February 28, 2007

Posted: March-April Issue of The Corporate Counsel

We have posted the March-April 2007 issue of The Corporate Counsel since it contains practical guidance that pertains to proxy season issues that you may be grappling with. We are making an exception to our subscription license to allow you to forward this issue of The Corporate Counsel to whomever you think it will benefit (and tell them to try a no-risk trial to The Corporate Counsel print newsletter).

SFAS 159: More Fair Value Accounting

A few weeks ago, the FASB issued SFAS 159, which is a new standard that provides companies with the opportunity to report selected financial assets and liabilities at fair value. In other words, SFAS 159 allows companies to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period.

The election, called the “fair value option,” will enable some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently, and it is simpler than using the complex hedge-accounting requirements in Statement 133 to achieve similar results.

Another Internal Controls Delay for Smaller Companies?

According to this article, Senators John Kerry (D-Mass.) and Olympia Snowe (R-Maine) have sent a letter to the SEC and PCAOB seeking another one-year delay in requiring small U.S. public companies to evaluate their internal controls of financial reporting.

Meanwhile, COSO announced that Grant Thornton has been commissioned to develop guidance designed to help organizations monitor the quality of their internal control systems.

February 27, 2007

Google's Option Auction

A few months ago, Google announced a “Transferable Stock Option Program” that would allow employees to auction off vested options, as managed by Morgan Stanley. Last week, Google filed a Form S-3ASR that fleshs out what they intend to do. Now, Google is test driving the auction process using 20 pre-selected employees, with a full roll-out to other employees expected in April.

- Testing Phase - This prospectus supplement explains how Google's “test launch” works. The test-driving employees receive 5 transferable options with different exercise prices, each with a strike price higher than Google’s stock price on the date on which the option is issued. During the testing phase, only one institution is able to bid on the options (in comparison, when the auction is "live," there will has to be at least two competing bids before an auction is deemed complete).

- Full Roll-Out - Here’s an excerpt from the prospectus explaining how the auction likely will work:

"Options will be sold under the TSO program through an auction process in which a designated broker dealer will serve as auction manager. Currently, we have selected Morgan Stanley & Co. Incorporated to act as the auction manager. The auction will be operated through a secure internal online tool (the “TSO system”), which is accessible by participating employees. All participating financial institutions must be able to provide automated bids for all options in the TSO program on a continuous basis, updated approximately every 30 seconds while the TSO market is open.

Employees will use the TSO system to see the current highest bid price offered by the participating financial institutions for their vested options. During regular TSO market hours, the TSO system will continuously update to display the highest current bid price for each eligible option. All participating financial institutions will be required to bid on all of the options eligible for sale as a condition of participation in the TSO program, although the participating financial institutions may place zero dollar bids. A bid will be valid, at the time submitted by the participating financial institution, for at least 1,000 shares underlying options. A bid will remain in force until either the total available size of the bid is purchased at the bid price or a revised bid is submitted by the auction manager or a participating financial institution. Employees will receive the highest bid price at the time their market order is received, which may not be the same as the latest quote provided through the TSO system. No order may exceed 1,000 shares."

President's Working Group: Hedge Fund Regulatory Approach of Market Discipline

Last week, the President's Working Group on Financial Markets issued guidelines on hedge funds that are intended to guide regulators as they address issues associated with private pools of capital, including hedge funds. The President's Working Group is chaired by the Treasury Secretary and composed of the Chairs of the Federal Reserve, SEC and CFTC. As noted in this press release, the guidelines reflect an agreement between the Working Group and the regulators to use an approach of market discipline to protect investors rather than an approach of regulator's doing more inspections or requiring more disclosure.

Wanna Buy a Hedge Fund - Cheap?

Search for "hedge fund" on Ebay. Bidding ends tomorrow and minimum bid is $70,000 (no bids made yet). This hedge fund - located in Switzerland - didn't receive any bids the first time it was offered a couple of weeks ago. If you don't want to buy a hedge fund, but would rather grow your own - you can find plenty of "How To" books on how to form a hedge fund. You too can have your own hedgie!

February 26, 2007

Confusion Reigns: Do NYSE Companies Need Press Releases Announcing Their 10-Ks?

Recently, a number of members have asked about NYSE Rule 203.01, as they wonder why companies listed on the New York Stock Exchange haven't been issuing press releases when they've filed their Form 10-K with the SEC (indicating that the 10-K is available from their website, etc).

As you might recall, last August, the NYSE amended its rules - to facilitate the SEC's e-proxy initiative - that repealed the requirement that listed companies distribute a copy of the annual report containing financial statements to shareholders. As part of the rule changes, the NYSE amended Rule 203.01 to provide that listed companies must (1) post its Form 10-K on or through the company's website, (2) state on its website that paper copies of the audited financial statements are available upon request and free of charge, and (3) simultaneously issue a press release announcing the filing with the SEC of the Form 10-K and stating that the Form 10-K is available on the company's website.

However, the NYSE recently stated in its annual corporate governance letter to listed companies that a listed company will be deemed to satisfy Rule 203.01 if it distributes its audited financial statements in compliance with the SEC's proxy rules (ie. "The Exchange will deem a domestic company that distributes its audited financial statements to shareholders in compliance with SEC proxy rules to be in compliance with the requirements of Section 203.01"). In other words, the NYSE clarified that a press release is not necessary if the company delivers a glossy annual report with financials to shareholders.

So most listed companies will not have to issue press releases when they file their Form 10-Ks. By the way, several companies have issued such a press release: Ryder Systems, Quicksilver, Krispy Kreme Doughnuts; Aspen Insurance Holdings Limited; Deere & Company; Building Materials Holding Corporation; and Pioneer Natural Resources Company. Thanks to Beth Ising of Gibson Dunn for helping to sort this quagmire out...

Last Minute Planning for the Proxy Season

We have posted the transcript for our webcast: "Last Minute Planning for the Proxy Season."

