November 30, 2005

SEC Proposes "E-Proxy"

At yesterday's open Commission meeting, the SEC proposed an alternative model of proxy delivery - a project the SEC calls "E-Proxy." Here is the SEC's press release and here is Chairman Cox's opening statement. Below are notes from the open Commission meeting:

- Purpose of E-Proxy - The proposals are intended to facilitate the use of technology in the proxy solicitation arena. The SEC is proposing an alternative notice and access model for satisfying Rule 14a-3 that people performing proxy solicitations could rely on.

- Posting Proxy Materials- For an issuer proxy solicitation, the issuer must post proxy materials on a website that is publicly available (but the SEC's website doesn't count). The posted proxy materials must be substantially identical to any printed version of the proxy materials.

- Delivery of Notice - The issuer would be required to deliver a “notice of availability” at least 30 days prior to the shareholder meeting. Banks and brokers and their agents must forward the notice of availability to the beneficial shareholders. No other shareholder communications can be delivered with the notice, but a proxy card can be delivered with a notice (though it is not required).

- What is "Notice" - The notice must contain information about the meeting (date, time, place, etc.); the address of the website where the proxy materials are posted; a toll free phone number and an email address that shareholders may use to get paper versions of the proxy materials; and a description of matters to be acted on at the meeting and the recommendations of the company.

- Making Paper Available - The issuer must respond to any requests for paper copies within two business days.

- Proxy Card - The proposal would permit companies and other soliciting parties to deliver a proxy card with the notice of availability, but does not require them to do so. There was much discussion about concerns that shareholders would vote based on the information in the notice rather than in the proxy statement - and the proposing release will ask a series of questions about whether the proxy card should be delivered with the notice of availability or whether it should only be allowed to be delivered with the proxy materials.

- Non-Issuers Too - Soliciting persons other than issuers would also be permitted to follow the proposed alternative model as well - these persons would be required to deliver notice at least 30 days before the meeting or within 10 days of the issuer filing proxy materials. As permitted under current rules, other solicitors would not have to solicit all shareholders, but would be permitted to target certain shareholders.

- What is Not Affected - The SEC indicated that the proposed amendments would have no impact on any state law obligations regarding soliciting proxies or holding annual meetings, and would not apply to business combination transactions.

- When New Rules Will Be Effective - The rules probably will not be implemented in time for the 2006 proxy season. There is a 60-day comment period.

FASB Tentatively Relaxes Standard on Tax Benefits From Uncertain Positions

Last week, the FASB tentatively adopted a "more likely than not" threshold for uncertain tax positions. If adopted, this would be a much more workable position than the "best estimate" method proposed in July.

In working on its final interpretation of FAS No. 109 to be issued in the first quarter of 2006, the FASB voted to pull back from a standard espoused in an exposure draft that the best estimate of the impact of a tax position be recorded only if that position "is probable of being sustained on audit based solely on the technical merits of the position."

Deferred Compensation: Actions Employers MUST Take by End of the Year

If you deal with deferred compensation, I hope you are aware of Section 409A and the latest proposed IRS regulations - and the laundry list of things you need to do by the end of December. If not, look no further than yesterday's blog by Mike Melbinger who provides such a laundry list.

November 29, 2005

NYSE Takes a Position in Sovereign Mess

Yesterday, I went into a blogging frenzy on the Blog regarding the proposed - and controversial - transaction by Sovereign Bancorp, which has been amended so that the NYSE would allow it to proceed without a shareholder vote. Rather than repeat that lengthy blog, here are the primary topics I addressed to help you determine whether it's worth visiting that blog:

- Dissecting the Shareholder Approval Issue
- The NYSE's Trap for the Unwary?
- The Use of Treasury Shares or Cash to Avoid Shareholder Approval
- A Final Thought on State Law vs. SRO Regulation

Companies Go Public With Auditor Liability Caps

Yesterday's WSJ carried an article with the title above that dissected the growing practice of limiting auditor liability through provisions in engagement letters. The article noted that two companies have disclosed the fact that they have limited their auditors liability in these proxy statements: Sun Microsystems' proxy statement (page 17) and Silicon Graphics' proxy statement.

Both companies disclose they have entered into an engagement letter with their outside auditor and then add: "That agreement is subject to alternative dispute resolution procedures and an exclusion of punitive damages." Expect more investors to be seeking disclosure about limited liability to help them decide whether to ratify an auditor's engagement - and I agree that this type of disclosure is a good idea.

Regarding the overarching point about the wisdom of limiting auditor liability, I have been urging companies for some time to push back on these so-called standard provisions in auditor engagement letters - learn more in our "Auditor Engagement Letter" Practice Area. Let me know if you have had any success pushing back recently!

UK Legislation on Auditor Liability and Engagement Letters

Following on the theme above, there is some interesting legislation introduced in the United Kingdom that would not only require auditors to disclose the details of their engagement letters, including any liability caps - but also require companies to obtain shareholder approval of these arrangements!

The proposed legislation would also create a lot more transparency regarding changes in auditors, giving investors a greater voice in that process as well. This legislation is part of a long-term review of UK corporate law that started in 1998.

November 28, 2005

NYSE Proposes Changes to Section 303A

On Wednesday, the NYSE posted these proposed Section 303A rule changes regarding director independence, disclosure mechanics and other clean-up changes. [Oddly, the proposal states that the changes were approved by the NYSE board way back on April 7th. Typo?]

SEC Filing Fees Reduced

On Wednesday, the SEC released Fee Rate Advisory #5, which reduces the fees paid to register securities by 9.1% effective yesterday, November 27th. On November 22nd, President Bush signed H.R. 2862, the appropriations bill that includes funding for the SEC and the reduced rates became effective five days later - so that the fees due now are $107.00 per million registered.

Revised Executive Pay Settlement Approved in Fairchild Case

Also on Wednesday, Delaware Vice Chancellor Strine approved Fairchild's revised settlement of a shareholder lawsuit alleging that the company's Chairman and CEO received excessive compensation. The terms of this revised settlement were the subject of a blog from last month.

