Happy New Year! I close the year with yesterday’s Financial Times front page article:
“Investors plan to make executive pay the number one issue at companies’ annual meetings this spring. New evidence suggesting that executive pay growth is accelerating, coupled with outrage at big severance packages for some bosses, has pushed the issue to the top of investors’ concerns.
The AFSCME union, whose pension fund is worth Dollars 800m, is calling for UK-style votes by shareholders on executive pay at the 2006 annual meetings of US Bancorp, Merrill Lynch, Bank of America, Home Depot and Countrywide Financial.
The union claims to have identified excessive compensation at these companies and warns it might try to oust directors on their compensation committees if they do not take steps to align bosses’ pay with company performance.
Alyssa Ellsworth, managing director of the Councilof Institutional Investors, whose members are pension funds with assets worth more than Dollars 3,000bn, said executive compensation would be the “headline issue” in 2006.
The median total compensation of chief executives grew by 30 per cent in 2004, according to a survey of 1,522 CEOs by the Corporate Library, a corporate governance watchdog. That increase compares with a median rise of 15 per cent in 2003 and 10 per cent in 2002.
The library concluded that of the 10 CEOs who enjoyed the biggest pay growth in 2004, only five could justify their increases based on the companies’ performance. Total compensation includes restricted stock awards and profits from exercising share options, which drove the 30 per cent increase.
Investors’ anger about executive pay boiled over this year at Morgan Stanley, the investment bank. Shareholders were angry that Phillip Purcell, the former chief executive who resigned in June, secured a 45 per cent pay rise in 2004, even though the firm’s net income increased by only 18 per cent. Anger turned to outrage when he departed with a Dollars 44m severance deal plus Dollars 62m in equity compensation and pension benefits.
William McDonough, former president of the New York Federal Reserve Bank, said last month “the American people are still very unhappy about the level of executive compensation” and warned of the risk that lawmakers would feel obliged to intervene. He said the one thing the public did not understand was “paying for failure”.
The Securities and Ex-change Commission, meanwhile, has been clamping down on breaches of its disclosure rules on executive pay. Last year the chief US financial regulator accused GE of failing from 1997 to 2002 to accurately outline the benefits the company would provide Jack Welch, its chief executive, after his retirement in 2001.
The SEC found that Mr Welch received benefits worth Dollars 2.5m in 2002, including use of the GE aircraft, an Dollars 11m New York apartment, a limousine, a Mercedes Benz car, offices and a personal assistant.
GE reached a post-retirement consulting agreement with Mr Welch in 1996, but it only became public during divorce proceedings with his second wife in 2002.
The SEC said GE had previously limited its description of Mr Welch’s retirement benefits to statements that he would have “lifetime access to company facilities and services comparable to those currently made available to him by the company”.
But while the SEC has stepped up enforcement of its disclosure rules on executive pay, they have not kept pace with changing forms of compensation.
A proposal to overhaul the rules will be the first big test for Christopher Cox, who became SEC chairman last August after pledging to stay true to the regulator’s mission to protect investors’ interests. But he risks incurring the wrath of chief executives by insisting on better disclosure of compensation.
Bosses are likely to be nervous about comments he made shortly after becoming SEC chairman that investors had to have sufficient information about executive pay to be able to “discipline” cases of “apparent excess”.
In a speech to business leaders in New York this month, he sought to reassure people the SEC did not want to “interfere in salary decisions” or to “cap salaries”.
The SEC has instead been studying what additional information should be provided to investors about executive pay. It is considering requiring companies to make valuations of bosses’ defined benefit pensions and stock options, potentially huge sources of compensation.
William Donaldson, Mr Cox’s predecessor, hoped that better disclosure of executive pay would help curb examples of big compensation packages at troubled or failing companies.
Mr Cox told the FT it was the job of boards of directors to align “executive pay with executive performance”, and that the SEC proposal “would not directly help with that aspect”.
However, he said the proposal would “assist in providing industry-wide competitive information about executive compensation levels with greater detail than is presently the case.”
Recently, I blogged about the battle between Delaware law and the federal securities law. Now, a development on when the NASD clashes with the SEC. [Perhaps next - what if the Mighty Thor met Conan the Barbarian!]
