October 31, 2003

FASB Moves on Expensing Options

On Wednesday, according to AccountingWeb.com, the FASB decided to mandate the expensing of options beginning in 2005 and will require the "modified prospective" approach for all companies (currently there are 3 different methods that are permissible). It had previously decided not to mandate any single formula for determining the value of options, but now has decided against allowing this level of flexibility. Rule proposals are still expected in early '04.

Corporate Governance Committee Evaluations

For TheCorporateCounsel.net members, in our "Governance/Nominating Committee Portal," we have posted our first sample corporate governance committee evaluation - in Word and PDF.

When developing this evaluation, I believe its important for the governance committee to consider how it performed relative to the issues that the SEC has raised in its two recent proposals that deal with nominating committees, such as:

- how the committee performed when it received shareholder nominations (including how well it made shareholders aware of its process), and

- how the committee performed when it considered incumbent directors for re-nomination

[Most common question these days: When will the SEC approve the SRO listing standards, which were supposed to be "any day now"? Answer: Nobody seems to really know anymore.]

SEC Approves NASD's "Hot Issues" Rules - Finally

The SEC approved a NASD proposed rule change regarding restrictions on the purchases and sales of IPO offerings of equity securities for comment. This rule change was first filed with the SEC in late 1999 and is on its 5th amendment.

The new NASD Rule 2790 will replace the current NASD Free-Riding and Withholding Interpretation. Rule 2790 generally prohibits NASD member firms from selling a "new issue," as defined, to an account in which a restricted person has a beneficial interest. "Restricted persons" include most brokers-dealers and their personnel and most owners and affiliates of a broker-dealer, and certain institutional account portfolio managers.

Rule 2790 does not include the NASD proposed prohibitions on "quid pro quo allocations" and "spinning", which were filed by NASD with the SEC on September 15, 2003. Thanks to Mike Holliday.

October 30, 2003

Corporate Governance in Europe

Early last week, I blogged about a speech by Ira Millstein during which Ira identified global governance reform as one of the two most significant trends arising from this spate of corporate scandals. To illustrate his point, consider that, in Germany, the Deutsche Bank CEO and some other supervisory board members of Mannesmann AG have been criminally charged with approving bonuses for Mannesmann executives following approval of Mannesmann's acquisition by Vodafone.

In the United Kingdom, a reform kicked off by the Higgs Report now requires that a company’s remuneration policy - as included in the annual Remuneration Report, which is part of the Annual Report - be put to shareholders at an annual shareholders' meeting for approval. If shareholders vote against the policy, this does not directly affect the terms of employment or compensation - but it would put pressure on the board to review those terms.

This new requirement has proved quite controversial already because - in July 2003 - the shareholders of GlaxoSmithKline refused to approve its remuneration report, largely because they were unhappy about the terms of compensation for the US CEO. In response, the company’s board stated that they commissioned an outside report and will report to shareholders on this matter in the near future. Investors still are up in arms and more significant changes appear inevitable at the company as a result.

For TheCorporateCounsel.net subscribers, learn more about how investors are feeling in the UK from an interview with Merlin Underwood on United Kingdom's Governance Practices.

Costs of SOX

Frequently, I get asked if I know of surveys analyzing the cost of SOX. There have been a couple, but I still think its too early to pinpoint an accurate range of the true costs as many rules have either only recently become effective - or have not yet been implemented. Regarding internal controls, a study by the Johnsson Group - as noted by an article in FEI's magazine - notes:

"In looking at initial one-time expenses for a "typical" $3 billion company, The Johnsson Group estimates incremental unanticipated expenditures totaling $1.1 to $3.5 million, itemized as follows:

Initial one-time costs estimates:

- Independent audit scope changes/fee increases - $500,000 - $2 million
- Internal audit expansion - $200,000 - $500,000
- Outside consulting services - $400,000 - $1 million
SubTotal - $1.1 - 3.5 million in one-time

In addition, the study states that companies can reasonably expect to incur ongoing incremental costs in the range of $800,000 to $2.8 million (Independent audit scope changes/fee increases
$500,000 - $2 million; Internal audit expansion $200,000 - $500,000; Outside consulting services $100,000 - $300,000)."

John Huber jokes that companies should make "404 costs" a line item in the income statement. Later today, we will post an announcement regarding a Tuesday, November 18th webcast with John and Teri Iannaconi, who is a Partner in KPMG's national office and former Deputy Chief Accountant in Corp Fin regarding “Internal Controls and Attestation – and the Procedural Ball of Wax.”

October 29, 2003

Wildest Proxy Season Ever

Our "Wildest Proxy Season Ever" webcast last week with Pat McGurn and Charles Elson was one of our most popular - and the transcript is now posted for members of TheCorporateCounsel.net.

During the program, Pat noted that ISS would be making its annual adjustments to both its proxy voting guidelines and CGQ criteria by mid-November - and then apply them on January 1st (typically, ISS doesn't apply them until March 1st). Like last proxy season, we will provide you details of these modfications as soon as ISS makes them.

More Microsoft

Yesterday, Microsoft filed its 424(b) prospectus with the SEC regarding its arrangement with JP Morgan to exchange options. I particularly enjoyed reading the "risk factors."

