TheCorporateCounsel.net

July 3, 2007

SEC Posts IFRS Proposing Release

Yesterday, the SEC posted its proposing release for accepting financial statements without a US GAAP reconciliation when they are prepared in accordance with International Financial Reporting Standards (IFRS), as published by the International Accounting Standards Board (IASB) in its English language version. The SEC posted a Staff Observations Report and Staff Review Correspondence.

Under the proposed amendments to Form 20-F, portions of Regulation S-X, Rule 701 and various Securities Act forms, in order to be eligible to omit the US GAAP reconciliation, an issuer must state “unreservedly and explicitly” that the financial statements comply with IFRS as published by the IASB, and the independent auditors’ report must similarly opine on compliance with IASB-IFRS. The proposing release describes and solicits comments concerning a number of areas where the IASB has not yet developed standards or where IFRS permits disparate treatment. These areas include: accounting for insurance contracts and extractive activities; accounting for mergers of entities under common control, recapitalizations, reorganizations and similar transactions; and the lack of any specific conventions for the format and content of income statements.

The SEC has established a 75-day comment period for the proposed amendments, which should keep this proposal on track toward being effective for reports filed in calendar year 2008.

ISS Reports on the 2007 Proxy Season

ISS highlights trends from the 2007 proxy season in its latest “Corporate Governance Bulletin.” As noted in the bulletin, clearly the come-from-behind shareholder proposal of 2007 was the “say on pay” proposal. This season saw nearly 40 proposals seeking an annual shareholder vote on executive compensation, which is a significant jump from the handful of such proposals last year. The “say on pay” proposals were remarkably successful (as these things go), with four proposals garnering a majority vote.

Beyond the “say on pay” proposals, over 60 proposals sought shareholder input on improving the link between executive pay and performance. Among the notable developments with these proposals was more shareholder support for “clawback” proposals, which generally call for recouping payments made to executives in the event that a later investigation or restatement results in their incentive goals having not been met. Also, not surprisingly, investor support for proposals requesting a shareholder vote on golden parachute packages saw an uptick in 2007, with a number winning majority votes. ISS notes that among the new executive pay proposals this year were those requesting that companies disclose, cap or permit shareholder votes on supplemental executive retirement plans, those addressing a company’s option grant practices, and those seeking information relating to the independence of compensation consultants.

ISS reports that proposals seeking majority voting continued to fare well in the 2007 season, with the most novel approach seeking to have companies reincorporate in Delaware. Proxy access proposals at H-P and UnitedHealth received strong, but less than majority support. Proposals seeking a separation of the Chairman and CEO positions did not fare as well as they had in the past. ISS also highlights continued strong shareholder support for proposals targeting anti-takeover defenses, most notably poison pills, classified boards, supermajority voting and dual-class equity structures.

Options Backdating: SEC Staff Provides Guidance on RSU Awards

One of potential collateral consequences faced by companies in the midst of investigations and pending restatements arising from options backdating troubles is that they find themselves in the unenviable position of having to suspend their equity-based employee benefit plan transactions while the company gets its financial house back in order. Oftentimes, switching over to cash-based incentive compensation can present a financial hardship at the worst possible time for the company.

Recently, the Corp Fin Staff addressed these circumstances in a no-action letter to Verint Systems. Verint had been a wholly-owned subsidiary of Comverse Technology until an IPO in 2002, and is still majority-owned by Comverse. Verint’s options backdating troubles are intertwined with those of Comverse, and the company switched to cash awards in order to retain employees while it remained delinquent and delisted. As an alternative, Verint proposed to make broad based grants of restricted stock units and deferred stock to non-affiliate, non-management employees. These awards vest in at least 3 installments over a 3-year period, except that the awards would not vest on the applicable vesting date if Verint is not current in its Exchange Act reporting obligations or if its shares are not listed on an exchange. Awards failing to vest due to either of these circumstances only vest when the later of these events occur. Further, Verint indicated that it will not deliver any shares under the awards until it is current, and that any issued shares will be treated as restricted securities (in the Rule 144 sense, that is), so that no shares can be sold until the company has an effective registration statement in place.

The Staff indicated that it would not recommend enforcement action if the awards were made to Verint employees without Securities Act registration, based on counsel’s opinion that the grants did not constitute an offer or sale under Securities Act Section 2(a)(3). In providing this relief, the Staff did not stray too far from its prior precedent in this area, most notably its no-action letter to Goldman Sachs (Aug. 24, 1998).

– Dave Lynn