How to File a Form 12b-25 and What to Watch Out For...

As we recently wrote about - in great detail - in the Jan-Feb issue of The Corporate Counsel, understanding Form 12b-25 in advance of this year's Form 10-K filing deadline is particularly recommended because of the uncertainty many companies are facing with respect to their ability to get their internal control reports finalized and filed by the Form 10-K due date. This is likely to result in an increased number of Form 12b-25 filings and more detailed disclosure than what is typically found in those filings.

Bearing that in mind, it's probably a good time to understand what is involved with a Form 12b-25 filing - particularly since the SEC Enforcement Division just brought a case against FFP Marketing (and the two employees responsible for preparing the 12b-25 filing) for deficient 12b-25 disclosure. If the independent examiner's report in the Spiegel case didn't drive the point home that Form 12b-25s are disclosure documents, this case certainly does. Learn more in this interview with Tom Hanley on SEC Enforcement's Interest in Form 12b-25 Filings.

Siebel's 1st Amendment Fight Against Reg FD

Today, CFO.com is carrying this article about Siebel Systems' upcoming court fight - on March 15 - during which the company will argue that the First Amendment’s right to free speech protects its CFO and an investor relations officer against a SEC complaint that alleges the company—for the second time—violated Regulation FD. This case is the first contested action ever brought by the SEC seeking to enforce Reg FD; the other five have settled.

IPO Litigation Opinion Now Available

On TheCorporateCounsel.net in the "Securities Litigation" Practice Area, we have posted the opinion and order of the District Court regarding In re Initial Public Offering Securities Litigation, which grants preliminary approval of the proposed settlement of plaintiffs with issuers and individual defendants in 298 coordinated cases involving IPOs of technology stocks, contingent on certain modifications.

The proposed settlement was opposed by the underwriter defendants on various grounds. The court conditioned its preliminary approval on modification of the proposed bar order - which the court found was broader than authorized under the Private Securities Litigation Reform Act. The opinion has a discussion of various PSLRA provisions, including proportionate liability (pp. 36-38); settlement discharge (pp. 38-43); and judgment reduction (pp. 43-46). Thanks to Mike Holliday for tracking this down!

Movement for Majority Votes in Director Elections

At its conference in October, members of the International Corporate Governance Network discussed the advantages of changing state laws to move from pluarality to majority voting, rather than have the SEC adopt its shareholder access framework.

Now, the ABA has formed the "Majority/Plurality Voting Task Force" - headed up by former Delaware Supreme Court Chief Justice Norman Veasey - to examine the possibility of updating the ABA's Model Act in this area. The Model Act serves as a framework for corporate law in more than 30 states.

Investors clearly are interested in this topic. So far this year, IRRC reports that over 80 companies have received shareholder proposals that seek to have a majority vote standard implemented - and Corp Fin has been allowing the inclusion of these proposals. Last week, Corp Fin rejected Citigroup's no-action exclusion request over this type of proposal.

More on the Art of Minute-Taking

Boy, look at the focus on minutes in this article in the Boston Globe. The article is about how - in the takeover of Gillette by Procter & Gamble - the Massachusetts Secretary of State (and future gubernatorial candidate) is "investigating" the takeover, to see if the Gillette CEO's severance package may have motivated him to sell the company.

The article notes that the Secretary of State "said the minutes of the directors meeting the company provided him are too skimpy to reflect what he said is the magnitude of the deal combining the two consumer product giants. 'There's no evidence of extensive deliberations," Galvin said. "I find it hard to accept that these are the actual minutes of what occurred.'"

Next week, the panel will discuss how to take minutes in the current environment on CompensationStandards.com - "Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney" - featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.

Enron Court Preliminarily Approves Director Settlement

On CompensationStandards.com - in the "WorldCom Settlement Analysis" page in the "Hot Topics" box - we have posted the order of the Southern District of Texas District Court that preliminarily approves the proposed settlement with outside directors that includes $13 million of their personal funds. As you may recall, this amount is based on 10% of their net gain on sales of certain Enron stock including certain stock options.

Learn what this all means for director's pocketbooks on next Thursday's webcast on CompensationStandards.com - "Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney" - featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.

Judge Orders Reinstatement for 1st Sarbanes-Oxley Whistleblower

An article on Law.com reports that a DOL judge ruled last week that Cardinal Bancshares is required to reinstate a former employee who had blown the whistle on its accounting practices and pay him nearly $65k in back pay/damages and $108k in legal fees. Last year, this whistleblower was the first person to win protection under Section 806 of Sarbanes-Oxley.

The DOL opinion sets out specific terms and conditions, and rebuts point-by-point arguments by Cardinal Bankshares that bringing the whistleblower back would be too onerous. The bank plans to file an appeal with the DOL Administrative Review Board over the next week. If that board decides not to take up the case, then the bank will consider whether to appeal it to a federal court.