Here is an excerpt from a Registered Rep article regarding a December 13th opinion from the DC federal court of appeals:
“For the first time in its 68 years as a self-regulatory organization, the National Association of Securities Dealers sued the Securities and Exchange Commission over a right it was never granted. Guess what? It lost.
The right in question was to seek judicial review of an SEC decision reversing disciplinary action taken by the NASD and in barely concealed astonishment, the presiding Senior Circuit Judge Edwards said, “No court has ever suggested that such a review was possible.” Moreover, he continued, “we can find no case” where the NASD had ever asked for a review and “no reason to allow it do so now.”
‘Simply put,’ the judge said later on in his analysis, ‘the NASD appears before this court as a disgruntled first-level tribunal, complaining because it has been reversed by a higher tribunal.’”
By the way, contrary to the article, the NASD has previously appealed an SEC decision. That appeal related to Instinet – see NASD v SEC, 801 F.2d 1415 (DC Cir. 1986).
Nasdaq’s Public Reprimand Letters
The SEC recently approved a rule filing from Nasdaq – on an immediately effective basis – that allows Nasdaq to issue a public reprimand letter if it has determined that a listed company has violated a corporate governance or notification listing standard (other than one required by Rule 10A-3 of the ’34 Act). This is a much lower level sanction compared to delisting. A company that receives a public reprimand letter is required to publicly disclose it within 4 business days.
In determining whether to issue a public reprimand letter, Nasdaq will consider these factors:
- whether the violation was inadvertent,
- whether the violation materially adversely affected shareholders’ interests,
- whether the violation has been cured,
- whether the issuer reasonably relied on an independent advisor, and
- whether the issuer has demonstrated a pattern of violations.
Footnote 8 of the SEC’s release provides examples of circumstances under which Nasdaq might determine to issue a public reprimand letter, including:
- a company engaged in a pattern of failing to provide advance notice of press releases to the Nasdaq StockWatch department;
- a company with a December 31 fiscal year end has not held an annual meeting for the prior year as of early January, but the company has filed a proxy to hold the meeting in the next few weeks; or
- an independent director resigned from the company and was replaced with another independent director, but the company did not provide prior notice to Nasdaq.
More on Auditor Liability Caps
A number of members weighed in on my recent blog on auditor liability caps. For more commentary, check out Jack Ciesielski’s AAO Weblog (see the posts from Jack on December 5th and earlier) and this Bloomberg article. It will be interesting to see if this issue has “legs” and grabs the attention of the PCAOB and the SEC.
Following up on several recent blogs, here is another recent internal affairs doctrine case: Grosset v. Wenaas. This October opinion was issued by the same division of the California Court of Appeal that issued the opinion in Friese v. Superior Court. However, only one of the three justices (McDonald) was involved in both opinions.
The Grosset decision tackles the question of: whether Delaware or California law applies to the question of standing to maintain a derivative suit by a stockholder of a Delaware corporation that was headquartered in California. The Court applied Delaware law, citing with approval the Delaware Supreme Court’s decision in VantagePoint v. Examen. The losing plaintiff has petitioned for a review by the California Supreme Court.
If the Supreme Court does grant the review, the opinion of the Court of Appeal will not be considered published (per Rule 976(d)(1), Cal. Rules of Court). Generally, the Supreme Court has 60 days to decide whether to grant review. Thanks to Keith Bishop once again!
Happy Holidays – and One More Thing on 409A
From Mike Melbinger’s Compensation Blog: “On December 21, President Bush signed The Gulf Opportunity Zone Act (H.R. 4440). Although primarily a package of tax incentives and relief measures for individuals and businesses in the gulf region affected by hurricanes Rita and Wilma, the bill also contains revisions to the Code Section 409A rules pertaining to foreign rabbi trusts.
Section 409A(b) imposes immediate taxation, the 20% penalty and interest if deferred compensation accrues in a “foreign-situs” trust or other arrangement that the IRS deems equivalent to such a trust, even if the assets are subject to the claims of the employer’s creditors (with an exception if all employees perform “substantially all” services related to such deferred compensation in the jurisdiction of the trust). Even if the underlying plan terms otherwise conform to the requirements of Section 409A, holding assets in a foreign trust results in immediate taxation and penalties unless the exception applies.