You know overpaid executives has become a mainstream topic when "Jeopardy" has a category entitled "Forbes Top Executive Salaries." Yes, an episode of Jeopardy that I saw over the weekend included this category. And I am proud to say I did quite well on it! But not so well in the other categories - either that show has gotten tougher in my old age or I am fading...

The Blog about Wall Street? Really?

Yesterday, the NY Times ran a brief article about a one-month old blog that allegedly gives the inside scoop on Wall Street. I ran a "Whois" search on who owns the blog's URL and came up with the Brownstone Media Group. Then, I googled "Brownstone Media Group" and came up with nothing but this blog about renovating properties in Brooklyn.

Although there is sparse contact information on either blog, the renovation blog does include an "advertisement" for the new Wall Street blog. So some sort of connection seems to exist between the two. This took all of two minutes to uncover. Maybe I don't know enough about Wall Street - but Brownstone doesn't strike me as part of the Wall Street establishment.

Think the NY Times was had? The article says the blog is run by an anonymous 30-something banker - but all of the blog entries are merely snippets or commentary regarding articles run in mainstream business publications. There is nothing in the way of real inside scoop or any other indicia that shows the blogger has any more Wall Street experience than Barney Rubble. I could be wrong but me thinks this is some sort of Web hijinks...

November 23, 2005

Senate Acts on Personal Use of Corporate Aircraft

Last Thursday, the US Senate added an amendment to a broader tax bill approved by the Senate that would require all employees - not just officers - to pay tax on the company's actual cost of providing them personal travel on corporate aircraft. This Dayton amendment isn't part of a tax bill that is now pending in the House of Representatives. After the House passes its version, the two bills would go to a conference committee to be reconciled before being presented to the President for his approval.

Senator Dayton's proposed amendment to the Code would require the inclusion in income to the employee of the greater of the fair market value or actual cost of such use (less any payment made by the executive, which is severely limited under Part 91 of the FARs). Senator Dayton's amendment would presumably eliminate the non-commercial aircraft valuation rules of Treasury Regulation 1.61-21(g). [Interestingly, in arguing in favor of his amendment, Sen. Dayton cited this article from the WSJ, which showed a pattern of CEOs traveling on their company jets to play golf. This illustrates how the media plays a role here.]

In short, the days of using the "SIFL" rates to value personal use of employer-provided aircraft would come to an end - and the modest income attributable to personal use flights would grow significantly. The benefit to the company from this would be that, since a large number is being included in the executive's compensation, it is likely that the entertainment disallowance to the company would be reduced, if not eliminated. Even if the proposed changes are not enacted into law, it seems likely that some Congressionally crafted changes will be passed eventually. Thanks to Stewart Lapayowker of Akerman Senterfitt for helping sort through this!

SEC Issues Draft RFP for EDGAR

Yesterday, the SEC issued a press release about a draft RFP that contemplates a significant, multi-year project to update EDGAR. The last RFP for EDGAR was back in 1998 - and even though the current EDGAR contract doesn't expire until later next year, buying anything under federal procurement rules takes a long time.

The question is whether the SEC will select a new contract that places a large burden on companies or will they try to do something that can be done internally without issuer burden. As I blogged recently, I get a little nervous about constant talk about the need for "interactive data." That suggests companies would have to create it.

One thing that could come out of this new contract is some sort of new "Financial Data Schedule." This might be a template (perhaps with XBRL tags in the background) that would permit automated analytics of financial statements by both the SEC and analysts. Many of you will recall how a Financial Data Schedule was eliminated a few years back due to its uselessness - but one could be created with more value this time around.

One tension in all this is the differing needs of investors, analysts and regulators. I am not convinced that interactive data will help analysts much because they each seem to have their own approaches to normalizing and organizing corporate reports. Something like XBRL may help a bit, but it is far from an automated solution for them.

On the other hand, regulators need flags to go up or bells to ring that point them in a particular direction that allows them to better target their resources. They can dig in after the flag goes up and take it from there - more like the IRS. Again, XBRL might help - but it is not an automated solution for them either. If companies will be asked to bear most of the costs necessary to create interactive data, the benefits for the marketplace should be clearly shown.

November 22, 2005

ISS' Voting Policies for 2006

ISS has released its voting policies update for 2006, including a new policy on majority vote shareholder proposals. Below is a snapshot of the most notable developments, as ISS will now:

- recommend a vote "against" shareholder proposals seeking implementation of a majority voting standard in a director election if company has adopted a corporate governance principle that addresses certain key points and the company satisfies other criteria.

- recommend a "withhold" vote from director nominees who serve on audit committees if company has serious internal controls issues

- recommend a "withhold" vote from director nominees who serve on compensation committees if company has poor compensation practices (also encouraging compensation committees to include "tally sheet" or other total compensation disclosures)

More on ISS' Majority Vote Voting Policy

Fleshing out ISS' new voting policy on majority vote shareholder proposals, Gibson Dunn issued this law firm memo that recaps the voting policy - and an ABA panel from this weekend where John Connolly and Martha Carter, ISS's President/CEO and its SVP/Director, U.S. Research, respectively, stated:

"For 2006, ISS will generally support "reasonably crafted" shareholder proposals (regardless of whether binding or non-binding) asking a company to implement a majority voting standard in uncontested director elections. However, ISS will consider recommending votes "Against" this type of shareholder proposal if the company has adopted formal corporate governance principles that "present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast." At a minimum, such principles should:

- apply to each nominee in an uncontested election who fails to receive affirmative votes of a majority of the votes cast in the election (i.e., not a majority of outstanding shares standard);

- contain guidelines that are disclosed annually in the company's proxy statement;

- provide a clear and reasonable timetable for all decision-making regarding the status of a nominee who does not receive a majority vote;

- state that the process for determining the nominee's status will be managed by independent directors, excluding the nominee in question;

- detail the range of remedies that can be considered concerning the nominee (e.g., accept a resignation from the nominee, cure issues underlying the voting results, etc.);

- commit to prompt disclosure of the nominee's status via an SEC filing; and

- describe the timeline for disclosing the directors' decision regarding a nominee's status and explaining how the decision was reached.