Since Sarbanes-Oxley took effect, whistleblowers have filed 144 claims with the Department of Labor. The Cardinal Bancshares whistleblower is one of just three workers to win protection so far. Another 16 cases have ended in settlements.

Impact of SEC's Letter on Lease Accounting

Today's Washington Post carries an article that notes the dramatic impact of the letter on lease accounting from the SEC's Chief Accountant on some retailers, causing restatements. The letter was issued two weeks ago. I have heard a number of complaints from members on how the letter is wreaking havoc on their 404 plans.

IRS Makes Settlement Offer for Stock Option Scheme

Yesterday, the IRS announced a settlement initiative for executives and companies that participated in an abusive tax avoidance transaction involving the transfer of stock options or restricted stock to family controlled entities. Under this scheme, executives - often facilitated by their employers - transferred options to family controlled partnerships and other related entities typically created for the sole purpose of receiving the options and avoiding taxes on compensation income normally taxed to the executive. The tax objective was to defer for up to 30 years taxes on the compensation and, in many cases, resulted in the corporation deferring a legitimate deduction for the same compensation.

To date, the IRS has identified 42 companies, many more executives and unreported income of more than $700 million involved in this scheme, which was aggressively promoted by financial advisors about 5 years ago. The IRS still is looking to find other companies that engaged in this practice.

Executives who engaged in these transactions will have until May 23rd to accept an IRS settlement offer to resolve their tax issues. The offer also extends to companies that issued the options to executives and directors as part of their compensation. Proof that the SEC is paying attention to compensation issues; Chairman Donaldson issued a statement praising the IRS' action.

On CompensationStandards.com, we have posted a host of materials related to this IRS initiative in the "Hot Topics" Box on the home page under "IRS Stock Option Settlement Offer."

Status of Disney Trial

Many members have asked me about the status of the Disney trial. The parties have just begun briefing, which is scheduled over the next two months. Then there may be oral argument, so the decision is not likely to occur until sometime in June. And of course, there are all sorts of factors that can delay it further.

SEC Sets of Date of Internal Controls Roundtable

The SEC has set the date of its internal controls roundtable for April 13th in its HQ in Washingto DC. Panelists have not yet been selected. The SEC seeks comments on internal control issues by April 1st so that they can be considered for discussion. As an aside, by the time of the roundtable, the SEC's HQ likely will be half-empty as the HQ move should be well underway - last chance to visit 450 5th Street!

The Location of the 404 Management Report

In response to many questions from members, I have posted a "Quick Survey on the Location of the 404 Management Report" on the home page of TheCorporateCounsel.net. The five questions address:

- where in the 10-K you intend to include the report
- whether you also will include the report in the glossy annual report, proxy statement, web page - or cross-reference from those places
- where in the glossy annual report you will include it
- whether the CEO and CFO will sign the report
- whether you will forego the statement about management's responsibility for the financials

Please weigh in and answer the survey - and let me know if there any other items you wish to be canvassed.

Useful Examples of Internal Control Disclosures

Here are some useful examples of recent internal controls disclosures:

1. Transition Relief - Here is an example of a company - Bassett Furniture Industries - that is relying on the SEC's exemptive order that allows accelerated filers with market caps under $700 million to have a 45 day extension for filing the 404 management report and auditor attestation.

2. M&A Exception - Here is an example of a company - Black & Decker - which used the carve-out for a recent acquisition. The carved-out entity represents $1.1 billion of B&D's $5.5 billion in assets.

The Challenges in Setting Pay-for-Performance Goals

The media has paid a lot of attention to companies that provide incentives to executives even though the company hasn't performed (see last week's WSJ article about how the CEOs of the major Wall Street firms got a hefty pay raise despite lackluster stock prices). One example I have heard of relates to a CEO that has an arrangement to receive a higher salary if his options go underwater. Of course, this begs the question - what is the purpose of incentive compensation?

Setting pay-for-performance formulas are difficult, particularly since there often are unusual items that might impact benchmarks used in such formulas. Along those lines, here are some 8-Ks that disclose that bonus performance criteria were not met - but the compensation committees awarded bonuses anyway due to unusual items: Fifth Third Bancorp and Cinergy.

As these companies did, one solution for imperfect formulas is to allow the compensation committee to use its discretion in ferreting out the impact of unusual items - but the risk then arises that the committee can manipulate a formula so that payouts occur under any set of circumstances. Challenging indeed...

Last Minute Proxy Season Planning

We have posted the transcript from our popular webcast, "Last Minute Planning for the Proxy Season."

The SEC's 2006 Budget

On Wednesday, the SEC posted this "Budget in Brief" analysis of its 2006 budget. But it ain't brief - its 48 pages. Corp Fin's piece of that pie will be approximately $100 million (down from $102 million in 2005). Corp Fin anticipates that it will review 4,720 reporting companies' filings in 2006, which is equivalent to 38% of the reporting companies and is a 4% increase from the level it anticipates for fiscal 2005.

