TheCorporateCounsel.net

July 10, 2006

Common Comments on Form 10-Q

Although it appears that the SEC still is considerably behind in the monumental task of uploading comments/responses to its comment letter database, Steve Quinlivan and Jill Radloff have put together this excellent memo that identifies commonly-given comments from the SEC Staff on Form 10-Qs. This memo is posted on our home page in the “Hot Topics Box” as well as in our “Form 10-Q” Practice Area.

State Comparison of Mandatory By-Law Amendments

In light of CA’s recent by-law proposal dispute with Professor Bebchuk, it is interesting to compare some of the different state approaches to by-law amendments. Keith Bishop provides us with the following analysis:

Delaware – Section 109 of the DGCL provides that after a corporation has received any payment for its stock, the power to adopt, amend or repeal bylaws is in the hands of the stockholders. However, Section 109 permits the certificate of incorporation to confer the same power on the directors. The statute makes it clear that conferring such power on the directors does not divest the stockholder of the power. Thus, Delaware has an “opt-in” approach to the power of directors to adopt, amend or repeal bylaws.

California – California takes a different approach. Section 211 of the California Corporations Code confers the authority to adopt, amend or repeal bylaws on the shareholders and on the board. The required vote of the shareholders is a majority of the shares entitled to vote. In addition, the articles of incorporation or bylaws may restrict or eliminate the power of the board to adopt, amend or repeal bylaws. Finally, only the shareholders can change a bylaw changing the number of directors or the range of directors. Thus, California has essentially an “opt-out” approach with respect to the board’s authority to change bylaws.

Nevada – Nevada has its own approach. Under NRS 78.120(2), directors have the authority to “make” the bylaws. The statute further provides that unless prohibited in a bylaw adopted by the stockholders, the directors may adopt, amend or repeal any bylaw (including any bylaw adopted by the stockholders). Unlike California, however, Nevada does not require approval by a majority of the shares entitled to vote. The default vote required is a majority of the votes cast and this can by changed by the articles or bylaws. Some companies, such as Amerco, have specified higher shareholder vote requirements such as 2/3 of the shares entitled to vote. A big difference is that Nevada (unlike both Delaware and California) permits the articles of incorporation to vest authority to adopt, amend or repeal bylaws exclusively in the directors. Thus, Nevada corporations have the ability to divest shareholders of the right to change bylaws.”

Query: Item 5.04 of Form 8-K

As the number of questions in our Q&A Forum rapidly approaching the “Big 2000” mark, I feel bad because someone e-mailed me the query below and I erased it before I could send some thoughts on it (and I can’t remember who sent it). So I decided to blog the query – and my thoughts – with the hopes that it will reach the inquisitive mind who sent it:

Question: A public company has a 401(k) profit sharing plan under which the company matches a portion of its employees’ contribution in cash. The company’s stock is not used to fund the plan, nor is it an investment option for employees under the plan. The company intends to discontinue some of its investment choices under the 401(k) plan and automatically route the discontinued funds to a new fund unless the participant directs the company to do otherwise. Neither the discontinued funds nor the new funds have any company stock. The company will be required to temporarily suspend trading by participants during this process.

Assuming that no notice to the company is required pursuant to Section 101(i)(2)(E) of ERISA, we believe that because the plan does not permit investments in the company’s equity securities, the suspension of trading under the plan does not require disclosure pursuant to Item 5.04 of Form 8-K. Do you have a different view?

Answer: I agree. If there’s no issuer stock in the plan, I don’t think that Item 5.04 is triggered.