September 29, 2006

Dealing with Gifts to Directors

With more attention being paid to director compensation – and in light of the SEC’s revised requirements for disclosure of director compensation – boards should be re-examining all director perks that previously seemed harmless and determine whether their disclosure is worth the perk. As part of this re-evaluation, companies should ensure their disclosure controls & procedures capture all gifts provided to directors.

As I mentioned at our Conference a few weeks ago, companies should consider adopting a policy regarding gift-giving to directors to assist those responsible for collecting perk data and drafting the proxy disclosures perform their job. Of course, this policy can be fairly simple if the company’s policy is that directors are not permitted to receive any gifts over a de minimus value - as some governance experts believe that there aren’t any sound reasons for directors to receive gifts from people outside the company or even within the company (unless they receive something of insignificant value, such as a token gift at a dinner).

And companies are acting to rein in perks: Mark Borges recently noted in his blog that Molex's proxy statement disclosed that the compensation committee had recently adopted a perquisite pre-approval policy. Under this policy, certain (unspecified) perquisites and maximum amounts for such perquisites have been pre-approved by the compensation committee. And, the committee must separately approve any perks not specifically included in the policy or amounts that exceed the maximum amounts in the policy.

I just posted three questions (and answers) you should consider regarding director gifts in the "Directors Compensation" Practice Areas of and The questions are:

- Who should have the authority to give gifts to directors (from either outside or inside the company)?

- What should be addressed in a director gift policy?

- How should gift giving to directors be tracked?

The Latest on Internal Controls Testing

In this podcast, Ben Termini of BDO Seidman’s Risk Advisory Services Group describes the latest trends in internal controls testing, including:

- How can businesses reduce the number of controls tested on a daily basis (by as much as 60 percent without impacting effectiveness)?
- What daily controls are considered “key” controls?
- How does the more focused scope of daily control testing affect monthly, quarterly and annual testing?
- What are entity level controls? And why are they so critical to an effective internal audit program?
- What are general computer controls - and why are they imperative to ensuring efficient automated controls?
- How does the size of a company impact controls? Does “one size fit all”?

Motion to Win!

A little Friday fun, I am told that this is a real pleading that was filed! Reminds me of some of the handwritten notes I would see from disgruntled investors when I worked at the SEC ...

September 28, 2006

Sample Option Grant Policies

In response to heavy demand, we have posted three sample equity grant policies in the "Timing of Stock Option Grants" Practice Area on These are in Word - and one of the samples relates solely to new hires.

John White on Director's Role in the SEC Comment Letter Process

In this speech entitled “An Expansive View of Teamwork: Directors, Management and the SEC,” SEC Corp Fin Director John White appeals to directors to take a more active role in the SEC comment letter process by at least receiving copies of the SEC comment letters and responses from the company - and not allow management to “shield” directors from those documents.

As part of his series of speeches on the topic, John also spoke about the SEC's new executive compensation rules - for example, see this excerpt about the director's role in preparing the CD&A:

"I mentioned very briefly that your CEO and CFO will now be called upon to certify your company's Compensation Discussion and Analysis. As I also said earlier, that section of your company's disclosure must address the policies and decisions related to executive compensation. One objection that we heard to having that section be company disclosure is that it unfairly makes the CEO and CFO responsible for board and compensation committee actions that are outside the officers' "jurisdiction", for lack of a better word.

Your compensation committee report, as well as any consultations and discussions you may have about your CD&A section, can help provide your officers with the necessary insights and understanding they need in making their certifications. And this, in fact, is a two-way street. Your own comfort and your own knowledge can be equally fortified and improved through this process. And if you become more involved and more adept with these issues, that will inure to the benefit of your shareholders and investors more generally, which of course comes full circle to your overlap with the SEC.

The Commission has carefully structured a disclosure system in this area designed to further the interests and address the needs of investors. I hope you can see it in many ways as also offering the potential of furthering your interests and addressing your needs as directors. One important footnote — I would encourage you again to take a look at my remarks on principles based disclosure. They highlight and explain this crucial concept and, I believe, may help you and your company in drafting and evaluating your CD&A sections in the future."

Late SEC Filings as Bond Defaults: New York State Court Weighs In

A few weeks ago, I blogged about how some investors are leveraging late SEC filings as a way to accelerate repayment of outstanding bonds. Here is news of a recent development in this area from Davis Polk (and this memo is posted in our "Late SEC Filings" Practice Area):

The Supreme Court of New York, New York County (New York State’s trial level court) on September 18, 2006, issued an opinion in The Bank of New York v. BearingPoint, Inc., a litigation where a central issue was whether a company’s failure to file Exchange Act reports when required by the SEC constituted an Event of Default under a convertible bond indenture.

In the BearingPoint litigation, the company failed to file, within the time period required by the SEC, its annual and quarterly reports on Form 10-K and 10-Q for a variety of publicly announced reasons, including the existence of material weaknesses in the company’s internal controls and financial accounting. Following the company’s failure to file those reports within the SEC-prescribed time period, certain holders of its 2.75% Series B Convertible Subordinated Debentures sought to declare an Event of Default under the covenant default provisions as set forth in Section 7.01(g) of the indenture. The particular covenant under which holders alleged a default was Section 5.02 (entitled “SEC and Other Reports”) which provides:

"[T]he Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall comply with the other provisions of TIA Section 314(a). [Emphasis Added.]"

Although the Indenture clearly states that the company had no obligation to file SEC required reports until those reports were actually filed with the SEC, the court nonetheless ruled that the company’s failure to file those reports when required by the SEC constituted an Event of Default under the indenture.

Section 314(a) of the Trust Indenture Act does not specify a time period during which a company must file SEC required reports, but merely states that an issuer must file SEC reports with the indenture trustee. The court reasoned that a reading of the indenture that required the company to file those reports whenever it actually filed them with the SEC would frustrate the purpose of Section 314(a) the TIA which, according to the court, “was to make BearingPoint’s financial information available to Series B Debenture Holders … [so that] investors can make informed decisions about their investment and guard against the risks attendant to incomplete information.”

The BearingPoint decision is the New York trial court's opinion upon summary judgment. As a result, it is not certain whether other courts would reach a different conclusion or whether, upon appeal, the New York Court of Appeals would affirm the trial court's decision. In addition, because Section 314 of the TIA does not directly incorporate the filing requirements described above into every TIA qualified indenture and only obligates an issuer to make those filings as a matter of statute, the court did not address whether a failure to comply with Section 314 would have any effect on an indenture that did not expressly incorporate that section. Moreover, where the indenture does incorporate Section 314 of the TIA, as did the BearingPoint indenture, the court did not address contractual remedies other than acceleration that could have been included in the Indenture, such as a mandatory increase in interest rates.

September 27, 2006

Beware: CD&A Mock-Ups

A guest blog from Jesse Brill: Since time is of the essence - and we all face a formidable challenge - when we sit down to draft and review the new CD&A for the upcoming proxy season, we can understand the appeal of getting your hands on a mock-up CD&A. We have reviewed a few mock-ups that law firms have drafted and - at least, so far - they tend to provide the kind of pap that the SEC is trying to get away from.

The mock-ups punt on analysis and give the impression that the sample is a good starting-off point. We disagree - and we have decided not to post any samples yet because we believe we would be doing a disservice to those of you trying to comply with the SEC's (and shareholder's) expectations.

We urge law firms drafting samples to underscore the critical analysis that is expected. Otherwise, clients will fall into the trap of merely disclosing all the generalities and boilerplate that the SEC and shareholders do not want to see. If we find a good sample, we will immediately post it and make everyone aware that it's reliable as a sound example. Of course, every company's circumstances are different and each CD&A should be unique.

Remember that there is guidance out there available for you as you sink your teeth into a CD&A. We encourage you to read our complimentary Special Supplement to the September-October 2006 issue of The Corporate Counsel before you begin to consider your CD&A. For directors, you should check out this complimentary issue of Compensation Standards, which has a lead article on the board's role in the CD&A process.