As always, the SEC will be a cash cow for the government, with anticipated Section 6(b) and Section 31 fees of $1.435 billion collected during 2006. The SEC doesn't get to keep any of the money it collects. It all goes into the US Treasury - and then the Commission is at the whim of Congress to approve its budget each year.

WorldCom Judge Corrects Opinion

The WorldCom court issued a corrected opinion on February 14th on the proposed settlement of the outside directors, correcting footnote 14 on page 24 of the February 9th opinion by changing the word "only" to "not." We have posted the corrected opinion in "Alerts" on the home page of TheCorporateCounsel.net.

A Separate Executive Compensation Filing - the PAY-K

Here is an excerpt from Mark Borge's "The Compensation Disclosure Blog" on CompensationStandards.com (Mark continues to amaze with his regular analysis of recent disclosures; this particular item is more newsworthy):

Yesterday's Wall Street Journal features an interesting article on page C1 (subscription required) about the frustrations with the current executive compensation disclosure system. The article notes how the WSJ needed to retain an actuary and an excise-tax expert to calculate the pay due to Gillette's CEO as a result of the company's pending merger with Proctor & Gamble. Even then, the final figure was significantly different ($12 million) from that calculated by another paper's expert.

The author suggests that part of the problem stems from the disparate ways executive compensation information is currently reported -- some in the proxy statement, some in Forms 4, and, now, some in interim filings on Form 8-K. He also notes the lack of a single location where all compensation, including retirement benefits and accumulated deferred compensation, must be reported.

The solution? He suggests that the SEC develop a separate report for disclosing executive compensation - the "Pay-K" - that would be updated throughout the year as needed. It's an interesting idea, and certainly one that would simplify the piecemeal disclosure situation we're now in with the new Form 8-K requirements.

Surprises Caused by Audit Confirmation Letters

Having trouble with audit confirmation letters? Get help from this interview
with Clark Fitzgerald and David Howard on Surprises Caused by Audit Confirmation Letters.

Nasdaq's Rulemaking for Non US-Companies

Nasdaq has filed a rule change with the SEC - which will be effective around March 3rd - that would modify its rules to allow foreign private issuers to follow home country practice in lieu of certain requirements of the Nasdaq corporate governance rules without the need to seek an individual exemption from Nasdaq.

The Nasdaq rule filing states that, except for certain provisions of Rule 4350, a foreign private issuer would be allowed to rely on home country practices in lieu of the Nasdaq corporate governance requirements by providing a letter from outside counsel in that issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws and making appropriate disclosures in its annual reports filed with the SEC and, if applicable, in a registration statement.

Nasdaq also filed a proposal with the SEC that would modify its rules to require that foreign private issuers must publish semi-annual financial information in a press release or on a Form 6-K. Nasdaq proposes that the new requirement be effective for interim periods ending after January 1, 2006.

Everything You Wanted to Know About the SEC Chief Accountant...

...but you didn't know enough to ask. Interesting profile in Monday's WSJ about SEC Chief Account Don Nicolaisen. Sounds like he is a real team player.

NY Times Dissects Rule 14a-8 Process

On Sunday, the NY Times carried this article that interviewed long-time proponent Emil Rossi. It was a one-sided article - and an unflattering portrait - of how companies use Rule 14a-8 to exclude proposals, including a blow-by-blow description of how one particular company used the procedural bases of 14a-8 to exclude a proposal.

Unfortunately, the article didn't note how certain investors - that merely own $2000 worth of a company's stock - can waste a whole lot of the company's money (ie - hurt other shareholders) through submission of frivolous proposals. I agree that many companies unnecessarily fight shareholder proposals - but there is a flip side as many shareholders abuse the process too. I am in favor of raising the ownership bar so that shareholders with more of an interest can gain an audience with management and the board, and cut down on some of the more eccentric proponents that waste shareholder money.

For the many of you that have dealt with Emil in the past, the NY Times article has a photo of him and his sons, who also have been active proponents over the years. Also, here is a more detailed article on the Rossi family from a few years back.

And for die-hard fans of the gadflies, this Fort Wayne Gazette article states that Evelyn Davis was the only speaker at Disney's annual meeting on Friday, where the crowd hissed at her. For more on Evelyn, here is last year's Washington Post interview with her that I have posted on GreatGovernance.com.

February Installment of Carl's Corner

I have posted the February edition of Carl's Corner, this one dealing with sequential triggering events, tag-along and drag-along rights and restrictions on transfer in shareholder rights' agreements.

Latest Comp Lawsuit Targets Compensation Committee Report!

Last Tuesday, each director on Abercrombie & Fitch's board was sued in the Delaware Court of Chancery for waste and breach of duty of good faith and loyalty for allegedly overpaying its CEO. The directors also were sued for breach of the duty of disclosure!