The Promise of Transparency — Corp Fin in 2007

On Friday, Corp Fin Director John White delivered this speech entitled "The Promise of Transparency — Corporation Finance in 2007," which covers a bunch of rulemakings, etc. that are in the Division's "kitty" for the year.

February 23, 2007

By-Law Changes III: Allowing for Uncertificated Shares

My blogs on the Direct Registration System continue to generate a healthy dose of member feedback. Michael Kaplan of Davis Polk notes that there are some states (and countries) that don't allow issuance of uncertificated securities - and some companies actually have charter provisions about this. For these companies, it seems that the exchanges will not require charter amendments - which would require a vote during this year's shareholder meeting so long as the securities are DTC eligible. Michael also points out that IPO issuers should bear this in mind as they already are subject to the DRS eligible requirements of the exchanges.

Some members took the analysis a step further and asked why the exchanges were even bothering sending notices about uncertificated securities at all, as they view street name holders as essentially being in the same position vis a vis the company's shareholder records. In their view, all that should matter is that the company has securities that are DTC eligible.

Highlighting that each state has a law that can be read differently, one member noted that I mentioned the language "each shareholder is entitled to a certificate" as potentially requiring certificates under a common sense reading. He notes that, under Ohio law, there is that specific "entitled to" language in the statute itself, which many companies repeat in their code of regulations (the Ohio equivalent of bylaws), yet language further in the statute specifically provides that, unless provided otherwise in their articles or regulations, a company can have uncertificated shares. So at least under Ohio law, the "entitled to" language shouldn't be read to require certificated shares.

And Jane Whitt Sellers of McGuireWoods points out that Section 13.1-648 of the Virginia Code provides that, unless the articles or bylaws provide otherwise, the board may authorize the issuance of some or all shares without certificates. Jane believes that if you have a statute like Virginia's that operates "subject to" whatever the bylaws or articles say, you must amend any existing provisions in bylaws or articles that require certificates before going to an uncertificated approach. And in our "Direct Registration" Practice Area, we have posted another sample by-law provision for those that may need to amend their by-laws.

An M&A Conversation with Chief Justice Myron Steele

We have posted the transcript from the DealLawyers.com webcast: "An M&A Conversation with Chief Justice Myron Steele."

Chancellor Chandler Enjoins Caremark Special Meeting: Mailing Supplemental Disclosures

Last week, Chancellor Chandler of the Delaware Court of Chancery enjoined a stockholder vote on the pending merger between Caremark and Express Scripts until not earlier than March 9th. The Chancellor issued his decision because of the materiality of supplemental disclosures made by Caremark on February 12th, just 8 days before the stockholder vote scheduled for February 20th. We have posted a copy of the opinion in the DealLawyers.com "M&A Litigation" Portal.

Here is some analysis from Travis Laster of Abrams & Laster: The 8 days provided by Caremark was definitely towards the short end of the spectrum for supplemental disclosures, but it was not unprecedented. The Chancellor instead appears to have been influenced by the combination of the brief time period and the his view of the significance of the disclosures, which included "the revelation that Caremark has considered, on at least three separate occasions, potential transactions with Express Scripts."

The Chancellor juxtaposed this disclosure with the Caremark board's "present protestations that antitrust difficulties loom so large as to prevent the board of directors from even discussing an offer with an admittedly higher dollar value." (Emphasis in original). The Chancellor also noted the materiality of Caremark's disclosure that the CVS merger would extinguish stockholder standing to pursue derivative litigation regarding claims for stock option backdating. This statement comes on the heals of the Chancellor's two recent and quite strong decisions criticizing stock option practices.

At 2 typed pages, the opinion is quite short and worth a first-hand read, particularly for deal counsel and litigators who frequently must consider whether - and when - to make supplemental disclosures.

February 22, 2007

Aflac to Put Executive Compensation to an Advisory Vote in '09

After facing a shareholder proposal on the topic, Aflac has agreed to become the first major company in the US to give shareholders an advisory vote on executive compensation packages beginning in 2009 (the first year the company will have three years of comp data under the SEC's new exec comp rules). Boston Common Asset Management had submitted the proposal last year. Here is a related Washington Post article.

At least 60 companies have shareholder proposals regarding "say-on-pay" for their shareholder meetings this year, up from seven last year. As Pat McGurn of ISS noted during our recent webcast on the proxy season (here is the transcript), these proposals are expected to average a majority level of support from shareholders this year.

Rep. Barney Frank (D-Mass.), Chairman of the House Committee on Financial Services, has been pushing a bill that would allow for advisory votes on executive compensation and he intends to hold a hearing on March 8th regarding strengthening the role of shareholders in setting executive compensation. Advisory shareholder votes on executive compensation are currently required in the United Kingdom, Australia, Sweden and the Netherlands.

More on Delaware Chancery Court’s Backdating Decisions

A few weeks back, I blogged about Delaware Chancellor Chandler two opinions in declining to dismiss complaints alleging backdating of options (in Ryan v. Gifford) and spring-loading of option grants (in Tyson Foods). In this CompensationStandards.com podcast, Megan McIntyre of Grant & Eisenhofer (the firm that is bringing some of these backdating suits) provides some insight into these decisions, including:

- What did Chancellor Chandler hold in these cases?
- What does this mean for companies with backdating issues?
- Do you think these two opinions portend that more executive compensation related lawsuits will be filed in Delaware?