October 28, 2003

Disclosure of Option "Run Rates"

To gain shareholder approval of option plans going forward, companies will have to do a better job of explaining the purpose and objectives of such plans. So far, General Mills provides one of the best examples of what this disclosure should look like, as its latest proxy statement (filed 8/8/03) includes disclosure of useful data to investors, such as how grants will made under the proposed plan to maintain a specified "run rate." [The "run rate" is one way to track dilution; its a calculation to determine the net option usage at a company.]

From what I hear, General Mills approached some of its largest investors and asked what type of information they would like to see disclosed to assist them in analyzing the company's plan - then, General Mills included that information in its proxy statement. Below is an excerpt from that proxy statement:

"2003 Stock Compensation Plan

At the 2003 Annual Meeting, stockholders will be asked to consider the proposed 2003 Stock Compensation Plan. The key features of the Plan are set out below:

1. All employees are eligible to participate in the Plan. It is a two-year plan with a 15 million share authorization. The Company’s past stock plans have been for longer duration and generally authorized more shares.

2. Management and the Committee intend to make grants under the proposed Plan so as to further reduce the Company’s stock usage rate (or “run rate”) from 4.2 percent in fiscal 2002 to 1.6 percent at standard grant levels. In a year when the 25 percent performance adjustment is applied, the run rate could be as low as 1.2 percent or as high as 2 percent. In all cases, this represents a sharp decline from the Company’s prior share utilization for management stock compensation.

3. A blend of stock options and restricted stock will be offered under the Plan. In the past, stock options had been the principal form of long-term compensation.

4. The Plan continues the use of a performance adjustment on the size of the stock grants, providing a +25 percent upward adjustment in years of competitively superior performance and a -25 percent downward adjustment in years of below par performance.

5. The Plan reflects the Company’s strong compensation and governance practices, including:

a. Prohibiting stock option repricings, discounted stock options, reload stock options and loans.

b. Limiting the number of shares authorized under the Plan to 15 million shares (there is no “evergreen” provision) and the number of shares that can be issued as restricted stock to no more than 25 percent of shares authorized under the Plan.

c. The Plan will be managed by the Compensation Committee, which is comprised solely of independent, non-employee directors, and has engaged an independent executive compensation consultant to advise the Committee on compensation matters.

d. The Plan provides for four-year cliff vesting on all restricted stock and stock option grants. This provides for a strong retention incentive in an industry that is very competitive for top talent."

Shortly, the NASPP will be announcing a November webcast regarding shareholder approval of equity plans.

Desperately Seeking Guidance on Revenue Recognition

The Financial Accounting Standards Advisory Council (known as the "Council") provides guidance to the FASB about what its priorities should be. In its just-completed 2003 survey, Council members most often mentioned revenue recognition as one of the five most important issues that the FASB should address. Indeed, five members of the FASB also included revenue recognition as one of the most important issues to address.

Personal anecdote - "Desperately Seeking Susan" is one of my favorite movies; I grew up in Chicago and played with Rosanna Arquette in my neighborhood til 1st grade when she came to her senses - my 15 minutes...

October 27, 2003

Understanding the Basics Before Understanding Shareholder Access

In the corporate world, there are so many complex - and sometimes nonsensical - areas of law. Yet, one of the most convoluted areas underpin the SEC's proposal regarding shareholder access. I am talking about the layers of intermediaries that must work together in order to cast votes for a shareholders' meeting.

Companies ensure that all persons entitled to vote (both record holders and beneficial owners as of a record date) have an opportunity to vote after they have had an ample period of time to review proxy material and return proxy cards - and even revoke their votes if they desire. Companies solicit proxies through several layers of intermediaries - these intermediaries are involved because of the various different ways that securities can be owned. These layers of intermediaries makes it impossible for a company to directly communicate with all of its stockholders - since many stockholders remain anonymous to the company.

The voting process typically involves:

- Depositories provide an omnibus proxy to a company that states the number of shares held by "participants" in the depositories.
- "Participants" or "record holders" (primarily brokers and banks) hire proxy soliciting agents to obtain voting instructions from the beneficial owners who have bought stock through them (in "street name").
- Tabulation agents tabulate voting instructions and facilitate providing these results to the company from the participants (or from beneficial owners who provided their voting instructions directly to the company).

The voting process is similar to the process for proxy solicitation - but there are some differences. Note that record holders vote by using "proxies" - beneficial owners vote by using "voting instructions."

For TheCorporateCounsel.net subscribers, we have posted a PowerPoint presentation from ADP that explains this complicated proxy/voting process - this presentation might be useful to handout to directors so that they can better understand the SEC's important proposal. [you will need a PowerPoint viewer on your computer to open the file under #7 in our "Shareholder Access Portal"; if you can't - just shoot me an email and I will email the presentation directly to you.]

Directors By the Numbers

The WSJ has a special "Corporate Governance" section today, the most interesting of which is an interview with Peter Clapman of TIAA-CREF and David Farrell of Sun Microsystems. It also includes these factoids from The Corporate Library:

- average board size: 9.2 members
- largest board: 31 members; smallest board: 3 members
- independent outsiders: 66%
- average tenure on board: 8.4 years
- average age of directors: 58.9 years
- percentage of male directors: 90%
- total number of directors: 14,091; 9,369 served on one board and 7 served on nine boards

The Sushi Memo

From the "Ain't the Internet Great" department, the so-called "Sushi" memo made the e-mail rounds over the past week. A junior corporate partner at [name of law firm omitted; but this could easily happen in any firm] asked the paralegal on a deal they were working on to order her sushi for dinner one evening. The dutiful paralegal did as instructed and went on the seamless web and made some selections for the partner. About 45 minutes later, the paralegal received a call from the irate partner who was very displeased with her evening meal. She ordered the paralegal to research and prepare a memo on sushi options in midtown Manhattan. A memo was produced.