The complaint appears to be solely based on the company's 2002 Compensation Committee report in the proxy statement, which the plaintiff claims is false. Paragraph 18 of the complaint repeats the Compensation Committee report verbatim - and then Paragraph 19 cites an excerpt from the company's 2003 proxy statement, which discusses an amended and restated employment agreement with the CEO. This complaint is posted in the "Compensation Litigation" Portal on CompensationStandards.com.

Against those disclosures, Paragraph 20 of the complaint cites a Bud Crystal article on Bloomberg.com from August 4, 2004, in which Crystal points out that the Abercrombie CEO pay was at the top of the peer group. This basically was all that the plaintiff firm needed to file the lawsuit!

The bottom line is that this is further evidence of the continuing scrutiny of compensation by the plaintiffs bar looking for the "next" Ovitz case. Learn how directors can take steps to avoid liability in our March 3rd webcast on CompensationStandards.com - "Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney" - featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.

Corp Fin Focuses on Cash Flows in Letter Sent to Certain Companies

In January, Corp Fin sent letters to certain companies related to their presentation of cash receipts from inventory sales in their statements of cash flows. In order to affect wide-spread awareness of this issue - and to refocus companies on the proper presentation in their consolidated statements of cash flows - the SEC posted a copy of this letter, which includes sample comments, so that companies will consider these issues for future filings.

NYSE Updates 303 Written Affirmation Forms

Last week, the NYSE updated its 303 Written Affirmation Forms and Instructions for both US and non-US companies. The 2005 forms and instructions were updated to reflect the 303A.02(b)(iii) rule change effected on November 3, 2004, the expiration of the first year transition period and to provide expanded textual guidance for frequently asked questions. Here is a more detailed comparison between the 2005 and 2004 forms.

Corp Fin Sends Letter to Oil & Gas Companies

Recently, I received an email from a member who had noticed a number of oil companies reporting their year-end reserves in Section 2.02 of Form 8-K. Oil & gas companies have been under the gun from the SEC's Division of Enforcement - and now the Division of Corporation Finance has posted this letter that it has sent to all oil & gas companies. The letter asks the companies to answer accounting questions in the areas of exploratory drilling, buy/sell arrangements and disposition of properties.

WorldCom Judge Issues Opinion on Rejection of Director Settlement

Last Wednesday, Judge Cote issued a 38-page Opinion in the WorldCom case, which expounds on the one-page Order she issued on February 2nd that rejected the request to approve a cap called for by the proposed settlement on the amount by which any judgment against the non-settling defendants could be reduced.

Under the proposed settlement, the settling directors would have had to pay out of their own pockets but would have avoided the risk of paying even more if they had stayed in the case. The Court's decision did not change the amount those directors would have paid under the settlement, but would have the effect of potentially reducing the amount the plaintiffs could collect from any verdict or judgment against the non-settling defendants if the settlement became effective.

Mike Holliday notes that this Opinion explains why she denied the application for approval of the Judgment Reduction Formula in the proposed settlement insofar as the "Contribution Credit" in the Formula was adjusted to reflect any limitation on the financial capability of the Settling Directors. The February 2nd Order led to the termination of the proposed settlement by the Lead Plaintiff.

The decision is dictated by the complex interplay of provisions of the Private Securities Litigation Reform Act of 1995, in a result which the Opinion notes "will make it extraordinarily difficult for outside directors to settle Section 11 claims before all deep-pocket defendants facing joint and several liability have done so . . . ." The Opinion discusses how the PSLRA applies to settlements involving outside directors.

The proposed settlement contained a condition that the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the "Settlement Credit," the "Insurance Credit" or the "Contribution Credit." Mike referred in my February 3rd blog to the "Settlement Credit" and the "Contribution Credit" - the "Insurance Credit" apparently was added in a revision to the original proposed settlement.

At issue here is the "Contribution Credit" - what the settling directors' assessed proportion of the judgment would have been without the settlement but limited to what those directors would actually be capable of paying. The Court found that the proposed reduction limited to the financial capability of the settling directors violated the statue.

The two other prongs of the Reduction Formula were the "Settlement Credit," or amount of the Settlement, of $54 million, $18 million to be paid by the settling directors and $36 million by the insurers, plus any interest; and the "Insurance Credit," or available insurance coverage, which the Opinion concluded would be at most $85 million. It was reported that the proposed $18 million to be paid by the directors represented in excess of 20% of their cumulative net worth (excluding primary residences, retirement accounts and jointly held assets) which offers some insight into the capability of the directors to pay.

Criticism of the SEC Restitution Fund

Recently, the SEC's restitution fund has been criticized, such as in this NY Times article from yesterday and today's Washington Post article.

Learn How to Blog

For all of you that enjoy this blog - and the others we maintain on our sites - and wonder if blogging is for you, you may want to check out this webcast program that will be held this Thursday.

