July 31, 2003

For TheCorporateCounsel.net subscribers, we have posted the transcript of yesterday's "50 Nuggets" webcast at http://www.thecorporatecounsel.net/member/audio/07_30_03_transcript.htm. Please give me feedback/pushback on any of the nuggets and whether you liked format of program - broc.romanek@thecorporatecounsel.net. I hope to update the transcript with tidbits as i get feedback from the community.

Yesterday, SEC chairman Donaldson gave a one-year anniversary of SOX speech at http://www.sec.gov/news/speech/spch073003whd.htm. Nothing much new was said - but some of the Q&A was interesting, particularly the focus on the media on getting some of the former Enron execs in jail (for which the SEC has no authority).

You got the sense that his tenure might ultimately be judged on whether these alleged fraudsters at Enron and other scandal-ridden companies go to the "pokey." And the answer to the shareholder access question indicated that it was quite likely that the SEC will adopt rules quickly in this area.

July 30, 2003

Today is our practical webcast - "50 Nuggets in 50 Minutes" - which includes a special session with Alan Dye on the recent Section 16 e-filing changes at http://www.greatgovernance.com/programs.html#50nuggets.

We also have posted the August Eminders at http://www.thecorporatecounsel.net/E-minders/ - which includes more notes from last week's ABA webcast on "reporting up." We are holding a webcast on August 13th regarding "Designing Reporting-Up and Complaint Procedures" - see http://www.greatgovernance.com/Programs.html#designingprocedures.

Yesterday, the House Financial Services committee released a 1-year anniversary SOX report - see http://financialservices.house.gov/media/pdf/Sarbanes-Oxley%20One%20Year%20Later.pdf.

Yikes, the SEC is moving fast as promised on shareholder access. It has scheduled an open meeting for next Wednesday, August 6th, to consider proposing rules regarding disclosure of nominating committee activities and board/shareholder communications (but note that the proposed SRO corporate governance listing standards have languished for nearly a year, go figure). See http://www.sec.gov/news/digest/dig072903.txt.

July 29, 2003

Happy birthday Sarbanes-Oxley! The SEC got a nice birthday present regarding third-party liability when JP Morgan and Citigroup settled for big $$$ for their involvement in the Enron scandal. See http://www.sec.gov/news/press/2003-87.htm.

The SEC's General Counsel, Giovanni Prezioso, has released a letter he sent to the State Bar of Washington regarding the attorney conduct rules at http://www.sec.gov/news/speech/spch072303gpp.htm. Washington's State Bar has proposed a rule that would conflict with the SEC's new Rule 205. Part 205.3(d)(2) provides that "an attorney appearing and practicing before the Commission in the representation of an issuer may reveal to the Commission, without the issuer's consent, confidential information related
to the representation to the extent the attorney reasonably believes necessary..." to prevent certain specified harm. The State Bar's proposal would prohibit Washington lawyers from disclosing confidential information to the Commission that Rule 205 would permit them to disclose.

It should be noted that the ethical rules of most - if not all - states prohibit the revelations allowed under Rule 205 unless a higher threshold is met. There has been a debate as to whether the permissive provision adopted by the SEC would preempt the prohibition set forth in the ethical rules of the various states. In this letter, the SEC's General Counsel is taking the position that Rule 205 would preempt state law under the supremacy clause - and that a state bar can't discipline an attorney, appearing and practicing before the Commission, who in good faith, reveals to the Commission without the issuer's consent, confidential information related to the representation to the extent the attorney reasonably believes it is necessary to achieve one of the objectives of Part 205.3(d)(2).

Importantly, the SEC's General Counsel does not address whether a state bar could discipline an attorney who in good faith believes such a revelation is necessary if the bar later finds that the belief was not reasonable. Thanks to Ken Winer for his help deciphering the GC's letter!

For TheCorporateCounsel.net members, we have launched our "Blog City," which consists of five different sets of practitioners - with varying areas of expertise - blogging for your enjoyment. I like to think that the paper analogy to this new concept is the use of columnists in your daily paper - so find a blogger or two that matches your particular interests and personality today at http://www.thecorporatecounsel.net/blog/blog_city.htm.

