April 30, 2004

Google IPO Prospectus

Here is the S-1 filed by Google for its auction IPO!

Proposed Asset-Backed Registration & Reporting Framework

At Wednesday's open Commission meeting, the SEC proposed new rules - Regulation AB - governing registration, reporting and disclosure requirements for asset-backed securities. The SEC intends this new regulatory regime to codify existing staff positions taken in no-action letters and other interpretive guidance. There is a 60-day comment period. Here is the SEC's press release. We have started posting client alerts in A.11 of our Sarbanes-Oxley Law Firm Memos.

The following are meeting notes from Jenner & Block that indicate that the proposal would:

- provide for asset-backed securities to be registered on Forms S-1 or S-3. Form S-3 would be available for shelf registration of asset-backed securities under certain conditions, including the requirement that the securities be investment grade.

- enhance foreign access to the U.S. asset-backed securities markets by alleviating impediments to shelf registration by foreign asset-backed security issuers. At the same time, increased disclosure would be required regarding the material effect of foreign laws and regulations on the securities.

- emphasize differences between asset-backed and other securities require tailored disclosure requirements that target information that is important to investors in asset-backed securities.

- codify the many exemptive orders and over 200 no-action letters that have been issued to modify Exchange Act reporting requirements for asset-backed security issuers.

- continue to allow asset-backed security issuers to file, in place of quarterly reports on Form 10-Q, distribution reports that detail the performance of pool assets and payments on the securities.

- specify which of the recently adopted Form 8-K events would be applicable to issuers of asset-backed securities and includes events that are specific to asset-backed securities, such as the failure to make a distribution.

- codify the form of certification under Section 302 of the Sarbanes-Oxley Act and would retain current requirements for an annual service or compliance statement and an assessment and report attested to by an accountant as to compliance with particular servicing criteria.

- introduce a new subpart of Regulation S-K consisting of principles-based disclosure items that would form the basis of Securities Act and Exchange Act disclosure for asset-backed securities. The proposed disclosure items are based largely on current industry practice. They further enhance requirements regarding the sponsor, servicer and trustee of the securities and require disclosure of certain statistical information on a static pool basis if material to an offering.

- codify no-action letters issued in the mid-1990s permitting the use of certain written materials about asset-backed securities. These materials may contain information about the structure and asset pool and data regarding potential payouts of the assets under various pre-payment and other assumptions.

- clarify certain interpretive issues addressed by the staff over the past decade, such as the ability to include loan level information. The new rules would also require the filing of these materials.

- place foreign asset-backed offerings on a more comparable footing with domestic issuers. In the past, foreign issuers were required to use Form S-1 until the staff was comfortable with the issuer's disclosure of its home country's regulatory environment, particularly regarding bankruptcy, tax and the perfection of a security interest. The staff determined that it could be just as vigilant on these disclosure issues in the shelf context as in the non-shelf context, and that Form S-3 should therefore be more available to foreign issuers.

Who Do Ya Like in the Derby?

If you follow the ponies, you are duty-bound as a card-carrying legal practitioner to bet on "Read The Footnotes," who a 12-1 entry in the Kentucky Derby on Saturday.

April 29, 2004

Snafus in Form ID E-Filing

I have heard members complain about a number of snafus related to the new mandatory e-filing of Form IDs that commenced Monday. In hindsight, the SEC might have been better off with a phase-in period to work out the kinks.

The most trouble appears to occur in the area of "notarized authenticating documents." For example, when you fax in your signed authentication, do not use the print version of the Form ID - you need to use the online version of the form or the SEC's system will reject it.

Thanks to Ruth Kaufman of RR Donnelley, below is an excerpt of what Donnelley sent to clients regarding notarized authenticating documents:

"The SEC has added one additional step to the Form ID process. The SEC now requires applicants to fax to the SEC (202.504.2474 or 703.914.4240) a notarized authenticating document within two days before/after the
electronic filing of Form ID. The fax must include the accession number of the electronically filed Form ID if the electronic filing preceded the fax.

Examples of how to comply with the authenticating document requirement:

"I [name of applicant] hereby confirm the authenticity of the Form ID [filed on] / [to be filed on] [specify date] containing the information contained in this document."

One way to satisfy the authenticating document requirement after electronic filing, would be to use a print-out of the Form ID application acknowledgment generated by the EDGAR Filer Management website. To use the printout to satisfy the requirement, the applicant must notarize the printout and add an authenticity confirming statement. Before faxing the printout, the applicant also should make illegible the passphrase that appears on it (as it should be kept highly confidential).

The adopted amendment, unlike the proposed, also includes a requirement to place in the notarized authenticating document the accession number of the related electronic Form ID filing when electronic filing occurs first."

Transcripts are Up!

