September 30, 2004

How Much CEO Pay is Too Much? How About Half a Billion?

Yesterday, we posted a practice pointer on from Paul Hodgson of The Corporate Library about a company which has paid a total of $500 million to three separate CEOs over the past decade. Yes, this is an extreme (and our October 20th conference is not about extremes - it is about practical guidance for all the situations that are not extreme) - but it is quite a shocker and makes for interesting reading.

Most importantly - particularly considering the SEC's interest in this area recently (ie. likely to be more GE-like SEC Enforcement disclosure actions) - Paul notes this amount includes a $21 payment related to the huge $111 million "golden hello" that he previously had not been aware of - the $21 million was paid to a GE subsidiary to buy Wendt out of his confidentiality agreement and it had not been disclosed in the company's proxy statement or in the filed employment contract. But Paul did manage to dig out a tiny paragraph disclosing the amount in a massive pre-bankruptcy Form 10-K.

NYSE Proposes Procedures for SEC Filing Deficiencies

Yesterday, the SEC proposed an amendment by the NYSE that would codify existing procedures followed by companies that fail to timely file their annual reports with the SEC (i.e. 10-Ks, 20-Ks, etc.; doesn't apply to the glossy annual reports). According to the proposal, once a company has been notified by the NYSE that it is late:

- Within 5 days of receipt of this notification, the company would be
required to (a) contact the NYSE to discuss the status of the annual
report filing, and (b) if it has not already done so, issue a press
release disclosing the status of the filing.
- If the company fails to issue this press release in a timely manner, the NYSE would itself issue a press release stating that the company has failed to timely file its annual report with the SEC.
- During the 9-month period from the filing due date, the NYSE would monitor the company and the status of the filing, including through contact with the company, until the annual report is filed.
- If the company fails to file the annual report within 9 months from the filing due date, the NYSE would be permitted, in its sole discretion, to allow the company's securities to be traded for up to an additional 3-month trading period depending on the company's specific circumstances.
- If the NYSE determines that an additional trading period of up to 3 months is not appropriate, suspension and delisting procedures would commence.

September 29, 2004

Yikes! Three Audit Committee Meetings Per Quarter?

A member emailed me to share the NYSE's interpretation of Section 303A.07(c)regarding the requirement that the audit committee discuss the annual/quarterly financial statements and MD&A. The comment period for the NYSE's proposed amendments ends today.

The member asked the NYSE Staff to clarify a concern regarding the proposed change to Section 303A.07(c)(iii)(B) that inserts the phrase "meet to review and" before the current requirement "to discuss" - because he was worried that the audit committee will now be required to "meet" to review specific MD&A disclosures.

In response, the NYSE Staff stated that it interprets the existing standards - not the proposed standards! - to require audit committees to review a "relatively advanced" draft of MD&A at a meeting. These meetings can be held telephonically. This interpretation comes despite the fact that it is probably not readily apparent that the NYSE had always contemplated that audit committees would be holding meetings to review specific MD&A disclosures under Section 303A.07.

As you know, many companies schedule committee meetings (including audit committee meetings) around the regular board meeting schedule. Some companies have board meeting schedules that don't coincide conveniently with the earnings press release and the Form 10-Q/K filing schedules. Such companies typically schedule two meetings of the audit committee each quarter: one to address the earnings release (including the financial statements) and another to review the Form 10-K/Q drafts. These meetings often are held telephonically.

During their second meeting, audit committees will discuss disclosures to be made under MD&A, but are unlikely to have a draft of the complete Form 10-K/Q filing - including MD&A - available at that meeting because it isn't ready yet. In such instances, the practice is to discuss disclosures under MD&A generally and instruct management to circulate a draft to committee members as soon as possible. Committee members then are given an opportunity to comment on the draft and discuss it with management, but an additional meeting is not held. Apparently, those days are over and audit committees might have to hold a third meeting to review a "relatively advanced" draft of MD&A - or a more likely solution, push back the second meeting until the MD&A is sufficiently specific.

SEC Issues SAB 106 for Oil & Gas Companies

Yesterday, the SEC issued SAB 106 to express the Staff’s views regarding the application of FASB Statement 143, Accounting for Asset Retirement Obligations, by oil and gas producing companies following the full cost accounting method.

The Coming Non-Qualified Deferred Compensation Legislation

Today is the NASPP webcast - The Coming Non-Qualified Deferred Compensation Legislation – featuring Bill Sweetnam of the U.S. Treasury Department and Max Schwartz of Sullivan & Cromwell, who will explain how this legislation is still very much alive – and the dramatic impact it will have on equity compensation!