Of course, feel free to always contact me to ask questions on about how to become a blogger - as it is one that I am passionate about (and I am always looking for new talent!). If you can believe it, I am about to enter into my fourth year of blogging and it has been immensely rewarding in several different ways (see today's NY Times article on blogging). One obvious way is that you can brand yourself in a way that would have been difficult to do before the Web; but less obvious ways include the email relationships it has fostered with so many of you. Keep the feedback coming, I appreciate it!

The Location, Content & Format of Internal Controls Disclosure

We have posted the transcript from the webcast: "Demystifying Internal Controls Disclosures."

I have also posted an interview with panelist Linda Griggs of Morgan Lewis to cover some unanswered business from the webcast regarding the location, content and format of 404 reports.

Difficulties of Auditor Turnover

On Sunday, the NY Times ran this interesting article on how some smaller companies are losing their independent auditors at the eleventh hour.

One point that is not directly made in the article - but borne out by the end of it - is that a fair number of companies that lose a Big 4 auditor find another Big 4 firm to fill the void pretty quickly. Lynn Turner of Glass Lewis recently shared some statistics with me that reveal that this is the case more often than not. Of course, some companies are not able to do so and are forced to hire much smaller audit firms.

If You Thought Evelyn Davis Was Bad...

As we approach the annual meeting season - and with the continuing emphasis on corporate governance - Keith Bishop shares this amusing description of corporate governance in Japan (the translation is of "Kaishahou Nyuumon" - which means "an introduction to corporate law" - done by Keith's daughter):

"Our country's company managers have come to view general stockholder meetings as a necessary evil. Rather than exhausting doubts, everything is done to see that the formality is carried out quickly. Extortionists who threaten to disrupt stockholder meetings take advantage of the weak attitude of the managers. They threaten to disrupt the meetings and demand money. Managers also use extortionists to speed meetings along. In order to stop this phenomenon peculiar to our country, in a show a revision to the commercial law steps were taken to limit companies' ability to furnish benefits in order to preserve the rights of stockholders. In particular, it attached penalties to officers and employees who provided illegal benefits."

SEC Chair Speaks on Shareholder Access, Executive Comp and More

Yesterday, SEC Chair William Donaldson gave a lengthy interview to major newspapers. During the interview, Chairman Donaldson indicated that the proposed shareholder access framework would need to be altered before it could be adopted, as explained in this Washington Post article and NY Times article.

And, in this article, the Wall Street Journal wrote about Chairman Donaldson's desire to push for better executive compensation disclosures, with "plans to work with the staff to find a way to make compensation disclosure more transparent and understandable." The article also noted "beyond better disclosure, Mr. Donaldson said he also is concerned about performance measures some companies use to reward executives. In some cases, he said, officials may be getting paid to simply hit Wall Street estimates rather than actually improve a company's long-term performance. I believe that performance should be paid and good performance should receive good pay, but there has to be a better definition of what real performance is, he said. Mr. Donaldson said he wants companies and boards to start paying closer attention to what metrics they use to determine compensation."

Audit Committee Guide and Best Practices

In our "Audit Committee" Practice Area, we have posted this excellent 112-page Audit Committee Guide from Wachtell Lipton, complete with a number of model documents (bear in mind the July 2004 date of the Guide) - such as whistleblower procedures, pre-approval policy and audit committee charters (for both NYSE and Nasdaq companies). Thanks to David Katz!

Proxy Advisory Report on Disney

On the GreatGovernance.com home page, I have posted the 11-page report issued by the new proxy advisory firm, Proxy Governance, related to Disney's annual meeting. For those of you that have never seen the types of reports upon which institutional investors typically make their voting decisions, this will be informative.

Although this year's Disney annual meeting - being held tomorrow - won't be as exciting as last year, there should be some excitement as former directors Stanley Gold and Roy Disney just announced that they will withhold votes for all directors because they believe the CEO succession process is lagging (but they don't encourage other shareholders to withhold their votes; what is that all about?). Also, CalPERS announced it will withhold its votes from Michael Eisner, because it doesn't think Eisner should remain on the board after he steps down as CEO in '06.

Death Blow for Shareholder Access?

Maybe not, but on Monday - as reported by the NY Times in this article - Corp Fin allowed the exclusion of shareholder access proposals submitted by major shareholders of Verizon, Qwest and Halliburton. This decision is consistent with Corp Fin's final decision on a similar shareholder proposal submitted to Disney at the end of the year.

As I blogged back on December 30th, the shareholders tried to rely on footnote 74 in the SEC's proposing release, which said that while the SEC was deliberating on final rules, shareholders could submit shareholder proposals that mirror the framework of proposed Rule 14a-11.