What You Need to Do Now: On October 12th, join the 2000 that will participate in Las Vegas – or the more than 3000 that will watch by nationwide video webcast for the "3rd Annual Executive Compensation Conference." To be able to understand the practices that you will be describing in the CD&A, you need to attend this major one-day conference that has become a "must" for all directors and all those involved with executive compensation. Note that registration rates are more than half-off for members.

By looking at our agenda for this Conference, you can see that this year's conference will be even more crucial than before to watch live or by archive. Register today.

Webcast Attendees: Time to Test Your Connection

As always, for those attending the "3rd Annual Executive Compensation Conference" by video webcast, we strongly advise that you ensure you have the proper connection and equipment before the Conference. You should act now to test your ability to access video as you will not be able to test after Thursday, September 29th.

It's That Time of the Year Again - End of the SEC's Fiscal Year

When fiscal year 2007 starts on October 1st, the SEC will likely be operating under a continuing resolution as it normally does (under which fees remain at their current rates) - see last year's blog as to why this is an annual rite. Once Congress approves the SEC's '07 budget, registration fees will go down to $30.70 per million from $107.00 per million. See the SEC's latest fee rate advisory.

September 26, 2006

Postponed: Decision to Kill Broker Non-Votes

As reported by, it appears the NYSE is postponing amending Rule 452 to eliminate broker non-voting in order to allow companies additional time to prepare for implementation. According to the article, the rule won't be changed any earlier than mid-2007 -and probably wouldn't go into effect before 2008.

Not too surprising given that we haven't heard much on this since the NYSE's Proxy Working Group issued recommendations in June - and the postponement is definitely a good idea given the wide scope and magnitude of change taking place right now with respect to director elections (egs. new SEC proxy rules; ASFCME case; majority vote movement, etc.).

Senate Passes Bill for SEC to Regulate Credit Rating Agencies

On Friday, the US Senate passed a bill in a voice vote - "The Credit Rating Agency Reform Act of 2006" - which would give explicit authority to the SEC to regulate credit rating agencies, including resolving conflicts of interest and challenging practices that may be abusive or anticompetitive. The bill establishes standards, including a three-year track record, for agencies seeking to be designated as "nationally recognized" rating firms and allows the SEC to deny designating agencies that can't consistently do a high-quality job of evaluating debt. This Senate bill now has to be reconciled with a House-passed bill (which would give the SEC oversight over credit rating agencies but doesn't have all of the requirements called for by the Senate bill). Learn more in this WSJ article from Saturday.

These bills stem from a SEC concept release issued three years ago, which itself emanated from Section 702 of Sarbanes-Oxley (which required the SEC to submit a report to Congress on the role of credit rating agencies).

XBRL Modernization of SEC's EDGAR to Begin

Yesterday, the SEC announced the winner of its $48 million EDGAR contract competition (ie. Keane Federal Systems, with other partners such as Microsoft, Bearingpoint, Rivet Software, EMC and Akamai) in this press release. The SEC also announced the winner of a much smaller contract to build an XBRL viewer/analytical tool for the SEC's website.

More interesting is that the SEC is spending $5.5 to XBRL US (which I believe is also working with the FASB on a similar project) to improve and extend XBRL taxonomies. This development is what you should watch out for the most, as taxonomies are critical because that's how investors will be reading your financials. The SEC also announced an upcoming roundtable that will focus on new XBRL software, which will include demonstrations of the latest XBRL software.

By the way, I hear that some people are confused and think that the SEC already has mandated XBRL; that’s not accurate. This is merely a baby step to get EDGAR ready in case the SEC someday mandates XBRL...

September 25, 2006

Sample Related-Party Transaction Policy

In our "Related Party Transaction" Practice Area, we have posted a sample related-party transaction policy in a Word file. I expect to be posting a flurry of other sample documents as the SEC's new rules require changes to quite a few disclosure controls & procedures.

As for any content on our sites, we have a disclaimer - but even more so for these sample documents, as they should not be presumed to be legally sound as you should make that analysis yourself. If you peruse a sample document and upgrade it, please let me know - or if you have a sample document that you wish to contribute (anonymously or otherwise), you will receive total consciousness on your deathbed...

Corp Fin's Executive Compensation FAQs: Early Compliance and IPOs

On Friday, the SEC's Division of Corporation Finance issued a small set of FAQs on its new executive compensation and related-party transaction rules, confirming what I blogged last week about the interplay between the effective date of the new rules and early compliance. The FAQs also address the application of the rules and transition provisions to IPOs.

Cablevision's "I Pay Dead People" Grants

Ah, another contender for governance posterchild of the year! Some pretty heated competition this year. In Friday's WSJ, this article revealed that Cablevision Systems awarded options to a vice chair after his 1999 death but backdated them, making it appear the grant was awarded when he still was alive. Critics of executive pay often call it "pay for pulse" - but this doesn't even meet that low standard!

Perhaps even more troublesome is that the company improperly granted options to a compensation consultant options accounted for them as if he were an employee. So far, the compensation consultant hasn't been identified (apparently, the award was cancelled in 2003) - but this raises all sorts of red flags as "the company also said the consultant 'directly participated in the options dating process.'" Lesson learned: Board cannot solely rely on compensation consultants to do the right thing.

From the ISS "Corporate Governance Blog," here is Pat McGurn's hilarious take on this development.

September 22, 2006

Hewlett-Packard: Oh My!

I don't know how you felt, but I had the sinking suspicion that the Hewlett-Packard story would continue to dominate the headlines as more sordid details emerge. Another lesson in how not to manage a crisis. It's so critical for a company to maintain its credibility during a crisis so that shareholders and other stakeholders can believe management when they say they have a handle on it. Come clean quick and take the actions necessary to show that you have the situation under control. Should be quite an interesting House hearing next Thursday!

For a description of the latest developments, here is a:

- WSJ article intimating that H-P CEO Mark Hurd knew more about the investigation than has been previously disclosed

- Washington Post article providing a graphic description of a February report that details the investigation activity, which targeted wives and other relatives of H-P directors and reporters and even included obtaining Larry Sonsini's phone records. Apparently, the code names for the H-P investigations were "Kona 1" and "Kona 2"; Chair Patricia Dunn has a house in Kona, Hawaii.

- NY Times article saying that H-P conducted feasibility studies on planting spies in news bureaus of two major publications - and that H-P officers supervising the investigation (the company’s chief ethics officer) knew of the use of phone ruses at least as early as January 2006 and raised questions about their legality.

The Art of Boardroom Etiquette and Confidentiality

Many members are talking about legal issues implicated when a board is faced with a leak. There are a myriad of corporate, securities, and privacy law issues as well as listing standard and contract considerations (e.g. codes of conduct). I am putting together a webcast on these issues that will be announced shortly.

Here are a few musing on this topic that I have received from members:

- The fiduciary duty includes a duty to maintain confidentiality. In addition to that, most corporate codes of conduct include confidentiality restrictions and are applicable to boards. Lastly, some companies make their directors sign confidentiality agreements to emphasize the seriousness of their confidentiality obligations.

- I can imagine scenarios where the director believes his duty of loyalty in fact requires him to disclose information to protect the best interests of the compnany/shareholders. It will be interesting to see how the various lawsuits play out in the HP matter as there have been suggestions that the disclosures made by the HP director did not violate his fiduciary duties and thus the mere initiation of the investigation was ill-advised (in addition to the methods used).

- When it comes to leaks, my research suggests that it would simply be a duty of care/loyalty breach of fiduciary analysis - but it becomes interesting when you think about the fact that Boards owe their obligations to shareholders and as a result, there could be instances where directors would feel the need to discuss information shared by the board in order to satisfy those obligations.