September 28, 2004

Another Crack at Freezing Severance Payments?

Last May, a panel of the Ninth U.S. Circuit Court of Appeals in San Francisco voted 2-1 to reject the SEC's argument that $37.6 million in termination pay and bonuses to two top officials of Gemstar TV Guide International were extraordinary payments that must be frozen while the executives were under suspicion of cooking the company's books. This was the SEC's first attempt to use new Section 1103 of Sarbanes-Oxley to freeze termination payments that it felt was extraordinary.

On Friday, a majority of its 25 judges voted to grant the SEC's request for a rehearing before an 11-judge panel. No date has yet been set for the rehearing.

The big battle is over what is deemed an "extraordinary payment" - something that some of our Executive Compensation Task Force members have addressed through their practice pointers on

During the October 20th conference, how to determine the appropriate level of severance pay will be discussed on the panel, "What is the Appropriate Amount of Compensation for CEOS," as well as:

- What responsible ways (and yardsticks) can be used to structure each component of top executives’ compensation, including cash compensation, bonuses, stock compensation, retirement plans, severance and more
- What types and levels of compensation are now appropriate for CEO pay – and how to identify them
- What should be the role of surveys regarding CEO pay; including how to overcome the problems of defining peer groups
- How to critically evaluate survey data and avoid the pitfalls of benchmarking – red flags and nuggets
- How to implement internal pay equity methodology

The Future is Here - SEC Proposes Voluntary Use of XBRL

Yesterday, the SEC posted both a concept release and a proposing release regarding the voluntary tagging of EDGAR data to make the data more "fungible." Fungible is probably the best way to describe XBRL - because it is derived from eXtensible Mark-up Language (known as "XML"), a coding language that allows for the creation of individual "tags" for specific elements in structured documents.

Using XBRL, each item in a financial statement is individually tagged based on a "taxonomy," or agreed-upon system of classification. With the tags working behind the scenes, companies can create financial statements that investors can easily manipulate. In other words, investors will be able to more easily compare "apples" to "apples" when comparing the financials of different companies.

Even before this voluntary program - that the SEC hopes to launch early next year - Microsoft, Morgan Stanley and Reuters have made their financials available in XBRL. Here are some FAQs that I drafted about XBRL back on my old site.

September 27, 2004

An Example of Revisiting Employment Agreements

It is important to recognize that the Fannie Mae and Computer Associates stories that filled Friday's papers effectively boil down to the same root problem - senior management massaging earnings to enable them to hit targets that create bigger payouts for themselves. To illustrate this point, the Friday NY Times contained a table that displayed the millions of dollars that Fannie Mae managers would not have earned if they hadn't tweaked their numbers.

Notably, on Thursday, Fannie Mae filed a Form 8-K explaining how the employment agreements with its senior managers had been amended to refine the definition of "cause" in the event of termination - and that upon a termination for cause, a manager is only entitled to accrued base salary.

From a shareholder perspective - and the executive's own fiduciary perspective, as highlighted in the Sept-Oct issue of The Corporate Counsel - more companies should be revisiting existing employment agreements to alter cause definitions and severance payment calculations. And not wait until the roof falls in to do so! Remember, by showing they sought to protect shareholders, making such changes now will help directors avoid personal liability and reputational harm.

During our October 20th Executive Compensation Conference, there will be a key panel on this topic, "What to Do About Reviewing Outstanding CEO Pay Packages and Agreements," which will address:

- Obligations to re-examine, modify existing arrangements
- Fixing and adding "cause" provisions and clawbacks
- Ways to address current excessive compensation and how to have a difficult conversation about rolling back pay
- How to implement meaningful holding periods for outstanding equity compensation
- How to avoid traps for the unwary director when negotiating employment contracts and other compensation arrangements

8-Ks and Director Compensation

The Sunday NY Times contains an article about how 8-Ks are now providing executive compensation details sooner - but as noted by Ron Mueller on Thursday's webcast, even director compensation details are being disclosed in 8-Ks. For an example, see this Form 8-K filed by Quidel Corp.

As for the Sunday NY Times article, my cursory review of those "sooner" disclosures doesn't necessarily reveal any "fuller" disclosures...

September 24, 2004

A New Sample 8-K Policy!