The effect of this change is to eliminate any grandfather relief for amounts accrued prior to December 31, 2004. If you have a foreign situs trust for non-qualified plan asets, you need to act ASAP to avoid taxation. Ho, ho , ho.
Five Gap Executives to Exchange Stock Options
Speaking of 409A, it looks like The Gap recently made an option exchange in reaction to its application. Here is an excerpt from Saturday’s LA Times” “Gap Inc. said Friday that Chief Executive Paul Pressler and four other executives had accepted the retailer’s offer to exchange their stock options for ones that will result in lower taxes for the employees. As part of the swap, Gap will pay the five as much as $10.1 million.
In a regulatory filing, Gap said it was making the payments and replacing the old stock options because of tax rules adopted since the San Francisco-based company negotiated compensation packages for Pressler and the other executives. Stock options give the holder the right to buy or sell shares at a specified price by a set date.
To lure Pressler from his position as head of the theme park division at Walt Disney Co. in 2002, Gap gave him 1.1 million stock options priced at $5.92 a share, well below the stock’s market value at that time. Under the new tax rules, the executives would have incurred an immediate tax liability on the difference between the exercise price and market price, plus an additional 20% tax on that unrealized income.
To reduce the tax hit, Pressler’s stock options will be replaced with another batch of 1.1 million options carrying an exercise price of $11.83 a share — a price at or above Gap’s market value on the day of his hiring, the company said.
Gap compensated Pressler for the loss of the lower-priced options by paying him $2.36 million this year and as much as $4.14 million in the future.
The total payment of $6.5 million translates into $5.91 a share, the difference between the exercise prices of Pressler’s old and new options.”
On the NASPP’s website, there are hordes of memos regarding what you should be thinking about now to deal with 409A consequences, including option strategies.
My wife sent me this short video that spoofs “The Chronicles of Narnia.” It didn’t quite send me over the edge – but reminded me of my recent 15 seconds of fame when I was on the local news for a “man on the street” piece when Narnia opened. I was asked to comment on the religious undertones of the movie – before I even went in to watch it with my kids. I said there might be some, but that wasn’t why I went to see the movie. Apparently that was sophisticated enough for the network news…
Late last week, it was reported that Coca-Cola has adopted a policy of obtaining shareholder approval for its severance arrangements with senior executives if the payout exceeds 2.99 times the sum of the executive’s annual base salary and bonus. The topic of excessive severance pay angers investors more than any other compensation issue – and the recent House bill would require shareholder approval of all severance arrangements for officers.
According to this WSJ article, “Coke spokesman Charlie Sutlive said the company’s board approved the policy in October. It was first publicized yesterday by the International Brotherhood of Teamsters General Fund, which, as a Coke shareholder, unsuccessfully proposed a similar policy at Coke’s annual meeting in April.
Coke’s board opposed the proposal at the time. However, the measure earned support of roughly 41% of shares cast, indicating strong interest among investors.
“We believe this new policy both responds to and is in the best interests of shareowners,” Mr. Sutlive said. He said the board and its compensation committee adopted the policy after noting “the sentiment of many shareowners,” including the Teamsters.
Mr. Sutlive said the new policy reflects the board’s practice of reviewing corporate-governance policies and improving them where warranted. In this case, he said, the board’s compensation committee recommended the policy as a way to add controls while continuing to allow the board to render “prudent judgments.”
The move by Coke comes amid some criticism of executive pay. Steven Hall, a New York-based compensation consultant, said measures such as the one Coke adopted could serve to limit severance deals going forward.
Coke was criticized for the $17.7 million separation package it awarded to former Chief Executive M. Douglas Ivester, who stepped aside in early 2000 after about two years in the job. Steven J. Heyer, who left as Coke’s No. 2 executive in 2004, received a severance package of at least $24 million after three years on the job.
Douglas Daft, who stepped down as Coke chairman and CEO in June 2004, received 200,000 restricted shares of Coke, valued at $8.8 million at the time.”
In Sunday’s NY Times, Gretchen Morgenson wrote about this development in her column, including quotes from NASPP Chair Jesse Brill and Mike Kesner of Deloitte Consulting, who have spoken on this topic at our annual compensation conferences. Learn more about how to handle severance pay in our “Severance Arrangements” Practice Area on CompensationStandards.com.