The ISS representatives emphasized that the new policy is intended to be flexible (as opposed to a "check the box" approach), that ISS is not endorsing any one company's policy or approach and that it is very important for a company to explain why any policy it adopts is appropriate for that company.

The 2006 Policy Updates reflect this last point where they state that "In addition, the company should articulate to shareholders why this alternative [implementing a corporate governance policy on majority voting as opposed to changing the voting standard] is the best structure at this time for demonstrating accountability to shareholders." Finally, in considering its voting recommendation, ISS will also evaluate the company's accountability to shareholders, including whether it has a classified board or a history of not responding to shareholder proposals that received a majority vote."

The Gibson Dunn memo - and these other law firm memos - provide a number of practice pointers about what you should consider now in light of these new changes.

Working in Corp Fin During the '60s

How about a human interest story for the holiday? In this podcast, Bob Curley of Mayer Brown Rowe & Maw provides some insight into what it was like to work in the Division of Corporation Finance forty years ago, including:

- Where was the SEC located? What was the Staff’s composition?
- What was nature of working in Corp Fin back then?
- How were filings processed and reviewed?
- What were some of your favorite moments when you were on the Staff?
- What are some of things you missed most when you left?

November 21, 2005

Early Holiday Gift from the SEC: No More Proxy Delivery to be Proposed!

The SEC has announced an open Commission meeting for November 29th, during which the Commission will consider proposing rules that would eliminate the requirement to deliver proxy materials for companies that wanted to follow this "alternative model." This alternative model would require companies to deliver a notice - which could not be accomplished just by a Web posting - that state that proxy materials are available on a corporate website.

This proposal is a logical extension of the "access-equals-delivery" framework that the SEC adopted as part of the '33 Act reform, as the SEC clearly now recognizes the widespread availability of Internet access for investors (and for those that don't, they can request a paper copy). This proposal also reflects the fact that a high percentage of proxy statements go to shareholders that do not vote.

At an ABA meeting this weekend, Corp Fin Director Alan Beller indicated that the SEC would not be able to adopt final rules in time to apply to this proxy season. He also indicated that the proposed rules likely would:

- require that a proxy card or voting instruction form be sent (and will not presume consent to electronic voting)
- not address OBO/NOBO or other issues; it will be a narrowly focused proposal
- be available for issuers and others who solicit
- apply to the proxy statement and glossy annual report

ISS' Final Postseason Report for 2005

ISS has issued its final postseason report for 2005 - and I will cover ISS' voting policies for 2006 tomorrow.

To learn more about what to expect from investors and ISS in '06, listen to our January webcast - "Forecast for 2006 Proxy Season and Solicitation Strategies to Consider" - which will include proxy solicitor panelists that will provide guidance about strategies to consider regarding shareholder approval of plans, etc.

PCAOB Inspection Reports: PwC, E&Y, and BDO Seidman

On Friday, the PCAOB released the last of the Big Four 2004 inspection reports, by issuing this Ernst & Young report and PwC report. For good measure, it also released the BDO Seidman report (BDO is the sixth largest auditor).

Problems with 8 audits by E&Y and 30 by PwC were big enough to suggest that the firms failed to obtain "sufficient competent evidential matter'' to support opinions on their clients' financial statements.

Here are some thoughts from Lynn Turner, former SEC Chief Accountant and now head of research for Glass Lewis, on these reports: "These reports include some stunning revelations about shortcomings in the described audits performed by PWC and E&Y. Unfortunately, these reports are being issued over 22 months after the December 31, 2003 year-end involved in many of these audits - and over a year after inspections were done.

This will not help instill investor confidence that audits are being done in accordance with required standards. However, it does appear inspections are much more in-depth than they were when the firms were regulating themselves (and let's hope the PCAOB keeps up with this high level of inspection scrutiny).

Also of interest is that the Big Four are demanding that companies agree to a limitation on the damages an auditor would incur for doing negligent audit work. Based on these inspections, one can understand why the Big Four auditors want liability limitations."

With Apologies to "Intervention"

I broke my policy of open-mindedness when I dissed the reality TV show "Intervention" in my Friday blog without ever having seen it. One member set me straight:

"If you haven't seen "Intervention" on TV, you'd be doing yourself a big favor if you watched it. Particularly if you have kids. In my opinion, it is without a doubt the most gripping television I've seen in a long time, if not ever. It is nothing like Survivor, I imagine (I have to imagine this because I have never watched and will never watch Survivor or The Apprentice or any other "reality" TV).

Intervention is about the human condition, about forgiveness, about facing our own shortcomings, about growing up, about the disease of narcissism. Why did it take TV 60 years to create a show like this? Intervention is like a big public service announcement, a reminder that from dust we came and to dust we shall return, and in the meantime it would be good if could see our way clear to not being assholes to each other. A reminder I would do well to heed. And it is right that Intervention is shown on Sundays, particularly for those of us who, like me, don't always get to church. Intervention gives real meaning to the expression: There but for the grace of God go I. I recommend it."