Right before yesterday's popular 8-K webcast (audio archive available now; transcript in about a week), we posted a new 30-page inhouse 8-K policy. Among other features, it includes a description of the roles for each member of the disclosure committee and a great process flowchart.

SEC Brings Enforcement Action over GE Compensation Disclosures

Picture proof that you don't want to miss Alan Beller's lunchtime speech at the October 20th Executive Compensation Conference - and hear how the SEC is getting tough over compensation disclosures - is yesterday's settlement with GE over the failure to fully describe the substantial benefits it had agreed to provide Jack Welch under an employment and post-retirement consulting agreement.

If you read - and you should read it! - the administrative proceeding release, you will get the sense of how Enforcement appears to be upset with disclosure counsel's role in this action. In addition, Enforcement doesn't appear happy with how the GE board of directors accepted the lowball estimate of the value of Welch's retirement benefits.

On, we have many practice pointers devoted to perks and retirement benefits (not to mention our Model Section for the Compensation Committee Report) - but one of the most provocative is a chapter on Plane Perks written by David Kay Johnston, a NY Times reporter (we thought so highly of this chapter that we paid the publisher for the rights to reproduce it) and that chapter starts off with a discussion of GE.

I know that I prattle on about the October 20th Conference - but if you are disclosure counsel, you should realize that this conference is for you; it is not just for benefits counsel. Evidenced by the SEC's GE action and the pending Tyson Foods action (not to mention the judiciary and the IRS activity in this area), the regulatory and liability standards in this area are changing right now - and you are at risk.

It is akin to how we all became corporate governance experts two years ago - compensation is what truly drives the governance bus and this conference (along with the resources) will bring you up-to-speed quickly. So join the 400+ that have already registered for the conference - in person or by webcast - by registering now and gain immediate access to!

September 23, 2004

Sample Section 404 Management Reports

A common question these days is what should my Section 404 management report look like? I hear that the national offices of the Big Four are working on forms for what they would like to see from their clients - but they have not released these forms yet. In the meantime, we have posted some sample management reports that companies have voluntarily filed as well as model forms from the AICPA (these are posted in our Sample Document Library and Internal Controls Practice Area). Thanks to Bob Hayward of Kirkland & Ellis for the heads up!

From what I've gleaned from the PCAOB releases, these reports should be pretty short and conclusory - more like an auditor's letter than a full-blown, detailed report, as Auditing Standard No. 2 does not seem to contemplate a detailed discussion of what happened during management's assessment and testing.

Perhaps a more interesting question is whether the Big Four will develop checklists of the types of issues they will seek during their assessment process, or what type of records they will create to evidence the diligence performed to support their attestations.

Today's 8-K Webcast

Thanks for the scores of questions for "Reality Bites: More on the New 8-K Rules" - I hope to extend the program beyond the hour slated for the webcast and have the panel answer as many as we can. Had one good suggestion to change webcast title to "Real Time Bites"!

September 22, 2004

Finally Got My Act Together - New Blogging Software!

I finally changed my blogging software - so that my blog entries are now word-searchable and you can also register to receive emails when I blog. Still tweaking the "look and feel" for the next few days. Kool Aid Man says "Oh yeah!" kool aid man.bmp

Tackling This Year's Auditor Engagement Letter

I am receiving lots of questions regarding strong-arming from the Big Four (aka the "Mighty Big Four") during negotiations over auditor engagement letters, including issues regarding:

- Getting auditors to agree that their providing materials to the PCAOB or the SEC does not constitute a waiver of any privileges or doctrines available to the company or its counsel

- Getting clients comfortable with the dispute resolution mechanism

- Getting notice from auditors if the PCAOB requests documents relating to the audit of the client

Please let me know if you have any thoughts on these subjects - there appears to be a real need to share on this one...

September 21, 2004

A Tally Sheet for You to Build On

Although putting together a tally sheet is not as simple as it sounds in theory (i.e. adding up the various components of a senior managers compensation package), we are excited to add a very practical tool to - an Excel spreadsheet to use as the basis for your tally sheets. This Comprehensive Tally Sheet was contributed by Task Force members Matt Ward of Aon Compensation Consulting and Joshua Lurie of eComp Data Services Groups.

You can find this invaluable tool in our "How to Calculate and Tally-Up Hidden Benefits" section - and you can gain access to that now by registering for the October 20th Executive Compensation conference.