The partner also instructed the paralegal to have the first year on the deal review the memo before forwarding it on to the partner. The partner was apparently quite satisfied with the memo. She was on the elevator one day with the senior partner on the deal when the paralegal entered the elevator. Junior partner asked senior partner if he knew the paralegal. He said of course he did. The junior partner then gushed that he should read this great memo the paralegal wrote for her. At least proper recognition was given!

October 24, 2003

Regulation G's Mixed Blessing for REITs

In its FAQ No. 7 issued in June, the SEC staff reiterated that only the measure "funds from operations" - known as "FFO" - as defined by the industry association NAREIT could be used by companies as "funds from operations per share" in earnings releases and materials that are filed/furnished with the SEC. This exception for the real estate industry was first espoused in footnote 50 of Reg G's adopting release.

The mixed blessing is that NAREIT's definition was not universely applied by real estate companies - thus, the SEC's exception did not really help those companies too much. In FAQ 7, the SEC staff made clear that use of a modified measure would be subject to all of the provisions of Item 10(e) of Regulation S-K.

Lately, NAREIT has been in discussions with the SEC staff over a disagreement regarding the exclusion of impairment charges from FFO - the staff ruled it can't be excluded. As noted in a recent alert, NAREIT believes that this staff position is inconsistent with guidance it issued in July 2000, which indicated that impairment write-downs of depreciable real estate should be excluded from FFO. As I understand it, the theory for the NAREIT approach is that impairment charges should be treated like depreciation. The SEC staff appears to disagree. [it doesn't appear that the NAREIT alert is available on their web site - if you want a copy of the alert, shoot me an email.]

Disclosure of Potential Environmental Liabilities

Investors consistently seek more disclosure about potential environmental liabilities; companies consistently are loathe to provide too much disclosure for fear of tipping their hand in litigation. Alan Beller has stated that if the SEC puts out an interpretative release on MD&A in time for the upcoming proxy season (a window that is now measured in weeks), it will address this tension.

For TheCorporateCounsel.net subscribers, we have posted an interview with Greg Rogers on Environmental Liabilities Risks and Disclosure.

October 23, 2003

Completed My Set of Audit Committee Evaluations!

Like collecting baseball cards, we have completed a set of sample audit committee evaluations by obtaining one from each of the Big 4. Subscribers of TheCorporateCounsel.net can review these samples in our "Audit Committee Portal."

When putting together a committee evaluation, I believe its important to not overwhelm directors with too many questions. Quality over quantity. Its also important to have company-specific questions, particularly questions that probe into the committee's performance for handling critical matters that arose over the past year. The principal purpose of the evaluation process is continuous improvement.

Two different sets of directors should evaluate the committee, those on the committee and those not on the committee - although questions for those not on the committee often are part of the overall board evaluation. Note that under the PCAOB's proposal regarding internal control attestations, the independent auditor would be required to evaluate the audit committee's performance (see paragraphs 56-59 of the proposed standard)! [I find it odd that I haven't seen a single client memo on this proposal yet, arguably the most important rulemaking of the year.]

Forced and Sudden Auditor Rotation

One of the side effects of the absolute prohibition of certain non-audit services in Section 301 of Sarbanes-Oxley is that a company might suddenly find itself without an auditor with little warning. There is no materiality standard or safe harbor in Section 301 for these prohibitions. Changing an auditor is expensive as the new auditor has to exert a lot of effort to get up to speed and - more often than not - a change results in a restatement.

The first example of this dilemma comes from the Royal Bank of Canada, which had one of its two auditors (Canadian companies often have two auditors, a practice that is now changing) because it performed $200k (Canadian dollars) of non-audit services at a foreign subsidiary.

Audit committees are responsible for ensuring they don't have this messy - and expensive - situation on their hands. This can be quite a challenge for multinational companies with dozens of audit firms to oversee in far flung places (the Big 4 have loose affiliations with audit firms all over the world that share the same brand name, but really have separate operations - one of the issues implicated by the PCAOB trying to regulate the Big 4 as if they were really only 4 firms).

For TheCorporateCounsel.net subscribers - thanks to Marilyn Mooney of Fulbright & Jaworski - we have posted a nifty chart that audit committees can use to keep track of the various types of audit/non-audit services performed by the independent auditor (its at the bottom of the memo which resides in our "Audit Committee Portal").

SEC Adopts Amendments to Rule 10b-18 Safe Harbor

At its open Commission meeting yesterday, the SEC adopted changes to the Rule 10b-18 safe harbor. Rule 10b-18 provides a safe harbor from certain market manipulation violations under Rule 10b-5 for issuer repurchases of its common stock that meet certain conditions regarding the manner, timing, volume and price of repurchases.