SEC Posts Proposing Release for Non-US Company Deregistration
On Friday, the SEC posted the proposing release, under which it would be easier for foreign private issuers to deregister and terminate their SEC reporting obligations. European organizations have been urging this response to a perceived “Hotel California” problem for several years.
However, it is predicted that only a few dozen companies would take advantage of the new rules if adopted. On the other hand, these rules could curtail this problem: many companies have decided to list on the London Stock Exchange rather than a US exchange over the past year. So the rule changes might entice non-US companies to list on the NYSE and Nasdaq again.
Under the proposal, a foreign company that is listed in its home country would be able to terminate the SEC registration of its shares if it has been registered for two years, has filed all required SEC reports, has not offered its securities in the U.S. market for a year (including in a Rule 144A transaction or other private placement) and meets one of two quantitative tests:
• The first test, which is available to all companies, requires a deregistering company to have 5% or less of its public float held by U.S. residents.
• The second test, available only to well known seasoned issuers (generally companies with a market capitalization of at least $700 million) would increase this threshold to 10% for companies that have 5% or less of their worldwide trading volume in the United States.
SEC Finally Issues PCAOB Proposal re: Reporting on Previous Material Weaknesses
Late last week, the SEC finally issued the PCAOB’s proposed Auditing Standard No. 4 regarding reporting on whether a previously reported material weakness continues to exist. Comments are due to the SEC 21 days from publication in the Federal Register. The PCAOB originally issued AS-4 way back in July – AS-4 will not become effective until approved by the SEC.
Here is a recap of AS-4 from Mike Holliday: “AS-4 would be for a voluntary engagement at the request of the company, to enable the auditor to express an opinion on whether a previously reported material weakness in internal control has been eliminated. It would apply only where the material weakness has been identified in an auditor’s previous report on internal control issued pursuant to Auditing Standard No. 2. AS-4 would permit reporting on the elimination before the next AS-2 audit assessment of internal control, which is normally as of the fiscal year-end. (Additional requirements would apply to a successor auditor.)
Because the audit of financial statements and AS-2 audit of Internal Control normally occur only as of fiscal year-end, in the usual case AS-4 normally would be limited to material weaknesses identified in the annual assessment process. NOTE that in the usual case where the audit of financial statements occurs only at fiscal year-end, AS-4 would not apply to a weakness discovered during an interim period and eliminated in an interim period prior to the next annual assessment — for example, a weakness identified in the second quarter and eliminated during the third quarter would not be covered.
One of the main comments of investors to the PCAOB, in response to the March 31, 2005 request for comments, was to allow auditor reporting on material weaknesses identified subsequent to the company’s most recent annual assessment of internal control over financial reporting. The PCAOB did not accept that comment and retained the limitation to material weaknesses previously reported by an auditor in an AS-2 audit of internal control in conjunction with an audit of the financial statements.
Yesterday, the SEC posted the adopting release relating to the new accelerated filer definitions and deadlines.
The SEC found good cause to forego the normal 30-day waiting period for these new rules – and thus accelerated the effectiveness of them. If I understand Section III.D of the release correctly, all calendar year-end 10-Ks will need to include the check box to indicate whether the company is – or is not – a large accelerated filer (ie. LAF), even though the deadline for LAFs is the same 75-day period as it is for accelerated filers during ’06.
In addition, the SEC applied the new exit test retroactively so that accelerated filers can exit this year based on their Q2 ’05 float. This is noteworthy for some issuers that can take advantage and exit now, since I believe they can then skip the hassle of obtaining a 404 attestation until ’07 (even if they filed their 404 attestation for their last fiscal year).
Going Dark and Going Private Transcript is Up!
We have posted the transcript for the popular DealLawyers.com webcast: “Going Private and Going Dark.”
Contest Winner for Unclassified Category of Issuers!
Regarding my earlier blog on the lack of classification for a narrow group of issuers – the winner is “INECs,” which stands for “issuers, not elsewhere classified.” The winning member is now driving around town in a ’73 Beetle with our logo on the car doors…
Ode To A Fraud: A Humorous Take On SOX
From Scott Cohen of Compliance Week:
‘Twas the night before Christmas and most of the hires
were back in their houses, in front of their fires.
