April 30, 2007

Comverse First to Adopt Shareholder Access Bylaw

Scandal-ridden Comverse (you might recall the former CEO is on the lam in Africa) adopted a shareholder access bylaw last week in an attempt to defuse shareholder anger. See Article IV, Section 3(b) of Comverse's restated bylaws.

Below is an excerpt from ISS' "Corporate Governance" Blog: In a ground-breaking development, Comverse Technology has adopted a proxy access bylaw, a move that may encourage other companies to consider creating mechanisms to allow investors to nominate directors to appear on corporate ballots.

Comverse is the first company to adopt a proxy access provision since a federal appeals court ruled last September that the Securities and Exchange Commission improperly allowed American International Group to omit an access proposal filed by the American Federation of State, County, and Municipal Employees (AFSCME) in 2005. Since that ruling, investor advocates have filed two access proposals and urged the SEC to allow shareholders to pursue the issue at individual companies.

“The action at Comverse is a clear breakthrough as the first company that has amended their bylaws to establish a process for shareholders to nominate directors on the company proxy card,” Richard Ferlauto, director of pension benefit policy at AFSCME, told Governance Weekly.

Also this week, the SEC scheduled three roundtables on the proxy voting process for May 7, May 24, and May 25. Chairman Christopher Cox has said that the SEC will complete work on an access rule before the start of the 2008 proxy season.

Comverse announced the proxy access bylaw this week as part of a series of governance changes as the New York-based company tries to recover from a stock-option grant scandal that led to criminal charges against three former executives. The voice-mail technology firm also is facing a proxy challenge from Oliver Press Partners, which is seeking to call a special meeting and to elect two board nominees.

The new Comverse bylaw is more restrictive than the access provisions that have been proposed by AFSCME and state pension funds this season. Under Comverse's bylaw, an investor that owns a 5 percent stake for at least two years may nominate one director to appear on the company’s proxy statement. (These ownership and time requirements are consistent with a 2003 draft SEC rule that the agency later abandoned amid corporate opposition.) The Comverse bylaw also would bar an investor from making nominations for four years if its nominee fails to receive at least 25 percent support.

By contrast, a bylaw proposed by AFSCME and three state pension funds at Hewlett-Packard called for allowing two nominations by investors who collectively own a 3 percent stake for at least two years. That binding proposal received 43 percent support in March, despite the opposition of HP management. The California Public Employees’ Retirement System has filed a similar, but non-binding, proposal that will appear on the ballot at UnitedHealth Group on May 29.

It remains to be seen whether other companies will follow Comverse’s example. Last year, investors hailed Intel’s decision to adopt a majority voting bylaw, which since has been copied by dozens of major firms. Likewise, proponents of annual advisory votes on executive pay express hope that other firms will follow the lead of Aflac, which plans to hold such a vote in 2009.

Ferlauto said Comverse’s new bylaw and the vote at HP “indicate that proxy access will be part of the corporate governance landscape going forward and puts increased pressure on the SEC to set some standards for an approach for shareholder nominations.”

Comverse is believed to be the first U.S. company to adopt a proxy access bylaw. In 2003, California-based Apria Healthcare adopted a policy to allow shareholders to submit names for inclusion on its ballot, but the company's board can reject those candidates, according to Bloomberg News. While other firms, such as HP, allow shareholders to suggest nominees, investors have no recourse if management ignores those suggestions but to wage a costly proxy solicitation.

Shareholder Voting: Economic Perspectives - and the Power of Proxy Advisors

Last week, SEC Chief Economist Chester Spatt delivered this speech on shareholder voting and corporate governance. Here is a noteworthy excerpt:

"Some of my SEC economist colleagues and I are pursuing an academic style study of the role of proxy advisors in proxy "contests." We focus upon contests as compared to more routine proxy votes because there is relatively more uncertainly about the outcome and therefore, relatively greater potential impact and effects associated with the recommendations.

In our sample of contests with publicly-announced advisory vote recommendations, we find evidence that recommendations lead to price responses and in particular that the market tends to assess recommendations for the dissident as relatively positive news. That there appears to be a substantial valuation impact in the marketplace at the announcement of a contest recommendation also suggests that the recommendations reflect more than just previously public information or conflicts.

In addition, our empirical evidence shows that the recommendations are good predictors of contest outcomes; for example, a recommendation that supports the dissident is a good predictor that the dissident will prevail. The findings are associated with both "influence" and "prediction" hypotheses on the role of the advisor-that the recommendation either influences or helps investors to predict the outcome, or both."