Thanks to Mike Holliday, based on the oral comments made at the meeting, it appears that the changes include:

- elimination of the exclusion of block purchases from the volume limitation of 25% of the average daily trading volume (ADTV) so that block purchases will now have to be included in the 25% test; block purchases will also be included in the ADTV determination. The modifications adopted will provide a limited block purchase exception that would permit one block trade per week (probably of greatest value to small issuers).

- exclusion of repurchases from the safe harbor during the period from the time of public announcement of a merger, acquisition or similar transaction involving a recapitalization until the completion of such transaction. This would appear to expand the present wording which excludes from the safe harbor a purchase made "pursuant to a merger, acquisition, or similar transaction involving a recapitalization."

- expansion of merger exclusion from the safe harbor, but the SEC said it was also adopting a limited exception (e.g. whatever activity the issuer had during the 3 months prior to announcement of a merger would be permitted after announcement of the merger. In other words, the issuer could mirror the activity during the 3 prior months. It will be necessary to see exactly how this exception is worded in the adopting release.

- adoption of new disclosure requirements that will require a tabular presentation of information on all purchases of any class of registered equity securities by the issuer or any "affiliated purchaser" as defined in Rule 10b-18, whether public or private purchases, and whether or not the purchases were made under the Rule 10b-18 safe harbor conditions. The table and related footnote information are required in Forms 10-Q and 10-K. The purchase information is required to be presented on a monthly basis for each quarter. The 10-K would report information for the fourth quarter. In addition to information about purchases, certain information about publicly announced repurchase plans or programs is required, including whether the issuer still intends to purchase under the plan or program. This latter point on future intent was opposed by some commenters, but it appears it was retained in the new requirements as adopted.

October 21, 2003

The Wildest Proxy Season Ever: Forecast for 2004

Trust me that the 2004 proxy season will be wild. On top of the changes wrought by the NYSE/Nasdaq new rules regarding shareholder approval of equity comp plans (including the loss of broker non-votes), investors appear ready to cooperate more than ever. And the SEC staff likely will allow shareholder nomination proposals - so long as they reference the SEC’s proposed 14a-11 rule - so that "triggerable" circumstances will exist by the time the SEC adopts some form of shareholder access for 2005.

Last season, similar proposals were deemed excludable by the staff, such as the Citigroup no-action letter (that essentially was part of the motivation for the SEC to embark on this initiative) that the SEC staff has informally indicated is still excludable.

Tommorrow, on a TheCorporateCounsel.net webcast, join Pat McGurn of ISS as he dissects what trends are shaping up for next proxy season. In addition, Professor Charles Elson will spend some time discussing the Breeden report. I will be posting a PowerPoint from Pat sometime in the early afternoon and will link to it here and on the home page. Sign up for a "no-risk" trial to access this timely webcast.

PCAOB Registration of European Auditors

According to AccountingWeb.com, U.S. and European Union regulators are nearing agreement over the controversial matter of European firms registering with the PCAOB. U.S. firms have until tommorrow to register; EU firms have until April 2004.

Last year, E.U. Commissioner of Internal Markets objected to the suggestion that EU firms need to register with the PCAOB, indicating that their own controls are sufficient and a required U.S. registration would subject EU audit firms to "a double regulatory regime which would be excessive, inefficient and disproportionate." Now, PCAOB Chairman McDonough says that a final agreement was imminent that would require EU firms to "joint register" with their local regulators and the PCAOB.

One open issue is how much information firms will have to provide when registering. In addition, the compromise will require EU legislative changes, so that the EU registration requirements match those of the PCAOB. EU legislation can take up to 18 months - making it unlikely they could occur before the PCAOB registration deadline of April 2004.

October 20, 2003

SOX II! Now that is a Scary Thought...

At the NACD Annual Conference today, PCAOB Chair William McDonough gave an excellent speech on "Restoring Trust" and explained how the number one topic on the Hill these days is not the Iraq occupation - but rather sheer rage over executive compensation. He noted how many in Congress were asking him if it would be feasible to pass a law regulating compensation.

Much to Chairman McDonough's credit (my 1st time hearing him and he was simply great!), he recognizes that Congress' last foray in this area probably played a role in where we have gotten today (i.e. Section 162(m)). However, he believes that companies are not acting fast enough to curb excessive compensation and warns that SOX II could very well happen and that it "would curl your hair."

In addition, he noted that Wednesday is the deadline for audit firms to register with the Oversight Board, with just under 500 firms registering so far. As it will do every year, the PCAOB has begun investigating the Big 4 and have already moved from checking the "tone at the top" to an examination of individual audits (with next year promising to be more intrusive as the PCAOB grows from its 88 staffers to a much larger agency).

Ira Millstein, the Guru Speaks

The luncheon speaker was Ira Millstein, Senior Partner at Weil Gotshal, who was widely recognized at the NACD conference as the ultimate governance guru. A second edition of his book, "Recurrent Crisis in Corporate Governance" is due out in December (as an aside, Nell Minow was sporting the 3rd edition of her governance book that will be available soon - its a great book).

Ira pointed out that conceptually, two important events have occurred that outweigh the immediate impact of SOX and its related rules. First, he pointed out that the current governance revolution is a global one - not just localized here in the States. Second, he observed that governance has become a political issue - as governance undeniably impacts the company's economic growth and plays a role in the integrity of our retirement system (i.e. most retirement funds are in equities).