Survey Results: Stock Option Grant Procedures

The NASPP recently wrapped up a very popular survey regarding option grant procedures. Below is an excerpt from the survey results, along with the other questions posed to NASPP members:

1. Who approves option grants to non-executives?

- Board of Directors - 18.1%
- Compensation Committee - 47.6%
- Committee of officers - 6.0%
- CEO - 20.5%
- CFO - 0%
- Other - 7.8%

2. When are grants to new hires (non-executives) approved?

- Once a week (at the same time every week) - 3.6%
- Once a month (at the same time every month) - 23.1%
- Once a quarter (at the same time every quarter) - 10.9%
- After earnings are released - 5.3%
- Before earnings are released - 1.0%
- Only during open window periods - 4.9%
- When the board meets - 13.0%
- When the compensation committee meets - 28.9%
- Other - 16.4%
- No set scheduled - 16.8%

3. When are other (not hire-related) grants to non-executives approved?

4. How have you changed (or are planning to change) your grant procedures in light of the back-dating scandal?

5. If you conducted an investigation of historical grant dates, what was the extent of your investigation?

6. For new-hire grants (where the grant date is not the hire date), what date is vesting based on?

7. Did your external auditors apply additional procedures to validate the income statement impact of option grants?

February 21, 2007

It's Simple Math (Even for University Presidents)

A few days ago, I was quoted in this Indy Star article as saying that "outside directors should devote 200 hours or more a year to adequately do their jobs." For those following governance, this shouldn't be a bombshell as others have thrown around 200 hours as the post-SOX time commitment for quite a while (e.g. ABA's Corporate Directors Handbook).

The article focused on the current President of Purdue University - Dr. Martin Jischke - who serves on three boards. The President is quoted in the article as saying that my 200 hour estimate "sounded high." Probably proving that I take blogging too seriously, I decided to analyze his three directorships:

- Wabash National - According to the company's 2006 proxy statement, the Board meet 5x during 2005 - and Dr. Jischke served on the board's governance and compensation committees, which met 4x and 6x during 2005, respectively.

- Duke Realty - According to the company's 2006 proxy statement, the Board meet 6x during 2005 (including 4 executive sessions for independent directors) - and Dr. Jischke served on the board's compensation committee, which met 4x during 2005.

- Kerr-McGee (which was acquired last August; Dr. Jischke recently joined Vectren's board) - According to the company's 2006 proxy statement, the Board meet 14x during 2005 - and Dr. Jischke served on the board's governance and compensation committees, which met 4x and 4x during 2005, respectively.

So, during 2005, assuming that Dr. Jischke attended all of the board meetings for these three companies (he did attend at least 75% for each company; otherwise there would be proxy disclosure that he hadn't), he attended 25 board meetings and 22 committee meetings (not counting executive sessions, etc.).

Being generous in my calculations, let's assume Dr. Jischke spent 8 hours per board meeting (which includes the time spent at a companion committee meeting, travel time, etc.). Based on this assumption, I figure Dr. Jischke spent 200 hours alone just sitting in board-related meetings (i.e. 25 x 8 hours).

Now, I recognize that one of Dr. Jischke's companies was pondering a merger during 2005 and thus held an unusually large number of meetings - but if you sit on three boards, odds are that one of them will be in crisis mode or considering extraordinary events at any given time. But even if I was to presume "normal times" for each company on which he serves - and cut the number of board meetings for the mergerd company in half - I still come up with Dr. Jischke spending 150 hours for board-related meetings each year.

And in this age of close director scrutiny when it comes to the duty of care, I don't see how a director doesn't spend at least one hour doing board-related reading and research for each hour of meeting. Putting my "final answer" of 150 hours meeting plus 150 hours preparing = 300 hours per year. So I think I have room to argue that my estimate of 200 hours was even conservative if you're doing the job properly.

That's why I maintain - in our "Director Recruitment" Practice Area - that someone working full-time can't handle more than one - and two at the most - board seats...

Last Batch of PLI's "SEC Speaks" Notes: Enforcement

In our "Conference Notes" Practice Area, we have posted some notes from the PLI "SEC Speaks" Enforcement panel.

New NACD-CII Task Force Report

Last month, the NACD and CII jointly issued this Task Force Report that includes a series of governance recommendations.

February 20, 2007

By-Law Changes II: Allowing for Uncertificated Shares

Apparently, my blog on Friday about the Direct Registration System - as it relates to amending by-laws to ensure companies are DRS-eligible - hit a nerve as I received quite a few emails in response. There appears to be a debate regarding whether - and under what circumstances - companies need to amend their bylaws to permit uncertificated shares.

Section 158 of the Delaware General Corporation Law permits shares of stock to be either certificated or uncertificated, in the discretion of a company’s board - the 2005 amendments to Section 158 went further, removing the statutory entitlement for holders of uncertificated shares to request an executed certificate for their shares. Many other states - including both Georgia and New York - followed Delaware’s lead and now permit the issuance of uncertificated shares (Section 14-2-626 of Georgia Business Corporation Code and Section 508 of the New York General Business Law).

The Debate Under Delaware Law

Section 158 permits companies to issue uncertificated shares if authorized by board resolution. However, many companies have by-laws that expressly provide that "all stockholders shall be entitled to receive certificates," or, in even stronger language, that "all shares shall be represented by certificates." Based on a common-sense reading of such bylaw provisions, one could view them as stand-alone requirements that are not overridden by Section 158. In comparison, by-laws that merely provide that "shareholders are entitled
to certificates" are less likely to be viewed as a stand-alone requirement.

What's Happening in Practice (So Far)

It appears that there are different views among (and even within) Delaware law firms as to whether - and under which circumstances - one can interpret Section 158 as authorizing companies to issue uncertificated shares under the various permutations of certificate requirements that exist in the bylaws that exist today. This division is reflected in practice out there so far. For example, Paul Blumenstein of DLA Piper notes that he looked up the bylaws of a dozen or so "name brand" companies included in the list of DRS-eligible companies set forth in the SIA Dematerialization Guide - and in only two of them was he able to find language permitting the board to authorize uncertificated shares.

In describing Watts Water Technologies Form 8-K with their amended bylaws, I stated that they "needed" to amend there bylaws to provide for noncertificated shares to become DRS eligible. I retract that thought in the wake of receiving member input.

For example, Eric Handler of Dewey Ballantine notes that Watts Water's by-laws, prior to being amended, neither prohibited the issuance of noncertificated shares nor required the issuance of certificated shares only. Rather, they simply stated that the holders of stock shall be entitled to a certificate (which language was left in the bylaw even after the amendment). Eric notes that other large company's such as McDonalds and Staples have DRS issues (according to Appendix 4.1 of the SIA Dematerialization Guide) and yet their by-laws contain no language expressly authorizing the issuance of noncertificated shares - in fact, the bylaws of those two companies contain the same "shall be entitled to a certificate" language as that found in Watts Water Technologies.