Updated List of Foreign Private Issuers

On Friday, the SEC posted its 2006 list of non-US issuers.

On a somewhat related note, as reflected in this press release, global regulators are working in tandem more than ever before. One of my first speaking gigs, well over a decade ago when I was at the SEC, was at an IOSCO function. I found it's pretty hard to get a message across when the audience comes from such a wide variety of backgrounds (different legal frameworks - and don't forget that there are language barriers to boot) - so that these global regulatory meetings tend to stay at a pretty high level.

April 27, 2007

SEC Announces Next Steps Towards International Financial Reporting Standards

On Tuesday, the SEC announced the "next steps" it will take along its path towards the “IFRS Roadmap.” The next steps include a concept release that will pose questions about whether US based companies should be permitted a choice between filing in IFRS or US GAAP - as well as a rule proposal to give non-US companies that choice. Both are expected this summer - with comments due in the fall - as the SEC towards its goal to eliminate reconcilation by 2009.

In addition, the SEC recently announced a protocol for implementing the Work Plan between the SEC and the Committee of European Securities Regulators to share information on application of IFRS by issuers listed in the UK and the US. Things here are moving along towards some an end game that is a huge development...

US Senate: Attempt to Railroad Section 404 Reform Fails

On Wednesday, the US Senate voted, 62-35, to table an amendment of the COMPETE Act offered by Sens. DeMint (R-SC) and Martinez (R-FL) that would have impacted Section 404 of Sarbanes-Oxley. The Compete Act - S. 761 - is a bill addressing math and science education and US competitiveness in that area. The DeMint amendment would have made Section 404 compliance optional for companies with: market cap of less than $700 million, or revenue of less than $125 million, or fewer than 1500 shareholders. If this threshold ever became law, it would exempt 70% of the public companies out there from internal controls reporting.

As a counter to the DeMint amendment, Sens. Dodd (D-CT), Shelby (R-AL)
and Reed (D-RI) offered a "Sense of the Senate," which is a symbolic Senate statement expressing support for efforts already under way by the SEC and PCAOB to fine-tune Section 404. This symbolic statement received a vote of 97-0 in support.

SEC Commissioner Atkins Rants on Excessive Regulation

Earlier this week, SEC Commissioner Paul Atkins delivered this speech entitled "Is Excessive Regulation and Litigation Eroding U.S. Financial Competitiveness?" Not atypical for those that have closely followed Commissioner Atkins over the years.

Here is an excerpt from Jack Ciesielski's "AAO Weblog" pertaining to the Commissioner's attack on the Staff's interpretive process:

"Commissioner Atkins argues that Staff Accounting Bulletins (SABs) are subject to review under the Administrative Procedure Act - something that would dramatically impede the SEC's ability to widely disseminate their positions on application of accounting problems they've observed in practice. SABs are the result of observations by SEC reviewers and the Office of the Chief Accountant; sometimes they deal with new standards (see SAB 107); sometimes they deal with problems observed in practice over many years (see SAB 108). They are always the result of observed reporting issues, and they are issued in order to keep all registrants on the same page, accounting-wise. They're not loved by companies, because they can force them to change things. Putting them into an Administrative Procedure Act would slow down their issuance even further. Atkins' take:

'I have no opposition to our staff's attempting to explain or apply an SEC rule or accounting standard to a current situation. Staff guidance can provide very helpful advice to all participants in the capital markets. Such guidance can be issued faster and is particularly appropriate to situations with a unique set of facts and circumstances.

But sometimes staff pronouncements can fundamentally change existing market practices. For example, Staff Accounting Bulletin No. 101 (SAB 101) addressed in depth various aspects of revenue recognition. The final guidance required registrants to reflect the adoption of SAB 101 as a change in accounting principle, similar to the adoption of a new FASB standard. With all of the attributes of rulemaking from the perspective of affecting the marketplace, it is difficult to argue that such pronouncements are not rules and should not be subject to the requirements of the Administrative Procedure Act.'

SAB 101 was nothing new: it was a compendium of revenue recognition issues pulled from existing accounting literature, and a description of the SEC's take on various misapplications of them. Not all companies had to "change accounting principles" to comply with it, and those that did, probably weren't employing the proper principles in the first place. Sounds like another front is being opened in the battle to tamp down fair reporting to shareholders."