For NASPP members, we have posted the transcript regarding "The FASB’s Expensing Exposure Draft—What it Says and How to Implement It. "

For TheCorporateCounsel.net members, we have posted the transcript regarding "The Many Faces of Director Independence."

Controlled Companies Exceptions

Yesterday, the WSJ ran an article that contained criticism of the fact that some controlled companies have taken advantage of the exceptions in the new SRO governance standards regarding director independence. I'm not convinced the criticism is warranted in all cases - rather, true independence is what counts regardless of relationships, etc.

Anyways, we have updated our "Controlled Companies" Practice Area to include links to the proxy statements of 30 controlled companies.

April 28, 2004

Blackout and Window Period Survey

Come on and fill out our latest Quick Survey - a blackout and window period survey.

OECD Finalizes Updated Corporate Governance Principles

Last week, the OECD Council approved these updated corporate governance principles after much deliberation and changes. The original OECD priniciples were established in 1999. It is expected that these principles will be ratified by the OECD Ministers at a meeting on May 12.

Some of the final principles are bound to be controversial in the US, such as:

- shareholders should have more say in nominating directors and deciding their pay
- shareholders should be able to express their views about compensation policy for board members and executives
- all equity components of an executive pay package, such as options or share incentives, should be subject to shareholders' approval
- boards should make a clear link between pay and performance when disclosing remuneration policy
- rating agencies, banks, brokers and information providers should disclose and manage conflict of conflicts of interests that may arise in the course of close contacts with a company

April 27, 2004

Business Roundtable and Direct Access

The BRT has been one of the more outspoken opponents of the SEC's shareholder access proposal - and the BRT recently filed a petition for rulemaking asking the SEC to allow companies to have direct access to beneficial owners. In addition to saving money, this would provide companies with greater opportunities to communicate with their "true" owners in the mini-contested elections that would be part of a shareholder access world.

In its petition, the BRT requests that the SEC "take steps to make the system of shareholder communications more efficient." Specifically, the petition seeks:

- companies be able to obtain a list of all beneficial owners so that they can communicate directly with beneficial owners rather than through brokers, banks and ADP

- brokers and banks be required to execute proxies in favor of their customers so that beneficial owners can vote directly rather than through "voting instructions"

- companies be permitted to transmit proxy materials directly to beneficial owners, and not have to go through brokers and banks

The petition asks the SEC to begin the process with a concept release to solicit public comment.

FOIA Flap over Shareholder Access Rulemaking

Speaking of the BRT, Gibson Dunn (which has represented the BRT for some time) recently filed a letter as part of the shareholder access rulemaking record regarding a recent denial of a FOIA request. For what I can gather from this letter, the original FOIA request sought data that ADP provided to the SEC staff - this data was prominently noted when the 35% withheld vote trigger was proposed (egs. see footnotes 78 and 84 - and related text - of the proposing release).

It appears that the SEC staff has denied this FOIA request so far. From my dwindling memory of rulemaking, under the Administrative Procedures Act, a federal agency is required to publicly state what it relied upon when proposing a rule because it can't base its rulemaking on secret evidence.

April 26, 2004

A New Approach to the Regulation of Underwriting Agreements

Suzanne Rothwell of Skadden Arps has put together a "bible" on new NASD Rule 2710. This 60-page memo - entitled "A New Approach to the Regulation of Underwriting Agreements" - follows up on her February interview with me, plus much more. It is available as a link from that interview as well as a link on the home page (until I create an "Underwriting Arrangements" Practice Area next week).

Updating Governance Practices

Learn how Nextel - a Nasdaq company - has coped with new governance obligations by forming a new department and more from my interview with their Corporate Secretary/Head of Governance & Corporate Responsibility Office, Christie Hill.

Today, You Need a New Passphrase to Make an EDGAR Filing

Starting today, you will not be able to make an EDGAR filing without a new passphrase. I blogged about this last week (and before that). If you have any questions about how to do this, look at the two Q&A Forums on Section16.net as Alan Dye has been answering hordes of questions there. Me, I ain't no EDGAR expert...

April 23, 2004

SEC Files Unusual Amicus Brief in WorldCom Litigation

Last Friday, the SEC filed an amicus brief in a 2nd Circuit court appeal from a district court decision certifying a class of investors who alleged that they were defrauded in purchasing WorldCom, Inc.'s securities based in large part upon misrepresentations contained in defendants' analyst reports.

As the NY Times noted in an article earlier in the week, the SEC's brief supports the lead plaintiff - New York State Retirement Fund - by arging that analysts like Jack Grubman affect the price of a company's stock and bonds and may be held accountable for misrepresentations they may make. Citigroup, the parent of Grubman's employer, is contending that his unrelenting enthusiasm for WorldCom securities had no impact - and therefore investors were not harmed when they relied on his reports. Here is more from the NY Times' article:

"At issue is a bedrock concept in securities law known as the fraud-on-the-market theory, used in many securities fraud cases. Under this concept, all widely disseminated information about a publicly traded security is reflected in its market price, and investors rely on the integrity of this price when deciding whether to buy or sell a security. Therefore, any information about the company that is false or misleading is reflected in the market price and can harm investors who buy or sell relying on that market price.