SEC Provides Unbundling Guidance

Yesterday, the Corp Fin provided its first update to the Telephone Interpretations Manual in years - when the Office of Mergers & Acquisition addressed the topic of unbundling under Rule 14a-4(a)(3). This update is in the fifth supplement to the Telephone Interpretations Manual.

The Staff decided to provide this interp after watching companies throw the kitchen sink into merger proposals - including significant corporate governance and anti-takeover provisions. Apparently, the straw that broke the camel's back was an attempt by Comcast/AT&T Broadband to include what was referred to as an "atypical governance proposal" - a provision that eliminated the election of directors for three years - in their merger proposal.

The new interp lays out when unbundling is required (and when it's not mandated). According to the interp, unless immaterial, matters should be unbundled on a ballot if:

- the provisions in question were not previously part of the company's charter or bylaws;

- the provisions in question were not previously part of the charter or bylaws of a public acquiring company; and

- state law, securities exchange listing standards, or the company's charter or by-laws would require shareholder approval of the proposed changes if they were presented on their own.

Comparison of Rights of First Refusal and First Offer

Check out the September installment of Carl's Corner that provides a Comparison of Rights of First Refusal and First Offer.

If you can't get enough of Carl's wisdom - he was an advisor to Corp Fin in the early '60s - you should review the interesting interview with him that is posted on the SEC Historical Society's site.

September 20, 2004

Funky New 8-Ks

For those of you tracking the crop of 8-Ks filed since the new rules took effect last month, my vote for the most bizarre (and immaterial) goes to Energas Resources. Is there such a thing as a non-8-K? If so, this would be one. Please email me if you find other interesting 8-Ks.

Last call for you to submit questions so that I can present them to our expert webcast panel this Thursday regarding "Reality Bites: More on the New 8-K Rules." Not surprisingly, I already have received hundreds of questions (many are duplicative; some are not) and we will do our best to address as many as we can.

My email address is (or click on "Contact Broc" on the left side of this blog).

Impact of Sarbanes-Oxley on Non-Profits

Some practitioners are surprised to learn that certain provisions of Sarbanes-Oxley apply to all companies, including non-profits. Of course, most SOX provisions don't apply to non-profits - but non-profits increasingly are taking steps to voluntarily comply with more provisions.

In my interview with John Corrigan on the Impact of Sarbanes-Oxley on Non-Profits , John provides specific examples of non-profits that voluntarily have taken steps to comply with various aspects of Sarbanes-Oxley.

September 16, 2004

Corp Fin Issues New Staff Legal Bulletin on Shareholder Proposals

Yesterday, Corp Fin issued its third Staff Legal Bulletin on shareholder proposals - SLB 14B. The big news is that Corp Fin has followed-up on its warnings and "clarified" its views on Rule 14a-8(i)(3) - which is the exclusion basis for false and misleading statements - by creating a more objective and higher standard for companies that seek to modify proposals and supporting statements.

Noting that nearly half of no-action requests now argue for modification under (i)(3) - which is a huge resource drain for Corp Fin - the Staff has narrowed (i)(3) so that it will only entertain modification of proposals and supporting statements if a company argues that they are materially false and misleading under the following 4 categories (the labels are mine):

1. Reputation Killer - statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation

2. Objectively False Fact - the company demonstrates objectively that a factual statement is materially false or misleading

3. Crazy - the resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires — this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result

4. Unrelated Supporting Statement - substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote

The SLB also contains a list of circumstances under which it won't entertain (i)(3)
arguments anymore, such as unsupported or disputed facts, opinions, or facts that companies don't like. The bottom line is that companies now face a much greater burden of proof to convince the Staff that something is false and misleading - so warn your CEO and IR officers now that next year's proxy statement may contain language that they don't like.

The SLB also contains a reminder about how to draft defect notices, such as pulling directly from Rule 14a-8(b). It addresses when supporting legal opinions should be submitted - and how it might entertain requests that don't meet the 80-day deadline in Rule 14a-8(j) for "good cause."

How the Staff Processes No-Action Requests

The final part of Staff Legal Bulletin 14B sheds light on how Corp Fin processes no-action requests - and this includes some interesting items, such as:

- Since all materials are eventually placed in the public domain, the Staff seeks all arguments in writing and states that it won't discuss substantive matters over the phone.

- The Staff might fax a response - rather than mail it, which often means that commercial databases find it first - if you include all your contact info as well as all the contact info of the proponent. In other words, if you want it faxed - which you do so that you find out first what the response is - obtain the proponent's fax number and provide that to the Staff.