[Get your Friday "Moment of Zen" by watching a hunk of cheese age, another piece of Web genius: the cheddar cheese webcam.]

April 26, 2007

The Fortune 50: Compensation Disclosure Trends

Much thanks to Marc Trevino and Joseph Hearn of Sullivan & Cromwell for this interesting survey of compensation disclosure trends by the Fortune 50 (it's really a survey of 30 companies from the Fortune 50; those are the companies that had filed as of the survey date). We have posted this survey on CompensationStandards.com under our "The SEC's New Rules" Practice Area. I plan to blog about various statistics from this survey in the near future.

Results of Quick Survey: CD&As

Well over 400 of you responded to our recent survey on the CD&As drafting process. Below is a summary of the results:

1. At my company, the first draft of the CD&A was drafted by:

- In-house lawyer - 37.9%
- In-house corporate secretary - 7.4%
- Human resources staffer - 28.2%
- Outside compensation consultant - 8.1%
- Lawyer in outside law firm - 12.7%
- Other - 5.8%

2. At my company, the following people spent the indicated number of hours drafting and/or reviewing the CD&A (note – this survey is just the CD&A, not the remainder of the compensation disclosures and tables; if more than one person in a category spent time on the CD&A, combine their time):

a. In-house lawyers and corporate secretary staff

- 0-5 hours - 8.9%
- 5-10 hours - 8.7%
- 10-20 hours - 13.2%
- 20-30 hours - 14.8%
- 30- 40 hours - 9.2%
- 40-80 hours - 17.1%
- More than 80 hours - 28.2%

b. Senior management (ie. CEO and/or COO)

- 0-5 hours - 50.5%
- 5-10 hours - 26.9%
- 10-20 hours - 13.4%
- 20-30 hours - 4.9%
- 30- 40 hours - 1.7%
- 40-80 hours - 1.2%
- More than 80 hours - 1.4%

c. Human resources staffers

- 0-5 hours - 26.3%
- 5-10 hours - 12.0%
- 10-20 hours - 10.8%
- 20-30 hours - 7.3%
- 30- 40 hours - 10.8%
- 40-80 hours - 10.1%
- More than 80 hours - 22.7%

d. Accounting staff, including CFO and controller

- 0-5 hours - 31.3%
- 5-10 hours - 23.1%
- 10-20 hours - 15.5%
- 20-30 hours - 10.8%
- 30- 40 hours - 7.1%
- 40-80 hours - 6.8%
- More than 80 hours - 5.4%

e. Compensation committee and other directors

- 0-5 hours - 38.0%
- 5-10 hours - 34.7%
- 10-20 hours - 18.5%
- 20-30 hours - 5.4%
- 30- 40 hours - 1.4%
- 40-80 hours - 1.2%
- More than 80 hours - 0.7%

f. Outside compensation consultants

- 0-5 hours - 50.2%
- 5-10 hours - 17.5%
- 10-20 hours - 16.0%
- 20-30 hours - 6.8%
- 30- 40 hours - 4.4%
- 40-80 hours - 3.6%
- More than 80 hours - 1.5%

g. Outside lawyers

- 0-5 hours - 27.8%
- 5-10 hours - 24.0%
- 10-20 hours - 18.3%
- 20-30 hours - 9.3%
- 30- 40 hours - 7.8%
- 40-80 hours - 4.3%
- More than 80 hours - 8.6%

Quick Survey: Board Evaluations

Please take a moment to participate in this Quick Survey on Board Evaluations.

April 25, 2007

SEC Announces Three Roundtables Regarding Proxy Process

Yesterday, the SEC announced it will hold three roundtables in May (scheduled for May 7, May 24 and May 25), which will consist of panels addressing:

- The federal role in upholding shareholders' state law rights
- The purpose and effect of the federal proxy rules
- Non-binding and binding proposals under the proxy rules

No word yet on who will serve as the participants in the roundtables...

Huge Settlement Personally Paid by Outside Directors

As noted in this article from Monday's WSJ, five former outside directors of a bankrupt company - Just for Feet - paid out a combined $41.5 million of their own money to settle allegations that they breached their fiduciary duties to shareholders, easily surpassing the out-of-pocket settlements paid by former outside directors of Enron and WorldCom. This lawsuit was filed in an Alabama court, where filings show that only $100k of liability insurance remained available to the directors, as most of it had already been exhausted by the company's officers in settling a shareholders' lawsuit.