Lawyers at Paul, Weiss, Rifkind, Wharton & Garrison in New York, representing Citigroup in the class action, argue in their brief that this legal theory should apply neither to analysts in general nor to Mr. Grubman in particular. Their brief states that institutional investors ignore analysts' reports and that analysts' opinions - including that of Mr. Grubman - are simply part of a conglomeration of information and do not have a distinct effect on securities prices.

There is no reason to believe that Mr. Grubman's opinions, which relied on WorldCom's disclosures, had any distinct price impact "over and above the price consequences of WorldCom's massive ongoing fraud," Citigroup's lawyers said in their brief. As such, each investor should have to prove that he was harmed by Mr. Grubman and Salomon in individual cases, not as a class action.

But lawyers at the S.E.C. countered that economic studies showed that analysts' reports affect securities prices and that their very purpose was to provide information upon which investors base their decisions.

In arguing that Mr. Grubman's opinions did have an impact on WorldCom's stock and bond prices, lawyers for the New York State fund noted in their brief the "unusually close relationship" between Mr. Grubman and WorldCom, citing the analyst's attendance at board meetings where acquisitions were discussed.

Mr. Grubman's influence was so pervasive that Salomon specifically solicited prospective investment banking clients by promising them that Mr. Grubman would "support" the stock with favorable research reports if they retained Salomon as their investment banker, the brief stated.

The brief also noted that the New York fund has uncovered new evidence showing that Mr. Grubman "fraudulently manipulated the underlying financial analyses he used to value WorldCom stock to maintain falsely inflated target prices for the stock and justify a buy rating, even though WorldCom's performance did not satisfy Salomon's own criteria to earn such a rating."

It is unclear what prompted the WorldCom filing. But the brief seems to be evidence of continued vigilance by the S.E.C. on issues related to brokerage firm research even after its historic settlement with Citigroup and other Wall Street firms over analyst conflicts more than a year ago."

April 22, 2004

Samples Reflecting Top Disclosure Trends

In our "Proxy Season Resource Center," we have pulled disclosures from recent filings to give a window into what companies tend to be disclosing in five hot areas in "Top Disclosure Trends From This Proxy Season." These hot areas include:

- Shareholder Communications with Directors
- Audit Committee Financial Experts
- MD&A Overview
- Executive Perks
- Qualified Legal Compliance Committees

By the way, all 20 of the most widely-held companies have now filed their latest 10-Ks and proxy statements as reflected in our list of links to the proxy statements and 10-Ks for the 20 most widely held companies.

SEC to Propose New Asset-Backed Registration & Reporting Framework

The SEC will consider proposing an overhaul of registration, disclosure and reporting requirements for asset-backed securities at an open Commission meeting on April 28th. The proposals will relate to four primary regulatory areas: '33 Act registration; disclosure requirements; communications during the offering process; and ongoing reporting under the '34 Act.

This has been in the works in Corp Fin for about a decade as the ABS market has grown enormously and is quite a complicated project as ABS issuers have been putting a "square peg through a round hole" for quite some time. Hats off to the staffers who slugged this one! If all the staffers who had ever worked on the project were named, I would imagine they would number about 2 dozen. I even worked on the project as a staffer briefly back in '97, didn't I Knute?

Yes, Private Companies Also Getting the "Treatment" from Auditors

One member - who is at a law firm - forwarded a legal opinion request from one of the Big 4 in connection with a new audit of a privately held company. Even though the private company was seeking just a routine audit - there was no registration statement or offering involved - E&Y asked the CFO to obtain a legal opinion from outside counsel that the company is duly organized, what the capitalization is, etc. Any other interesting stories to share?

April 21, 2004

Alan Dye's New Section16.net Blog!

I'm excited to report that Alan Dye has started blogging on Section16.net regarding Section 16 matters in "Alan Dye's Section16.net Blog." With larger and larger Section 16 lawsuits making their way through the courts - including one seeking over $600 million - this blog should quickly become a morning ritual for Alan's many fans.

Don't Forget to Obtain New EDGAR Passphrases Starting Monday

Reminder that beginning Monday April 26th, the SEC will start requiring companies to obtain a new passphrase before they can make any filings on a newly updated EDGAR. Here is information from the SEC on how to create a passphrase. For more information, see Alan Dye's blog from Tuesday.

Note that the Romeo & Dye Section 16 Filer has been updated for EDGAR's new changes - but users of this Filer will not be able to use the Filing Wizard until they create a passphrase. For more information about updated EDGAR, see yesterday's SEC Digest.