All toasty inside as Northeasterlies blew,
naïve of my plan, yes, they hadn’t a clue.
And as the lights sparkled and as their kids knelt
to open their toys (or their Hanukkah gelt)
and gifts were exchanged—here a train, there a jewel—
and meals were devoured with dribble and drool,
I sat in my office, cast under a pall,
and patiently waited and watched the snow fall.
The lights had been dimmed and computers were down,
the hallways were barren—there wasn’t a sound.
Except for old Jasperhams, typically juiced,
who handled recycling the reams we produced,
had chosen that moment to tidy about.
I gently persuaded him: Get the hell out.
So through empty hallways as I did maraud,
I knew that the time had arrived for my fraud!
How perfect an eve of deceiving, I beamed,
a night for my swindle, my racket, my scheme!
Constructed in summer and fostered in fall,
‘Twas daring, audacious … the nerve and the gall!
A plan based on timing, by my own admission,
advanced by the exodus from the Commission.
Yes, SEC veterans, bailing, they flew,
On Goldschmid! On Cutler! On Donaldson, too!
With turnover rampant, and chaos set in,
at last my deception, my scam, could begin!
My goal was pure evil, a dastardly deed,
a scandalous racket inspired by greed.
‘Twas really quite simple, but one that still shocks:
to undermine every provision of SOX.
Yes Sarbanes and Oxley, so feeble and dense,
who doled legislation that lacked common sense;
the thoughtless decrees that you morons inscribed
would soon in their whole be defaced and defiled!
I started out slowly, with SOX 301:
by snipping the lines on the phones, oh, what fun!
Thus blowers of whistles had no tool to sort
our audit committee their whining report.
I then took my pen to our corporate code
of suitable conduct (good God, what a load!),
deleted decrees that the board said: “Obey,”
and wrote down, “Just do what you want, it’s okay!”
Then freed of restrictions I rolled up my sleeves
and tackled more regulatory pet peeves.
For certification of SOX 302,
I crossed out my named and signed, “Winnie the Pooh.”
Pro forma financials all settled with GAAP,
I quickly unwound and made tricky to map.
For “plain English” filings (which I cannot speak)
I crafted disclosures in Yiddish and Greek.
“Good God, this is simple!” I cried of my prank
(I guess that it’s my MBA I should thank!).
So SOX 404, let us dent you as well:
I’ll simply erase key controls from Excel.
I then found some insider rules to evade:
A pension fund blackout within which to trade.
The “two-business day” rule was next to ignore:
I waited a fortnight to file my Form 4.
For bookkeeping rules that are overly stringent,
(off-balance sheet deals and arrangements contingent)
I structured some entities, all of them fake,
ensuring transparency now was opaque.
And measures impacting resources and risk
were moved from my hard drive to some floppy disk
unreadable by any modern machine:
derivative instruments … ne’er to be seen!
Now SOX 407 was easy to shirk,
I breached that directive without any work:
Our “financial expert” knows nothing, dear Cox,
his audit skills can’t fill a cereal box!
And then my attention did finally turn
to those who created my awful heartburn:
My trusted accountants, my partners, my friends,
whose counsel and leadership gave me the bends.
So SOX 303: You be damned, I decreed!
and swiftly began to coerce and mislead,
manipulate, obfuscate (hey, it’s a waltz!)
let’s bribe, threat, and document things rude and false!
To frame my dear auditor, this was quite grand:
I gave him some non-audit work that was banned.
‘Cause, hey, how much profit must they really earn?
Why, I oughtta give them a “going concern.”
And wanting my auditor’s fall guaranteed,
the rules of the dreaded PCAOB
must be disobeyed (they are way too damn stringent):
more tax shelters, please, and commissions contingent!
And last on my list: Why my lawyers, I’ll call!
Confess everything, force a noisy withdrawal,
then phone all our analysts, give them a plea
of non-public facts that defy Reg. FD.
And looking back over the rules I had breached,
I smiled to myself … I had finally reached
the goal to which my Christmas Eve had aspired:
Defying the rules that old Sarbox required.
Oh relish this moment, ye governance punks,
Like feisty Nell Minow and Bob A.G. Monks,
and Yerger and those who prod corporates with wit,
like Lally, Anne Simpson and Millstein and Pitt.