In the identical no-action responses sent on Monday, Corp Fin Director Alan Beller implied that the footnote (and the shareholder access proposal itself perhaps?) had become stale with his statement, "Given the passage of time since the proposal, we will not recommend enforcement action to the commission" if the companies omitted the shareholder proposals from their proxy materials. So with these letters, Corp Fin has basically reverted to the Division's historical approach to election proposals under 14a-8(i)(8).

How to Use Governance Ratings

Learn how to use governance ratings in this interview with Gavin Anderson of GMI International. I was surprised by Gavin's comments regarding the appetite of retail investors for governance ratings.

SEC Will Hold Internal Controls Roundtable

Yesterday, the SEC announced that it intends to hold a roundtable later this spring on internal controls. No date yet has been set. The SEC will also solicit - and post - written comments about 404.

By the way, I continue to post sample 404 reports in our "Sample Section 404 Management Reports and Auditor Attestations," including this report from Altria Group filed in an 8-K last Wednesday.

Restatements Regarding Lease Accounting

Yesterday, the SEC's Office of Chief Accountant posted this letter regarding how to use lease accounting in restatements, including what disclosures might be appropriate in MD&A such as:

- The accounting for leases should be clearly described in the notes to the financial statements and in the discussion of critical accounting policies in MD&A if appropriate.

- Known likely trends or uncertainties in future rent or amortization expense that could materially affect operating results or cash flows should be addressed in MD&A.

The SEC noted that the MD&A disclosures should address:

1. Material lease agreements or arrangements.

2. The essential provisions of material leases, including the original term, renewal periods, reasonably assured rent escalations, rent holidays, contingent rent, rent concessions, leasehold improvement incentives, and unusual provisions or conditions.

3. The accounting policies for leases, including the treatment of each of the above components of lease agreements.

4. The basis on which contingent rental payments are determined with specificity, not generality.

5. The amortization period of material leasehold improvements made either at the inception of the lease or during the lease term, and how the amortization period relates to the initial lease term.

Shareholder Access (And More) By Gunpoint

In the latest of a string of settlements that impose governance changes on companies, Ashland has settled a shareholder derivative lawsuit brought by the Central Laborers’ Pension FundHolders that requires the company:

- to solicit institutional shareholders who hold 1 percent or more of the company stock's for a list of candidates to nominate as independent directors

- to make a part of its governance policy its practice of requiring at least two-thirds of its board be independent directors

- to mandate shareholder approval for the adoption of stock option plans for directors or officers, and require a holding period for a portion of shares acquired by directors and senior officers through option exercises

Last Minute Planning for the Proxy Season

Join us for tomorrow's webcast - "Last Minute Planning for the Proxy Season" - to hear Amy Goodman of Gibson, Dunn; Karl Groskaufmanis of Fried Frank; David Katz of Wachtell Lipton; and Michael Ullman of Johnson & Johnson to make sure you haven't overlooked anything this proxy season!

Also, I just posted the announcement for our March 10th webcast - "The Evolution of Due Diligence Practices (and Securities Act Liability)" - during which Bob Buckholz of Sullivan & Cromwell; Joe McLaughlin of Sidley Austin; and Michael Kaplan of Davis Polk will analyze how diligence practices are evolving in the wake of the first major court opinion in decades.

Oh, They're Real and They're Spectacular

On CompensationStandards.com, I continue to analyze and post 8-Ks that make compensation disclosure in the "Form 8-K Disclosure" Practice Area. Some nice ones are being filed, including some that might be useful to review when drafting proxy disclosures.

This 8-K filed by Aetna last week provides a table of what salaries the Named Executive Officers will receive in 2005; what options and long-term performance units they were just granted (and disclosure that targets have not yet been set); as well as bonuses that were just awarded for 2004 performances. Interestingly, it is disclosed that these amounts were the byproduct of "ordinary course" executive compensation decisions.

And Mark Borges just blogged about Becton Dickinson's proxy statement which - as I pointed out briefly during his webcast last month - includes several interesting disclosures, including a tally sheet. Mark has been blogging up a storm in his "The Compensation Disclosure Blog" and he pointed out on Friday that:

As part of the Board Compensation Committee Report (page 22), BD provides a "Value of Total Compensation" table that sets out the dollar value of the total annual compensation for the named executive officers. While it doesn't quantify every component of NEO compensation (such as retirement benefits and perquisites), it does lay out the cash compensation (salary and bonus -- as well as the amounts disclosed in the "Other Annual Compensation" and "All Other Compensation" columns of the Summary Compensation Table) and the dollar value of long-term incentives (stock options, performance units, and career shares) for each executive, and totals up these amounts.

Other interesting disclosures include:

- A supplemental table to the Summary Compensation Table specifying the voluntary elective deferrals of salary and bonus in each year for each NEO (page 24).

- A description of the methodology used to calculate the incremental cost of perquisites (note 2 to the SCT).

- The grant-date present value for stock option grants using BD's SFAS 123 valuation methodology (see my February 2nd entry on "Disclosing Option Grant Values.")