PCAOB Names Its Advisory Board

The PCAOB has established its 30-member advisory board, which includes 3 lawyers that represent companies (one of whom is a former SEC Commissioner). It is intended that this board will provide input into the PCAOB's standard-setting.

Who is the Most Frequently Noted Governance Pundit?

Someone once did a Nexis search to ascertain who is the most popular source of quotes on governance for the mainstream media. Far and away, the top three - in this order - were Professor Charles Elson, Nell Minow and Pat McGurn. Not that I am in their league, but I was delighted to be quoted in this recent CNN Money article regarding Grasso's pay along with Nell and Pat. Gotta toot my horn once in a while...

April 20, 2004

The Many Faces of Director Independence

During tomorrow's webcast - "The Many Faces of Director Independence" - our panel will be analyzing over three dozen fact patterns in six different topic areas. In addition to analyzing these fact patterns, the panel will discuss a number of other important issues related to independence determinations, such as how frequently should the assessments take place!

These sample fact patterns are now available - you should print these off before the webcast to facilitate your understanding of the analysis.

Shareholder Access Framework to be Revised?

Yesterday's WSJ contained an article with rumors that the SEC might narrow the eligibility standards to submit a triggering proposal to reduce the likelihood that "narrow interests" could dominate use of the triggers. In addition, the article intimated that the SEC might increase the 35% withheld threshold to 50%.

An Interesting Way to Go Private

Yesterday's Washington Post carried an article about how IBW Financial Corp. had filed a preliminary proxy statement to conduct a 1-for-101 reverse stock-split, which would be followed by 101-for-1 stock-split - which would restore the stock to where it was to begin with. [I believe the company has given up on these transactions for now because its definitive proxy materials deleted these transactions - the Post reporter appears to have missed that...]

The purpose of the transactions was to eliminate 280 shareholders that hold less than 100 shares - enabling the company to have less than the requisite 300 shareholders for deregistration from the company's '34 Act obligations. The article notes that the company currently spends $150 per shareholder to makes its SEC filings (and pays dividends of 45 cents per share).

April 19, 2004

What to Consider for Your Next 10-Q!

I would call this interview with Jonathan Wolfman on Important Changes for Your Next 10-Q a "must" read. Not just because it includes a link to a 18-page checklist of matters to consider, but because there are some new issues to consider that were not applicable for the recently filed 10-Ks.

One big change is the new Item 703 stock repurchase tables that I blogged about a few weeks back, when I noted our compliation of sample tables that had already been voluntarily filed. We also have two dozen law firm memos in Section B.23 of our Sarbanes-Oxley Law Firm Memos on this topic.

At the ABA Spring Meeting a few weeks ago, Alan Beller fielded a few questions in the Item 703 area and indicated that, for purposes of this table, "repurchases" would not include common stock surrendered to a company in connection with a cashless exercise. Alan noted that this was his own opinion and referred the audience to check with the SEC staff (but I have spoken to some people that have checked in with the Chief Counsel's office and gotten confirmation of this position - let me know if you hear differently).

E&Y Banned from Obtaining New Public Clients for 6 Months

On Friday, SEC Chief Admin Law Judge Brenda Murry - in this 69-page initial decision - barred E&Y from obtaining new public company clients for a 6-month period.

The initial decision found that E&Y violated the SEC's rules on auditor independence during E&Y's audit of PeopleSoft, which caused PeopleSoft to violate the securities laws by filing financial statements that were not audited by an independent accountant. Interestingly, the 6-month bar is not unprecedented as three of them were levied by the SEC back in the '70s - but each of these prior instances involved fraudulent audits. In this case, the SEC didn't allege that PeopleSoft had incorrect financials.

In addition to the 6-month bar, E&Y was hit with a cease and desist order and must disgorge $1.7 million (equal to the fees for auditing PeopleSoft) - as well is required to retain an independent counsultant acceptable to the SEC to help implement better controls. E&Y reportedly will not appeal this decision to the Commissioners.

April 16, 2004

Hear FASB Chair Bob Herz on Option Expensing!

Don't forget Monday's NASPP webcast - "The FASB's Expensing Exposure Draft-What It Says and How to Implement It" - during which Bob Herz, Chair of the FASB; Paul Munter in KPMG's National Office; and Ted Buyniski of Mellon Human Resources & Investor Solutions will discuss the nuances of the exposure draft and explore the various alternatives available to implement the proposed new standards.

An audio archive and transcript will be posted following the live webcast. The non-member fee for this special webcast is $495. If you wish to access this valuable program without paying this fee, you may simply take advantage of a no-risk trial.