Regarding shareholder access, Ira's view is that the current system has not performed well - and that access clearly would be better (albeit perhaps not the best solution). Most of all, it would add to the other new incentives that should help ensure that directors are thinking about what they are doing, so that they would "be proud to tell their mother" about the decisions they have made.

October 19, 2003

Shareholder Approval of Equity Compensation Plans

Last week, the SEC approved the Amex's rules on shareholder approval - as well as amended rules for the Nasdaq.

At the NASPP conference, David Drake of Georgeson Shareholder and Art Meyers of Palmer & Dodge gave an excellent presentation on the impact of the new rules - and the NASPP might have a reprise of that panel on a special webcast soon. Also note that the Sept/Oct issue of The Corporate Counsel that just hit the streets covers the new shareholder approval rules in detail.

SFAS 123 Transition Deadline Looming

One point well made at the NASPP conference was the upcoming SFAS 123 transition deadline for companies looking to expense their outstanding options under the increasingly popular prospective method. As set forth in SFAS 148 - which amended SFAS 123 and establishes three alternative transition deadlines - the deadline for selecting the prospective method is December 15th.

Under the prospective method, the fair value expensing of options is applied only in the year of grant and subsequently. This initially results in a lower level of option expense in the income statement compared to the other two alternatives - which can make it appear that a company has a trend of increasing option expenses. However, this effect can be offset if the company intends to reduce the aggregate value of future grants - which is the case for many companies.

From Bear Stearns, here is a list of the 350 companies that have adopted - or announced that they intend to adopt - 123 as of early September.

Cert. Denied by Supreme Court in Section 16 Case

On October 14th, the U.S. Supreme Court denied the application for certiorari filed by the defendants (insiders) in Levy v. Sterling Holding Company LLC (Docket No.03-171).

This is the case with the troublesome decisions on Rule 16b-7 and Rule 16b-3. The SEC had filed an amicus brief in the rehearing before the entire Third Circuit arguing that the Court's interpretation of the SEC rules was incorrect. As you may recall, the Third Circuit did not follow the SEC's interpretation of the rules. Alan Dye - who was involved in the case - provides an analysis of this important case on Section16.net.

October 17, 2003

11-Ks and 404

On Wednesday - on a teleconference program on my old website - David Lynn, Chief Counsel of Corp Fin, clarified that Section 404 of is not applicable to Forms 11-K. Section 404, and the SEC's rules implementing it, requires each issuer that files
periodic reports with the SEC under the Securities Exchange Act of 1934 to (i) establish and maintain a system of internal control over financial reporting, (ii) include in its annual report a report by management on the system of internal controls, and (iii) accompany the report with an attestation report on the system of internal controls.

As noted by Gibson Dunn in a recent client alert, "this guidance addresses a significant question that was left open in the release adopting the Section 404 internal control requirements. Although most employee benefit plans would not have been viewed as "accelerated filers," and thus would not have been required to comply with the Section 404 rules until filing the Form 11-K report for the fiscal year ending on or after April 15, 2005 (whereas public companies that qualify as "accelerated filers" must comply with the 404 rules for fiscal years ending after June 15, 2004), there was substantial uncertainty as to how the 404 rules would
apply in the context of employee benefit plans. Accordingly, the SEC staff's interpretation provides reasonable and welcome relief."

October 16, 2003

Microsoft Receives Tender Offer No-Action Relief

After my blog last night, the SEC posted its no-action response to a request from Microsoft that sought exemptive relief from certain tender offer provisions to conduct its option exchange program. The relief granted includes exemptions from:

- Rule 13e-4(f)(2)(ii) to permit Microsoft to terminate withdrawal rights for tendered options at the end of the Election Period.

- Rule 13e-4(f)(8)(i) to permit Microsoft to exclude certain options and certain option holders from the program.

- Rule 13e-4(f)(8)(ii) to permit Microsoft (i) to pay holders of Multi-year Grant Options less for those options than other options with similar terms, (ii) to pay option holders, who are entitled to a total payment in excess of $20,000, a portion of the payment on a deferred and contingent basis, (iii) to further defer the contingent payment portion due to senior management, and (iv) to calculate the initial payment due to senior management holders in certain foreign jurisdictions with adverse tax regimes based on the relevant increased tax imposed.

In addition, the SEC staff noted that it would not object nor take enforcement action if:

- the pricing structure has a final price that will be neither known nor paid until after the Averaging Period ends.

- the total payment for transferred options is determined after the Election Period and during the Averaging Period (i.e. Rules 13e-4(f)(1)(ii) and 14e-1(b)).

- the total payment for options is determined after the Election Period and pays holders for transferred options (i.e. Rules 13e-4(f)(5) and 14e-1(c)).

October 15, 2003

Microsoft Files Tender Offer Documents for Option Transfer Program

Another day of hectic travel, so I borrow liberally from Mike O'Sullivan's blog to inform you that Microsoft has filed tender offer documents divulging the details of its novel stock option transfer program, which is designed to permit its employees to sell their underwater options to J.P. Morgan.

There are a number of tender offer documents - but the main document appears to be the "Notice to Eligible Employees of Stock Option Transfer Program."

As I am at the NASPP conference with a horde of experts on the topic, I will endeavor to get you insights into this arrangement tommorrow.