The Upshot

As Brink Dickerson and Curry Woods of Troutman Sanders have shared with me: Although there's seems some ground to stand on that companies can rely on Section 158 without having to amend their by-laws, the safe thing to do would be to amend the bylaws - for those companies with by-laws that did not anticipate uncertificated share issuances - to provide clarity and transparent compliance with the new SRO rules. This just seems like the smart thing to do even though I understand that some companies prefer not to trigger an 8-K event if it can be avoided. At the end of the day, I don't think companies should feel ashamed to file this type of an 8-K as I don't think it reflects poorly on them.

Courtesy of Brink and Curry, we have posted a red-lined by-law provision that would comply with the new SRO rules in our "Direct Registration" Practice Area.

SEC's Filing Fees Finally Adjusted

After a longer delay than usual (as I blogged about recently), President Bush signed a continuing resolution on Thursday that allows the federal government to operate for the remainder of fiscal year '07 (instead of the regular appropriations bill that Congress normally passes; Congress can't get their act together this go around) - which triggered the filing fees cuts determined by the SEC last year (but which doesn't go into effect until Congress acts).

These are significant cuts as SEC Chairman Cox notes in this press release. Starting today, registration fees are down to $30.70 per million, a 71% drop from the prior filing fee rate of $107.00 per million! The extended delay cost companies some real change this time around...

Help Desk Hijinks

Here is a "cute funny" bit from YouTube about "Introducing the Book."

February 16, 2007

By-Law Changes: Allowing for Uncertificated Shares

Recently, Nasdaq sent out a notice reminding listed companies that they must be using a transfer agent and have governing documents that enable them to participate in the Direct Registration Program, even if they don't intend to actually participate in the Program. To be DRS-eligible, a company must allow for investors to hold their securities in book entry-only form (aka "uncertificated shares").

All the exchanges adopted similar rules regarding the Direct Registration Program last summer, with a long phase-in period to enable companies to find new transfer agents or make changes to their by-laws if they needed to do so (eg. see the NYSE's approval at page 3 and the SIA dematerialization guide on page 26).

There is a standard section in most by-laws about certificates that addresses form and it’s possible that some companies have a section that doesn’t provide for uncertificated securities. In this case, a by-law amendment would be in order (and I guess it’s also possible some by-laws that don’t permit uncertificated certificates and would require shareholder approval for such an amendment, but most by-laws have a provisions that permit the board to amend the by-laws).

However, few companies have needed to make by-law changes, since many companies already allow for uncertificated shares through ESOPs or DRIP programs, etc. Here is an example of one company that needed to make a by-law amendment recently to comply with the new DRS-eligible requirement: Watts Water Technologies filed a Form 8-K under Item 5.03.

IT Forensic Audits

In this podcast, Don Cox of Cyber-Tech Forensics explains how to protect a company’s assets, including:

- What should companies do to protect themselves against employees misusing computers?
- If someone deletes a document, is it really gone?
- What is involved with an IT computer audit?

Blog Switcharoo

Yes, blogs can live on even when their founders move on...meaning this blog may very well live well past my own lifetime and my mortality fades. Anyways, Bruce Carton has left ISS to join claims administrator Garden City Group and just started up the new "Best in Class" Blog.

But even without Bruce, ISS has put the defibrillator paddles on his old "Securities Litigation Watch" Blog and revive it by hiring Adam Savett, who in turn is shopping his old "Lies, Damn Lies and Forward-Looking Statements" Blog if you want to assume a blogging platform to express your pent-up rages and rants...

[Kidnapping redux, don't let it happen to you! Another round of airplanes sitting on the ground for 10 hours with no food, etc. Sign the petition today and support the "Stranded Passengers Bill of Rights"!]

February 15, 2007

Survey Results: Related-Party Transaction Procedures and Policies

With new Item 404(b) requiring that the proxy statement describe a company's "policies and procedures for the review, approval, or ratification of any transaction required to be reported" by Item 404(a), our latest survey on these policies and procedures was popular. Below are the results from that survey (and please participate in our new survey on director resignations!):

1. Indicate which of the following you have in place (or are proposing) to implement for approval of related party transactions:

- A stand-alone policy statement regarding related person transactions - 42.5%
- Approval procedures regarding related person transactions covered in one or more board committee charters - 20.4%
- Approval procedures regarding related person transactions covered in our Code of Conduct - 19.5%
- Approval procedures regarding related person transactions covered in our corporate governance guidelines - 14.2%
- Approval procedures not included as part of any of the documents noted above - 10.6%

2. Indicate what process do you use (or are proposing) to use for approval of related party transactions:

- Pre-approval or pre-clearance of related person transactions - 61.8%
- Monthly review of related person transactions after-the-fact - 0%
- Quarterly review of related person transactions after-the-fact - 5.6%
- Annual review of related person transactions after-the-fact - 12.4%
- Periodic review of related person transactions, with timing tied to board/board committee meetings after-the-fact - 14.6%
- Other - 5.6%

3. If someone is responsible for reviewing related person transactions, which of the following will undertake that task:

- Full board - 12.2%
- Board committee - 76.7%
- Board committee chair - 8.9%
- General counsel - 35.6%
- Securities counsel - 23.3%
- Other type of inhouse lawyer - 1.1%
- Head of human resources - 2.2%
- Chief compliance officer - 7.8%
- CFO or controller - 11.1%
- Other - 2.2%

SAB 108 Disclosure Trends

As we were reminded by Corp Fin Chief Accountant Carol Stacey during "SEC Speaks," the one-time relief granted in connection with restatements under SAB 108 is not a general amnesty for prior period restatements. The Staff expects companies to restate prior period financial statements for material errors if management failed previously to appropriately apply either the iron curtain or rollover method (whichever method it had previously selected to use) including the proper consideration of all relevant quantitative and qualitative factors.