We also have posted two interviews: one with LaDawn Naegle and Randy Wong on how to file CEO/CFO certifications this quarter at http://www.thecorporatecounsel.net/member/InsideTrack/07_29_03_Naegle.htm - and the other with Caroline Gottshaulk on how SOX impacts voluntary filers at http://www.thecorporatecounsel.net/member/InsideTrack/07_25_03_Gottschalk.htm.

July 28, 2003

Effective today, the SEC has tweaked Edgar so that CEO/CFO certifications must be filed as Exhibits 31 (for Section 301 certs) and 32 (for 906 certs) - rather than under "signatures" and as exhibit 99. In addition, earnings releases and blackout period information must now be filed under the 8-K items that were originally intended (ie. the SEC's interim fix of using Item 9 is no longer in effect).

For TheCorporateCounsel.net subscribers, we have posted a Word file of the new 302 certification at http://www.thecorporatecounsel.net/member/DocLibrary/302_certification.doc.

Also, the SEC has commenced a 6-month trial to allow same-day Edgar filings to be received at 6 am EST - 2 hours earlier than the 8 am official start time. See http://www.sec.gov/info/edgar/ednews/edchanges728.htm.

This SEC press release is curiously silent about the changes to the Section 16 e-filing system that are supposed to take effect today (as noted in this SEC final release from last week adopting updated Edgar Manual 8.6 - http://www.sec.gov/rules/final/33-8255.htm).

Based on what we know, we expect the SEC's changes to not fix all the snags that currently exist. As a result, we have added a session to this Wednesday's webcast where Alan Dye will explain these traps and offer possible solutions - join us Wednesday for "50 Nuggets in 50 Minutes" at http://www.greatgovernance.com/programs.html#50nuggets.

Last Friday, the SEC released a study encouraging the adoption of a "principles-based" accounting system - see http://www.sec.gov/news/press/2003-86.htm.

July 25, 2003

On yesterday's ABA webcast on "Reporting Up," there was an interesting discussion on when in-house counsel can be considered the "supervisor" of outside counsel. Richard Humes, Associate General Counsel of the SEC (speaking on behalf of himself and not the Commission) expressed the view that this scenario could exist in certain circumstances.

In other words, if an in-house lawyer is acting as “supervisory attorney,” within the meaning of Rule 205.4, for all outside securities lawyers who are appearing and practicing before the Commission in the representation of the issuer, and one of those outside securities lawyers reports evidence of a material violation to the inhouse attorney, that outside lawyer is then relieved of any further Rule 205 obligations with respect to that evidence. [I will blog more after I listen to the program again - and note that more complete notes from this webcast will be in the upcoming August Eminders.]

This interpretation of Rule 205 could be quite problematic in practice - and create some unwieldly results as companies might be pressed to engage in active review of their outside counsel's reporting up policies. Of course, it is unreasonable for both companies and their outside counsel to be negotiating policies on a "one-off" basis. And I can't imagine how a mid-level in-house lawyer who has asked a senior partner in a firm to review his or her work would intuitively view themselves the "supervisor" of that partner. More to come...

For TheCorporateCounsel.net subscribers, we have launched a "Shareholder Access Portal" at http://www.thecorporatecounsel.net/member/FAQ/ShareholderAccess/index.htm.

July 24, 2003

As my blogging software gave me fits this week, I pondered "what if you blog and no one can hear you" - or as Don McLean put it "the day the blogging died." Anyways, I am back in the saddle...

On July 28, 2003, EDGAR Release 8.6 will take effect. A list of the changes set forth in the Release is listed below. The two worth noting are:

1. Form 8-K will now permit the filing of Items 10, 11, 12 and 13. As you may recall, the SEC issued interpretive guidance indicating that issuers should file all earnings releases required to be filed under Item 12 under Item 9 until the EDGAR system was updated. Accordingly, all Item 12 filings (earnings releases and other releases of results of operations for completed fiscal periods) made on or after July 28, 2003 can be filed as Exhibit 12.

2. The EDGAR system will now recognize Exhibit 31 (302 certifications) and Exhibit 32 (906 certifications). Accordingly, for all 10-Ks and 10-Qs filed on or after July 28, 2003, the CEO/CFO certifications can be filed as Exhibits 31 and 32 (as opposed to filing to the 302 certifications after the "Signatures" section and filing the 906 certifications as Exhibit 99).