SEC Action over Best Price Rule Deemed Arbitrary and Capricious

On April 6th, the US Court of Appeals for the DC District issued an opinion finding the SEC's "cease-and-desist" order against WHX Corporation to be arbitrary and capricious. Some of you may recall that in March 1997, WHX launched a hostile "two-step" tender offer for Dynamics Corporation of America. WHX's first-step tender offer for 19.9% - just below DCA's pill threshold - was initially structured to include a "record holder" condition requiring DCA shareholders to be a holder of record on the record date for DCA's upcoming annual meeting in order to be eligible to tender in the offer.

WHX's goal was to acquire as many shares as possible with a right to vote at the annual meeting without triggering DCA's poison pill. At the time, WHX's lawyer contacted the SEC's Office of Mergers & Acquisitions on a pre-commencement basis seeking guidance as to whether the proposed record date condition would violate the All-Holders, Best-Price Rule (i.e. Rule 14d-10). Despite the informal advice of a staffer in OM&A that such a condition would violate Rule 14d-10, WHX proceeded to launch its tender offer with the record holder condition intact. After a threat of an SEC enforcement action, WHX amended its offer to eliminate the record holder condition.

During the pendency of the offer, however, the SEC brought action against WHX for alleged violations of Rule 14d-10. An administrative law judge upon hearing the case ruled in WHX's favor. Ultimately, WHX's offer was unsuccessful because DCA was acquired by a white knight.

Nevertheless, a year later the SEC proceeded to issue a "cease-and-desist" order against WHX, prohibiting the company from committing or causing future violations of the rule. Here is a copy of the opinion finding the SEC's action "arbitrary and capricious." Thanks to Jim Moloney of Gibson Dunn for this fine recap and analysis!

April 15, 2004

Our Analysis of Common Non-Gaap Measures

In our "Regulation G/Non-Gaap Measures Portal," we have added a new "Analysis of Common Non-Gaap Measures." Among other matters, this analysis covers 13 common non-gaap measures, complete with links to sample disclosures. These common measures include:

- Earnings Before Interest and Taxes ("EBIT")
- Earnings Before Interest, Depreciation and Amortization ("EBITDA")
- Earnings Before Interest, Taxes, Depreciation, Amortization and Rent ("EBITDAR")
- Economic Value Added ("EVA")
- Free Cash Flow ("FCF")
- Funds from Operations ("FFO")
- Net Asset Value ("NAV")
- Net Operating Income ("NOI")
- Net Operating Profit After Tax ("NOPAT")
- Operating Cash Flow ("OCF")
- Operating Earnings
- Operating Profit
- Standard & Poor's Core Earnings

ABA Spring Meeting Notes on M&A

At the ABA Spring Meeting in Seattle a week ago, new Office of Mergers & Acquisitions Chief Brian Breheny made these observations:

- SEC considering amendments to “best price rule” - Rule 14d-10(a)(2) - to remedy differing approaches by courts
- Staff considering expanding application of position re: “lock ups” in merger transactions to other situations, including restructurings
- on October 27, 2003, the SEC settled enforcement proceeding for violation of “going private” rules in SEC v. Wilkerson
- On April 1, the Second Circuit overturned a district court in this order and issued an injunction against Highland Capital in connection with MONY/AXA merger – sending photocopies of management’s proxy card to shareholders does constitute the furnishing of a “form of revocation” and is not an exempt solicitation

April 14, 2004

US Sentencing Commission Votes to Amend Sentencing Guidelines

Yesterday, the US Sentencing Commission issued a press release about last week's meeting during which the Commission voted unanimously to amend the existing organizational guidelines to make more stringent the guidelines’ criteria for effective compliance and ethics programs. The new amendments to the sentencing guidelines will be submitted to Congress by May 1st and will take effect November 1, 2004 - unless Congress disapproves them during a six-month review period.

In our "Sentencing Guidelines" Practice Area, there is a recent 24-page memo from O'Melveny & Myers about the guidelines - and more to come as this develops.

Retail Investors Communicating Online about their Voting Decisions

The ability for investors to communicate online easily about their voting decisions is an interesting concept that is being borne to fruition as told in my interview with Brian Heil and Mark Frigon of ProxyMatters.com.

Remember My Warning about Online Forms

A few months back, I blogged a warning about using online forms as many are outdated. Along those lines, Richard Rafferty of Haynes & Boone points out that the Schedule 14A on the SEC's website - which was updated in March - doesn't reflect the changes to Schedule 14A made pursuant to the SEC's November release on "Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors."

SEC Adopts Foreign Banking Exemption from 402 and Proposes No S-8s for Shell Companies

At an open Commission meeting yesterday, the SEC voted to adopt a rule that would exempt foreign banks from the insider lending prohibition of Section 13(k) of the '34 Act - as added by Section 402 of Sarbanes-Oxley. The SEC also proposed rules that would prohibit shell companies from using S-8s and would require these companies to file a 8-K when they ceased being a shell that would include all the requisite information for registering a class of securities. The SEC wants to stop the practice of reverse mergers of private operating companies into shell companies.