In our "Restatements" Practice Area, we have posted a new 8-page Glass Lewis research report which analyzes a bunch of the disclosures made under SAB 108 so far...

SEC Urges Higher Pleading Standard

Recently, the SEC and the DOJ jointly filed an amicus curie brief in the Tellabs case pending on writ of certiorari before the US Supreme Court, in which the agencies urge the Court to adopt a restrictive test that plaintiffs must satisfy in order to meet the heightened pleading standard under the Private Securities Litigation Reform Act. Kevin LeCroix does a great job exploring what this means in his "D&O Diary" Blog - and here is a related article from Business Week and an article from NY Times.

February 14, 2007

More Notes from PLI's "SEC Speaks" Conference

In our "Conference Notes" Practice Area, we have posted notes from the Accounting panel and workshop from the PLI "SEC Speaks" Conference. No big surprise for those avidly following this blog, SEC Chief Accountant Conrad Hewitt spoke about how he wants to add liability limits for audit firms to AS #5 at the Conference.

By the way, following up on the global accounting "roadmap" announced back in the spring of 2005, the SEC has announced it will hold a Roundtable on this topic on March 6th.

The SEC’s 8-K Rule Changes: How They Impact You

Join SEC Staffer David Lynn, Alan Dye and Ron Mueller tomorrow for the CompensationStandards.com webcast: "The SEC’s 8-K Rule Changes: How They Impact You." This is Part III of our Web Conference regarding the SEC’s new executive compensation rules.

As an aside, following up on my blog yesterday about the ability to file preliminary proxy statements without exec comp disclosures, Corp Fin tweaked Interp 1.04 of the newly minted Item 402 FAQs (ie. 1.04 relating to FAQs of "General Applicability"; the numbering system for the new interps can be a little confusing) yesterday to reflect what was said at SEC Speaks. Of course, companies can choose to file preliminary proxy statements with the exec comp disclosure as Baker Hughes recently did...

Backdated Options: IRS' New "Tax Reprieve" Program

Last week, the IRS launched a new initiative for rank and file employees that unwittingly received backdated stock options. Here is the IRS announcement - and here is the related IRS press release.

Under the voluntary initiative, companies are allowed to pay the 20% penalty plus interest tax owed by employees - but they are not allowed to pay for the taxes on backdated options for Section 16 officers and other insiders and directors. This relief is available only for options that vested in 2005 and 2006 and were exercised last year - and the amounts paid to cover these additional taxes will be treated as compensation income for those employees in 2007 tax year.

For companies that plan to participate in the program, they must notify the IRS by February 28th and notify the affected employees by March 15. If they do decide to participate, companies will be expected to provide detailed information about the backdated options, including the tax calculation sufficient to allow the IRS to determine that the Treasury received all taxes owed.

Given the February 28th deadline, this 20-minute podcast on "IRS’ Voluntary Initiative for Backdated Options" on CompensationStandards.com with "Handy" Hevener of Baker & McKenzie is timely and should be very useful for those companies with backdating issues. Handy is one of the more experienced practitioners out there when it comes to dealing with the IRS. The podcast is a big audio file so give it a minute to download...

February 13, 2007

Notes from PLI's "SEC Speaks" Conference

In our "Conference Notes" Practice Area, we have posted notes from Corp Fin's panel and workshop from the popular PLI "SEC Speaks" Conference, which was held over the weekend.

Corp Fin's Position on Preliminary Proxy Statements and Exec Comp Disclosures

At the PLI's "SEC Speaks" conference, Corp Fin Chief Counsel David Lynn provided some guidance about whether the Division intends to review executive compensation disclosure in preliminary proxy statements this year. For this proxy season, Corp Fin doesn't intend to review preliminary proxy statements just because they have executive compensation disclosure under the new rules. In other words, companies may file their preliminary proxy statements that omit executive compensation without fear that the filing is so deficient that the 10-day clock doesn’t start to run, so long as the omitted disclosure isn’t the reason for the preliminary filing and the executive compensation disclosure isn’t otherwise made public. Of course, the executive compensation disclosure is required to be included when definitive proxy materials are filed.

This position isn't much of a surprise given that IBM filed a preliminary proxy statement without executive compensation disclosure a few weeks ago - and General Electric filed a preliminary proxy statement without such disclosure last week...

NYSE Issues Annual Corporate Governance Letters

Last month, the NYSE issued its annual corporate governance letters to listed companies. The letters provide an overview of the things that listed companies should keep in mind when preparing for their annual meetings and Form 10-Ks or Form 20-Fs; there are two versions of the letter: the US issuer letter and the non-U.S. issuer letter.

February 12, 2007

Corp Fin Rejiggers Its Home Page

On Friday, Corp Fin unveiled its new home page, with the content more organized along the lines of various subject matters. Looks good, but no new substance.

My favorite is a new catch-all called "Frequently Requested Materials," which houses two ancient items: one is 45 years old and the other is nearly 20. A more accurate label is "Old Stuff You May Never Have Heard About (But Still Has Some Value)"...

More Proxy Filings Under the New Executive Compensation Rules

The new batch of proxy filings are starting to flow, and Mark Borges blogged Friday about a handful of them. Here are a few others that aren't noted in Mark's blog that Bob Dow of Arnall Golden Gregory sent me:

- Merck

- Genuine Parts

- Taragon Corp. (merger proxy - 11 NEOs!)

House Tax Measure to Omit Senate-Approved Limit on Deferred Pay

Following up on the Senate's passage of a tax package that would include limits on nonqualified deferred compensation, as noted in the following excerpt from a Bloomberg article by Ryan Donmoyer and Vineeta Anand: "the U.S. House Ways and Means Committee will draft a tax cut for small businesses of as much as $1 billion that omits a Senate-passed penalty on employees who receive tax-deferred compensation in excess of $1 million, a congressional aide said.

The aide, who is involved in drafting the House legislation, confirmed that it wouldn't contain the provision, a key element of an $8.3 billion measure passed Feb. 1 by the Senate. The House panel will debate its tax measure Feb. 12.