October 14, 2003

Shareholder Access Release is Up

The SEC has posted its shareholder access proposal - lots of questions asked in the release...

GMI Study Shows Link Between Good Governance & Financial Performance

GovernanceMetrics International - one of the governance rating services - recently completed a study that demonstrated a positive link between strong governance practices and a company's financial performance. Among other things, GMI found that overall, average annual total returns are higher as the percentage of independent directors increases.

For TheCorporateCounsel.net subscribers, we have posted an interview with Howard Sherman, the Chief Operating Officer of GMI, on the results of that study and the relationship between corporate governance and a company's financial performance.

8-Ks and 906 Certifications

I have received a few clarifying questions on what Paula Dubberly stated at the ACCA conference last week regarding the SEC/DOJ joint position on 906 certs (see my10/8 blog). The most common question relates to 8-Ks - its should be noted that the joint position applies to no 8-K, even ones with financial statements.

October 10, 2003

NYSE Sends Its Presumed Final Corporate Governance Listing Standards to the SEC

On Wednesday, the NYSE filed a second amendment to its proposed corporate governance listing standards with the SEC. The NYSE had made its original filing last August and filed the first amendment back in April. The current amendment (which reflects the Exchange’s response to 64 comment letters from the public as well as from the SEC) is expected to be the NYSE’s final filing with the SEC - as the NYSE sent an email to issuers indicating that the SEC might approve these standards as early as next week.

Markets Appear to Appreciate Director Independence

The executive search firm Christian & Timbers recently released results of a study it did on 15 large public companies that had each elected new, independent directors to their boards. That study found that the value of the company's stocks rose at an annualized rate of 91.5% during the period beginning with the election of the new directors.

Analysis of Shareholder Access Proposal

As the community knows, the SEC's new proxy access rules will hinge on a couple of triggering events -- one of which will be the receipt of 35% or more "withhold" votes for any given director or directors. (For a good recap of the rules based on the little we've gotten from the press release and the open meeting, see Mike O'Sullivan's blog summarizing the proposal. We're still hoping to see the SEC's release later today.)

Floyd Norris reported in the New York Times yesterday that Calpers will be withholding its votes from members of any audit committee who vote to allow the company's independent auditor to perform any tax advisory services. This is really not anything new as CalPERS had announced this policy during the past proxy season - and actually might withhold votes if an independent auditor provides any type of non-audit services this season.

October 8, 2003

11-Ks and 906 Certs - You Heard It Here First!

At the Annual ACCA Conference, I just came off a panel with Paula Dubberly, Corp Fin's Associate Director - Legal, who announced that she (and other members of the staff) just completed discussions with the Department of Justice - as well as members of the President's Corporate Fraud Task Force - and they have jointly concluded that Section 906 of Sarbanes-Oxley does not apply to 8-Ks, 6-Ks and 11-Ks.

Of course, this would have been more welcome news back in June when most plans were filing their 11-Ks - but Senator Biden's unexpected remarks on the topics put considerable pressure on the SEC staff to not take a position at that time. So those plans that filed the 906 certification in June seemingly are stuck with a cert in that filing - but can rest easy with the knowledge that the DOJ doesn't believe that 906 applies. And don't file the 906 cert next year...

October 8, 2003

SEC Proposes Rules on Shareholder Access

Although the SEC has not yet issued a rulemaking release (expected Friday) - but there is a press release - about its meeting this morning, the Commission did vote unanimously to propose rules allowing for shareholder access to corporate proxies. At the meeting today, Commissioner Harvey Goldschmid raised the question -- addressed in summary fashion by the SEC's General Counsel -- of the Commission's authority to regulate in this area. Commissioner Paul Atkins also appeared highly engaged with this issue. The SEC seems to be expecting a legal challenge on authority grounds to any access proposal it adopts, and we look forward to more on this angle of the rulemaking.

The SEC has put the proposal out for a 60-day comment period (following its official publication in the Federal Register).

Ethical Accountants

With the PCAOB, among others, continuing to spotlight the importance of accountants’ professional standards, at least one state has also stepped in to make it clear that the stakes have indeed been raised. The New York State Society of Certified Public Accountants announced on September 25 that it has adopted a bylaw amendment that requires its professional ethics committee (PEC) to share ethics violations with state and federal regulatory authorities. The PEC may even inform regulatory authorities about its investigations before a final determination is made about the alleged ethics violations. The new bylaw also requires the PEC to turn over all statements and other materials relating to the investigation, or copies thereof, requested by the regulatory authorities. New York is the first state society to adopt such an extensive referral process.

EC Adopts International Accounting Standards

On September 29, the European Commission adopted a regulation endorsing International Accounting Standards (IASs), including related interpretations, thereby confirming their compulsory use starting in 2005 under the terms of the general IAS Regulation adopted by the European Parliament and the Council in 2002. The regulation requires listed companies, including banks and insurance companies, to prepare their consolidated accounts in accordance with International Accounting Standards from 2005 onwards.

PCAOB Likely to Rebuff European Plea for Auditor Equality

As reported in the Financial Times today, Chairman William McDonough of the PCAOB is meeting next week with representatives from the European Union. McDonough has indicated that the PCAOB is unlikely to stand down on inspections of European audit firms in the near term. Chairman McDonough also indicated to the FT that the PCAOB was planning to review the independence implications raised by accountants providing tax services to their audit clients, although the Board has not set any specific time table for that review.