Stock Ownership Guidelines With "Hold 'Til Retirement" Provisions

On, we have posted two new practice pointers from Robbi Fox regarding "hold 'til retirement" stock ownership guidelines - one that is a survey and one that lists companies that presently have such provisions in their guidelines. To see all the practice pointers we have posted, see this chronological list that you can check under the "Practice Pointers" button on the home page.

To access these pointers today, register for the October 20th Major Compensation Conference now!

September 15, 2004

FASB Discusses Employee Stock Purchase Plans

Way back when, the FASB proposed a Exposure Draft that would provide that ESPPs be deemed noncompensatory only if: (1) its terms are no more favorable than those available to all holders of the same class of shares; and (2) substantially all eligible employees that meet limited employment qualifications may participate on an equitable basis.

At its August 25 meeting, the FASB Board tentatively decided to modify that guidance, and at its September 8th meeting made further modifications. FASB cautions that these conclusions are tentative and may be changed - and become final only after a final Statement is issued.

Thanks to Mike Holliday for providing the current tentative conclusion on accounting for ESPPs after these meetings: An ESPP is not compensatory and does not involve recognizable compensation cost if all three of the following conditions are met:

1. (a) The terms of the ESPP are no more favorable than those available to all holders of the same class of shares OR (b) any discount under the plan results in proceeds not less than proceeds that would be received in an offering of shares issued to third parties by other means, e.g., through an underwriter. A discount of 5% or less from market price complies with this criterion without further justification. [The addition of (b) is a change from the Exposure Draft.]

2. Substantially all eligible employees that meet limited employment qualifications may participate on an equitable basis.

3. The ESPP does not incorporate option features. An example is given for a plan where the purchase price is based on the share price at date of grant and permits an employee to cancel participation before the purchase date and get a refund, which is considered a compensatory plan. [This condition is not in the Exposure Draft.]

Everything You Wanted to Know About SOX

Now that Sarbanes-Oxley is more than two years old - and some younger lawyers might need a primer in the new law - we have created a Sarbanes-Oxley Practice Area, complete with a list of comprehensive memos (some more than 200-pages long!).

How to Get Your Name on the SEC's Website - Submit a Rule-Making Petition?

Here is proof that the Web now makes it easier to get your name in lights, even on government websites. Recently, an enterprising pair submitted a rule-making petition to the SEC that seeks a new listing standard forcing companies to have an "Earnings Rating." "Earnings Rating" is a trade-marked term (hmmm, I wonder by whom?), which is an assessment of the quality of a company's reported earnings. Like a credit rating, Earnings Ratings would be a secondary look at auditors' work and be publicly available. The issuance of these ratings would be made by a private enterprise (hmmm, I wonder who would run this enterprise?).

September 14, 2004

More on the Disney Trial

On Friday, Delaware Chancellor Chandler granted portions of Michael Ovitz' motion for summary judgment - and denied the rest. Ovitz won regarding his culpability for entering into his employment contract (because he was not yet an employee) - but will have to defend the part of a shareholder suit over his $140 million severance package (because he was an employee when he entered into that arrangement). The trial starts October 18th.

Meanwhile, expect more fireworks at next year's Disney annual meeting as Roy Disney and Stanley Gold have called on Disney's board to reject CEO Eisner's offer to retire in 2006 as well as Eisner's choice of President Robert Iger as his successor. The two former board members said they would propose an alternate slate of directors if Disney's board does not launch an immediate search for a new chief executive and announce that Eisner will step down from the board at the end of the search. The two former board members said a new CEO should be in place before Disney's next shareholder meeting in early 2005. Eisner has not indicated yet whether he would seek to remain on Disney's board or remain as a consultant.

Pension Plans to Disclose Votes?

Last week, Senator Ted Kennedy said he would press US pension plans to disclose proxy votes on the stocks they hold - as mutual funds began to do a few weeks ago - in response to a GAO report urging Congress to pass legislation to make their proxy votes public, in an effort to ensure that pension managers act in the best interests of the workers whose nest eggs they are overseeing. Not surprisingly, the GAO report found that pension plans face the same potential conflicts of interest that mutual funds face when they vote.

Enforcement Action Regarding Disclosure Controls

Several weeks ago, I blogged about the importance of the recent SEC Enforcement action against Siebel because it involves disclosure controls - learn more about this important action from my interview with David Brown and Oni Holley on the SEC's First Enforcement Action Involving Disclosure Controls.