And governance “raters” who think you’re so blessed,
like proxy advisors (that’s you, ISS),
Glass Lewis and Moody’s, get back in your den,
I’ve just undermined the whole ICGN!
And as I strolled, grinning, outside in the lot,
I never did grasp the one thing I’d forgot:
That back in the office, and this was quite sloppy,
I’d dropped on the floor my diskette that was floppy.
And Jasperhams, damn you, old man! How you dare
conspired to capture my disk unaware,
and transfer to counsel a thorough report
that caused all the lawsuits that led to the court.
And though I claimed innocence (how I did plead!)
the jury said, “guilty,” the judge then agreed,
and though I had fainted and mustered some tears,
the sentencing judge gave me two hundred years.
And that’s why this winter—this cold, cold wet day—
I’m not on my yacht with my Klee and Monet,
but stuck in a cell wearing dirty striped shorts,
with Ebbers, Kozlowsi, Lay, Rigas and Swartz.
And thus, my dear friends, lies a lesson of risk:
That bastards like Jasperhams may find your disk.
So trust me: the law is a thing you can’t duck.
So Sarbanes and Oxley: I guess I’m the schmuck.
Yesterday, Corp Fin added some phone interps on Regulation AB to its Telephone Interpretation Manual – as well as added a new index page. The Manual is now split into discrete PDF sections coded, rather than posted as a single file – although the five Manual supplements are still separate and not integrated yet.
The new look is nice, but I am bummed that the sections are no longer alpha-numbered so that a particular interp can be easily referenced (eg. “I.84″ instead of now having to say “#84 in the ‘Regulation S-K’ section” like I just did in answering a query in our Q&A Forum). Other members have complained that they wish a PDF of the entire Manual was still available so that it could easily be word-searched or printed out. Maybe Santa will hear us?
[Of course, we still have our searchable, HTML version of the Manual posted - but it will be difficult to maintain this version if the Staff makes piecemeal changes to the Manual going forward.]
This is an encouraging sign and perhaps means that Corp Fin’s long-standing project to update the Manual will be in full swing during ’06. Quite a challenge for the Staff to undertake as the last comprehensive update was in 1997 – and things sure have changed a bit since then!
Scrushy’s Latest Maneuver: The Shareholder Proposal Angle
Everytime I hear the dude’s name, I roll my eyes. Now Richard Scrushy has been rejected by Corp Fin in his attempt to use 14a-8 to amend the HealthSouth bylaws so that a majority of shareholders could fill board vacancies and set the number of directors on the board. Note that the former HealthSouth CEO submitted his proposal before he was indicted again – this time for political corruption – and before he sued HealthSouth for $70 million in back pay. This guy has some gall, eh?
On December 9th, the SEC Staff agreed with Healthsouth that Scrushy’s proposal could be excluded after the company argued that the proposal would result in a “pro rata” vote that deviates from the “one share, one vote” rule under Delaware law.
S&P 500 Governance Survey
This new Spencer Stuart survey regarding the S&P 500′s corporate governance practices shows considerable progress having been made in recent years. At the same time, it highlights a number of shortcomings. Here are some of those shortcomings, as noted by former SEC Chief Accountant Lynn Turner:
1. 12% of boards still have no women; 43% of these companies are in the high technology industry, often in California.
2. Lead directors are commonplace with 94% of the boards with them, compared to only 36% in 2003. Directors as a whole are more “independent” than before SOX as defined by the listing rules.
3. However, the CEO still chairs most boards, and where they don’t, the chair is usually not independent. As a result, the leader of the vast majority of the boards is not independent. However, the number of boards with a truly independent board chair, something almost unheard of just 5-6 years ago, is now up to 9%.
4. Audit committees appear to have changed little, most likely due to the SEC “watering down” the requirement for a “financial expert” over the objections of investors. As a result, it appears there probably are a lot of people who are not real experts in the field of financial reporting who are still designated as financial experts. As noted in the attached survey, audit committees still often do not have a board member who has been a CFO, controller or CPA. The number of audit committ members with CFO and accounting backgrounds remains at only 9% in 2005, the same as in 2004.
Accordingly, board oversight of the financial reporting process is probably still not what it should be. Often these so-called “experts” are probably challenged at best – if not fully unable – to deal with many typical issues, such as financial reporting questions; discussions of what are the necessary internal controls over accounting and disclosure; and auditor independence issues.