April 13, 2004

Did I Speak Too Soon...SEC Notices PCAOB's Attestation Rulemaking

It's a coincidence I'm sure, but after I blogged yesterday about waiting for the SEC to notice the PCAOB's rulemaking regarding attestations and internal controls - the SEC noticed it. There is a 21-day comment period.

The compliance date for accelerated filers to comply with the SEC's requirements regarding management's internal control report is the first fiscal year ending on - or after - November 15, 2004. The new attestation standard will apply to the annual audit for that fiscal year. Other dates apply for non-accelerated filers and foreign private issuers.

Company Sues Shareholder Proponent for Defamation

Back in January, as reported recently by the Atlanta Journal-Constitution, Cintas Corp. filed a defamation lawsuit against against Timothy Smith, SVP of the investment firm Walden Asset Management. Cintas alleges he made defamatory remarks at its October annual meeting.

According to the suit, Smith linked the company to a "sweatshop'' factory in Haiti. He was urging passage of a shareholder resolution calling on Cintas to assess the effectiveness of its vendor code of conduct and the compliance of its factories and suppliers. Apparently, Smith declined to comment on the case for the Journal-Constitution, but Amy Domini of Domini Social Investments, which sponsored the resolution with Walden, said that Cintas had ignored numerous attempts to discuss this issue before the meeting. Cintas is asking for damages of at least $75,000, plus unspecified punitive damages - and also wants Walden barred from repeating his sweatshop comparisons.

I waited to blog about this lawsuit because it just doesn't seem like it could really happen in this era of improved shareholder relations...I'm not sure that Cintas was thinking about the bigger picture of IR as this likely will draw negative press - and the ire of other investors - for some time to come.

Indemnification of Buyers in Acquisitions

The April installment of "Carl's Corner" is up - regarding indemnification in acquisitions. As usual, Carl provides interesting commentary and annotated provisions. This is a topic that also has been addressed by the "Deal Guys Blog."

April 12, 2004

SEC General Counsel Speaks Out on Lawyer Responsibilities

At the end of the ABA's Business Law Section meeting in Seattle last Saturday, Giovanni Prezioso, the SEC's General Counsel, gave a speech that should serve as interesting reading.

Among other topics, Giovanni noted that the SEC still is considering adoption of its outstanding "noisy withdrawal" proposal and that he believed that the SEC's existing rule pre-empts any state laws that are contradictory. Notably, he warned that the SEC is closing watching how lawyers apply the new standards and monitoring how the state bars address the issue of lawyers' obligations to clients.

SEC "Notices" PCAOB's Auditing Standard No. 1

The SEC finally has "noticed" the PCAOB's Auditing Standard No. 1, which deals with what it means to say your audit complied with the PCAOB's auditing standards versus GAAS. As you might recall, the PCAOB is required to have all of its rules approved by the SEC before they become effective. It is my guess that odds are low to nil that the SEC won't approve any of the PCAOB's rules, but the SEC has been slow to move the PCAOB's rules through this process so far (e.g. we're still waiting for the SEC to notice the PCAOB's Standard No. 2 regarding internal controls).

Imbedded in this notice appears to be a posturing - and important - reminder that "we're bigger than they are" (ie. that your financials must comply with the PCAOB rules but you'd better never forget the preeminent place of the SEC). The SEC also uses the occasion of this notice to announce that it will be coming out with an interpretive release of its own.

Sample Annual Meeting Scripts

Due to popular demand, we have created a new "Annual Stockholders' Meetings" Practice Area, complete with 2 sample annual meeting scripts in Word files.

April 8, 2004

Auditor Engagement and Request Letters

At the ABA Spring Meeting, one hot topic was the growing struggle between counsel and auditors over audit request letters. Recent issues of The Corporate Counsel have analyzed the latest issues arising in this area - and upcoming issues will continue to address these issues as they evolve.

Along these lines, I have received a lot of emails from members rife with horror stories related to auditor request letters - as well as some success stories in pushing back. Please share your stories with me and then I will try to post a comprehensive (and anonymous) analysis of what appears to be happening in the industry.

Here is an example of a recent horror anecdote I received from a member: "Our company just received an audit request letter with the following language: Please confirm that all information brought to your attention indicating the occurrence of a possible illegal act committed by the Company, or any of its agents or employees, has been reported to [the Auditing Firm] and to the Company's Audit Committee."