November 18, 2005

A Few Highlights of the SEC's 2005 Annual Report

On Wednesday, the SEC posted its 2005 Annual Report. Thumbing through this thing, here are some highlights (let me know if you spot some other nuggets):

1. A chart with milestones for significant rulemaking is on page 16 of the PDF (page 14 of the annual report)

2. Discussion of the causes of its unforeseen $48 million budget shortfall begins on page 21 of the PDF (page 19 of the annual report)

3. Discussion of the corrective actions to fix the SEC's three remaining material weaknesses of its internal controls begins on page 23 of the PDF (page 21 of the annual report)

4. Staff turnover rate in '05 was 7.5%, the highest level since '01 ('04 had a 6.3% rate - but these levels tend to be much lower compared to a law firm)

5. Corp Fin's gross costs were $125 million in '05; up from $92 million in '04

6. The number of foreign companies listing in the US and the dollar amount they raised jumped significantly compared to the past year, noted on page 41 of the PDF (page 39 of the annual report)

7. Corp Fin's response time on comment letters is quicker and is less than 30 days as mentioned on page 44 of the PDF (page 42 of the annual report)

8. Corp Fin referred significantly more cases to the Enforcement Division, likely because the size of Corp Fin's Office of Enforcement Liasion has grown itself and more filings are being review now that companies are required to be reviewed once during every three years, as noted on page 48 of the PDF (page 46 of the annual report)

Remember: Your PowerPoint Could Wind Up On The Web

Last Sunday's NY Times ran Gretchen Morgenson's column about Delphi's controverial incentive and retention bonus arrangements, during which Gretchen singled out the lawyers and comp consultant's involvement in the arrangements that have been made public by virtue of the company's bankruptcy filing (although oddly she didn't single out the board, which we all know should be held accountable first and foremost).

In the article, Gretchen specifically called out this Watson Wyatt 35-page PowerPoint presentation, which was filed as part of the company's bankruptcy proceedings. The PowerPoint sets forth the proposed parachute arrangement proposal that ultimately was approved and implemented.

Knowing that this type of information could become publicly available - and spotlighted in the mainstream media - should serve as a cautionary tale to advisors who migth be second-guessed if they don't provide their clients with some responsible alternatives as to compensation arrangements.

Debunking the Myths on "Going Dark"

Lots of interest in this upcoming - "Going Private and Going Dark." As this article suggests, a surprising number of companies are "going dark" - and I believe that the article even understates how many companies have done so recently. During the webcast, the lawyers and a banker from the panel will debunk a bunch of the common myths regarding going dark.

If you can't wait for the webcast, we have created a new "Going Dark" Practice Area, which has several articles about going dark - and a partial list of companies that has recently done so.

November 17, 2005

Slogging Through the Blogs

Yesterday, this helpful WSJ article highlighted a number of top blogs that cover specific industries - and contained a blurb on the Blog. That was great to provide exposure for that blog - but omitted any mention of this fine blog.

It just goes to show that you never know how - and when - you will obtain your 15 minutes of fame. I'm just glad to catch mine in an unembarrassing manner in this day and age of reality TV. Can there really be a show now called "Intervention?" And the show's subject is not even aware that his/her intervention is shown on TV...

The SEC's General Counsel Roundtable

Today the SEC is hosting a Roundtable with a panel consisting of the current SEC General Counsel and eight former SEC General Counsels. This program is being webcast at noon eastern. It was slapped together at the last minute - and (oddly) no specific agenda is provided.

General Electric Joins the Majority Vote Resignation Gang

We have updated our "Majorty Vote Resignation" Chart to reflect that General Electric has joined the growing number of companies that have revised their corporate governance guidelines to add a provision that calls for directors to resign upon receiving a majority of withhold votes in an uncontested election. Here is GE's announcement.

The FASB to Act on Pension Liabilities

Last Thursday, the FASB voted to take a fresh look at its guidance in FAS 87, "Employers' Accounting for Pensions," and 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The first part of the project - expected to be completed by the end of 2006 - would require companies to show any assets or liabilities from overfunded or underfunded pensions on their balance sheets. The current practice is to show those amounts in footnotes.

From what I am hearing, this change in FAS 87 and 106 could cause total shareholders’ equity to drop significantly for some companies, which in turn would adversely impact their debt-to-equity ratios enough to trigger a host of debt covenants.

After next year's first step, the FASB likely will engage in a joint project with the IASB to overhaul the entire system for accounting and reporting on postretirement benefits. Here is more information on this development from

November 16, 2005

The NASD's Underwriting Review Process for WKSI Shelf Offerings

During the PLI Securities Law Institute, Elisse Walter of the NASD addressed an open issue regarding WKSI shelf offerings and NASD Rule 2710: In the near future (but not likely to happen before the December 1st effective date of the '33 Act reform), the NASD's review procedures are likely to be modified so that these offerings are cleared within one day of the date they are filed - this is good news because a full review otherwise could take weeks. This change won't affect shelf offerings exempt from the filing requirements of Rule 2710 that are not subject to Rule 2720.

While it will still be necessary to file prospectus sup­plements and post-effective amendments required to be filed under Rule 2710, the NASD likely will not require that such materials be approved prior to use (but the NASD likely will "spot check" these materials for compliance). Here are more notes from that PLI panel, including comments from Elisse on free writing prospectuses and the NASD's outstanding proposal on fairness opinions.

Looking for SEC Staffer Phone Numbers?

Now that the SEC's HQ has relocated, I've been fielding requests from members looking for an updated SEC Phone Directory with new phone numbers. Unfortunately, I believe the 2004 SEC Phone Directory is the latest.

Although not as useful, the SEC does have a personnel locator phone number that you can call: (202) 551-6000. This number leads to an automated function or you can opt out to speak with an operator. I will let you know when an updated SEC Phone Directory is available.

Gemstar Wants Prison for Ex-CEO

According to this article, Gemstar-TV Guide International has filed a victim's statement with the Los Angeles federal probation office seeking harsher punishment for fired CEO Henry Yuen, who presided over a $248 million accounting fraud. The former CEO's plea agreement with the Justice Department calls for a proposed six-months in home detention, a $250,000 fine and a $1 million charitable contribution.

Victims of crimes have the right to protest proposed plea bargains if they contend the punishment isn't adequate. Companies rarely file such statements - but this illustrates how companies should take steps now to deal with bad actors before the going gets rough (egs. revisit employment agreements and D&O insurance and indemnification arrangements).