Note: Although the effective date will technically be the date of publication in the Federal Register, which should occur on or about July 28th (the final rules adopting Release 8.6 were just released yesterday), I think companies are safe implementing these changes on July 28th. Thanks to Amy Seidel of Faegre & Bensen!

For TheCorporateCounsel.net subscribers, we have posted an interview with Bob Schifellite of ADP on Proxy Season Results at http://www.thecorporatecounsel.net/member/InsideTrack/07_24_03_Shiffeletti.htm.

July 23, 2003

Rumor has it that the SEC's July 28th changes to the Section 16 e-filing system will not fix all the glitches. However, it is likely that the changes will start allowing CEO/CFO certifications to be filed under the new proper items. In other words, the EDGAR system will be reprogrammed to permit filing of 8-K Items 10, 11, 12 and 13. If correct, this will have a big effect on those making earnings announcements and filing second quarter 10-Qs.

For TheCorporateCounsel.net subscribers, we have added two more sample reporting up policies to our "Attorney Responsibility Portal" at http://www.thecorporatecounsel.net/member/FAQ/attnyresponsibility/index.htm.

July 22, 2003

Corporate Counsel magazine (not affiliated with our publications) has released its annual GC compensation survey that reveals that inhouse lawyer salaries are going up. Here are profiles of Top 10 inhouse lawyers that get paid the most - http://www.corpcounsel.com/other/3rd_party/GCProfiles.shtml.

July 21, 2003

The PCAOB has set a date by which audit firms must register on a Form 1 - October 22nd. See more at http://www.pcaobus.org/pcaob_news_7-17-03.asp.

In addition, the PCAOB has released a 12-page briefing paper for its upcoming July 29th roundtable on internal controls at http://www.pcaobus.org/rules/2003-07-10_Internal_Control_Briefing_Paper.pdf. The briefing paper lays out the status of the various internal control issues - and lists the discussion questions to be addressed at the roundtable.

July 16, 2003

One surprising note in the aftermath of Corp Fin's shareholder access report is the apparent speed by which the Commission appears ready to act - a proposal on the disclosure component sometime in August and a proposal on shareholder access to the ballot in September. See the Washington Post interview with SEC chair Donaldson at http://www.washingtonpost.com/wp-dyn/articles/A61884-2003Jul15.html. Obviously, the magnitude of the shareholder access proposal should persuade the Commission to allow a lengthy comment period after its proposing release is issued.

For TheCorporateCounsel.net subscribers, we have posted a list of 20 insider trading policies at http://www.thecorporatecounsel.net/member/FAQ/InsiderTrading/07_03_SamplePolicies.htm.

July 15, 2003

Today, the Division of Corporation Finance delivered its report to the SEC on shareholder access - and should be commended for making its report public. The 33 page report is well-written and organized, with a series of pros and cons for the 5 alternatives presented - and a series of questions for the Commission to consider when it puts together an official proposal. See the staff report at http://www.sec.gov/news/studies/proxyreport.pdf. There is also a 55 page summary of comments at

I have yet to fully digest the report - but at first glance, it appears clear that the staff has considered the state law issues involved in what could be a complicated rulemaking project. Obviously, the Commission has the authority to require enhanced disclosure - and has some room to maneuver under the proxy rules regarding the nomination process.

However, state law dictates most of the nominating process - and the tension between those state laws and the staff's alternatives that would allow major, long-term shareholders to nominate directors that will come under close scrutiny.

For TheCorporateCounsel.net subscribers, we have posted an interview with Tom Hanley of Pepper Hamilton on Impact of Nasdaq's Proposed Shareholder Approval Rules on PIPEs at http://www.thecorporatecounsel.net/member/InsideTrack/07_14_03_Hanley.htm.

July 12, 2003

Here is an interesting observation from Sue Morgan, a partner at Perkins Coie: She thinks it is very interesting that Microsoft apparently is actually going to grant restricted stock units, not "stock awards" in the usual sense. While the references in the conference call and articles are to "stock awards," the Microsoft press release makes this one reference:

"While many companies provide stock awards, commonly know as restricted stock units, to executives, Microsoft is one of the first major corporations in which every employee will be eligible to become a direct owner of the company through Stock Awards."