The omission is a victory for groups that opposed the Senate provision such as the Financial Services Roundtable and Financial Executives International. The deferred-pay rule was one of about a dozen revenue-raising measures designed to offset the cost of the tax cuts, which are included in legislation to increase the minimum wage for the first time in a decade. 'This is a huge relief,'' said Brick Susko, a partner in the New York law firm of Cleary Gottlieb Steen & Hamilton, who advises corporations on executive pay. "The Senate bill was misguided and not well thought out.''

The deferred-compensation provision may become a sticking point later this month when House and Senate lawmakers meet to reconcile differences between the two tax measures, possibly delaying passage of the broader minimum-wage legislation." Here is a related Forbes' article.

February 9, 2007

Last Minute Planning for the Proxy Season

Tune in Monday for our webcast - "Last Minute Planning for the Proxy Season" - to hear Cathy Dixon of Weil Gotshal, Amy Goodman of Gibson Dunn, Ellen Friedenberg and Gloria Nusbacher of Hughes Hubbard, John Siemann of Georgeson Shareholder, and Bill Tolbert of Jenner & Block discuss the latest guidance to help you feel more comfortable that you have not missed anything for this year’s proxy season, including the SEC's new related-party transaction rules, hot areas for MD&A and much more...

More D&O Questionnaires Posted

We have posted two new D&O Questionnaires in our "D&O Questionnaires" Practice Area, one for Nasdaq companies and one for NYSE companies. They come complete with a "crib sheet" for determining director independence.

ABA's Letter to SEC Chairman: Seeks Revised Cooperation Guidelines

On Monday, the President of the ABA wrote to SEC Chairman Cox urging the SEC to revise its cooperation guidelines to bar the SEC staff from demanding that companies waive the privilege. We have posted a copy of the letter in our "Attorney-Client Privilege" Practice Area.

By the way, former SEC General Counsel David Becker, now at Cleary Gottlieb, has just joined the panel for our March 8th webcast: "After McNulty: Changes in the Attorney-Client Privilege and Investigations."

February 8, 2007

The SEC's '08 Budget Request

Earlier this week, the SEC released its budget request for 2008, as well as it's Congressional justification for the request. As is the case for most federal agencies not dealing with homeland security or the military, the SEC's budget would remain flat in terms of constant dollars as it increases to $906 million from $878 million, as noted in this article.

More importantly, the headcount at the SEC would once again be cut for almost all substantive functions, including Corp Fin and Enforcement - although the budget assumes the SEC will finish fiscal 2008 with 3,567 full-time employees, the same number the agency is expected to have at the end of the current fiscal year. With accountants making up the bulk of Corp Fin these days, the number of lawyers in the Division today is quite low compared to the good ole days when some of us roamed her halls...

SEC Filing Fees: Any Update?

A member recently asking if Congress ever approved the SEC's budget, which in turn would lower the SEC's filing fees. Although a delay from approving the SEC's budget - whose fiscal year ends September 30th - is an annual rite of passage, this year's ongoing delay might be a record! Four months and counting (although there finally has some movement on approving the Federal budget this week). Here is the SEC's most recent resolution that extended temporary funding through February 15th. So, filing fees remain at last year's rates for the time being...

ISS' Board Pay Study

Last week, ISS issued its 2007 Board Practices, Board Pay Study (here is an interview with Carol Bowie on the Study). Among the findings reported are:

- Director compensation rose 12% to $160,000/yr., mostly due to higher value of equities.

- Stock option use continued to decline, down to 54% of directors from 58% in 2005 and 66% in 2004. Restricted stock use increased to 51%, compared to 44% in 2005.

- Annual retainers remain the most popular, with 95% of boards getting them.

- Increased disclosure of stock ownership requirements; 37% in 2006 v 28% in 2005. 56% of S&P 500 now have such requirements, typically 5 times board retainer.

- Diversity hasn't changed from 2005 to 2006. Still 12% of directorships held by women; 10% by minorities.

February 7, 2007

Stock Options: Chancellor Chandler Delivers Backdating and Springloading Decisions

Yesterday, Delaware Chancellor Chandler delivered two opinions in declining to dismiss complaints alleging backdating of options (in Ryan v. Gifford) and spring-loading of option grants (in Tyson Foods). We have posted copies of these opinions in our "Backdated Options/Grant Policies" Practice Area.

Here is some analysis of these opinions courtesy of Potter Anderson & Corroon:

The backdating case is Ryan v. Gifford. The Chancellor declined to stay the case in favor of earlier filed California federal actions, citing, among other things, the interest of Delaware courts in deciding novel and important issues of Delaware law. Not surprisingly, the Chancellor refused to dismiss the complaint, saying very strongly that intentional backdating constituted bad faith and that the board made fraudulent disclosures to shareholders by putting out proxy statements and other documents saying that the grants complied with the plan when in fact they did not, because the plan required the options to be priced at fair market value on the date of grant. The Chancellor did dismiss the complaint as it related to backdating that allegedly occurred before the plaintiff acquired his stock in a stock-for-stock merger.

The Tyson Foods opinion deals with a complaint challenging many aspects of compensation and alleged self-dealing. Among the allegations were several instances of "spring-loading"; that is, issuing options ahead of news the directors allegedly knew would move the stock higher. In refusing to dismiss the spring-loading complaint against the members of the compensation committee that granted the options, the Chancellor found it "difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at 'market rate' and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more."

The Chancellor went on to clarify that it was important to his decision that the plan in question was approved by shareholders and that to survive a motion to dismiss the plaintiff must plead that the directors knew they had inside information and intended to "circumvent otherwise valid shareholder-approved restrictions upon the exercise price of the options."

Lawsuits Against Audit Firms

Against the backdrop of the push for capping auditor liability, here is an interesting paper on large claims filed against the auditing firms. As the paper notes, the incidences of such claims has declined - and these claims may be dismissed, dropped or settled for substantially less than the amounts claimed. The paper also discusses trends in the litigation. The paper is posted in our "Securities Litigation" Practice Area - which has grown so large that it's almost a website unto itself - under "Studies Re: Securities Litigation Trends."