November 15, 2005

My Ten Cents: The SEC's Focus on XBRL

It appears that one of Chairman Cox's top priorities is the use of XBRL; here is a speech he gave last week on the topic (and here is another speech he gave recently). The SEC's XBRL pilot has been in operation since April - and in that 6 month period, a total of 19 filings have been made in XBRL. I believe there's a reason for this: the technology is complex and the payoff for a company that dabbles in it is small (at least right now), so that no one wants to invest in creating even an XBRL test filing.

Chairman Cox is absolutely right in his concern that the SEC is behind the curve regarding the use of technology to give examiners a jump on where to focus their resources, but I'm not convinced that widespread adoption of XBRL will be the big breakthrough that helps solve that problem. Plus I believe it will take quite a while to get most companies over the XBRL hump (EDGAR was not built in a day; it took roughly a decade until full implementation).

From what I understand, there perhaps are other quicker - and cheaper - ways for the SEC to leverage automated analysis. For example, the SEC could buy data and create analytics based on XBRL data; there are multiple XBRL providers already and some can convert financial statements into XBRL almost on the fly. So the SEC could do what the FDIC has already accomplished - create a templated report that every company has to file and this template could have XBRL behind the curtain. Just my ten cents...

Caselaw Developments regarding D&O Insurance

In this podcast, Nate McKitterick of DLA Piper Rudnick Gray Cary explains the latest caselaw developments involving D&O insurance – which have drastic implications as innocent D&Os could see their policies rescinded - including:

- What is "rescission"?
- What have the courts said recently regarding rescission?
- Won't the indemnification obligations adequately protect the directors and officers?
- What can a company and its board do to minimize rescission risk?

When ERISA Suits Tagalong to D&O Claims, the Fiduciary-Liability Coverage Might Not

From the Insurance Scrawl Blog: Corporate directors and officers litigation today often involves claims asserted under the federal securities laws as well as under federal employee-benefits law (ERISA). The plaintiffs in these suits are conceptually different: securities-law plaintiffs are people who (and entities that) purchased or sold the company’s securities; ERISA plaintiffs are participants in employee-benefit plans that held or permitted the investment in company securities. Increasingly, ERISA cases are tagging along to securities cases: the directors and officers (who often are plan fiduciaries) are alleged to have failed to disclose certain facts about the company’s operations or finances to the market generally (for securities claims) or to participants in company-sponsored employee-benefit plans (for ERISA claims).

The United States Court of Appeals for the First Circuit recently had the opportunity to address coverage for a tagalong ERISA claim that was made four years after a securities-law class action was filed. In a very troubling opinion, the court ruled that no coverage was available for the ERISA class action because the gravamen of the complaint echoed the allegations in the earlier securities class action. The basis of the court’s ruling was not that the policyholder had failed to disclose the early securities-law class action, but rather that a generic prior-and-pending litigation exclusion barred coverage. Federal Ins. Co. v. Raytheon Co. (1st Cir. Oct. 21, 2005). More analysis on this case is provided here.

November 14, 2005

Notes from PLI's Securities Law Institute

We have posted notes from 6 panels of PLI's Securities Law Institute in our "Conference Notes Practice Area," including the popular Q&A Picnic with Corp Fin Director Alan Beller. Many of the questions answered by Alan deal with the new '33 Act reform.

Controversial Executive Compensation Bill Introduced

As I blogged Thursday, the Democratic leaders of the House - led by Rep. Barney Frank - have introduced "The Protection Against Executive Compensation Abuse Act." Here is a copy of the bill - and here is a summary (and here is a quasi-white paper issued by the House Democrats).

This Act would amend Section 16 of the '34 Act that would require companies to:

1. Include an "Executive Compensation Plan" on the ballot for shareholder approval - This Executive Compensation Plan would to be included as part of the company's proxy materials, which would disclose:

- Tally Sheets- Tally sheet-type information for top executives (the number of executives covered vary depending on the total assets of the company);

- Compensation Policies - Compensation policies for top executives, including the short- and long-term performance targets that are used to determine compensation (and whether such targets were met in the preceding year); and

- Clawback Policy - Company's policy for clawing back compensation not disclosed in the company's Executive Compensation Plan; incentive compensation or bonuses within 18 months of a negative restatement; or compensation if the executive was engaged in fraud.

2. Require shareholder approval of golden parachutes - As part of any merger or acquisition, companies would need to receive shareholder approval of any additional compensation for top executives that coincides with the sale or purchase of substantial company assets.

3. Require companies to include simple and clear disclosure of their compensation arrangements on their websites - "Rather than forcing shareholders to regularly monitor and decipher the SEC’s arcane “EDGAR” database." That's a Congressional zinger on EDGAR.

What Does This Executive Compensation Bill Really Mean?

First and foremost, this bill shows that predictions of CEO pay becoming a political football have been proven to be true. Even if this bill doesn't go anywhere - and I don't expect it to go far - we should expect more of the same from the Hill leading all the way up to 2008.

As for the confusing concept of having shareholders approve disclosure - but not the substance of compensation arrangements - we can look at what is happening in the United Kingdom. In the UK, for the past several years, shareholders have been able to vote on the disclosure made in compensation committee reports (interesting, the only time one has been voted down was due to the mere existence of a CEO employment contract - which is an unacceptable practice in the UK, but is fairly routine here in the US).

The shareholder votes on compensation disclosure in the UK are non-binding - but the message delivered by them can be ignored only at management's peril. I believe this is the concept that the House Democrats are driving at by requiring shareholder approval of the disclosure regarding a company's "Executive Compensation Plan."

As for shareholder approval of severance arrangements and forcing companies to adopt policies on clawbacks - here the House Democrats target two areas where investors have been noticeably angry and the subject of quite a few shareholder proposals during the past few proxy season. Both of these areas were addressed by panels in the just-concluded "2nd Annual Executive Compensation Conference."

The bottom line is that boards and managers should get their "house" in order regarding executive compensation or run the risk that Congress eventually will take action. And as you can see from this new bill, that is not something that many are gonna like.