Sue confirmed this with someone at Microsoft, who said that "we are doing units, but they will be referred to as stock awards." According to Sue, while restricted stock is actually outstanding stock, restricted stock units are units of stock that are recorded in an account and paid out in shares as the units vest. As with other companies that have granted restricted stock units rather than restricted stock, one of the reasons is most likely to avoid the Section 83(b) election morass that comes with actual awards of restricted stock.

July 11, 2003

In anger over comments made about classification of non-audit services at HealthSouth, the SEC has sent a letter to E&Y. The letter states that not all attestation services can be treated as "audit-related" for purposes of the audit/non-audit fee table in the proxy statement. See the letter at http://www.sec.gov/info/accountants/staffletters/e-y070803.htm.

The PCAOB has announced a roundtable on internal controls to be held on July 29th - an all day affair which will be webcast. See http://www.pcaobus.org/pcaob_news_7-10-03.htm.

Thanks to John Jenkins at Calfee, Halter & Griswold for the following insightful analysis regarding the questions I posed on Wednesday regarding Microsoft's underwater option arrangement with JP Morgan:

It's hard to predict what Microsoft is going to do, but I'll bet that from a 1933 Act standpoint, they'll do something similar to what they did for their directors and executive committee members' stock options back in December 1997, which is use the discretion provided under the plans to allow them to transfer the options, and then register the primary shares underlying them on an S-3 - http://www.sec.gov/Archives/edgar/data/789019/0001047469-97-009148.txt.

By doing it this way - instead of through the the re-offer prospectus approach contemplated by General Instruction C to Form S-8 - I guess Microsoft concluded that it could avoid having to name the transferors or transferees of the options as selling shareholders. I don't think that works with whatever they're doing here. If the transferees are JP Morgan or other identified investment banks and they're purchasing the securities, I would imagine that the S-3 would have to identify the relevant investment banks in the plan of distribution section or in a prospectus supplement and that those folks would likely be subject to Section 11 liability.

The issue of shareholder approval came up when the SEC eliminated the restrictions on transferability back in the mid-1990s. I know that back then, the staff took an interpretive position that eliminating the transferability restrictions wasn't a material modification requiring shareholder approval. It looks like Microsoft acted on that advice, like I think most people did. In the 1997 S-3, there's language indicating that the option plans generally prohibit transfers by plan participants, but as with many of the plans put in place after transferability was first permitted, they allow the Board to "extend such transferability rules, on a general or specific basis, in its sole discretion." I think most post-1995 plans have similar language, so even if Microsoft is dealing with newer plans than the ones covered here, my guess is that the ability of the board to allow transfer won't be an issue under the plans or the agreements.

The transcript of Steve Ballmer's press conference sheds some light on the accounting treatment Microsoft expects (the bottom line is that they're going to expense all of their outstanding options and reflect that treatment in prior periods as well):

"Given that we are going to account for this under FAS 123, which is also the rule under which stock options must be expensed, it means we will also be expensing stock options that have been granted previously. For best comparability of our results going back and forward, we will reflect FAS 123 in our basic results for prior years in addition to our go forward results."

Ballmer's comments provide a few more details on how this is going to work (I've got no idea how they're going to implement this, but it sort of sounds like a combination of a standby underwriting arrangement and some of the restricted stock hedging strategies that brokerages have been peddling for quite some time). It also looks like they're trying to get some interpretative advice from the Commission (perhaps on the tender offer issue):

"The other thing which we are announcing to our employees today is the work that we are doing to implement a program that will allow them or give them the option, I should say, the choice, to sell their options that are, let's say, quite a bit underwater, to a third party or a set of third parties. We are working through the details of that now, both with the Securities and Exchange Commission, who needs to review this kind of an offer, as well as with third parties. The goal here would be to allow the employees to make a sale of their underwater options, and to receive the proceeds from a third party on that sale on some schedule which vests into the future."

Here's the link to the whole press conference -http://www.microsoft.com/presspass/exec/steve/2003/07-08compensation.asp .