Some analysis from Keith Bishop: “Here is an opinion – from Newcastle Partners v. Vesta - from Vice Chancellor Lamb last month that is interesting for two reasons. First, there is an interesting historical discussion of Section 14(c) under the Exchange Act.
Second, he reaches the conclusion that state law, specifically Section 211 of the Delaware General Corporation Law, trumps the federal proxy rules. He reaches this conclusion based on the internal affairs doctrine (citing VantagePoint v. Examen, the subject of several recent blogs). Despite what the Vice Chancellor states in the opinion, I do think that there is a clear conflict between the proxy rules and Section 211.
As an aside, I wonder how Corp Fin feels about there telephone responses making it into the record (see page 4 of the opinion)?” I have posted a copy of the opinion in our new “Internal Affairs Doctrine” Practice Area.
SEC Chairman Roundtable
Today, the SEC is hosting another interesting roundtable, this one featuring a slew of former chairmen.
Recently, the SEC Historical Society has added some cool content to its site, including information regarding the first chairman, Joseph Kennedy.
What’s Doing Under the New SEC Chair
Yesterday’s WSJ ran an article about the new SEC Chair’s course of action so far, with a particular focus on Chairman Cox’s attention to detail and the numerous vacancies of top staffer jobs. Here is a snippet from the article:
“One result of his approach is longer meetings. Private commission meetings where enforcement staff present cases last for several hours, with Mr. Cox peppering lawyers with questions, debating the merits of each case and asking for detailed descriptions — rather than summations — of each case.
While some viewed Mr. Donaldson as too detached, there are concerns that Mr. Cox’s desire to be involved in every decision is grinding the agency to a halt. Perhaps the biggest complaint centers on Mr. Cox’s failure to select directors for either the investment-management or market-regulation divisions. SEC lawyers said the two offices are essentially paralyzed, since there is no liaison to the chairman’s office and no one to float staff ideas upstairs or transmit marching orders from above.”
Celebrities and the SEC
Nothing works better for the SEC’s Enforcement mission than cases that attract a lot of media attention. That is because the SEC’s limited resources can only do so much against the high volume of fraud out there.
So there should be some real bang for the buck from yesterday’s announcement that former Sirius Satellite Radio executives engaged in insider trading before the news of Howard Stern’s hiring became public. [Driving back from a speaking gig in Philly last Friday, I came across Howard's last show on FM radio. Maybe I am too sensitive a guy, but Howard just doesn't do anything for me. In fact, I do eat quiche.]
And the poker world is riled because it has been disclosed that the SEC is investigating poker legend, Doyle Brunson, over his $700 million takeover bid for the World Poker Tournament (run by WPT Enterprises). The SEC said the formal investigation is focusing on the legalities of Brunson’s offer and the subsequent decision to publicize it. Learn more about this development from this poker blog.
Here is an interesting article describing a trustees’ meeting during which Florida Governor Jeb Bush and two other state leaders ordered Florida’s public pension fund Tuesday to take a leading role nationally to push for corporate governance reform. They specifically want to target “outrageous” executive compensation and “undemocratic” proxy voting at public companies. The two other state leaders are Republicans hoping to secure the governor nomination when Bush’s term expires.
Told ya that executive compensation was gonna be a political football. First, the Democrats grabbed onto the mantle with it’s recent proposed legislation – now the Republicans are taking a turn…
More on Exec Comp Practices
Here are three more recent newsworthy articles on executive compensation:
- USA Today ran this article on a letter sent to the SEC from a worldwide group of institutional investors regarding compensation disclosure practices
- Yesterday’s NY Times had this column on a CEO who refused a pay raise (and sent this letter to his own compensation committee)
- Yesterday’s NY Times had this column on Delphi’s employees being asked to take huge pay cuts, while upper management implemented a bonus plan for itself
Update on the “Pink Sheets”
If you missed it, Saturday’s WSJ carried an informative article on the recent overhaul of the pink sheets. Here are some interesting points from the article:
- Starting this spring, there will be an elite list of issuers that report more information than legally required
- The changes of the Pink Sheets are so dramatic that an SEC official says the agency is monitoring its progress to make sure it doesn’t accidentally become a stock market.