- Where we have seen confidentiality issues come up is in the context of contested director elections where the company tries to get the dissident to sign a confidentiality agreement as a condition to coming on the board. The fiduciary duty is one of doing what is in the best interests of stockholders, and if it is in the best interest for confidentiality not to be maintained, then...

- Under Delaware corporate law, there are two fundamental fiduciary duties for directors: the duty of care and the duty of loyalty. There is no duty of confidentiality per se under Delaware corporate statutory or case law. Nonetheless, the duty to keep company information confidential is generally considered part of the duty of loyalty, and disclosure of a company's confidential information by a director could constitute a breach of the duty of loyalty. And, even though not an explicit part of Delaware corporate law, the importance of board confidentiality is generally recognized as a matter of good corporate governance, because of the potential implications that disclosing confidential information can have under insider trading laws and its potential impact on the company's business generally.

Harvey Pitt's Take on Boardroom Leaks

Check out this Forbe's commentary from Harvey Pitt entitled "Looking For Leaks In All The Wrong Places." Here is an excerpt:

"The failure of the HP board to address what the rest of the business community had long seen festering reflects a critical lack of pragmatic board leadership. Dysfunctional boards almost always erupt into internecine warfare if nothing is done to allow the causes of dissension and disagreement to be addressed and, hopefully, amicably resolved. Appropriate opportunities should be afforded for concerns to be raised. Time at meetings is one useful vehicle, but sometimes concerns need to be raised in one-on-one conversations, so directors don’t feel intimidated or embarrassed.

Boards can and must be collegial without being required to proceed unanimously. The goal is an atmosphere that permits and encourages frank debate and the exploration of different viewpoints. This doesn’t mean boards should be comprised of “yes” men and women. But thoughtful directors should agree that differences of view are a positive factor, as long as they can be resolved rationally and collectively. Anyone who fails to accept that as an operational credo should be disqualified from serving on boards altogether.

At HP, the leak problem should have been raised with all the directors, at a face-to-face discussion around the boardroom table. Directors should have been solicited for their views on how to achieve greater collegiality and stem future leaks. Leaks can’t be condoned. But most people who try to identify leakers discover it's almost impossible unless unethical or illegal means are employed.

If there had been a general consensus on HP’s board that the leaker should be identified, the simplest approach would have been to ask all directors, again at a face-to-face meeting, to make their telephone and e-mail records available to a third party investigator. If one or two directors refused, but the others were prepared to permit their records to be reviewed, that would have been a fairly good indication of the identities of the responsible parties."

Director Survey on Priority of Confidentiality describes this interesting survey, as written up by "The Ponemon Institute claims that 85% of 226 directors responding to a survey place a higher priority on corporate confidentiality than shielding their personal information from prying eyes. Just over half of the surveyed directors said they have served on corporate boards that have authorized the use of "aggressive" surveillance techniques to address a potential leak, according to a press release regarding the survey, taken just days after Hewlett-Packard confirmed details of a corporate investigation into apparent leaks from their board. Half the surveyed directors said they would endorse a ruse similar to the one used by HP's detectives to obtain phone records, as long as the deceptive tactics aren't deemed illegal."

Reminder: Don't Forget to Register for Huey Lewis & The News

For those attending the "14th Annual NASPP Conference" in two weeks, don't forget that registration for the NASPP Conference doesn't automatically register you for the Huey Lewis & The News bash at the Mandalay Bay on October 10th. For Conference attendees, there is no charge to attend the concert, but you must register for the concert separately by the end of next week, September 29th.

September 21, 2006

Early Compliance with the SEC's New Executive Compensation Rules

A lot of folks have been asking whether a September 30 fiscal year end company can voluntarily chose to comply with the new executive compensation/related-party disclosure rules for its upcoming proxy statement. The SEC Staff has been answering that question with: "Yes, so long as the proxy statement is filed on or after November 7th (which is the date the new rules become effective) - and as long as the proxy statement complies with all of the new rules (meaning Items 402, 404 and 407, etc.). Of course, this begs the question of who would want to be the first guinea pig anyways...

State of Corporate Law Reform

Between legal challenges to the authority of Sarbanes-Oxley and lobbying efforts to reform the Act, pressure has never been greater to make some changes. Earlier this week, SEC Chairman Cox testified that he agrees that some changes to Section 404 may be in order, but he doesn't believe those changes should be legislated. PCAOB Chair Mark Olsen testified similarly. Here is all the opening statements and testimonies from this week's House hearing. And here is a final report from the Financial Services Forum from a roundtable conducted on America's competitiveness a few months ago.

In this podcast, Cindie Jamison and Kathy Schrock of Tatum LLC provide some insight into the latest developments in the long-standing efforts to reform Sarbanes-Oxley and how the reform is impacting the capital markets, including:

- Have non-US companies continued to list elsewhere? If so, why?
- What can be done to streamline the US registration and listing process to minimize obstacles and reduce negative perceptions?
- What’s next and where is it going? And how is it going to get there?

Nasdaq Amends Cure Period for Independent Director/Audit Committee Compliance

Last week, the SEC approved amendments to Nasdaq Rules 4350(c)(1) and 4350(d)(4)(B) that modify the cure period for companies that fail to comply with the majority independent board requirement, either because a vacancy arises on the board or because a director ceases to be independent for reasons outside their reasonable control - as well as for when there is a failure to comply with the audit committee composition requirement because a vacancy arises on the audit committee. The prior rules provided that the cure period lasted until the earlier of the next annual shareholders’ meeting or one year from the event that caused non-compliance, sometimes resulting in a company having only a short period to recruit a new director.

The amended rule provides more time for companies to recruit - so that a company will now always have at least 180 days from the non-compliance event to regain compliance. Note that the SEC's release states that the amended rules don't allow an audit committee member who ceases to be independent to remain on the committee beyond the period contemplated in SEC Rule 10A-3(a)(3) and Nasdaq Rule 4350(d)(4)(A)(i.e. earlier of the next annual shareholders meeting or one year from the non-compliance event).

September 20, 2006

SEC's Chief Accountant Issues Guidance on Option Backdating

Yesterday, the SEC's Chief Accountant issued guidance - in the form of this letter - on determining measurement dates for option grants under APB 25. As stated in the SEC's press release, the letter discusses the accounting consequences under APB 25 of dating an option award to predate the actual award date; option grants with administrative delays; uncertainty as to the validity of prior grants; among other related circumstances.

Here is one member's reaction to the new guidance: Is it my imagination, or is this letter incredibly helpful and long overdue? If only we could get the IRS to give similar guidance for ISO/409A/162(m) purposes. I think these two excerpts from the SEC Staff's letter alone resolve 90% of the options nonsense problems (without whitewashing the true back-dating situations):

"Where a company’s facts, circumstances, and pattern of conduct evidence that the terms and recipients of a stock option award were determined with finality on an earlier date prior to the completion of all required granting actions, it may be appropriate to conclude that a measurement date under Opinion 25 occurred prior to the completion of these actions. This would only be the case, however, when a company’s facts, circumstances, and pattern of conduct make clear that the company considered the terms and recipients of the awards to be fixed and unchangeable at the earlier date. The practices described in the preceding paragraph would, of course, preclude a company from concluding that a measurement date occurred prior to the completion of all required granting actions.


The staff does not believe that the lack of complete documentation being available several years after the activities occurred should necessarily result in a “default” to variable accounting or to treating the awards as if they had never been granted. Rather, a company must use all available relevant information to form a reasonable conclusion as to the most likely option granting actions that occurred and the dates on which such actions occurred in determining what to account for."

Shiver Me Timbers!

Woke up humming "Rhinestone Cowboy" and knew it was gonna be an odd day - but at least it wasn't "The Year of the Cat"! Then found out it was "Talk Like a Pirate" Day - and that my pirate name is "Iron Tom Vane."

Notwithstanding the foregoing, I have decided to make a difference in the world by starting my own new holiday! Please join me on November 14th for "Talk Like Lawyers Write" Day. Yes, that's the best I could come up with - but it beats the alternative: "I Love Practicing Law (No, I Really Really Do)" Day...