NY Times Directors Register 42% Withheld Vote

Yesterday, as noted in this Forbes article, four NY Times directors received a 42% withheld vote, up from a 30% withheld vote last year. The Times is family-controlled, with the remaining nine directors receiving 100% of the vote from holders of the Times' Class B shares, which are controlled by the Ochs-Sulzberger family.

I bother to blog on this development for two reasons: first, because it is further evidence that voting is "real" these days, even for companies that maintain their plurality structure - and second, family-controlled businesses should be aware that they are not left untouched by the changed governance environment.

SEC: Nasdaq Capital Market Securities as "Covered Securities"

Last week, the SEC finally adopted an amendment to a rule under Section 18 of the '33 Act to designate securities listed on the Nasdaq Capital Market as "covered securities" for purposes of Section 18, so that they will be exempt from state "blue sky" law registration requirements. The amendments are effective 30 days after publication in the Federal Register.

At the same time, the SEC also cleaned up an issue, as requested by the states and ABA, concerning the availability of the exemption for all markets listed in the SEC's rule.

April 24, 2007

AFL-CIO's "Just Vote No" Campaign: Targeting Verizon's CEO Pay

On Friday, this Washington Post article outlined the AFL-CIO's campaign against six directors of Verizon (all on the company's compensation committee) to vote "no" due to the CEO's pay package. This vote on May 3rd should be interesting because Verizon is one of the companies that switched to a pure majority vote standard recently (and Verizon also has a "say on pay" proposal on the ballot). However, ISS has recommended a vote for all the director nominees - so it's unlikely that this campaign will "win" the day and result in a "failed" election (ie. more votes "against" a director than "for").

When it comes to determing who "won" in these battles with investors, it depends on one's definition of "winning." From the perspective of investors, this "limit CEO pay" movement is just getting off the ground - when you realize the tactic of directly confronting directors by challenging their board seats is truly in its infancy. I would consider support for a campaign of this sort in the 20% range to be a win for the AFL-CIO.

According to the Post article, a few weeks ago, "shareholders of Toll Brothers registered their dissatisfaction by withholding votes for the director who chairs its compensation committee. The luxury-home builder has yet to release vote tallies, but the Laborers' International Union of North America, which led the protest, said a quarter of shareholders withheld support." To me, that's a win and you can bet the Toll Brothers board is nervous as that level of "against" votes should rattle the average director. And remember that the support for these types of investor campaigns typically builds each year.

E-mails to Employees Explaining a CEO's Pay Package: A Proxy Solicitation?

For us securities law junkies, an interesting sidenote is that the AFL-CIO has sent this letter to the SEC's Division of Enforcement to complain about an e-mail that the Verizon's CEO sent to employees last week about the AFL-CIO campaign. The AFL-CIO contends that the e-mail should have been filed with the SEC as additional soliciting material (as most employees are also shareholders). The Post article notes that a Verizon spokesperson said that the e-mail was not a solicitation for votes.

You be the judge; it's a tough call as "proxy solicitation" has a broad definition, yet the e-mail doesn't specifically mention a solicitation, the targeted directors or the shareholders' meeting. In our "Investor Demands for Reasonable Pay" Practice Area on CompensationStandards.com, we have posted copies of the AFL-CIO's letter to the SEC as well as a copy of the email from Verizon's CEO to employees. Take a gander and e-mail your analysis to me (which I shall keep confidential if you wish).

We're Number #3!

Congrats to the SEC for landing the #3 spot in a "Top Places to Work in the Federal Government" survey for large federal agencies for the 2nd year in a row (albeit its score dropped from last year). This ranking is conducted by the Partnership for Public Service and the Institute for the Study of Public Policy Implementation, based on a Office of Personnel Management's Federal Human Capital Survey.

What's surprising to me is not that the SEC fared so well - it's that the #1 ranked Nuclear Regulatory Commission is deemed to be a large agency. I'm a long-time DC resident and have never met a soul who worked there - but apparently it has 3500 employees, according to this report. Thus, the NRC is roughly the same size as the SEC. So what do I know about anything...

April 23, 2007

House Passes "Say on Pay" Bill

On Friday, the US House of Representatives passed H.R. 1257 - the "Shareholder Vote on Executive Compensation Act" - by a vote of 269-134. Since the Democrats only hold a 31-seat majority in the House, the vote indicates that the bill attracted some Republican support.