- As it stands, the Pink Sheets is essentially a publishing company as large investors known as “market makers” pay Pink Sheets to list their bids and offers for their inventory of “over the counter” stocks.
- Pink Sheets issuers aren’t required to file documents with the SEC, though the market makers and brokers that provide quotes are regulated by the National Association of Securities Dealers.
- Pink Sheets now exclusively quotes 4,800 issuers, including several giants that filed for bankruptcy-law protection
Companies Without a Home?
Some thoughts from an introspective and anonymous member: “My wife’s late grandmother belonged to a religious sect that did not believe in formalities, including having a name for the sect. Consequently, some people referred to them as the “no-names.”
The SEC seems to have also created a no-name category. It seems we now have small business issuers, accelerated filers, large accelerated filers and well-known seasoned issuers. However, what is the name for the category of issuer that doesn’t fall within any of these four categories? I think calling them “non-small business issuers, non-accelerated filers, non-large accelerated filers, non-WKSIs” is a a little cumbersome. Also, it is a little strange to be defined by what you are not. Perhaps the SEC should have a name that category contest?”
Lord knows that the scope of this site is already too broad and I am not looking for more work. But I thought I would check in on the mutual fund world via this interview with Victor Siclari of Reed Smith on mutual fund compliance developments.
At yesterday’s open Commission meeting – as noted in this press release – the SEC adopted some changes to the accelerated filing deadlines and definition of “accelerated filer”; established the new category of “large accelerated filer”; and changed the provisions to exit accelerated filer status (as well as adopted separate exit hoops for the new large accelerated filer category).
The SEC made a few tweaks to what it had originally proposed so that the framework now looks like this:
- The new definition of accelerated filer has a public float requirement of at least $75 million – but less than $700 million.
- Exiting accelerated filer status requires a public float of less than $50 million. This is a change from the proposal which had a threshold of less than $25 million.
- The new category of large accelerated filer has a public float requirement of $700 million or more
- Exiting large accelerated filer status has a public float threshold requirement of less than $500 million. This is a change from the proposal which had a threshold of less than $75 million.
- As proposed, the redefined accelerated filers will continue to have a 75-day filing deadline for Form 10-K and 40-day deadline for Form 10-Q.
The SEC deferred its proposal that the new large accelerated filers have a 60-day deadline for filing 10-K for fiscal years ending on or after December 15, 2005 for one year – so that large accelerated filers will continue to have a 75-day deadline for 10-K at this time, but will have a 60 day deadline for filing 10-K beginning with fiscal years ending on or after December 15, 2006. Large accelerated filers will continue to have a 40-day deadline for 10-Q, the same as for redefined accelerated filers.
The SEC also proposed amended rules to allow foreign private issuers to exit the ’34 Act reporting system – as well as proposed to amend the best-price rule (as I blogged about yesterday on DealLawyers.com).
Underwriting Agreements and Legal Opinions After the ’33 Act Reform
- Jack Bostelman, Partner, Sullivan & Cromwell LLP
- Fred Knecht, Managing Director and Head of Investment Banking Legal for the Americas, Goldman Sachs
- Mike McAlevey, Chief Corporate and Securities Counsel, General Electric Company
- John White, Partner, Cravath Swaine & Moore LLP
From Bruce Carton’s Securities Litigation Watch: Fortune has an excellent, in-depth article on SEC Chairman Christopher Cox entitled “The Stock Cop.” The article provides a detailed view of Chairman Cox and his life experiences, and includes the following description of a framed check that Cox keeps on the wall of his office at the SEC:
“That’s the message on the wall of his tenth-floor office in the SEC’s sun-washed new Washington headquarters, where Cox has assembled a makeshift shrine. It consists of a framed check made out to his grandfather alongside a plaque depicting the notorious Samuel Insull, whose empire of utility companies collapsed in 1929, taking with it the money of countless investors, including Cox’s grandfather. Insull’s chicanery helped inspire the creation of the federal regulatory apparatus, including the SEC, that sprang up during the Depression. But the lesson here isn’t historical as much as it is personal. Cox’s grandfather lost $6,000—or $70,000 in today’s dollars—and the check was intended to compensate for the loss. It’s for $3.36.” Cox’s message: Investors, I’m on your side.