- Separate tabular disclosure of BD's Career Share grants made in 2004 for fiscal 2005.

Rastaman Live Up!

Yesterday was Bob Marley's 60th b-day and it reminded me of this little ditty:

Me listen to da drummer
Me listen to da bass
Me listen to Jah music
Make me wind up me waste

Trouble Ahead: Only One Room with a View!

As the SEC nears the time to move into its new HQ, Bloomberg reports that "Securities and Exchange Commission Chairman William Donaldson has a decision to make that will determine the outlook at the SEC for years to come: Who among the four commissioners gets the room with a view when the agency moves to new headquarters in March.

Donaldson, 73, the U.S.'s top securities regulator, says the question of who gets what office is roiling the agency. The SEC is hardly a stranger to contentious issues: past votes have covered rewriting corporate-governance rules and overseeing the $973 billion hedge-fund industry.

"For anybody that has ever made office moves, they become hot subjects,'' he said in an interview in Davos, Switzerland. "We will not be an exception.''

Commissioners Roel Campos and Cynthia Glassman have made it clear they want the only office besides Donaldson's that overlooks the Capitol, according to people familiar with the matter. Commissioner Paul Atkins has said it's unfair for any one official to get a better office, the people familiar said. Commissioner Harvey Goldschmid, who is recovering from surgery, has mostly stayed out of the squabble.

Of the four commissioners, the three who lose will get offices looking over train tracks at Washington's Union Station in the new headquarters."

I say split the baby and let them share an office, like most new Staffers do - that's how you make the best of friends while working at the Commish anyways. Just kidding...

Impact of Internal Controls on M&A

On DealLawyers.com, we have posted the transcript from our webcast, "Impact of Internal Controls on M&A."

XBRL Off and Running at the SEC

Yesterday, the SEC established its voluntary program for eXtensible Business Reporting Language ("XBRL") filings. Registrants may voluntarily furnish XBRL data in an exhibit to specified EDGAR filings, beginning with the 2004 calendar year-end reporting season. The effective date is March 16, 2005, which is the final day for calendar year-end accelerated filers to file their 2004 10-Ks.

For the calendar year accelerated filers planning to make XBRL filings - not sure there will be many volunteers - note that the new rules do not become effective until March 16, the final day for filing the 10-K. If a company files before March 16, the new rules - including the limited protection from liability - would not yet be in effect.

Mike Holliday notes that those companies ready to experiment with XBRL should consider not making the XBRL filings until on - or after - March 16. Even if the 10-K is filed before March 16, the XBRL documents can be provided later in an amendment to the 10-K or in an 8-K.

Ex-WorldCom Directors' Deal Breaks Down

Yesterday, the plaintiffs pulled out of the proposed settlement under which 10 former WorldCom directors would personally pay $18 million of a $54 million settlement. New York State Comptroller Alan Hevesi, the lead plaintiff, announced that the plaintiffs were pulling out of the deal after U.S. District Judge Cote struck down a key component of the agreement yesterday.

Judge Cote ruled in this order that any jury award resulting from the February 28 trial could not be reduced using a formula that would have taken into account the limited finances of the directors who settled. Some investment banks that were defendants in the case had objected to the settlement, telling the Judge that they would be unfairly prejudiced unless all the defendants stood trial together.

Here is a more technical explanation from Mike Holliday: The Stipulation of Settlement has a condition that the amount of the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the "Settlement Credit" or the "Contribution Credit." The "Settlement Credit" is simply the total settlement amount of $54 million to be paid by the settling directors ($18 million) and the insurers ($36 million) plus any interest. The other prong of the maximum reduction is more complicated. It would be the contribution claim non-settling defendants would be entitled to assert against settling directors equal to the aggregate proportionate shares of liability of settling directors (determined by the Court), BUT ADJUSTED to reflect any limitation on the financial capability of settling directors to pay their proportionate shares of liability. Absent Court approval of this provision relating to the Settling Director's ability to pay, the Lead Plaintiff is entitled to terminate the Settlement.

Judge Cote's order denied the application to approve the judgment reduction formula insofar as the "Contribution Credit" is "adjusted to reflect any limitation on the financial capability of the Settling Director Defendants, " as a violation of 15 U.S.C. Sec. 78u-4(f)(7)(B)(i). There will be an opinion to follow that will explain the reasons.

Under Subsection (f)(7)(B), which is part of the Private Securities Litigation Reform Act, where a defendant (covered by the Subsection) enters into a settlement prior to final verdict or judgment, the verdict or judgment is to be reduced by the greater of (i) "an amount that corresponds to the percentage of responsibility of" that settling defendant; or (ii) "the amount paid to the plaintiff by" that settling defendant. In this case, the provision in question in the Settlement could have reduced the amount in (i). That could decrease the amount by which any final verdict or judgment is reduced, which would have the effect of increasing the amount of any final verdict or judgement required to be paid by non-settling defendants.