By the way, the new edition of the "AICPA Audit and Accounting Manual" suggests the following key ingredients for engagement letters:

- Identification of the client
- Records retention policy
- Description of the services to be provided
- Responses to subpoenas and outside inquiries
- Staffing of the engagement
- Explanation of how fees and costs will be billed
- Description of client responsibilities
- Payment terms
- Designation of client contacts
- Consequences of non-payment
- Timing of the work
- Alternative dispute resolution
- Consequences of extending completion deadlines
- Withdrawal and termination
- Requests for additional services
- Client signature
- Client communications required by the AICPA
- Provisions to resolve potential ethical conflicts
- Any matter or terms unique to an engagement that are agreed upon in advance of rendering services

April 7, 2004

Required Disclosure of Issuer Repurchases

March 15 came and went without much fanfare, but it signaled the start of a new disclosure obligation for public companies. Beginning with their first quarterly or annual filing for a fiscal period ending on or after 3/15/04, they must provide a tabular disclosure regarding repurchases of their own securities. This disclosure is set out in Item 703 of S-K and is required by new Items 2(e) of Form 10-Q and 5(c) of Form 10-K.

A number of companies voluntarily complied with this disclosure requirement in their recent 10-Ks. With the 10-Q filing deadline approaching quickly for calendar year companies (for an accelerated filer with a quarter ended March 31, the 10-Q must be filed by May 10 this year), we have posted in our “Disclosure Analysis and Samples” practice area a new “Issuer Repurchases” page with links to some of those early examples.

The Demise of Physical Stock Certificates and T+3?

Last month, the SEC issued a concept release asking for comment regarding various topics relating to securities transaction settlements. In the release, the Commission is seeking comment on shortening the settlement cycle for securities trades from the (in)famous T+3 (so proceeds and securities would have to move more quickly after the trade date, which they often already do in our wired and wireless world) and on the elimination of physical stock certificates, bringing us closer to a paperless world.

The elimination of physical stock certificates has been a long-standing initiative of the Securities Industry Association and could serve to save companies money and administrative headaches if proposed and eventually adopted. Comment letters are due to the SEC by June 16th.

And Now, It's that Much Easier to Submit Comments to the SEC

Recently, the SEC upgraded its website to allow anyone to submit comments on a proposal by filling out an "EdgarFeed" form. If you go to a proposing release on the SEC's website and click the link where it says "Click to Submit Comments," an online form pops up where you can input the relevant contact info as well as your comments - and then just hit "Submit."

Although submitting comments before was fairly easy, this new form should facilitate the process even more (e.g. the commenter no longer needs to remember to include the file number as it's handled automatically). It looks like die-hard commenters can use the new form to submit comments on any rulemaking that was proposed in 2004, not just those that still have open comment periods. Perhaps the shareholder access proposal would have had 20,000 comment letters instead of 13,000 with this form...

April 6, 2004

SEC Brings Another Certification Enforcement Action

A week ago Thursday, the SEC's Enforcement Division filed another lawsuit based on false CEO/CFO certifications as well as other fraud offenses. This complaint is entitled SEC v. Cedric Kushner Promotions.

According to Ken Winer of Foley & Lardner, based on the allegations in the complaint, the conduct at issue was egregious. so the case probably would have been brought even without the Section 302 certification.

Nevertheless, Ken points out that the complaint is interesting in one respect. The SEC charged that the CEO "signed [the annual report] and the Sarbanes-Oxley certification without having read either document and without having taken any steps to determine their accuracy or truthfulness, relying instead on nothing more than Angel's representation to that effect." According to the complaint, Angel was a 27-year old executive vice president, whose responsibilities included working hand-in-hand with the issuer's auditors to ensure that filings are complete and accurate, and to review filings for completeness and accuracy prior to presenting them to the CEO and to the executive vice president who was principal finance and accounting officer.

Thus, the enforcement action signals that a CEO must do more than obtain conclusory assurances from a senior officer of an issuer. Certifying officers should not take comfort from the appearance that this case does not break new ground. Ken fully expects that the SOX certification will result in the SEC bringing enforcement actions against certifying officers that would not have been brought absent the certification.

April 5, 2004

U.S. Court of Appeals Overturns MONY Decision on Mailing Management Proxy Cards

On Friday, the U.S. Court of Appeals for the Second Circuit unanimously ruled in favor of MONY and directed entry of a preliminary injunction preventing a dissident shareholder, Highfields Capital, from violating the SEC's proxy rules by mailing proxy material that included reproductions of MONY's proxy card to stockholders in connection with MONY's proposed merger with AXA Financial (without complying with the disclosure requirements of the proxy rules). The Court held that "MONY will suffer irreparable harm if [the dissidents] are allowed to enclose duplicates of management's proxy cards in their solicitations to MONY shareholders without complying with the disclosure requirements" of the federal proxy rules.

As previously blogged about on February 16th, the judicial pendulum has swung back to reversing what had been the SEC staff's position (the SEC's now invalid position was that the applicability and scope of Rule 14a-2(b)(1) - the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6 - allowed dissidents to include management proxy cards in their mailings without preparing full blown proxy materials of their own).