Forecast for 2007 Proxy Season and Strategies to Consider

We have posted a transcript of the popular webcast: "Forecast for 2007 Proxy Season and Strategies to Consider."

February 6, 2007

More on the SEC Speaks on Problematic PIPEs

According to this Forbes article, the Mob is doing PIPE deals! Anways, following up on last week's blog on the SEC Staff's guidance on resales of securities underlying convertible notes, Andy Thorpe of Morrison & Foerster fleshes out what Marty Dunn and Shelley Parratt said at the Northwestern conference:

Corp Fin's goal is to elicit clear disclosure in the registration statement so that purchasers in the secondary sale understand the background of the convertible note transaction and its effect on the company and on the shareholders. Regarding the 10-12 items it seeks, the Staff may request the following types of disclosure:

- The determination of the number of shares to register
- The dollar value of the securities registered for resale
- Amount of all fees and all payments made to the selling securityholder, its affiliates, or any other party such as a placement agent in connection with the transaction
- Amount of all proceeds to the issuer and amounts deducted from the proceeds
- Possible profits from the conversion of the notes (including profits as a result of a market discount built into the conversion formula)
- Prior transactions among the issuer and the selling securityholders
- Relationships between the selling securityholders and relationships between the selling securityholders and the issuer
- Issuer's intention or ability to make payments under the terms of the notes
- The dilutive effect of the conversion
- The identities of natural persons with voting or investment power over the securities registered on behalf of the selling securityholders
- Short positions of the selling securityholders known to the issuer

Marty and Shelley also stated that transactions are more likely to withstand scrutiny as a valid secondary transaction if there are a large number of selling securityholders that are not affiliated with each other or the issuer - and where no single securityholder is selling a large number of securities.

Regarding the 60-day/six-month guidance, Marty indicated that the test is to be determined on a per selling shareholder (and its affiliates) basis. This means that a company can file a resale registration statement for a subsequent PIPE transaction before 60-day or six-month period if it contains new selling securityholders that are unaffiliated with those on the previous registration statement.

By the way,we just announced a new webcast - "The Latest on PIPEs II" - during which the panel will discuss the lay of the land for PIPEs now.

Analysis: Congress’ Proposed Legislation on Deferred Compensation

On February 1st, the Senate overwhelmingly approved the "The Small Business and Work Opportunity Act of 2007," which would amend the Internal Revenue Code that would significantly curtail any employee's ability to defer compensation in excess of $1 million per year under Section 409A. In addition, the Act would broaden the definition of "covered employee" under Section 162(m) so as to apply the $1 million deduction limitation to payments made to a "covered employee" even after such individual ceases to serve in that capacity. In this CompensationStandards.com podcast, Art Meyers of Seyfarth Shaw provides some insight into this proposed legislation, including:

- What's in the Senate's bill regarding deferred compensation?
- What would be the implications if the bill became law with no changes?
- What might happen in the Senate-House conferencing to change the bill?

Implementing Scrutiny-Proof Grant Procedures

For NASPP members, catch the webcast tomorrow - "Implementing Scrutiny-Proof Grant Procedures" - to hear Howard Dicker of Weil Gotshal, Sharon Hendricks of Heller Ehrman, Bill Dunn of PricewaterhouseCoopers and JD Higginbotham of Monolithic Power Systems discuss grant practices that all companies should consider implementing, as well as important control to prevent errors or even fraud.

February 5, 2007

Our Proxy Season Checklists

Like every year, don't forget that we post a number of checklists from law firms, along with our own, in the "Proxy Season" Practice Area.

Don't forget to tune in next Monday for our webcast - "Last Minute Planning for the Proxy Season" - to hear Cathy Dixon of Weil Gotshal & Manges, Amy Goodman of Gibson Dunn & Crutcher, John Siemann the Managing Director of Georgeson Shareholder, and Bill Tolbert of Jenner & Block discuss the latest guidance to help you feel more comfortable that you have not missed anything for this year’s proxy season, including the SEC's new related-party transaction rules.

SEC Continues to Get Slapped Around

On Thursday, a Senate committee released its interim investigation findings on the SEC's Enforcement Division's handling of an investigation of hedge fund, Pequot Capital Management. You may recall that two Senate committees began grilling the SEC last summer after a former Staffer, Gary Aguirre, said he was fired for complaining that the Pequot investigation had been derailed because of political considerations. Here is an excerpt from a Friday NY Times' article:

“At best, the picture shows extraordinarily lax enforcement by the S.E.C.,” Senate investigators concluded. “At worse, the picture is colored with overtones of a possible cover-up.” The report strongly suggests that Mr. Aguirre was fired in retaliation for his criticism. At the same time, Senate investigators said they were “deeply troubled” by the failure of the S.E.C.’s inspector general, Walter J. Stachnik, to investigate Mr. Aguirre’s accusations properly.

[As an aside, I can't help but remember the good old days of prank of folks calling a fellow Staffer and pretending to be the SEC's inspector general. Those were some real gems.]

Corp Fin Adds An Asset-Backed Interp

On Friday, Corp Fin added #17.06 to its Regulation AB telephone interps, making a lot of ABS practitioners very happy. The new interp provides guidance on when a vendor hired by a servicer should not be viewed as a party participating in the servicing function (and thus will not need to provide separate assessment and attestation reports for inclusion in a 10-K).

February 2, 2007

NASD Changes Filing Fees for WKSI Filings

Last week, the NASD filed a rule change with the SEC to amend its filing fees for WKSIs under Rule 2710, with a maximum fee of $75,500 for each such filing. The NASD rule was effective upon filingbut with an implementation date of February 26th. The maximum filing fee has been $75,500 for a while now.

The problem regarding filing fees for any shelf offering is that, even though the amount registered on the shelf would justify payment of the full fee, the NASD has been willing to allow the first broker-dealer that takes down a tranche need only pay a filing fee on that tranche, and then each following broker-dealer pays more fees - up to the $75,500 maximum per registration statement.