September 13, 2004

Putting the Heat on the Activists

CalPERS has been widely recognized as a leader in the shareholder activist movement for some time - yet, now both CalPERS and CalSTRS are being pushed by the California State Controller's office to do even more. The Controller wants these two pension giants to look at executive compensation as a comprehensive program - not just a set of guidelines to use when voting proxies - with a program foundation based on these 4 concepts:

1. Executive compensation policies should link a substantive portion of compensation to achieving key performance targets;

2. Executive compensation policies should be fully transparent to shareholders and should be regularly submitted for shareholder approval;

3. Executive compensation should be evaluated over an appropriate time period (e.g., three to five years), not at just a single point; and

4. Executive contracts should be disclosed in easy-to-understand language in the proxy statement to allow shareholders to evaluate the link between pay and company performance.

We have just added California Deputy Controller Toni Symonds to the panel - "The Institutional Investors’ New Focus on Executive Compensation: What It Means For You" - for our October 20th Major Compensation Conference. Register now!

Where is the Love?

Wilson Chu does it again on the Deal Guys Blog with a nice blog containing some insightful analysis into the advisability of adversarial negotiation tactics that I guess can be best characterized as profane. Wilson's blog links to the actual voicemail left by an associate that has created quite an Internet buzz. Feel free to provide Wilson with feedback as some already have done...

Section 404 Guidance Manual

We have added a pretty nice 43-page Section 404 guidance manual from Deloitte & Touche to our "Internal Controls" Practice Area.

September 10, 2004

Sept-Oct Issue of "The Corporate Counsel" Posted!

As we believe that this issue of The Corporate Counsel is unique - and can make a difference, the Sept-Oct issue has just been posted on the lower left side of the home page, in a publicly accessible section of - we provide a html version and a PDF version. This issue contains the last 5 steps of our 12 steps to responsible compensation practices, finishing up what was started in the May-June issue (which also is still available on the site on a complimentary basis).

Note that both of these issues contain links are to materials and memos that can only be accessed by those that sign up for the October 20 Major Compensation Conference. Register now and gain immediate access!

SEC Begins to Post Amicus Curiae Briefs

I could be wrong, but I believe that the SEC just starting posting amicus curiae briefs on its "Briefs" web page. Anyways, there are two recent 2nd Circuit ones posted now: one JP Morgan Chase brief addressing whether the lengthened statute of limitations in Section 804 applies to actions brought after the enactment of Sarbanes-Oxley for claims that had already lapsed under the previous limitations period - and the WorldCom brief that addresses whether the fraud-on-the-market presumption of reliance is applicable to analysts' public material misreresentations.

The "J" Code Can Kill Ya

Alan Dye has some nice analysis in his Blog this week, responding to the Tuesday WSJ article regarding exchange funds. He notes that in his model form on exchange funds (Model Form 157 in the Romeo & Dye Section 16 Handbook, posted on that he advocated using code "S" - but drew a little resistance when he first made that recommendation, proving the benefit of being candid in reporting insiders' transactions.

September 9, 2004

Disney Trial Set for October 18th

Yesterday, Delaware Chancellor Chandler heard a plea from attorneys for former Walt Disney president Ovitz to remove Ovitz from the list of defendants in the shareholder suit over his $140 million severance package - based on the argument that Ovitz didn't owe a fiduciary duty to Disney when his severance agreement was drafted because he was not yet an employee.

It is an interesting argument because the Sept-Oct issue of The Corporate Counsel, which is being printed today, has this quote from a colleague: "The court in Disney made it pointedly clear [at pgs 29-32 of the opinion] that the executive has a fiduciary duty here as well. Query whether a committee could bootstrap that into some leverage: 'We think you, Mr. Executive, have a fiduciary duty to the company and its shareholders to be sure that the package was fair and appropriately authorized and if you don't cooperate with our re-examination under a
review that applies the proper process and asks the right questions, we think you are breaching your fiduciary duty, and therefore providing a basis for us to terminate you, Mr. Executive.' In other words, the executive may have a self-interest in having the committee re-evaluate the existing compensation arrangements and defending the pay by being able to show that the committee had thoroughly considered it."

The plaintiffs in the Disney case seek more than $200 million - that's a lot of personal liability! The four-week trial is set to begin on October 18th - just two days before our "Executive Standards - Meeting the New Standards" conference.