IASB Issues New Accounting Standards

Last Wednesday, the International Accounting Standards Board (IASB) issued a number of new standards (and amended other standards). As I blogged a few weeks ago, these standards take effect in 2005 for more than 90 countries. Controversial standards regarding derivatives are still subject to change from what is included in these standards.

U.S. companies are still following U.S. rules, but IASB and FASB are working to create a single set of rules that both can use.

Correlation between Corporate Governance and Corporate Performance?

The latest GMI Governance and Performance Analysis study finds a statistically significant correlation between governance and performance when measured across a number of variables over a multi-year period.

Results of the new analysis are consistent with those of GMI's 2003 report as well as other studies in the field, including "Corporate Governance and Equity Prices" by Paul Gompers, Joy Ishii and Andrew Metrick (Quarterly Journal of Economics, February 2003) and Chapter 5 of The Recurrent Crisis in Corporate Governance by Paul MacAvoy and Ira Millstein (Palgrave MacMillan, 2003).

April 2, 2004

Intel's New Two-Year Incentive Plan

On Wednesday, Intel caused a stir when it filed its proxy statement which revealed that it included a novel company proposal to replace its expiring shareholder-approved plan and a nonshareholder-approved plan (which still has three years of life in it) with a single equity plan that has a two-year life. The company says that it will seek shareholder approval every year beginning in 2005 to extend the plan for an additional year.

As the analysis on the NASPP's website reveals, this is a significant development as most companies roll out plans with a ten-year life. In fact, the only company that the NASPP could find with a similar arrangement is Altera.

No-Action '34 Act Reporting Relief for Bankrupt Companies

As the Corp Fin staff has emphasized for some time - since 1997 with Staff Legal Bulletin 2 - it is hard to obtain no-action relief for modified, reduced '34 Act reporting for bankrupt or reorganized companies. I bet the staff rejects more requests in this area than it grants.

In fact, as this new no-action letter denying relief reflects, the Chief Counsel's office will not hesitate to do some sleuthing of its own to rebut a company's representations that it has few market makers or low trading volume.

Here is an excerpt from the SEC staff's response: "Specifically, despite the company's belief that there have been 5 market makers for the company's common stock, the OTC Bulletin Board reports 17 active market makers for the company's common stock as of March 22, 2004. In addition, although not included in the company's letters, the trading volume for the company's common stock during the months preceding the letters generally ranged in the hundreds of thousands to millions of shares per day."

By the way, who are these investors that heavily trade a bankrupt company's securities...

SOX on Sky Radio

So I'm on a cross-country flight yesterday, flipping through United's radio stations and come across a program on "Corporate Governance and Best Practices." It featured several vendors (that I never heard of before) who sliced and diced a bunch of Sarbanes-Oxley topics, including internal controls. That's proof to me that SOX has gone mainstream. [And Michigan won that "other" basketball tourney! Go Blue!]

April 1, 2004

Our April E-Minders is Up!

The April issue of E-Minders is now available!

The FASB's New Exposure Draft on Options Expensing

As expected, the FASB issued its exposure draft on options expensing yesterday. Comments are due by June 30, 2004. Here is the link to the FASB document that has links to the actual Proposed Statement and Appendices - a total of 229 pages of a pdf document. However, it is in segments consisting of the Proposed Statement (25 pages) and 7 appendices, each of which can be separately downloaded.

Hear what Bob Herz, Chair of the FASB, thinks about the new exposure draft on the NASPP's webcast - "The FASB’s Expensing Exposure Draft—What it Says and How to Implement It" - on April 19th. In addition to Bob, Paul Munter, Partner, KPMG’s National Office and Ted Buyniski, Principal, Mellon Human Resources & Investor Solutions will discuss the nuances of the exposure draft and explore the various alternatives available to implement the proposed new standards. Try a no-risk trial to the NASPP and catch this exciting webcast!

Upcoming EDGAR Changes

Based on the newly released draft EDGAR manual, Form IDs soon will be required to be filed electronically - and notarized copies faxed to the SEC - before they can be processed by the SEC staff.

In addition, all existing filers will have to create a passphrase before they can continue filing. These passphrases will allow filers to reset passwords, PMAC, and CCC codes (in the past, a Form ID was required to be filed if any of these codes were forgotten or if a password expired). Another change is that the length of company and individual names can now be up to 150 characters.

These changes are scheduled to take effect on April 26th (the draft manual says the 24th, the most recent web notice says 26th). Learn more on Section16.net.

Sarbanes-Oxley to be Repealed!

I couldn't resist an April Fool's joke. Now, off to Seattle for the ABA Spring Meeting -and then on a quasi-vacation next week (ie - working at half-speed, but still intend to blog)...