The NASD has followed this practice ever since the shelf rules allowed undesignated shelfs - and issuers and broker-dealers argued that the mere fact that the issuer had registered $500 million of securities, for example, did not mean the NASD should collect a fee on that amount, since the issuer may only sell a small amount from the shelf.

Thus, NASD was willing to base its fees for shelf offerings on the amounts sold off the shelf rather than the amount registered with the SEC. It appears that for WKSI filings, the NASD staff concluded that the practice was just too cumbersome and could hold up a no-objections letter. Since the n-o letter isn't issued unless the fee is paid there is too little time in today's filings for the underwriters to wait for the filing fee to be sent, received, recorded at the NASD.

For those negotiating agreements related to registering securities, the practice point is that you should ensure that the issuer is obligated to pay all NASD filing fees or otherwise clearly state what is expected up front - otherwise the broker-dealers, selling shareholders, and issuer will end up arguing about who is responsible for the full NASD filing fee when it is due upon filing of a shelf. I hear that there have been instances of selling shareholders doing a shelf takedown and discovering that the NASD wants the fee for the entire shelf covering all primary and secondary shares...

SEC Clears Market-Based Option Valuation

A few months ago, I conducted this podcast about Zions Bancorp and its use of market value for auctioning employee stock options. Last week, the Office of Chief Accountant issued this letter to the company approving the market-based valuation approach after the company tweaks what it has been doing. This WSJ article provides more details - and look for more information on this topic on an upcoming NASPP program.

In his "AAO Weblog," Jack Ciesielski weighs in on whether ESOARs will fly in the marketplace.

Our February Eminders is Posted!

We have posted the February issue of our monthly email newsletter.

February 1, 2007

Senate Approves "The Small Business and Work Opportunity Act of 2007"

Today, the Senate overwhelmingly approved the "The Small Business and Work Opportunity Act of 2007," in which I think Sections 226 deals with 409A and 226 deals with Section 162(m). It's hard to parse this bill, which is S.349 if you plug it into this Bill Locator.

Yesterday's WSJ included this negative opinion of the bill; I agree that Congress should not try to regulate executive compensation through the tax code as boards can evade the law with tax gross-ups and other employees may be unfairly penalized. Of course, Congress shouldn't be blamed for excessive compensation as the op-ed intimates; that blame should fall on the shoulders of directors.

The Senate and the House now have to reconcile this Senate bill with a much simpler House version. Here are more documents related to the Act:

- Staff Summary
- Revised Joint Committee Summary
- Revised Joint Commitee Revenue Estimate

Here We Go Again: Caremark's Severance for Those Not Terminated

I easily could blog on executive compensation every day. I really don't want to and I don't think you want me to either. But it's hard not to, particularly with boards continuing to prove that they are either aloof or indifferent as to what their shareholders want. Take Caremark as the latest example. As yesterday's Washington Post column from Steve Pearlstein outlines (as well as this press release), many of Caremark's executives will receive hefty change-of-control payments when CVS completes its acquisition of Caremark - even though those executives also will receive handsome employment agreements with the merged company! No pay practice infuriates shareholders more than this one.

A lawsuit related to this merger has been filed in Delaware's Chancery Court, with Chancellor Chandler getting another whack at these types of egregious compensatory arrangements (you may recall that Chancellor Chandler is the one who sent the Disney case to trial). With boards like Caremark, I don't blame Congress for "getting into the game" and trying to rein in existing practices, even though the end result will likely cause unintended consequences...

President Bush on Rethinking Pay Practices

And putting the nail in the coffin that CEO pay truly is a hot political topic, President Bush called on Wall Street to rethink pay practices in a speech yesterday. Here is an excerpt from today's related NY Times article:

"White House officials said that Mr. Bush decided to raise the issue out of his own sense of outrage over deals in which executives have left flagging or failed companies with huge compensation packages, as workers and lower-level executives have been left far behind.

But officials said there was also an economic concern: that distrust of corporate executives over their pay had the potential to scare individual investors out of the market."

Yes, Many CEOs of US Public Companies Really Are Overpaid…

This recent op-ed from the Washington Post is probably the most misguided one I have seen yet on executive pay. As I often do, I dutifully posted a comment with my views but what struck me the most was the outpouring of anger from others in the comment section. Executive pay likely will be an issue to contend with in upcoming elections, as reflected already in the recent Congressional activity in this area.

Harvard Law School has a new corporate governance blog and I will be posting some rants now and then on it. Below is a response to Professor Kaplan’s comments on the recent New York Times article about private equity funds:

While it’s true that some private equity funds are luring sitting CEOs with higher pay, I think it’s far from a widespread trend. There are about 14,000 sitting CEOs today; maybe a dozen have been lured away, if that.

And since the terms of the pay arrangements given to privately held CEOs are not publicly available, we don’t really know what those arrangements consist of. Will private owners continue to pay for poor corporate performance? Will they pay out a huge severance package--or any severance--to a fired CEO? I doubt that private owners would follow the lead of so many public companies in these criticized areas.

But more importantly, we must remember the difference between CEOs of private companies and public companies. Private owners are free to pay someone as much as they want; it’s their money. In the public company context, the board of directors have their fiduciary duties to consider when paying someone and appropriate processes must be used. Unfortunately, the processes followed today often are broken - and have been for some time.

In this "Open Letter to All Journalists,” I try to explain how board processes for setting CEO pay levels can be improved. For example, can you believe that boards didn’t consider the total amount already committed to be paid to a CEO before layering on more compensation as recently as three years ago? On CompensationStandards.com, we coined the term “tally sheet” in 2004 when we started pushing boards to begin consulting spreadsheets before adding/changing an element of a CEO’s pay package.

I continue to get too many confidential emails from board advisors describing naive - and uninformed - acts by directors to buy into the notion that CEOs are underpaid. Many processes continue to be broken and even when the processes are repaired, boards have not yet addressed the excesses created by more than a decade of bad practices. This is all common sense: if we pay a highly paid CEO even more, will shareholders get better performance? I think the millions most CEOs already receive should be incentive enough.