November 10, 2005

Disclosure Controls: Interplay with Internal Controls and Remediation "Cooling Off" Periods

In response to member inquiries, I recently polled my advisory board on several issues involving disclosure controls and how independent auditors were reacting to deficiencies - and have now posted some analysis of these issues in the "Disclosure Controls" Practice Area.

For example, when considering the interplay of internal controls and disclosure controls, here is one situation that should serve as a "cautionary note." Mittal Steel (formerly known as International Steel Group) disclosed a material weakness in internal controls in Section 9A of its last Form 10-K - but yet the company concluded that its disclosure controls were effective. Notably, in its attestation, the company's independent auditor stated that it disagreed with the company's conclusions regarding the effectiveness of its disclosure controls. Ouch!

Let me know if you have any other 404 issues or anecdotes to share this proxy season.

"The Protection Against Executive Compensation Abuse Act"

I'm gonna try to make it down for the press conference today where the Democratic leaders of the House will introduce "The Protection Against Executive Compensation Abuse Act." As this press release indicates, the proposed Congressional legislation appears to mainly focus on eliciting more disclosure about executive compensation practices in an effort to address the "problem of runaway executive compensation."

This development could spur the SEC to even quicker action on the compensation rulemaking project that is expected to be proposed sometime during the next few months. And it makes the upcoming webcast series on proxy and 8-K disclosures even more critical: "Your Upcoming Proxy Disclosures—What You Need to Do Now!" and "Real Life Examples (and Explanations) to Meet the SEC's New Expectations."

To listen to this webcast series, renew your membership today - or if you are not a member, try a no-risk trial (and also get access to the recently completed "2nd Annual Executive Compensation Conference" at reduced rates).

November 9, 2005

Ramping Up for the '33 Act Reform

With the December 1st effective date approaching, many of us are ramping up for the many changes that will take place. I just posted a helpful Davis Polk memo about issuer preparedness in our "Hot Box" on the home page; a nice companion to the Sullivan & Cromwell memo that I posted earlier. Soon I will announcing additional webcasts on what deals actually look like under the new regime.

Heads Up: '33 Act Reform and EDGAR Coding

Last Friday, the SEC adopted the updated EDGAR Filer Manual that includes numerous changes in response to the '33 Act reform rules that become effective December 1st.

Some of the changes in the updated EDGAR Filer Manual can be confusing, because even though the new rules aren't effective until December 1st, the headers for Form 10-Ks and 20-Fs must now include a checkbox as to whether the filer is a WKSI or voluntary filer (which is further odd because the voluntary filer checkbox doesn't appear to be required for Form 10-SBs; but it is required for 10-Ks), as well as include a checkbox as to whether the filer is a shell company.

On the other hand, a filing will be suspended if it includes certain '33 reform coding before December 1st, such as coding for free-writing prospectuses (i.e. the new Form FWP).

The revised Volume II of the EDGAR Filer Manual also updates the Form 8-K to include Item 5.06 for changes in shell company status.

In addition, the SEC Staff has issued this statement, which includes Q&As about EDGAR programming and Regulation AB for asset-backed issuers.

FOIA Litigation Against the SEC

Last week, a Federal judge concluded that the SEC failed to follow proper procedure in responding to litigation brought by SEC Insight in 2004, an independent and private investment research firm. According to this press release, starting under former Chairman Harvey Pitt, the SEC began to simply "refuse to confirm or deny" the existence of records in response to many of SEC Insight's FOIA requests. SEC records show that this type of denial, commonly referred to as a "Glomar response," was asserted by the SEC only three times in the entire decade prior to 2002 - but was used 99 times in 2003 alone, with 66 of those instances specifically targeted at blocking SEC Insight's requests.

The court declined to issue an injunction against the SEC's future use of the Glomar. However, the SEC has not issued a Glomar response against SEC Insight since the lawsuit was filed. Here is a copy of the court's order, which we have posted in the "Confidential Treatment Requests" Practice Area.

November 8, 2005

The SEC Speaks at PLI's Securities Law Institute

To keep you satisfied until we will post notes from last week's PLI Securities Law Institute, here are some noteworthy points from the SEC Staff panelists at the conference:

- Corp Fin's Chief Accountant’s Office intends to issue a new version of the "Current Issues Accounting Outline" by the end of November

- Corp Fin is planning on issuing additional '33 Act Reform FAQs sometime during the next few weeks - these will not deal with transitional issues, but will rather focus more on the substance of the new rules

- Corp Fin's Office of Mergers & Acquistions has come to the conclusion that an interpretation of 14d-10, the all-holders rule, will not suffice to solve the problem created by the split in the circuit courts - thus, it is working hard to provide a proposal to amend the rule. The proposed amendment will not be a brightline test, but will be broad enough to provide the Staff with the ability to interpret. As a reminder, the Staff noted that the SEC has consistently taken the view that bona fide compensation arrangements should not raise 14d-10 issues.

As you can see, there weren't too many newsbreaking developments at this year's conference - likely because the new SEC Chair has not set his full agenda yet. Heard a few attendees bemoan the fact that fan favorite Marty Dunn was used for little more than "eye candy" on the '33 Act reform panel - but that's what happens when someone is a last minute addition to the panel (which Marty was).

[Not sure why, but my wife just sent me this video - maybe she's a closet Milli Vanilli fan? Anyways, it reminded me how cool Google Video will be once it has matured...]

Implementing Ombudsman Programs

In this podcast, Arlene Redmond and Randy Williams, Founders of Redmond, Williams & Associates, provide their experiences on what makes a sound ombudsman program work, including:

- What is an organizational ombuds? And what role does one have in helping to protect a company’s reputation and assets?
- If a company has effective formal channels, such as the Corporate Secretary or legal department, why would it need an ombuds?
- How do the role of whistleblower hotlines compare to the role of an ombuds?
- How can a company assess the effectiveness of an Ombuds program?
- What are examples of companies that have Ombuds programs?

Governance Posterchild: Sovereign Bancorp?