PCAOB Releases Summary of Big 4 Inspection Reports

Last week, the PCAOB released limited inspection reports for each of the Big 4 audit firms. These reports are based on 16 different audits, conducted over a 6-month period last year, and identified significant audit issues missed by the Big 4. The reports express concerns about each audit firm's internal control systems.

Significant for companies is that the PCAOB found that these auditors allowed clients to incorrectly classify some debt as a long-term liability - and in several cases, the PCAOB staff asked the auditors to convince their clients to restate financial statements (but did not name which clients).

In a statement, the PCAOB laid out the differences between public and non-public portions of inspection reports, as the PCAOB is mandated by Section 104(g) of Sarbanes-Oxley to not disclose quality control defects found at an auditor for a period of 12 months after the date of an inspection report.

Also noteworthy is that the PCAOB reaffirmed in its statement that an auditor can voluntarily release any portion of an inspection report. This is significant because we have heard that auditors have been rejecting requests from clients that seek copies of inspection reports that implicate them - and the rationale provided for these rejections is that the PCAOB requires that inspection reports be kept confidential. Footnote 9 on page 4 of the PCAOB's statement refutes this argument - and companies might consider including provisions in their engagement letters requesting copies of these reports (as Alan and I recommended in Nugget #5 of our 50 Nuggets II webcast a while back).

Lastly, these four inspection reports (scroll to the bottom to find them) are valuable because they provide detailed descriptions of the type of matters that the PCAOB is focusing on - as well as a description of the types of procedures the PCAOB will use during their inspections - although both of these likely will change as the PCAOB moves from "limited" to "full" inspections this year.

New "Poison Pill" Practice Area

We have created a new "Poison Pill" Practice Area - breaking out some of the content from the "Mergers & Acquistions" Practice Area that has continues to grow.

September 8, 2004

Agenda & Speakers Announced for October 20th Compensation Conference

We have posted the Agenda & Speakers for our "Executive Standards - Meeting the New Standards" conference set for October 20th - available live in San Fran or by video/audio webcast.

It took so long for us to develop the program because each speaker was closely vetted during long hours of phone conversations - to ensure the program will be much more responsible and practical than any conference ever conducted before it. We hope you agree - look at the bulleted descriptions of each panel to see if our efforts have paid off.

We have also added a reasonable firmwide rate for multi-office law firms - only $2999 for anyone in your firm to access the webcasted conference, live or archived - as well have access to all the resources of! So register now!

SEC Issues Proposed NYSE Governance Listing Standards Changes

The SEC has issued proposed changes to the NYSE governance listing standards. The amendments - as was summarized in our September E-Minders - are intended to make clarifying language changes consistent with interpretations provided by the NYSE in response to questions and in its published FAQs, and also changes to Section 303A.02 to align it more closely with the similar standards of other listing markets.

Note the NYSE initially filed the amendments with the SEC on August 3rd and requested SEC approval on an expedited basis - but an amendment was filed on August 30th deleting the expedited approval request. The new SEC release states that the amendment also makes changes to the proposal's description - and replaces the original filing in its entirety.

The SEC's Recruitment Video

The SEC has posted a short recruitment video in its continuing efforts to find more staffers - starring role for John Stark of Enforcement and Paul Roye of IM (nice cameo by the dapper Keir Gumbs). It's a nice video (with some repeated odd scenes of kids on their bikes, I guess to give the feel of investor protection).

In its ongoing efforts to find accountants, the Corp Fin web page now features a rotating banner in the top right corner - "CPAs Wanted."

September 7, 2004

Earnings Releases and 10-Qs

Getting a lot of questions on this topic lately, so to determine the possible impact of shorter deadlines on earnings release practices - as well as gauge whether companies already have adjusted their earnings release practices - we just posted a Quick Survey on Earnings Releases and 10-Qs. Please take the survey now!

Delaware Developments Regarding Alternative Entities

A lot of movement on the laws regarding LLCs, limited partnerships and partnerships during this year's legislative session in Delaware. I just conducted this interview with Lou Hering on Delaware Developments Regarding Alternative Entities - Lou was on both committees that were instrumental to make these changes happen.

September 2, 2004

Getting Sued as Acquiror's Counsel

There is a pretty interesting blog today in the Deal's Guy Blog regarding a scary new case blaming acquiror's counsel for lack of disclosure - here is an excerpt from that blog: "How many times have you delivered disclosure schedules that contained a one-line reference to a set of closing docs that evidence an otherwise complex transaction? In light of Vega, can you sleep at night knowing that you’ve “properly disclosed.” What happened to caveat emptor and opposing counsel’s obligation to its client to figure out what’s in that stack of documents?"

