TheCorporateCounsel.net

June 14, 2006

Delaware Court Watch: Mandatory By-law Amendments Could Subsume Rule 14a-8

As I blogged about recently, there are big things brewing in the Delaware courts that could shake up shareholder proposals and Rule 14a-8 as we so fondly know it.

Keir Gumbs of Covington & Burling notes: “Corp Fin has put the issue of shareholder-proposed bylaw amendments squarely in the lap of Delaware courts. Last Monday, the Division declined to address Computer Associates’ arguments that a mandatory by-law proposal submitted by Lucian Bebchuk could be excluded as contrary to state law. Although not unprecedented, this may be the first time that the Division has followed the “pending litigation” exception to its general practice of responding to shareholder proposal-related no-action requests when the proposal was a mandatory by-law proposal currently being litigated in a Delaware court.

The stakes are pretty high. With Hilton’s recent experience with shareholder proposed by-law amendments, Computer Associates’ may be faced with the tough choice of including the proposal in its proxy materials and risking shareholder approval of a by-law amendment it does not support – or waiting out the Delaware court and hoping that a decision is made before it mails its proxy materials. Not an enviable position, but other companies that are watching the development should be holding their breath as well. If the Delaware court sides with Professor Bebchuk, the floodgates for mandatory by-law proposals may soon open.

Interestingly, Grant and Eisenhofer, the firm that is representing Bebchuk in the case, already has tasted victory in this arena. Last year, it represented a group of shareholder-plaintiffs in Unisuper v. News Corporation, a case in which a Delaware Chancery court upheld the validity of terms of a contested agreement which would have required shareholder approval of the decision to adopt a poison pill. This case suggests that a by-law such as that proposed by Professor Bebchuk may not be invalid under Section 141 of the DGCL.”

On Sunday, the NY Times carried this column that touched on Computer Associates’ recent Rule 14a-8 request – but oddly, the column stated that the Staff had not yet made its decision even though it appears that it had…

Round Two: Market-Valued Employee Stock Options

Last September, you may recall that the SEC rejected Cisco’s proposal to issue exchange-traded employee options. At that time, the SEC stated that it was open to other ideas about how market instruments could be used to value employee options (and the SEC’s Office of Economic Analysis even suggested two alternatives, although the SEC’s Chief Accountant expressed skepticism about whether companies would quickly embrace them).

Last Thursday, the WSJ ran an article that Zions Bancorp planned to register securities that would mimic employee stock options for public auction – and the price fetched at auction would become a “market” value for the securities that the company could use to determine the expense it must book for awarding options to its employees. I don’t believe the registration statement is filed yet.

Here is an excerpt from the article:

“Buyers of the securities receive payments from Zions when employees exercise their options. If the options expire worthless or aren’t exercised by employees, holders of the securities receive no payments and lose the entire value of their investment. Essentially, Zions is creating what looks and feels like a so-called asset-backed security, with the underlying asset in this case being the options. The bank expects high-net-worth individuals and sophisticated investors to buy the securities. Among other things, these investors would be betting Zions’s stock will continue to rise and thus push Zions employees’ options “into the money.”

The bank hopes the auction will produce a truer — read: lower — value for employee stock options than would be derived from valuation methods such as Black-Scholes, the standard formula that has been used for years. That would happen, Zions argues, because investors would take into account factors unique to each company’s employee options program that aren’t reflected in most pricing models.”

It will be interesting to see if the SEC will approve Zions’s method – one key difference from Cisco’s rejected proposal: Zions will sell the securities at the highest, “market-clearing” price it receives at the auction rather than sales through private placements. And if the SEC approve’s Zion’s deal, it remains to be seen whether there will be enough competition among bidders to ensure a real market emerges. I don’t much about Zions Bancorp but I can’t imagine the appetite for a security based on its options would be anywhere near the level of a company like Cisco…

The Evolving Relationship Between Lawyers and Auditors

Join us tomorrow for the first in a webcast series dealing with audit committees and their advisors: “The Evolving Relationship Between Lawyers and Auditors.” Among other topics, Stan Keller of Edwards Angell Palmer & Dodge; Dick Rowe of Proskauer Rose; and Stacey Geer of BellSouth will address:

– What are the latest developments for auditor engagement letters and how do they affect independence
– What are the latest developments for audit inquiry/response letters, including how to handle non-conforming requests
– What issues arise from Interpretation 47 of FAS 143 regarding Conditional Asset Retirement Obligations (essentially environmental contingencies) – and why you should care
– How are comfort letter procedures changing – and how do these changes impact legal opinions and other aspects of deals
– How do the efforts of the ABA Task Force on Attorney-Client Privilege impact audit matters

Vonage’s IPO Travails Continue

Over the past few weeks, I have blogged about the challenges faced by Vonage’s recent IPO, including the disclosures about possible securities law violations involving the lack of links to a prospectus from a Directed Share Program solicitation. The inevitable class action lawsuits have now been filed in the US District Court for New Jersey; so far, three of them have been filed.

We have posted a copy of the complaint from one of these lawsuits in the “Rescission Offering” Practice Area. I’m always looking for content from our members, but I particularly would like to enhance the content in this Practice Area if you have something hidden in a drawer that could benefit the community…please email me if you do…