All of this should make the CompensationStandards.com March 3rd webcast - "Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney" - even more interesting as the directors now have the potential to pay significantly more than they would have under the proposed settlement.

Webb Report on Grasso Pay Now Available

Yesterday, the NYSE released the 142-page Webb Report that details how Dick Grasso was paid when he ran the NYSE. Here is Grasso's response.

The NYSE released the Webb report - named for attorney Daniel Webb who compiled it - after a judge overseeing New York Attorney General Eliot Spitzer's suit against Grasso ruled last week that it was not subject to attorney-client privilege. Here are some comments on the report culled from a longer article in the Washington Post:

- The report in many ways tracks Spitzer's complaint, although it offers no legal conclusions or analysis. The report generally concludes that Grasso's pay was unreasonable and that Grasso had undue influence over his own compensation, chiefly by controlling appointments to the board and the compensation committee.

- The report concludes that Grasso's pay was incorrectly based on compensation for chief executives at much larger, publicly traded companies. And it says the composition of the board and the compensation committee changed too often for directors to attain full understanding of the nature of Grasso's complex pay arrangements.

- The report says Grasso's executive assistant was paid $240,000 per year for the last three years of Grasso's tenure and that Grasso used the services of two drivers on the NYSE payroll, each of whom earned about $130,000 per year.

I will blog further after I analyze the report myself. It will be interesting to see what Michael Melbinger blogs on CompensationStandards.com, since he is with the law firm, Winston & Strawn, that prepared the report.

Musical Lawyers and Accountants for Scrushy

Yesterday's WSJ article about how the Scrushy defense team has rotated extensively over the past 20 months is one of the more fascinating "reveals" I have read lately.

My favorite quote from the article is from my pal Mike Mulligan, who served as a foresenic accountant for a period of time for the defense team: "I've never seen a case of this profile involve a shift from law firm to law firm and accounting firm to accounting firm," said accountant Michael Mulligan, the executive director of FCL Advisors International LLC, Great Falls, Va., who was replaced as a forensic accountant on Mr. Scrushy's team. The turnover, he added, "in some ways is even bizarre."

What NOW Needs to Be Disclosed in the Proxy Statement

On CompensationStandards.com, the transcript is available for the popular webcast: "What NOW Needs to Be Disclosed in the Proxy Statement." Since the webcast lasted well over 2 hours, it is quite a sizable transcript.

Summary Sheets for NEO Compensation

On CompensationStandards.com, I answered a question yesterday in the Q&A Forum that has been asked more than once. The question was: In view of recent SEC guidance, we're considering filing as exhibits to our next periodic report a summary sheet for comp arrangements for each NEO. Are others considering this as well? Has anyone seen examples filed for other companies? What categories need covered and at what level of detail?

After reading Alan Dye's remarks from the transcript noted above, I answered that FAQ 5 is pretty clear regarding directors - and directors and NEOs are treated the same under both 8-K and Item 601, so I don't know how you escape the conclusion (unless you just disagree with the Staff, as we hear some people do).

I like what American Express filed on a Form 8-K on January 28th. It includes details about salary levels and option and restricted stock awards for both 2005 and 2004; bonus levels for 2004 and 2003; LTIP payouts for recent performance periods - as well as what the directors fees will be for 2005. I imagine this is what some of the summary sheets might look like.

The Final Standard: Option Expensing is Here – Are You Ready?

Tomorrow, the NASPP will host a webcast - "The Final Standard: Option Expensing is Here – Are You Ready?" - featuring Mike Crooch, Board Member, FASB; Mike Tovey, Project Manager, FASB; Carlo Pippolo, Partner, Ernst & Young; and Ellie Kehmeier, Tax Director, Deloitte & Touche.

And the NASPP is nearly ready to announce two subsequent webcasts regarding equity planning in the wake of option expensing to be held during March and April.

Coverage for In-House Counsel Under D&O Insurance Policies

It's a jungle out there for in-house counsel! Learn whether in-house lawyers can protect themselves in this interview with Ethan Lenz on Coverage for In-House Counsel Under D&O Insurance Policies and Indemnification Provisions.

You Got Questions on 404 Issues?

If you do, please forward them to me so I try to have the panel address them on tomorrow's webcast: "Demystifying Internal Controls Disclosures."

Document Destroyer Goes to Jail

The Oakland Tribune reports that a former E&Y partner - among the first charged with document destruction under SOX - has been sentenced to a year in federal prison for his role in falsifying or destroying documents to impede a SEC probe.

In pleading guilty in October, the partner acknowledged that in April 2003 he testified under oath to the SEC regarding audit work his team had performed on NextCard (a company whose collapse the SEC was investigating) and he didn't bother to mention that documents related to NextCard's audit and quarterly working papers had been altered, with considerable parts deleted in November 2001. The partner later admitted this was a cover-up meant to impede the SEC's probe.