in the Corporate & Securities The confl ict minerals disclosure rule is appli- group of Mayer Brown LLP and Sydney H. Mintzer is a cable to companies in many industries because partner in the Government & Global Trade group of Mayer numerous types of products are made with confl ict Brown LLP. The authors also wish to acknowledge the con- minerals. Tantalum, which is extracted from tributions of Robert E. Curley, senior counsel, and Marc H. columbite-tantalite, is used in electronic com- Folladori, partner, of Mayer Brown LLP. ponents such as mobile telephones, computers, INSIGHTS, Volume 26, Number 9, September 2012 2 videogame consoles and digital cameras, and as circumstances analysis that takes into account the an alloy for making carbide tools and jet engine degree of infl uence a company exercises over the components. Gold, in addition to jewelry, is used materials, parts, ingredients or components of for electronic, communications and aerospace the product being manufactured. The SEC’s equipment. Tungsten, which is extracted from guidance specifi es that merely doing the follow- wolframite, is used for metal wires, electrodes and ing does not rise to the level of contracting to contacts in lighting, electronic, electrical, heating manufacture: and welding applications. Cassiterite is the metal ore from which tin is extracted. • Specifying or negotiating contractual terms with a manufacturer that do not directly relate to the manufacturing of the product (such as Companies Subject to the Rule training or technical support, price, insurance, indemnity, intellectual property rights, dispute According to Section 13(p) of the Securities Exchange Act of 1934 and new SEC Rule 13p-1, the confl ict minerals disclosure rule applies to any company that fi les reports with the SEC under Copyright © 2012 CCH Incorporated. Section 13(a) or Section 15(d) of the Exchange All Rights Reserved. Act if confl ict minerals are necessary to the func- tionality or production of a product manufac- tured or contracted to be manufactured by that company. The disclosure requirements apply to foreign private issuers as well as to domestic issu- ers and to smaller reporting companies. There is no de minimis exception. INSIGHTS (ISSN No. 0894-3524) is published monthly for a subscription rate of $746/1 year; $1,268/2 years; $1,790/3 years: $75/Single Issue Even if a company, such as a private company, by Aspen Publishers, 76 Ninth Avenue, New York, is not directly covered by the new rule, it may never- NY 10011. POSTMASTER: Send address changes theless be impacted by the confl ict minerals disclo- to INSIGHTS, 7201 McKinney Circle, Frederick, sure rule to the extent that it is part of the supply MD 21704. chain of a public company that is subject to the rule. To subscribe, call 1-800-638-8437. For customer service, call 1-800-234-1660. Manufacture. The SEC did not defi ne what For article reprints and reprint quotes contact Wrights is meant by the term “manufacture.” However, Media at 1-877-652-5295 or go to www.wrightsmedia.com. Instruction 1 to Item 1.01 of Form SD specifi es This publication is designed to provide accurate and that a company that only mines confl ict miner- authoritative information in regard to the subject als would not be considered to be manufacturing matter covered. It is sold with the understanding those minerals. that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other professional assistance is required, Contracting to Manufacture. While the SEC the services of a competent professional person should did not defi ne the term “contracting to manu- be sought. facture,” the adopting release provides guidance —From a Declaration of Principles jointly adopted in this area. To be considered to be contract- by a Committee of the American Bar Association and ing to manufacture a product, a company must a Committee of Publishers and Associations. have some actual infl uence over the manufac- www.aspenpublishers.com turing of that product. This requires a facts and 3 INSIGHTS, Volume 26, Number 9, September 2012 resolution, or other like terms or conditions Necessary to the Production concerning the product); To determine whether a confl ict mineral is “nec- • Affixing a brand, marks, logo or label to essary to the production” of a product, a company a generic product manufactured by a third should consider: party; or • Whether the conflict mineral is intentionally • Servicing, maintaining, or repairing a product included in the product’s production process, manufactured by a third party. other than being included in a tool, machine, or piece of equipment used to produce the The exception in the guidance for specifying product (such as computers or power lines); or negotiating contractual terms does not apply if such terms are the practical equivalent of terms • Whether the conflict mineral is included in directly related to the manufacture. For example, the product; and specifying that a manufacturer should include a particular confl ict mineral in a product would be • Whether the conflict mineral is necessary to viewed as contracting to manufacture under the produce the product. rule, even though the company may not be exert- ing a substantial infl uence on the overall manu- The SEC emphasized that for a confl ict min- facturing process. eral to be considered necessary for the production of a product, it must be contained in the product. Necessary to the Functionality Therefore a confl ict mineral that is used as a catalyst will not be considered necessary to the production To determine whether a confl ict mineral is “nec- of the product if it is not present in the product. essary to the functionality” of a product, the SEC However, if trace amounts appear because that guidance stated that a company should consider: catalyst is not completely washed away, the prod- uct will be viewed as containing a confl ict mineral • Whether the conflict mineral is intentionally that is necessary to its production and will be sub- added to the product, or any component of ject to the confl ict minerals dis closure rule. the product, and is not a naturally-occurring by-product; The SEC’s guidance also makes clear that to be necessary for the production, a confl ict mineral • Whether the conflict mineral is necessary to must not only be contained in the product, it must the product’s generally expected function, use be intentionally added.