-- Posted by Kimberley Drexler

October 7, 2003

Upshot of Proposed Attestation Standards

Although the proposed attestation standards are not yet posted, the PCAOB has posted a briefing paper. Here are my ten cents on the proposed standards:

- Overall, the bulk of the proposed attestation standards were not a surprise, particularly the PCAOB's "one-size-does-not-fit-all" philosophy.

- However, the devil is in the details of a bevy of novel definitions. In the proposal, the most critical definitions are that of "significant deficiency" (if it results in more than a remote likelihood of a misstatement of the company's annual or interim financial statements that is more than inconsequential in amount) and "material weakness" (if, by itself or in combination with other internal control deficiencies, it results in more than a remote likelihood of a material misstatement in the company's annual or interim financial statements). Hopefully, the proposing release will clarify terms such as "more than remote" and "inconsequential."

- From the issuers' perspective, the proposal would allow companies to be able to rely on others, which is a positive development - but the discretion given to auditors as to how much documentation is considered adequate might be considered a negative one from the corporate viewpoint (ie. more expensive).

- The concept of mandatory "walk-throughs" arguably brings the involvement of auditors to new heights. A "walk-through" is when auditors kick the tires to ensure that the controls actually were implemented and operate as they were designed to operate.

- The bottom line is how will auditors "evaluate the results and form an opinion" when they consider whether a particular deficiency is "significant" or "material." Considering the fact that the Big 4 still are being sued for the misdeeds of their clients (for which they bear some responsibility, of course), they likely will remain quite conservative - which could result in a long road to hoe for companies.

Okay, I am back to the Annual ACCA Conference and I will let Kimberley take it from here...

October 7, 2003

PCAOB Proposes Attestation Standards

At its public meeting in Washington this morning, the PCAOB proposed its first substantive standard -- the auditing and related professional practice standard for the attestation to Management’s Assessment of Internal Control over Financial Reporting. Section 404 of SOX, along with Section 103, directed the PCAOB to establish these professional standards.

The PCAOB’s chief auditor, Douglas Carmichael, explained that under the proposed standard, the auditor must evaluate both management’s assessment and conclusion and the internal controls themselves in order to provide its report with the required level of assurance. As part of that, audit committees should expect to have their own performances scrutinized and evaluated. An ineffective audit committee could itself be a failure of internal controls. The PCAOB expects to receive extensive comments on this last element of its proposal.

To satisfy the PCAOB, the audit of internal controls must be integrated with the audit of the financial statements. Note that while the PCAOB isn't yet proposing to change the auditor independence rules generally, the PCAOB’s proposed standards would evidently prohibit the auditor from accepting an internal control engagement (for non-audit services) that has not been specifically (as opposed to categorically) pre-approved by the audit committee.

The PCAOB also adopted rules relating to its inspections of registered public accounting firms and proposed a rule defining some terms used in its professional practice standards.

More Details About Tomorrow's SEC Open Meeting Leaked

Not to be outdone by the PCAOB, the SEC is set to have an open meeting tomorrow (at 9:30 a.m.) to take up its own significant and undoubtedly contentious topic – whether to propose rules that would require companies, under certain circumstances, to include security holder nominees for director in the company’s proxy materials.

Unlike the typical secrecy surrounding most proposals, the details of tomorrow's proposal have been gradually leaked. The Washington Post reports today that the proposed framework will be triggered if either:

- a group representing at least 1 percent of a company's investors puts a proposal on the proxy ballot requesting that a shareholder nominee or nominees be added to the ballot the following year. The proposal would need the approval of more than 50 percent of shareholders to win; or

- 35 percent of shareholders withhold their votes for a director or slate of directors, triggering a provision giving investors the right to try to get nominees on the next year's ballot.

Once triggered, investors would have to win backing from 5% of shareholders to submit nominations. Shareholders would be allowed to propose one name for smaller boards and as many as three for larger ones. Nominees would have to get more than 50% of the vote to win.

Inside Scoop on Serving as a Director

For TheCorporateCounsel.net subscribers, we have posted a very interesting interview with Jim Ukropina on Serving as a Director. Jim, who sits on several Fortune 500 boards, provides his unique insights into a variety of topics, including the upcoming shareholder access proposal.

October 6, 2003

New SEC Settlement Policy Raises D&O Insurance Issues – And Significantly Increases Civil Litigation Risks

The upcoming issue of The Corporate Counsel will discuss the SEC's new enforcement settlement policy, that I blogged about back on August 5th. With regard to D&O insurance, this new SEC policy is very significant as it has an impact on the application of the various forms of the so-called intentional misconduct or dishonesty exclusion that exists in many policies. Specifically, if the exclusion requires only that the misconduct be established “in fact”, coverage in any ensuing civil litigation may well be precluded by the consent injunction entered in the SEC proceeding.

For TheCorporateCounsel.net subscribers, we have launched a new "D&O Insurance Portal," which includes sample underwriting questions that you can ask your insurer (courtesy of Patricia Villareal of Jones Day).

PCAOB = P-COB?

The answer to last week's trivia question - what nickname for the PCAOB is Chairman McDonough pushing for - is "P-COB."