The Filing of Schedule 13Ds

As we head into the unofficial end of the summer, I thought I would ruminate about the latest doings by the colorful owner of the Washington Redskins - and they are not sport-related. Dan Snyder filed a Schedule 13D for Six Flags on Monday, noting that he had been buying up stock recently and intended to pressure management to make changes (it is noteworthy perhaps that well known M&A lawyer, Dennis Block, was hired to prepare the 13D).

The next day, long-time 11% owner Bill Gates (yes, that Bill Gates) files a 13D also expressing displeasure with management and noting that he might seek a board seat. In the press, these two business giants say they are not working in concert, which is believable given that Gates has owned his shares for five years (he had filed a Schedule 13G and amended it three times). Whatever they do, I hope they don't get rid of the old bald dude from those commercials...

Nasdaq Rule 2710 Clean-Up

For those of you wanting to be as accurate as possible, here are some corrections to Rule 2710 - either to the Rule itself or the CCH version of it:

1.In the CCH looseleaf text of Rule 2710, as amended, the Fifth Exception for Purchases Based on a Prior Investment History states that a prior investment must be at least one year before the filing of the offering - but the right language is "two years." The two years was in the NTM04-13 announcing adoption of the rule, in the SEC approval order, and in Amendment No. 9 to the filing (the last amendment with the full text filed). The error stems from the second publication for comment which erroneously included one year. (I only wish it were one year, to be consistent with new Rule 2790.)

2. The errors in the published text of the amended rule in Notice to
Members 04-13 have been corrected in the CCH looseleaf version, which are that:

"a. the Listed Securities definition covers markets registered with the SEC pursuant to Section 11A of the Securities Exchange Act of 1934, i.e., Nasdaq; and

b. the exemptions from the lock-up requirements for securities that are not an item of value cover Listed Securities.

2. The NASD staff takes the position that the availability of the S-3/Rule 415 exception from filing is determined at the time of each takedown off a shelf registration (of course, based on the pre-1992 standards for the form). Thus, a shelf registration could come into and out of compliance with the filing exception during the life of the shelf."

September 1, 2004

Another Breeden Report

The 500+ Breeden Report regarding Hollinger International was filed yesterday on a 8-K - and makes very interesting reading! "Summer drinks" that cost $24, 950! What was in those drinks?

As the NY Times and other major business publications explore at length today, the role of each director is closely dissected in the report (e.g. Mr. Perle admitted that he never understood the underlying transactions before signing off on them).

If your compensation committee members can't understand the basic tally sheets that we are posting on - they will want to hear all about them during our October 20th major compensation conference! And avoid being mentioned adversely in a report like this - not to mention the liability...

The Form N-PX's are In!

Yesterday was the deadline for investment companies and mutual funds to disclose their voting records for the first time. These disclosures are made on Form N-PX. Over 1000 of these forms were filed during this first mutual fund "proxy season," with Fidelity alone filing more than 130 of them. Here is a sample if you want to see what they entail,

Nasdaq Proposes Shareholder Approval Requirement Exception for Discounted Private Placements

The SEC has published a Nasdaq proposal to provide an exception from the shareholder approval requirements for purchases of the issuer's securities by officers, directors, employees or consultants when such issuances are not made as part of a public offering and are for less than the greater of book or market value of the stock. Nasdaq is proposing to amend Rule 4350(i)(A) - and the related interpretation in IM-4350-5 - to provide this de minimis shareholder approval exception solely in these limited circumstances:

1. officers, directors, employees, or consultants are sold discounted stock as part of, or in connection with, sales to third parties, at the same price and on the same terms, and that do not involve any public offering;

2. the total number of shares sold to all such officers, directors, employees or consultants, either individually or in the aggregate, be less than five percent of the total shares to be issued in the transaction, and

3. the shares issued or to be issued in the transaction aggregated with all other discounted sales to officers, directors, employees, or consultants during the preceding 12-month period do not exceed one percent of the total shares outstanding at the beginning of the 12-month period.

Further, although not required by the proposed amendments to the text of Rule 4350(i)(1)(A), the changes to IM-4350-5 state that Nasdaq intends that the new exception will only be used in situations where third parties investing in the company require a minimum level of participation by company insiders as a condition to their investment.