"I See Rich People"

Here is the latest observation from Keith Bishop: "One of the unintended consequences of federal and state private placement exemptions has been that they can favor people who know rich people. A start-up whose founders don't have rich relations or friends is often caught between the prohibition on general solicitation and the practical difficulty of finding investors without incurring the expense of filing a registration statement.

This has forced many issuers to turn to so-called finders. Finders are not registered broker-dealers. They rely on judicial and administrative exceptions from the broker-dealer registration requirement. At the SEC level, the Paul Anka no-action letter is often cited, but the SEC staff's position on finders may have narrowed in the ensuing years. The result is a less than desirable situation with issuers and their finders operating in an area without a lot of clear guidelines. Sometimes, issuers are themselves victimized by the activities of finders.

In recent years, some states have stepped up enforcement over unlicensed finders (usually by scrutinizing Form D filings for commission payments). As mentioned in the release, both the ABA Section on Business Law and the SEC's advisory committee on smaller public companies have addressed the question of finder regulation. I'm pleased to see that the new California Commissioner is willing to put these issues on the table in this new proposal." We have posted a copy of the California Commissioner's proposal in our "Private Placements" Practice Area.

September 19, 2006

The Corporate Counsel: Complimentary Special Supplement

With so many of you grappling with getting your hands around the SEC’s new executive compensation rules (as evident from the large turn-out for our just-concluded Conference), we have posted a complimentary copy of "Necessary Actions": Special Supplement to Sept-Oct 2006 Issue of The Corporate Counsel on right side of's home page.

We encourage you to read it and pass it on to others who might benefit from seeing the important actions that many should be considering to implement. This complimentary Special Supplement goes hand-in-hand with the regular Sept-Oct issue of The Corporate Counsel, which will be arriving in the mail this week to those who are our loyal readers.

FASB's FAS 157: The "Fair Value" Pronouncement

Yesterday, the FASB issued its long-awaited pronouncement - SFAS No. 157 - regarding measurement and disclosure of fair values of assets and liabilities (here is a summary of FAS 157). Fair values can be quite useful for investors (as can historical cost numbers) - but they are only relevant if they are reliable (and obviously, not cooked up). This is a huge development that we will continue to provide guidance on...

SPACs: How to Use a Special-Purpose Acquisition Company

Don't forget to tune into today's webcast: "SPACs: How to Use a Special-Purpose Acquisition Company."

Preparing Your CD&A - You May Have Less Time Than You Think

Great piece from Mark Borges in his "Proxy Disclosure Blog": If one message came out of last week's Disclosure Conference, it's that compliance with the new rules will be a lot of work. Consequently, companies will want to get started soon mocking up tables and outlining their first Compensation Discussion and Analysis. It occurs to me that, because of liability considerations, some companies may have even less time to prepare their CD&A than they suspect.

Currently, companies that are accelerated filers have to file their annual report on Form 10-K within 75 days after fiscal year end. (Large accelerated filers will move to a 60-day deadline this winter.) Most companies satisfy their obligation to include executive compensation information in their Form 10-K by incorporating that information by reference from their annual proxy statement involving the election of directors. Under General Instruction G(3) to Form 10-K, as long as the proxy statement is filed within 120 days of the end of the company's fiscal year, that technique is permitted. While in many cases, the Form 10-K and the proxy statement are filed simultaneously (or within a few days of each other), in some cases, the filings can be separated by a month or more.

In this latter situation, a company's CEO and CFO may be required to certify the Form 10-K without necessarily having seen the final version of the tabular pay disclosure (although certainly a draft version will have been circulated and reviewed). It's not clear to me that the CEO and CFO will be willing to take the same approach in the future now that their certification also covers the CD&A. I would expect that they will want the CD&A to be finished or near completion at the time the Form 10-K has to be filed (and the accompanying certification submitted along with it) so that they will know the substance of what they are certifying.

It seems to me that, going forward, the timeline for preparing the CD&A (and, perhaps, the disclosure tables) will be the schedule for filing the Form 10-K, and not the schedule for the proxy statement. For companies that file the two reports separately, this means that the CD&A will have to be substantially wrapped up by before March 15th (in the case of a calendar-year company), rather than sometime in April.

Companies will need to factor this consideration into their plans as they look to revise their timetable for drafting their year-end filings, as well as the availability of the compensation committee to review drafts and provide feedback to management. In some situations, I can see where a company will need to get going soon on its CD&A in order to meet this shorter schedule.

September 18, 2006

SEC Staff Issues SAB 108 on Quantifying Financial Statement Errors

Last week, the SEC Staff (OCA, Corp Fin and IM) issued long-awaited guidance - in the form of SAB 108 - on how errors, built up over time in the balance sheet, should be considered from a materiality perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.

As stated in this press release, there have been two common approaches used to quantify such errors. Under one approach, the error is quantified as the amount by which the current year income statement is misstated. The other approach quantifies the error as the cumulative amount by which the current year balance sheet is misstated. The SEC Staff believes that companies should quantify errors using both a balance sheet and an income statement approach - and evaluate whether either of these approaches results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.

SAB 108 also describes the circumstances where it would be appropriate for a registrant to record a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial as well as the required disclosures to investors. There is no real "effective date" of SAB 108 since they represent the SEC Staff's views of the proper interpretation of existing rules, but November 15, 2006 is a reference point as noted in SAB 108. For more analysis of SAB 108, see the AAO Weblog.

CalPERS Calls for Hearing on Shareholder Access

To better understand the significance - and the consequences - of the AFSCME case, I am in the process of finalizing the panel for a webcast - "Shareholder Access and By-Law Amendments: What to Expect Now" - which will be held about a month after the SEC's open Commission meeting to propose amendments to Rule 14a-8.

Here is some information from "": "In response to the AFSCME court victory on shareholder access and the subsequent announcement by the SEC to hold a public hearing on 10/18/06, CalPERS' Board President, Rob Feckner sent a letter urging the SEC to fully consider investor views about access to the proxy to nominate corporate directors.

I understand that a Commission meeting has been scheduled to discuss a recommendation by the Division of Corporation Finance to amend Rule 14a-8 in response to the AFSCME litigation. Instead of simply responding to this litigation by adopting a stopgap rule, CalPERS asks that the Commission give the proxy access issue its full consideration."

"The SEC-Saw"

From Friday's WSJ, here is an editorial on shareholder access from Ira Millstein and Harvey Goldschmid:

"Shareholder access is officially back on the agenda at the SEC, forced there by a recent court decision. And this time around the SEC should seize the opportunity to craft a solution that opens up the proxy to shareholders in a sensible way, a solution that ensures board accountability to shareholders.

The decision last week by the Court of Appeals for the Second Circuit paved the way for shareholders to propose bylaw amendments allowing shareholders to nominate directors and for those nominations to be included on the company's proxy. The decision turned on the court's analysis of an SEC rule allowing exclusion of any proposal that "relates to an election" and the various interpretations given to that rule by the SEC over the years. The SEC has since announced that it will develop a proposed amendment to that rule and will hold an open meeting on Oct. 18, 2006, to consider the proposal.

This isn't the first time the SEC has considered this issue. Most recently, in October 2003, it proposed new rules for shareholder access to company proxy material. Those rules were designed to shift the balance of power between corporate managements and shareholders, by giving dissatisfied majorities of shareholders a meaningful role in the election process without the need to embark on an expensive proxy contest. Under the process then and now in effect, there are virtually no contested elections for the boards of large public corporations in the U.S. The analogy is to elections in the Soviet Union.

The SEC's proposed rules in 2003 generated an enormous amount of vigorous debate. It even led indirectly to reform in the area of majority voting through the urgings of institutional investors and governance thought-leaders. But the proposed rules themselves never progressed to "final." This occurred for a variety of reasons, including concerns about complexity and potential for abuse by obstructionists, to pure management self-interest in ensuring that director elections remained under company lock and key.