As to the tender offer issue, Microsoft probably is arguing this isn't like a repricing exchange offer, in that it involves the facilitation of the exercise of an option, which is best regarded as a compensation decision, and not an investment decision. Ballmer's comment that the optionees are going to be paid "on some schedule which vests into the future" undercuts that argument, and also suggests to me that in addition to any Williams Act issues are associated with the deal, there may also be some 1933 Act issues associated with what the employees are receiving from JP Morgan (or whomever).

July 10, 2003

I got some great feedback to yesterday's questions posed about Microsoft's novel underwater option arrangement with JP Morgan from several community members.

Art Meyers of Palmer Dodge notes that the existence of the JP Morgan program raises the possibility that any stock options issued in the future by Microsoft might be taxable at grant under the Section 83 IRS regulations. The analysis is if JP Morgan's valuation program can be viewed as causing the company's stock options to be considered "actively traded on an established market" within the meaning of IRS Reg. 1.83-7(a) and (b)(1), then future options (whether immediately exercisable or not) might be taxable upon grant, not exercise.

Furthermore, even if this trading criteria is not met, a future option that is fully vested when issued (or perhaps even an early exercise option) and is freely transferable could be taxable upon grant under IRS Reg. 1.83-7(b)(2). That subsection generally only requires such an option to have a fair market value which can be "measured with reasonable accuracy."

Let me know if you have anything to add to Art's reasoning. I will post additional community member thoughts tommorrow.

By the way, Mike O'Sullivan of Munger Tolles provides some detailed background about Microsoft's plans in his excellent "Corp Law Blog" at http://www.corplawblog.com.

July 9, 2003

Today's problem for the day (as sent by a community member): Does anyone understands how the proposed Microsoft plan to have employees sell underwater options to JP Morgan works? It would seem options registered on an S-8 are generally not transferable (See General Instruction A to Form S-8) but perhaps an S-3 could be filed or something. Is this a tender offer by Morgan? Also, if the option agreement provides for nontransferability, or if the plan documents provide for nontransferability, can those provisions be waived without shareholder approval as a material amendment? What are the accounting issues associated with an amendment? We will post answers soon - but if you have any thoughts, send them to broc.romanek@thecorporatecounsel.net.

For TheCorporateCounsel.net subscribers, we have posted an interview with Geoff Morgan of Michael, Best & Friedrich on State Laws that “Wanna Be” Sarbanes-Oxley at http://www.thecorporatecounsel.net/member/InsideTrack/07_09_03_Morgan.htm.

July 8, 2003

As reported by Alan Dye on Section16.net, last week the SEC sent over 600 letters of rejection to companies that tried to file Section 16 reports on paper.

Even more troublesome is that we hear that companies might believe they have successfully filed a report through the SEC's new system - because they did not receive a rejection email - yet the filing was not successful. It is critically important to go to the SEC's Edgar database each time you believe you have made a filing to confirm the filing was made!

Please share any similar horror stories with us by sending me an email at broc.romanek@thecorporatecounsel.net.

July 7, 2003

Back in the saddle after a trip to Yellowstone (most beautiful place on the mainland) and the annual conference of the American Society of Corporate Secretaries (always one of the best). At the ASCS conference, there was much discussion about drafting reporting-up policies before the August 5th implementation date.

Many companies and law firms have waited to see how the SEC would proceed after its January reproposal of "reporting out." But now that it appears that the SEC might not act before August 5th, they are hastily putting a policy together. For TheCorporateCounsel.net subscribers, we have put together an "Attorney Responsibility Portal," complete with a sample reporting up policy and an interview with Kris Sharpe on issues to consider regarding QLCCs (among other items). The Attorney Responsibility Portal is at http://www.thecorporatecounsel.net/member/FAQ/attnyresponsibility/index.htm.

July 3, 2003

Well, I hope my ability to interact with Broc's blogging software has improved since Tuesday.

It's been a busy week absorbing the new NYSE and Nasdaq equity compensation plan shareholder approval rules. At this point, it seems that practitioners have more questions than answers. Those of us on the west coast technology world are of course focusing primarily on the Nasdaq side of things, and our questions on those new rules include:

What is a bona fide period of unemployment?