Last week, much was reported about how Sovereign Bancorp's CEO botched his communication of some deals that the company was negotiating. Boy, the news reports regarding investor reaction to the CEO's comments at an analyst conference sure don't seem to jibe with tenor of this press release released by the company.

But that is just the tip of the iceberg for Relational Investors, who owns the largest stake in the company and has filed preliminary proxy materials with the SEC to elect a short slate to the company's board. The short slate consists of two members of Relational. (For those of you unfamiliar with Relational Investors, this is how they typically invest - they target poor performers and buy a stake; then take an active role in reforming the company. They are quite successful with this investment strategy.)

If you read Relational Investor's preliminary proxy materials, it will blow you away. For example, here is a snapshot of how Relational Investors describes the company's director compensation practices:

- Directors are paid over $300,000 annually, more than any other financial institution in the country, including global banks like Citigroup and Bank of America and more than 5x the peer group (which means that it will be easier for a plaintiff to show that the company's directors are not independent since they set their own pay)

- Directors have the opportunity to earn "special bonuses" if the company meets certain cash targets - and the targets were set below guidance put out by management and could even be paid if the targets weren't met (not to mention using this type of incentive pay for directors is dangerous since this could incentivize directors to be in cahoots with a management team that wanted to manipulate the numbers)

- Until recently, the company paid directors under a two-tiered compensatory structure so that newer directors were only paid about $60,000 annually (compared to the $300,000 paid to more senior directors) - even though all directors had the same obligations, liabilities, responsibilities and workload (arguably calling into question the board's business judgment and sense of fairness)

November 7, 2005

Senior Managers Lose Jobs Over Option Grant Date Practices

Last week, it was widely reported that the CEO, CFO and General Counsel of Mercury Interactive Corp. resigned involuntarily after an internal investigation revealed that some of the company's stock option grants had been manipulated over the past decade. The company's internal investigation was prompted by an inquiry from the SEC; then SEC Enforcement Director Stephen Cutler gave a speech about the Staff looking into granting practices well over a year ago and this is the first publicly known result from that sweep.

According to the company's Form 8-K, in 49 instances, the stated grant date of the stock options differed from the actual grant date - and in almost every case, the price of Mercury's stock was higher on the actual grant date than on the stated grant date.

Interestingly, the misdating occurred with respect to grants to all levels of employees - not just the senior managers who were forced to resign. Also interesting was that the CEO, CFO and GC were each aware of and, to varying degrees, participated in the practices (and of course, benefited personally from the practices). At most companies, I would think that the legal department and stock plan administrator's office would handle dating practices - and that the CEO and CFO would have no clue as to what they were.

It didn't help that the CEO misreported, on at least three occasions, exercise dates which had the effect of reducing his income (and exposing the company to possible penalties for failure to pay withholding taxes) - and that a $1 million loan to the CEO did not appear to have been approved in advance by the board and was not clearly disclosed.

On the subject of the culpability of the company's compensation committee - here is what is disclosed in the 8-K: "The Special Committee believes that questions should have been raised in the minds of the Compensation Committee members from 1995 through 2002 (who included present directors Igal Kohavi, Yair Shamir and Dr. Yaron) whether six grants that they approved by unanimous written consent were properly dated. It appears that the Compensation Committee members reasonably, but mistakenly, relied on management to draft the proper documentation for the option grants and to account for the options properly. The Special Committee believes that changes in Board procedures made in recent years will prevent similar oversights occurring in the future."

It will be interesting to see how many other actions the SEC has in the pipeline over this type of behavior...

Judge Alito and the Securities Law

For those wondering how the Supreme Court nominee has ruled on securities law issues to date, check out this website, where the University of Michigan Law Library has posted an extensive collection of Judge Alito's opinions. Here is a blogger's analysis of Judge Alito and the securities law.

Your IR Officer's Greatest Fear: "Clever and Pernicious" Hacking

From Bruce Carton's "Securities Litigation Watch Blog": "According to this SEC press release, the SEC filed an emergency action against an Estonian financial services firm and two of its employees for conducting an alleged fraudulent scheme "involving the electronic theft and trading in advance of more than 360 confidential press releases issued by more than 200 U.S. public companies," resulting in at least $7.8 million in illegal trading profits.

How did they supposedly steal 360 confidential press releases? How did they earn the "clever and pernicious" description from the SEC?

According to the SEC, " in June 2004, [the Estonian firm] became a client of Business Wire for the sole purpose of gaining access to Business Wire's secure client website. Once defendants had access, they surreptitiously utilized a software program, a so-called "spider" program, which provided unauthorized access to confidential information contained in impending nonpublic press releases of other Business Wire clients, including the expected time of issuance."

The complaint further alleges that the information fraudulently stolen by the defendants has allowed them to strategically time their trades around the public release of news involving, among other things, mergers, earnings, and regulatory actions. Using several U.S. brokerage accounts, the defendants have bought long or sold short the stocks of the companies whose confidential press release information they have stolen, and purchased options to increase their profits."

Note that Business Wire has issued a press release stating that none of their client's press releases were accessed before the public saw them.

November 2, 2005

Survey Results: Disclosure Controls and Disclosure Committees

With such a focus on majority voting and tendering of director resignations these days, I thought it would be a good time to conduct a new survey on director retirement ages. Please take a moment and provide your input!

Here are the survey results from our last survey on disclosure controls and committees:

1. Does your company have a formalized, written set of "Disclosure Controls & Procedures"?
- Yes - 57%
- No, but the appropriate personnel know what these procedures are - 10%
- No, but the appropriate personnel know what these procedures are, and there are some written documents or checklists that are utilized - 32%

2. Have your company's Disclosure Controls & Procedures been formally updated and revised in the last year?
- Yes - 56%
- No formal changes, but there have been some informal changes during the last year - 21%
- No, there have been no changes in the last year - 22%

3. Does your company have a Disclosure Committee Charter?
- Yes - 59%
- No - 39%
- We don’t have a formal Disclosure Committee - 2%

4. If there is a formal Disclosure Committee, who is the chairman of the Disclosure Committee?
- General Counsel - 11%
- Securities Counsel - 11%
- CFO - 20%
- COO - 1%
- Controller - 30%
- Corporate Secretary - 1%
- Other - 25%

PIPE Transactions Remain Under Scrutiny

According to this article, the SEC has announced another Enforcement action in a PIPEs transaction. From what has been reported for a while, a number of market players have been dealing with the SEC's Enforcement Division in connection with alleged fraudulent trading and reporting of private investments in public equities. These SEC actions will be among the many topics addressed in our upcoming webcast: "The Latest on PIPEs." The webcast primarily will focus on the latest developments in PIPE mechanics and strategies.