The October 2003 proposed rules may have stalled, but the reasons they were proposed in the first place are all around us still. Shareholders are still the providers of capital in our economy. They are still responsible for electing directors who will improve performance. And they still lack a meaningful avenue of bringing about mid-course corrections when management is ineffective or wrongheaded and the board is compliant. They still need an avenue to making themselves felt.

The court's decision has opened the door for the SEC to think again about shareholder access and its importance for corporate efficiency, honesty, productivity and profitability. The SEC should strive for a solution that gives shareholders a voice in the director election process. Its recommendation should include safeguards such as minimum holding requirements that may be necessary to ensure that access opportunities are not abused by shareholders with non-efficiency or obstructionist motivations. A uniform approach to shareholder access is key to achieving a balanced result and avoiding the confusion and delay that can reign when ad hoc development by too many cooks is permitted to occur (as with majority voting reform, for example).

We urge the SEC to balance the system and give shareholders the tools to hold boards accountable -- and, in the process, restore public confidence in the fairness and economic rationality of the governance system."

September 15, 2006

This Clown Sure Can Set a Benchmark...

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September 14, 2006

John Olson on "The Board Presentation"

I know I am biased, but I can honestly say that anyone I have spoken to - or emailed with - raved about our just-concluded Conference: "Implementing the SEC's New Executive Compensation Disclosures: What You Need to Do Now!" (For those that missed it, all the panels are now archived and available to watch - it's never too late to register and take in the Conference.)

One of the conference highlights was the keynote by John Olson of Gibson Dunn on how to make your presentation to the board about the new rules. Many attendees - including a CEO from Dallas who came to DC to take in both days! - urged us to make John's remarks widely available as "necessary" viewing for CEOs and directors.

We wholeheartedly agree. We have posted John's 20-minute video - on a complimentary basis - on the home page of for everyone to see. Please watch John's inspirational remarks - "John Olson on 'The Board Presentation'" - and pass on the link to those that need it!

Conference Lessons Learned: What to Do Now

One of the central themes I heard from attendees is that each of the panels drove home the point that much more work will be involved this year putting together the new tables and disclosures; much more than they had originally thought. The mock-up tables and disclosures put together by the panelists really reinforced this point - even plain vanilla situations likely will result in tables that are 4x longer than you might have initially thought. And I challenge anyone who watched "The New Retirement Pay Tables" panel to bravely step forward and say their company can easily overcome all of the complicated open issues that were identified. The same challenge could easily apply to a half dozen other panels.

And the risks for not being prepared have never been greater. Not only do you bear the risk of angering directors and managers for surprising them with huge pay numbers - or even low numbers (eg. perks) - that will embarrass them once disclosed, but you run the very real risk of not capturing all the data you need to provide full disclosure.

And don't forget that late SEC filings have now become a part of the game that hedge fund activists play, as they buy up bonds of late filers and then use the covenants in indentures to trigger huge defaults/cross-defaults - all in an attempt to put the companies in play! And as we all know by reading the papers, journalists are chomping at the bit for these enhanced disclosures - and investors are not afraid to use them to quickly mount a "just-vote-no" campaign against director nominees. This ain't the same playing field as last proxy season, my friend! Not by a long-shot.

This is a mini-version of the internal controls exercise we went through over the past few years, just not nearly as comprehensive nor expensive. But another key difference is that most companies simply don't have the resources they will now need to adopt a new multi-disciplinary approach to drafting compensation disclosures. As panelists repeatedly said, securities lawyers are now going to have to learn much more about compensation - and the HR staff needs to learn securities law. That's why so many HR professionals attended our just-completed compensation disclosure conference.

So how are the securities lawyers going to learn about compensation? Attend the "14th Annual NASPP Annual Conference" coming up next month in Las Vegas, which has over 40 panels on various compensation issues. If you can't do that, at least attend the "3rd Annual Executive Compensation Conference" by video webcast - if you listen to John Olson's video, you should quickly recognize how important it is for lawyers to ramp up their compensation knowledge base as soon as they can. Remember that the "3rd Annual Executive Compensation Conference" is part of the NASPP Conference this year - so you get to attend it free as part of the 40 plus panels (and to cheer you up, there also is a private "Huey Lewis & the News" concert for NASPP attendees).

Consult Your Privacy Lawyer

I had many favorite moments during the Conference, among them was the advice from John Huber that securities lawyers shouldn't practice privacy law. This was not in the context of the Hewlett-Packard saga, but in the more common context that many of us will now face when implementing updated disclosure controls & procedures and asking management and directors more questions about their finances and relationships.

Speaking of the Hewlett-Packard saga, I have posted the letter from four members of both parties of the House Committee on Energy and Commerce sent to H-P regarding their board investigation in the "Privacy Rights" Practice Area. There is legislation pending - that has been proposed for some time - to prevent the type of unauthorized access to individual phone records that appears to have occurred in the H-P situation (ie. HR 4943, Prevention of Fraudulent Access to Phone Records Act).

September 13, 2006

Coming Soon: A Leaner (and Less Meaner?) Version of AS #2

As reported by, the PCAOB and the SEC are working together to rewrite the internal controls auditing standard - Auditing Standard No. 2 - so that it's much shorter and clarifies the respective roles of the internal auditor and management in the internal controls process. However, the core principles of AS #2 will not change. also posted this survey with an interesting perspective from CFOs, including questions on Section 404 and putting liabilities for pensions and leases on the balance sheet. The survey results seem to run counter to the critics who content that Section 404 needs a complete overhaul as 70% say that they have seen at least some improvement in their business due to the new law.

SOX 404 - Moving Forward

Yesterday, Corp Fin Director John White delivered this speech on internal controls. I'm still catching up on my emails after being away two days at our Conference and haven't read it yet...

The New "Committee on Capital Markets Regulation"

But I have read this article from the NY Times' Floyd Norris about a new Commission - the "Committee on Capital Markets Regulation" - being formed to make legislative recommendations to Congress about how to "fix" Sarbanes-Oxley. Bizarre timing given all the scandals in the papers this week; Bristol-Myers, Hewlett-Packard, etc.

Here is a list of the Committee's members - and here is an excerpt from the NY Times article:

"The Committee on Capital Markets Regulation, announced today, includes representatives of every industry group interested in relaxing regulation of securities markets, and of increasing regulation of those who would sue them. It is not an official body, but it includes former close associates of Treasury Secretary Henry Paulson, and the news release announcing the formation of the group included praise from Mr. Paulson.

As such, it provides a road map to what some people hope will come out of the current anti-regulation mood, and it calls for a lot more than relaxing Section 404 of the Sarbanes-Oxley Act, which requires that companies have their internal control systems audited. Other areas to be explored include finding ways to limit liability for auditors, directors and bankers, and to assure that no future Eliot Spitzer comes out of state government to impose new regulations on investment banks.

It will also look at shareholder rights, such as whether activist hedge funds should be curbed, and will consider whether the Securities and Exchange Commission should be required to pay more attention to the cost of its regulations. It may even suggest giving some other part of government the right to block S.E.C. rules on the ground they are too costly.

There are professors and chief executives galore on the committee, and even a lobbyist and a corporate lawyer. But there are no former members of the S.E.C.

Hal Scott, the Harvard law professor who will direct the committee and helped choose its members, told me that was deliberate. “We would not want to put people in the position who had formulated these rules in the past,” he said. “They may have a lack of objectivity.”

The committee plans to get a report out in November, a schedule that committee co-chairman W. Glenn Hubbard told me was suggested by Mr. Paulson. Mr. Hubbard, a former chairman of President Bush’s Council of Economic Advisers and now dean of the Columbia University Business School, said that there would be plenty of S.E.C. knowledge because “Many of these people have S.E.C. interaction on a regular basis.”