Chairman McDonough urged the use of this nickname during his Senate testimony last week. Although the Chairman himself has been guilty of using "Peek-a-boo," it is now well known that the PCAOB strongly dislikes that nickname. I don't know about you, but I just get a feeling that P-COB will fail to attract followers...why not try something simple, like "Oversight Board"...

Evelyn Davis - Looking Her Best

Yesterday's NY Times contains a brief article about how a photo of Dick Grasso graces the cover of Evelyn's upcoming annual booklet (typically, $525 per copy, minimum order of two). Evelyn had chosen that photo before the recent controversy over Dick's compensation - but she is happy to keep the photo because "the most important thing is that it's a great picture of me." For those that aren't familiar with Evelyn, that says it all.

On GreatGovernance.com, we have posted an amusing interview with Evelyn from the Washington Post that ran in the spring.

October 3, 2003

Blah Blah Blog
Can you believe it?

October 3, 2003

Battle Heats Up Over Director Nominations - And Rules Aren't Even Proposed Yet!

Yesterday, a group of pension plans held a press conference to object to the SEC's director nomination proposal - the one that is supposed to be voted on by the Commission next Wednesday!

As reported today by the New York Times, the SEC's proposal will involve a two-year process. In the first year, a triggering event - such as a sizable percentage of shareholders that abstain or withhold votes for nominees - would have to occur. In the second year, a contested election could take place, with candidates selected by the board running against shareholder candidates (one to three candidates depending on the board's size). The shareholder candidates would have to certify that they have no conflicts of interest nor financial relationship/special ties to the investors that nominated them.

The pension plan press conference comes a few days after the Business Roundtable sent a letter to the SEC urging that the Commission study the related issues further before it takes action.

My initial reaction to this extraordinary level of pre-proposal activity is that institutional investors truly are getting their act together. Undoubtably, this exercise in lobbying the SEC will strengthen their relationships and communication channels - so that when it comes time to act as a group to meet any ownership thresholds imposed by this rulemaking, it will not be as difficult to accomplish as it might have been a year ago.

Meanwhile, from the company perspective, it will be difficult for management to get its act together to impact this rulemaking. Aside from the ASCS, ABA and BRT, many of the other associations whose members are impacted by this rulemaking think of lobbying the SEC as a sideline; not a primary mission. Another factor is that this rulemaking most directly impacts CEOs and directors; not CFOs, controllers and lawyers (which are the professions more accustomed to lobbying the SEC). CEOs tend to lobby in groups broken out by industry - and directors normally do not lobby in their roles as directors (as being a director typically is not a primary job).

Convertible Debt Offerings - "Happy Meals" and More

For TheCorporateCounsel.net subscribers, we have posted the transcript for last week's "New Twists in Convertible Debt Offerings." Personally, I learned a lot, including why a convert offering coupled with an issuer's repurchase program is called a "Happy Meal" (answer - everyone goes home happy).

We have also posted an interview with Walter Van Dorn of Thatcher Proffitt on Internal Controls for Non-US Companies .

October 2, 2003

How to Fire Your Auditor

A lot has been reported over PCAOB Board Member Charles Niemeier’s comments that the PCAOB will closely scrutinze any instances of a company changing auditors, as I blogged about on September 23rd.

At the PLI’s Directors Institute, the question was raised whether threatening to fire an auditor for the next year over a legitimate disagreement over the current year's accounting would be "coercion" prohibited by the new auditor influence rules. Commissioner Goldschmid was the only panelist who ventured an opinion on this, stating that these facts would not support a finding of coercion. Thanks to Nathan Dooley of Baker McKenzie.

PCAOB Adopts Investigations, Adjudication and Registration Withdrawal Rules

On September 29th, the PCAOB adopted rules regarding investigations and adjudications as well as withdrawal of registrations. New trivia question – what nickname for the PCAOB is Chairman McDonough pushing for?

Dick Grasso Trivia

On Monday, I asked the trivia question about which company rang the last bell with Dick. Shinhan Financial Group Co., Ltd. was the last to ring any bell with Dick, they rang the opening bell on September 16th. Sabre Holdings was the last listed company to ring the closing bell.

By the way, Christian & Timbers is conducting an online poll on “What do you think Dick Grasso will do next?” So far, writing a book is leading with 48%; becoming a CEO has 15%; consultant on regulatory issues has 13% and cable market analyst lags at 8% (heading another stock exchange has 2%).

October 1, 2003

SEC to Consider Shareholder Access Proposal Next Wednesday

As reported today by the NY Times, SEC officials noted after Chairman Donaldson's Senate testimony on NYSE governance that the shareholder access rules will be considered next Wednesday, October 8th at an open meeting.

However, the Times incorrectly reported that the SEC would be approving these rules - hopefully, that was not the tone of the SEC officials! They have to be proposed and subject to public comment first.

October Eminders is Up - So is the "2004 Proxy Season Resource Center"!

We have posted our October Eminders - and launched the 2004 Proxy Season Resource Center.

For subscribers of TheCorporateCounsel.net, the 2004 Proxy Season Resource Center includes new activities for you to consider during this proxy season, either as required by law or as a matter of prudence.

There is ample commentary, analysis, sample disclosures and sample documents. For example, courtesy of John Newell of Goodwin Procter, we have posted a comprehensive "Time & Responsibility Schedule for Accelerated Filers." We will be continuously adding new content as the proxy season wears on.