When Nasdaq says that it "recommends" that plans meant to permit repricing use explicit terminology to make this clear, what does it mean in practical terms? It stops short of saying that the plans "must" include explicit terminology. We anticipate that Nasdaq will get many questions on this issue.

Does the exception from the shareholder approval requirement in a merger context (where the acquiror "acquires" shares under a target shareholder-approved plan and may issue such shares under awards to certain employees of the combined entity post-deal) apply where the target was private before the transaction? We think it should, but need Nasdaq to weigh in on this.

If an acquiror "acquires" target plan shares in a merger in the above manner, can it use the shares so acquired under any plan (e.g., use target ESPP shares to issue regular stock options post-deal)? There is language in the release to support this conclusion.

If an acquiror acquires a target plan that includes a shareholder-approved evergreen, can the evergreen continue to add shares to the plan after the deal and if so how would this work in terms of calculating the number of shares to be added each period (maybe the fixed number in most evergreens would apply by default)?

What is meant by the statement that a company "would not be permitted to use repurchased shares to fund options without prior shareholder approval"? We think this sentence is just meant to underscore that there is no free pass (as there never has been for Nasdaq companies) to use treasury shares unless you have shareholder approval of the maximum number to be so used. But the wording is causing some consternation.

Is the exception from shareholder approval for tax-qualified plans absolute? So, for example, if a company had a 20-year ESPP with an evergreen, would the tax-qualified plan exception mean that the company would not have to obtain new shareholder approval of the plan after ten years (as it would apparently be required to do if the plan were an option or other non-tax-qualified plan)?

Is it permissible to grant an award under a plan that has not yet received shareholder approval, where the grant is made contingent upon later shareholder approval?

And I'd guess there are many questions arising with respect to the grandfathering of old plans.

On another note, while the Disney and Abbott Labs cases have garnered a lot of attention recently about where the courts are on director duties and liability, I've just had a chance to read the Delaware Chancery Court opinion in the Oracle Corp. Derivative Litigation (June 17, 2003). The Court conludes that an Oracle Special Litigation Committee was not independent (and therefore won't accept its findings) because of various ties between both the SLC members and the company insiders involved in the litigation to Stanford University. The opinion seems to underscore how different the Delaware courts' attitudes on these issues are from a couple of years ago -- it shows the court looking under every rock to identify potential conflicts. This seems like it will be a controversial case -- it will be interesting to see where it goes from here. I'd recommend the opinion for your holiday weekend reading list (2003 Del. Ch. LEXIS 55).

Happy Fourth!

Sharon J. Hendricks

July 1, 2003

While Broc is enjoying the wild west (Yellowstone) with his family this week, a lot has already happened on the SEC front.

Section 16. First, yesterday, June 30th, was the effective date for mandatory electronic filing and website posting of Section 16(a) reports. Not only did the SEC make this requirement effective one month earlier than required by Sarbanes-Oxley, but in doing so they also created a new online filing service that is intended to simplify the filing process for Section 16 reporting persons. There are still some kinks being worked out in the new online system (the SEC is planning an upgrade to the system at the end of July), but this system is streamlining the filing process and hopefully making the insider transaction information reported more accessible to the general public.

SEC Staff indicated that on each of Friday and Monday they received about 500 electronically filed Forms 4. The Staff also indicated that the Commission rejected paper Section 16 filings it received on Monday (about 250 in total).

NYSE/Nasdaq Rules. In addition, and after much anticipation, yesterday the SEC approved new rules proposed by NYSE and Nasdaq that expand the shareholder approval requirements for equity compensation plans for NYSE- and Nasdaq-listed issuers. As expected, these new rules became effective yesterday, June 30th (on an accelerated basis). In the same release, the SEC also approved a change in the NYSE Rule 452, eliminating the ability of brokers to vote shares held in "street name" on equity compensation matters (at least those below the 5% dilution threshold level, deemed to be "routine" matters under the prior rule) unless the beneficial owner of the shares has given the broker specific voting instructions with respect to the plan proposal. This broker voting rule has a 90-day transition period prior to becoming effective, meaning that it will be effective for shareholder meetings that occur on and after September 28, 2003. The SEC release on these shareholder approval and broker voting matters is located at http://www.sec.gov/rules/sro/34-48108.htm.

Sharon J. Hendricks