Mr. Scott says he assumes Congress will not act on any recommendations until next year, but there is a scenario that might lead to quicker action, during a post-election session of the Congress. There is a pending lawsuit filed by the Free Enterprise Fund challenging the constitutionality of the Public Company Accounting Oversight Board. If a judge were to agree with the premise of the suit, that could create a crisis that would seem to require quick Congressional action. This committee’s recommendations would then be available to anyone hoping to reduce the regulatory burden."

September 12, 2006

John White Speaks on Executive Compensation

Corp Fin Director John White gave this speech yesterday at our Conference, entitled "The Principles Matter: Options Disclosure" - and here is a speech that John delivered last week entitled "Principles Matter." Based on his remarks, it appears that these two speeches are the first in a series of related speeches that John will be delivering in the area of executive compensation over the next few months.

I caught up with John after his remarks - and as I mentioned at the top of our "Dealing with the Complexities of Perks" panel - it sounds like the Staff will be issuing FAQs about early compliance at some point in the near future. It remains to be seen whether the Staff will issue FAQs on other interpretive questions, as they first need to see what types of questions they receive.

So far, I have heard nothing but glowing reviews about our Conference - but I am interested in criticism too (if you have any) because I really want your experience to be as positive as possible. One complaint I received was about bad pop music being played online during the breaks - I wasn't aware of that ("My Sharona"?) and will see if I can get our video production folks to play something more soothing today...

How to Watch Today: Those of you watching live today will want to click on the appropriate link under the caption "Watch Live: Panels Presented Consecutively" - otherwise, if you wish to view an archived video from yesterday, click on a link under that panel's caption.

Web Postings: Do They Satisfy Regulation FD?

Our new survey is on Regulation FD - please take a moment and answer the 4 queries. I'm particularly interested in how folks answer question #1, since it's frequently asked these days (eg. see #2022 and 1487 of our Q&A Forum). The question relates to whether a company that solely posts information on its website satisfies its Regulation FD distribution obligations. As you might recall when the SEC adopted Regulation FD six years ago - in Section II.B.4(b) of the adopting release (Rel. No. 33-7881 (August 15, 2000) - the SEC acknowledged that companies may be able to rely solely on the Web to make disclosure at some point in the future, but emphasized that web postings by themselves likely were not sufficient as a means of distributing information at that time.

More recently, practitioners have been actively debating whether the "future" is upon us - and I have heard quite a few differing opinions on the topic. So the survey results might help resolve the debate - take the survey now!

Survey Results: Executive Sessions

The results are "in" from our latest survey on board's executive sessions - they are repeated below:

1. Our board meets in non-management executive session:

- Before every board meeting - 12.5%
- After every board meeting - 62.5%
- Whenever the board decides it needs to - 8.8%
- Once per quarter - 8.8%
- Once per year - 1.3%
- Other - 6.3%

2. Our board’s Audit Committee meets in non-management executive session:

- Every committee meeting - 69.1%
- Whenever the committee decides it needs to - 14.8%
- Once per quarter - 13.6%
- Once per year - 0.0%
- Other - 2.5%

3. When our board’s Audit Committee meets in executive session:

- All employees of the company leave the room, including the corporate secretary- 86.1%
- Nearly all employees of the company leave the room, as the corporate secretary (or some other employee) stays to take minutes - 2.5%
- Nearly all employees of the company leave the room, as the corporate secretary (or some other employee) stays to take minutes for part of the executive session (for example, the employee stays for internal audit sessions but leaves for sessions with the outside auditor) - 11.4%

4. During the course of the year, our board’s Audit Committee meets at least once in executive session with each of the following:

- Independent auditor - 100.0%
- Head of internal audit - 81.5%
- General Counsel - 39.5%
- CFO - 53.1%
- CEO - 25.9%
- Chief Compliance Officer - 21.0%
- Other - 12.4%

September 11, 2006

Conference Items for Today

If you are attending today's Executive Compensation Disclosure Conference by webcast, remember that you need to use your Conference ID/password to access the video webcast. Your ID/password for or will not work to access the video webcast. Here are other troubleshooting tips if you need them.

To gain access, simply go to the home page for one of the sites and follow the prominent link that sits at the top of the page. Then, you have three choices: (1) watch the panels consecutively live; (2) watch a specific panel live; or (3) watch a panel by archive (it will take 5-6 hours for a panel to be archived after it is over). Remember you are able to watch the archive of any panel from now until the end of 2007!

Conference materials are posted beneath the links for each panel. I was pretty excited to receive 20-pages of "Essential Practice Tips You Oughta Know" from the speakers - and that alone is worth the price of admission.

CLE Credit: We also have posted this list of states with the status/number of hours available for CLE credit, divided into two categories: those attending online and those attending in DC. If you are in a state for which the Conference is accredited for online CLE - please register for CLE for webcast attendance and follow the instructions there (then, approximately 3-4 weeks after the Conference, we will e-mail you a Certificate of Attendance).

Final Executive Compensation Rules Published in the Federal Register

On Friday, the SEC's new executive compensation rules were published in the Federal Register - so they will become effective on November 7th (60 days after the date of publication), meaning triggering events for Form 8-Ks that occur on or after November 7th need to conform to the new requirements.

Compensation Standards - Our New Quarterly Print Newsletter!

In response to so many member requests for a practical print newsletter to share with their directors about executive compensation practices, we have created a new newsletter – Compensation Standards – to help directors learn the latest executive compensation developments - and to help them glean practice pointers that can assist them perform their challenging duties.

Compensation Standards is tailored for the busy director, quarterly issues that do not overload them with useless information – rather, this newsletter will provide precisely the type of information that you know they desire: practical and right-to-the-point. Plus, each issue will include timely compliance reminders to help directors avoid inadvertent violations (which also help advisors with their compliance tasks). And this newsletter is very reasonably priced - other director publications typically cost thousands! - with special discounts for companies that also are members.

We have just posted the Fall 2006 issue of the newsletter as a free sample - so you can see how practical it is for yourself! Order this practical newsletter today!

ISS: Up for Sale?

The WSJ reports that ISS has put itself on the auction block and might fetch as much as $500 million. ISS is privately held and changed hands just a few years ago. If a sale occurs, it will be interesting to see who will now control this influential organization.

September 8, 2006

Monday's Conference: A Few Last Points

If you are attending Monday's Executive Compensation Disclosure Conference by webcast, remember that you need to use your Conference ID/password to access the video webcast. Your ID/password for or will not work to access the video webcast. Here are other troubleshooting tips if you need them.

To gain access, simply go to the home page of one of the sites and follow the prominent links that will be at the top of the page. If you're coming to DC, see ya there! "Walk-ups" will be accepted in DC, but I would call our HQ today to let us know you are coming and to find out the amount you should bring (our HQ's number is 925.685.5111 or email

Binding Proposals: Second Circuit Overturns SEC's Interpretation of (i)(8) Exclusion

On Tuesday, the Second Circuit of the US Court of Appeals ruled in favor of AFSCME in its lawsuit against AIG over the SEC Staff's interpretation of the Rule 14a-8(i)(8) exclusion in the context of whether the shareholder proposal rule bars proxy access proposals. This decision reverses the district court, which decided in favor of AIG last year. Now, AIG is considering whether to ask for en banc review or appeal the decision to the US Supreme Court. We have posted a copy of the court opinion in our "Majority Vote Movement" Practice Area.

For the past two proxy seasons, AFSCME has submitted binding shareholder proposals to a handful of companies seeking to amend their bylaws to add a provision establishing procedures by which shareholders could nominate directors under certain circumstances (including that the shareholder or group of shareholders owns 3% or more of the company’s stock for at least one year). The SEC Staff permitted the exclusion of these proposals under (i)(8) because the proposals "related to an election." AFSCME sued AIG - one of the companies that excluded the proposal in 2005 - in an attempt to force the company to include the binding proposal.