2nd Circuit: Former Target Stockholder Can't Bring Action for Lost Merger Premium

From the Blog: Some of you will recall the 2004 decision in Consolidated Edison v. Northeast Utilities by the US District Court for the SDNY holding that former shareholders of the target could bring an action for a lost merger premium as a result of the buyer's wrongful repudiation of the merger agreement. Because such claim was vested in shareholders as of the date of the repudiation - and not the target or transferees of their shares - the target could not settle such claims (e.g., by amending or revising the terms of the original merger agreement).

Thankfully, the 2nd Circuit has overturned the decision on appeal concluding that, under the terms of the merger agreement between Consolidated Edison and Northeast Utilities, target stockholders become third party beneficiaries - with the right to enforce the buyer's obligation to pay the contracted merger consideration, only upon consummation of the merger.

This important decision confirms that claims of wrongful repudiation of a typically constructed merger agreement will not deprive the principal parties of the ability to amend - or otherwise settle disputes - by vesting claims in the hands of target shareholders at the time of the breach. Thanks to Kevin Miller of Alston & Bird for the heads up!

[Iffy if I will be able to blog from the PLI Conference the next coupla days - should be a ringdinger. Last night at the NASPP Conference, Hootie & the Blowfish was a huge hit - should be mandatory for every major conference to have live music!]

November 1, 2005

John Reed Speaks Out

At our "2nd Annual Executive Compensation Conference," John Reed opened with some stirring remarks. Among other things, Mr. Reed said "That's a cop out" when directors grant equity awards and don't then make adjustments to future grants when the amounts actually realized/accumulated exceed what was anticipated.

Here is more from Mr. Reed, excerpted from a Dow Jones article published yesterday: Calling stock based compensation a "blunt" and even "dangerous" instrument, Reed suggested that compensation can easily be skewed by market forces, resulting in executives being significantly overpaid.

Reed issued his warning about stock grants in a pretaped Webcast delivered to a compensation conference, offering up himself and his former company in his frank assessment. According to Reed, some Citigroup employees were ultimately paid at least four times more than initially targeted because of options.

"I've had personal experience when I was at Citibank where we gave out stock to individuals expecting it to represent a certain value, and it turned out to represent four or five times more than we had anticipated at the time we gave out the stock," he said. "This really meant that we had paid the people substantially more than we felt was appropriate to pay them."

Jamie Dimon Speaks Out

Equally impressive was the passion and candor from luncheon speaker JPMorgan Chase CEO Jamie Dimon - he started by noting the widespread "anger" out there - shareholders, employees and the general public - and how we all need to get our house in order before Congress does it for us. He then went on to discuss many specific compensation topics at length, an amazing display of knowledge about this important area. The guy was truly dynamic; I am ready to buy JP Morgan stock...

We had over 100 walk-up registrations at the last minute, with a final count of well over 600 in Chicago and more than 3000 by video (surprising considering it was Halloween and PLI's big event is later this week). We heard nothing but glowing reports from everyone here (an exhausting pace with so many panels back-to-back, but we felt a one-day conference was preferable to a two-dayer). I welcome any feedback you may have.

Update on Conflict of French Law and SOX's Whistleblower Provisions

There have been some recent developments on the whistleblowing/French data protection rulings issues, as the French data protection agency - the CNIL - had a conference call with the World Law Privacy Group data protection committee on the issues faced by companies seeking to comply with SOX and deal with EU data protection laws at the same time. Subsequent to that call, CNIL produced draft guidelines with a comment period that ends November 10th (the draft CNIL guidelines are posted in our "Whistleblowers" Practice Area).

Unfortunately, the draft guidelines have some problematic provisions - any comments should be sent to Mark Schreider at "," who co-chairs the World Law Privacy Group data protection committee (and is a Partner with Edwards Angell Palmer & Dodge LLP). Obviously, the CNIL comment process is different than submitting comments to the SEC or the exchanges; they need to go in through specific channels.

In this podcast, Mark discusses these latest developments with the French CNIL, including:

- What does he make of the new draft CNIL guidelines on whistleblower schemes in France?

- What are the deficits or problems in the draft CNIL guidelines?

- How can US companies or their in-house or outside counsel provide input to the CNIL on these guidelines?

Nasdaq Proposes Clarification of Director Independence Standards

A while back, the Nasdaq filed proposed rule changes with the SEC to clarify its rules regarding director independence. Under the existing rules, a director's independence is evaluated based on payments accepted from the company or its affiliates - the definition of independent director in Nasdaq Rule 4200(a)(15)(B) is proposed to be modified to provide that a finding of independence is precluded if a director accepts any compensation from the company or its affiliates in excess of $60k during any consecutive twelve month period within the three years prior to the independence determination.

The Nasdaq also proposed to change a Rule 4200(a)(15) interpretation to provide that a director that serves as a compensated officer of a company on an interim basis is not precluded from being considered independent after that service - the service as an interim officer is limited to not more than one year. The board would also still have an obligation to consider this interim service in making its overall independence determination.

The proposals would also clarify that references to "the company" in Nasdaq Rule 4200(a)(15)(D) includes any parent or subsidiary of the listed company.
Also, the proposals would clarify that the Rule 10A-3(c)(2) exception to the audit committee requirements for certain issuers that have a listed parent is also applicable to the Nasdaq's audit committee requirements.