The Second Circuit decision states that it takes "no side in the policy debate regarding shareholder access to the corporate ballot." Rather, the Court based its decision on the view that the current SEC interpretation of (i)(8) is a change from how the SEC Staff formerly interpreted the exclusion basis for a period of 15 years - from 1976 to 1990 - thereby creating an "ambiguous regulation." In 1976, the Commission created the (i)(8) exclusion when it codified the Staff's longstanding policy to exclude proposals that related to the election of directors so that proponents could not use the shareholder proposal process to effectuate a proxy contest.

Starting in 1990, the Staff began to interpret the (i)(8) basis more broadly to allow more companies to exclude proposals, but didn't provide a rationale for this shift in position. However, the Staff very rarely provides the reasoning for a particular no-action response, because each letter is analyzed under its own unique circumstances. In a sense, the Court appears to take issue with the way the Staff provides no-action responses when it states that the original 1976 Commission interpretation should control (as interpreted by the Court), unless the SEC can offer "sufficient reasons for its changed interpretation." The last paragraph on page 13 of the opinion drives the Court's point home.

I'm not sure I agree with the Court's logic here because forcing the Staff to provide a rationale for each no-action response would require the Staff to devote significant more resources to processing the hundreds of letters it reviews during the proxy season - and even then, what can appear to be very similar letters can get opposite results, because the Staff really does look closely at all the language in the proposal and supporting statement as part of its analysis.

The upshot may be that the SEC will reconsider whether it's worth the hassle of going through the burdensome no-action letter process if it's not allowed to change an interpretation over time. As evident from the last round of Rule 14a-8 rulemaking in 1998, the Staff would love nothing more than eliminating its role as referee in these disputes. But in that contentious rulemaking, one of the few things that everyone agreed upon was that it was critical that the Staff continue to serve as zebras.

Maybe a middle road is the Staff issuing more frequent Staff Legal Bulletins (recently, the Staff has issued one after each proxy season), such as issuing one whenever it decides to change a position under one of the shareholder proposal rule's exclusion bases. If these SLBs included the Staff's reasoning, that would appear to satisfy the Second Circuit - and it would help proponents and companies understand the latest Staff thinking.

What Does the AFSCME Decision Mean? Shareholder Access is Back!

The Second Circuit's reversal essentially revives the SEC's "shareholder access" reform - which was proposed by the SEC in 2003, but abandoned in the face of significant opposition - as it effectively allows for shareholder access until (and if) the SEC amends the shareholder proposal rule as noted below. It isn't so much the bylaw element that is at issue here - rather, the decision questions the validity of the Staff's view that 14a-8(i)(8) permits the exclusion of proposals that create election procedures that would have the effect of giving shareholders access to company proxy materials.

As a result of this decision, we should expect to see a huge increase in the number of binding "shareholder access" proposals this proxy season. If the decision stands "as is," it would make it significantly easier for shareholders to add their own nominees to ballots, since shareholders could submit proposals under Rule 14a-8 that would allow them to make nominations to the board in future years (if the proposals were approved by shareholders and if the nominating shareholders were eligible to nominate candidates under the criteria set forth in the bylaw amendment).

The SEC's Response: Amend Rule 14a-8

Just as I wrapped up drafting my blog yesterday morning, the SEC posted this press release noting that "that the Division of Corporation Finance will recommend an amendment to Rule 14a-8 under the Securities Exchange Act of 1934 concerning director nominations by shareholders. The staff proposal, still to be developed, will address issues raised by a decision of the U.S. Court of Appeals for the Second Circuit on Tuesday, which disagreed with the Commission staff's longstanding interpretation of Rule 14a-8.

The Commission has calendared the recommendation for consideration by the Commission at an open meeting to be held on Oct. 18, 2006."

Given the debate that took place inside the SEC when it was considering shareholder access the first time around, I would expect that there may still be some fiery exchanges within the SEC on this controversial topic - and remember that Chairman Cox and Commissioner Casey will be considering these issues for the first time...

September 7, 2006

Spy vs. Director: The Hewlett-Packard Saga

I love a good thriller, perhaps that's why I was drawn to all the lurid details in yesterday's WSJ article (and today's NY Times article) about the revelation that Hewlett-Packard hired a private investigator to monitor a long-time director's communications for leaks. And now, California's Attorney General has requested information concerning the processes employed in the investigations into the leaks.

I'm not aware of anything quite like this situation happening before, but there surely have been other examples of contentious infighting on boards - so that it wouldn't shock me if it has happened before, particularly the private investigator stuff. Rather than repeat the details laid out so well in the WSJ article, let me suggest which actors might play some of the key players for the movie based on this situation (given that I don't have any personal knowledge of these people, they may very well be miscast):

- George Keyworth (Ben Vereen), a long-time director and former science adviser to President Reagan and purported source of many of the leaks about board deliberations; he has not been re-nominated to serve on the H-P board

- Tom Perkins (Warren Beatty), a storied figure in Silicon Valley, having helped start one of the first venture-capital firms there, Kleiner Perkins Caufield & Byers and who worked for H-P in the 1960s, and joined the company's board in 2002 and who rejoined the board in February 2005; he resigned from the board on May 18th when it appeared that the board might try to remove his friend Mr. Keyworth from the board (he was once married to romance novelist Danielle Steel and recently wrote a racy novel of his own titled "Sex and the Single Zillionaire")

- Patricia Dunn (Meryl Streep), non-executive chair of H-P's board and vice chairman of Barclays Global Investors; she stepped up surveillance of Mr. Keyworth after Ms. Fiorina was fired and she grew up in Las Vegas, where her father (James Caan) was entertainment director at various casinos and her mother (Sharon Stone) had been a showgirl

- Carly Fiorina (Glenn Close), former Chair and CEO of H-P, who was fired in February 2005, partially due to her focus on board leaks; she has a "tell all" book coming out soon

- Robert Ryan (Robert Duvall, this guy - not the real one), Chair of H-P's audit committee and former chief financial officer of Medtronic; he oversaw the surveillance after Ms. Dunn and Ms. Baskins concluded the leak was a violation of the company's Standards of Business Conduct, which are overseen by that committee (in doing so they bypassed the Nominating and Governance Committee, then headed by Mr. Perkins, which normally handled matters concerning board operations)

- Private investigator (James Garner - Jimmy!), who was hired by the outside contractor (Harvey Keitel) who was hired by H-P to investigate the board leaks and who appears to have engaged in a controversial practice known as "pretexting" (ie. investigators call the phone company, and use personal information to falsely represent themselves as another person, in order to obtain that person's records)

With this melodrama spilling into the papers, I guess we shouldn't be surprised that this is a board that paid over $21 million to a fired CEO...

The Duty to Disclose: Director Resignations over Disagreements

Should what happens in a boardroom stay in the boardroom? Well, we know that answer is "no" if a director resigns due to a disagreement with management, as disclosure is required under Item 5.02(a) of Form 8-K. Item 5.02 requires that a Form 8-K be filed if "if a director has resigned or refuses to stand for re-election to the board of directors since the date of the last annual meeting of shareholders because of a disagreement with the company, known to an executive officer of the company, on any matter relating to the company's operations, policies or practices, or if a director has been removed for cause from the board of directors." The Form 8-K is required to include "a brief description of the circumstances representing the disagreement that management believes caused, in whole or in part, the director's resignation, refusal to stand for re-election or removal."

After Mr. Perkins resigned from the H-P board, a Form 8-K was filed on May 22nd that simply noted that Mr. Perkins had resigned and left it at that. Yesterday, Hewlett-Packard filed this Form 8-K describing the situation as it stands now. We have added it to our list of Form 8-Ks filed over disagreements in our "Director Resignations" Practice Area.

In the Form 8-K, the company discloses that it has "received a comment letter from the staff of the Securities and Exchange Commission’s Division of Corporation Finance with respect to its May 22 Form 8-K regarding Mr. Perkins’ resignation. HP intends to respond to the SEC staff that it believes its disclosures in the May 22 Form 8-K with respect to Mr. Perkins’ resignation were accurate and complete at the time of filing and were based upon Mr. Perkins’ actions and representations prior to such time concerning the reasons for his resignation."

I imagine Corp Fin is questioning the brevity and matter-of-factness of the May 22nd Form 8-K in light of Item 5.02. The WSJ article provides some background regarding why the company decided to go the route of minimalist disclosure in the May 22nd Form 8-K (ie. board concluded Mr. Perkins had no disagreement with the "company," only with the non-executive chair). It will be interesting to see if this moves on to the SEC's Enforcement Division...

Briefs Supporting the Existence of the PCAOB

Last Friday, SEC Chairman Christopher Cox announced that the SEC (as supported by seven former SEC Chairs, going back to 1973 and appointed by Presidents of both political parties) filed a brief on behalf of the United States setting forth the government's arguments in support of the PCAOB's constitutionality in the US District Court for the District of Columbia in Free Enterprise Fund v. The Public Company Accounting Oversight Board. In addition, another brief supporting the PCAOB was filed jointly by the Council of Institutional Investors, TIAA-CREF, CalPERS, AFL-CIO and more. We have posted these briefs - along with other courts filings - in our "Sarbanes-Oxley" Practice Area.

September 6, 2006

California's Legislature Passes Majority Vote Bill: What Will Arnold Do?

Recently, the California legislature passed SB 1207 (Alarcon) to allow some California corporations to adopt a form of majority voting. California law currently requires plurality voting for California corporations. The bill was co-sponsored by CalPERS and CalSTRS. Unless Governor Schwarzenegger returns the bill before September 30, it will become law and take effect on January 1, 2007. Voting on the bill in both houses of the legislature was sharply divided and bill supporters and opponents are making opposite predictions on the likelihood of a veto by the Governor.

As the bill moved through the California legislature, I understand some objected to the fact that it would allow majority voting in corporations with cumulative voting. California law mandates cumulative voting for all California corporations (and even corporations incorporated in other states that meet specified conditions). However, listed corporations (i.e., companies with shares listed on the NYSE, AMEX or Nasdaq National Market) may eliminate cumulative voting by an amendment to their articles or bylaws.

In the last few weeks of the legislative session, SB 1207 was amended to address this concern. As amended, a listed corporation that has eliminated cumulative voting may adopt an amendment to its articles or bylaws to provide that in an uncontested election the "approval of the shareholders" is required to elect a director.

Approval of the shareholders means the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present, which shares voting affirmatively also constitute at least a majority of the required quorum. If a director fails to be elected by approval of the shareholders, his or her term ends on the date that is the earlier of 90 days after the date on which the voting results are determined or the date on which the board selects a person to fill the vacancy.

Test Your Ability to Access Video Webcast

For those attending next week's conference - "Implementing the SEC's New Executive Compensation Disclosures: What You Need to Do Now!" - by video webcast, please test your ability to access video today (use your conference id/password to reach the testing area; a successful test means that you were able to play the sample video). We are unable to keep up these testing links beyond tomorrow, so it's important that you test now.

Options Backdating: US Senate Finance Committee Meeting

For those of you burning to catch today's US Senate Finance Committee Meeting on options backdating, I hear that you may be able to access a webcast of the 10 am eastern hearing. The witnesses include:

- Deputy Attorney General Paul McNulty

- IRS Commissioner Mark Everson

- SEC's Enforcement Director Linda Thomsen

September 5, 2006

Less Than a Week Left!

Last chance to register to attend our blockbuster conference:"Implementing the SEC's New Executive Compensation Disclosures: What You Need to Do Now." Many of you are making the trek to Washington DC – and even more are will be taking in the Conference online (either live on September 11-12th or by archive). Here is check-in information if you will attend in DC - and here is testing information if you plan to watch by video or audio; you definitely should test in advance of the Conference to ensure that you have either Windows Media Player or RealPlayer properly installed.

For those attending online, simply to the home page of and on the days of the Conference and click on the prominent link that will then be available and log-in. Note that course materials will not be available until the first day of the Conference. They will be handed out in DC and posted online, adjacent to the links you will use to access the video/audio.

September E-Minders is Up!

We have posted the latest issue of our monthly e-mail newsletter.

Revisiting Deferred Compensation

In this Special September Supplement, we have compiled a bunch of Mark Borges' recent blogs - from his "Proxy Disclosure Blog" - that have analyzed the SEC's new executive compensation rules to give you a leg up on the type of practical guidance that will be imparted at our upcoming Conference. Below is an example of Mark's latest handiwork:

"A couple weeks ago, I blogged about the the disclosure rules for nonqualified deferred compensation, but, as I'm starting to discover, I really only scratched the surface of the complexities involved in reporting deferral arrangements. Take, for example, a program that permits executive officers to defer all or a portion of their annual cash bonus into deferred stock units. each unit represents a share of stock at the deferral date. Let's also assume that the DSUs are payable to a recipient at retirement (in other words, the arrangement contains no separate vesting condition).

It seems to me that, under Instruction 2 to Item 402(c)(2)(iii) and (iv), a bonus deferral into DSUs would be reportable as a stock award in the Stock Awards column of the Summary Compensation Table. (I reach this conclusion in spite of the literal language of the Instruction which says that it applies to amounts otherwise includable in the Salary or Bonus columns of the SCT. As we know, most performance-based annual incentives will be reportable in the Non-Equity Incentive Plan Compensation column and not the Bonus column of the SCT. I'm assuming that the Instruction can be applied to "bonuses" before their reporting status is determined. If I'm right, this Instruction has the curious effect of shifting an amount that may be otherwise reportable in the Non-Equity Incentive Plan Compensation column to the Stock Awards column. The result seems reasonable to me though, since by electing to defer the payment the executive officer has essentially converted a cash amount into a stock award.)

This deferral arrangement would have several additional reporting consequences as well:

- The DSUs would be reportable in the year of grant in the Grants of Plan-Based Awards Table (presumably, in column (i), the All Other Stock Awards column). The company would also be expected to describe the deferral arrangement as part of the narrative supplement to the Summary Compensation Table and the Grants of Plan-Based Awards Table required by Item 402((e).

- The DSUs would be reportable in the Nonqualified Deferred Compensation Table as nonqualified deferred compensation. They would show up in the year of grant as an executive contribution to a NQDC arrangement in column (b) and the year-end value of the DSUs would be included as part of the executive officer's aggregate account balance in column (f). A footnote to the table would indicate where this amount was reported in the SCT (see the Instruction to Item 402(i)(2)). Again, the narrative discussion to accompany this table would need to describe the deferral arrangement (perhaps a cross-reference to the SCT discussion would be sufficient.)

- In subsequent years, the DSUs would be reportable:

= in the Outstanding Equity Awards at Fiscal Year-End Table (columns (g) and (h)) while outstanding and

= in the Option Exercises and Stock Vested Table in the year the executive officer retired. Even though the award doesn't have vesting conditions, it seems to me that receipt at retirement is the equivalent of vesting for disclosure purposes. Also, if the executive officer has properly elected to defer receipt of the shares again, then a footnote to this table would be necessary to quantify the amount and disclose the terms of the subsequent deferral.

- The DSUs would also continue to be included each year in the Nonqualified Deferred Compensation Table as part of the executive officer's aggregate account balance in column (f) and would be included as part of the footnote to the table quantifying amounts previously disclosed as compensation in the SCT (again, pursuant to the Instruction to Item 402(i)(2)).

= Unless further deferred, presumably the value of the DSUs at the time of retirement would be reported in the Aggregate Withdrawals/Distribution column of the table and would reduce the yearend account balance.

As I read back through this summary, I'm not sure that it's right - or that I've even identified all of the relevant issues. In addition, my example doesn't even get into how to treat any earnings on the DSUs while they were outstanding, which presents an additional set of reporting issues. That analysis will have to wait until tomorrow, or the next day."