Though the bill passed by a fairly wide margin in the House, the legislation's prospects of becoming law are uncertain. Senator Barack Obama (D-IL.) has stated that he intends to introduce an identical bill within the next few weeks, where Democrats hold a 51-49 majority- but the bill could have a tough time in committee. The Bush Administration has indicated that it opposes the House bill, as noted below.

Here is an excerpt with more details on "Say on Pay" from ISS' "Corporate Governance Blog":

While the White House released a short statement on April 17 expressing opposition to the bill, President George W. Bush has stopped short of saying he will veto the measure if it reaches his desk. The Bush administration said it "does not believe that Congress should mandate the process by which executive compensation is approved." The White House said recent governance improvements, such as the Securities and Exchange Commission’s new pay disclosure rules, "should be given time to take effect" before additional requirements are imposed.

In response, Frank and other bill supporters emphasize that bill "will not set any limits on pay." According to Frank's committee staff, the legislation will ensure that shareholders have an advisory vote on executive pay practices "without micromanaging the company."

Meanwhile, investors continue to show interest in annual advisory votes on executive pay. On April 17, shareholder proposals at Citigroup and Wachovia won about 43 percent and 40 percent support, respectively, according to the proponent, the American Federation of State, County, and Municipal Employees. The following day, a proposal filed by the Benedictine Sisters received 30.4 percent at Coca-Cola Co., the company reported. So far this season, pay vote resolutions have averaged about 39.7 percent support at six meetings.

Investors at nine companies will vote on the issue next week. Those meetings include Wells Fargo and Merck on April 24; Wyeth, Lockheed Martin, Capital One, and Valero Energy on April 26; and Abbott Laboratories, AT&T, and Merrill Lynch on April 27.

A Few Notes about Possible Timing of SEC Actions

On Friday, the WSJ ran this article - entitled "The SEC's Mr. Consensus" - in which SEC Chairman Cox indicated that these four regulatory initiatives will be addressed this year, even if a consensus among the five Commissioners is not reached: shareholder access, mutual fund governance, option backdating penalities and modifying Section 404 of Sarbanes-Oxley. The article notes "Mr. Cox plans to leave the agency after the next presidential election."

According to FEI's "Financial Reporting Blog, after his internal controls testimony last Wednesday, Chairman Cox told reporters that: “The SEC staff is aiming to make a final recommendation on the management guidance proposal by May 23.”

Private Equity M&A Nuggets

Tune in tomorrow for a DealLawyers.com webcast – "Private Equity M&A Nuggets" – to hear a lightening round of nuggets from Jill Goodman of Lazard, Julie Jones of Ropes & Gray, Glenn West of Weil Gotshal and Geoff Levin of Kirkland & Ellis.

No registration is necessary - and there is no cost - for DealLawyers.com members. Take advantage of our no-risk trial for this timely webcast.

April 20, 2007

The NYSE Speaks: Latest Developments and Interpretations: Course Materials Now Available

Tune in on Monday for our webcast - "The NYSE Speaks: Latest Developments and Interpretations” (print off these course materials before the program) - to hear Anne Marie Tierney and John Carey of the NYSE’s Office of the General Counsel discuss:

- What are the latest interpretations regarding director independence issues? Regarding shareholder approval of equity plans?
- What is the impact of the merger with Euronext?
- What rulemakings has the NYSE proposed and adopted recently? What is on the NYSE’s rulemaking agenda for this year?
- What should companies consider when they have a material development from a NYSE listing standard perspective?
- How does one go about getting an interpretive question answered by the NYSE Staff?

And coming up on June 5th: "The Nasdaq Speaks: Latest Developments and Interpretations."

Heating Up: NYSE and Nasdaq's Battle for Listed Companies

Did you catch the WSJ article from a while back about the NYSE and Nasdaq facing off for listed companies? This competiton has existed for as long as I can remember - as would be expected since they do compete for listings - but it's still interesting to note how going public might cause the exchanges to redouble their efforts.

In this vein, the NYSE recently changed its rules to eliminate the initial listing fee if a company transfers its listing from another national securities exchange. The fee waiver is not available if the company still maintains its listing on the other exchange. At the same time, the Nasdaq has modified its annual and listing fees.

Spring Fever?

From a member with spring fever perhaps: "Since your blog sometimes ventures into popular culture (many thanks last year for the "Talk Like a Pirate Day" reminder), I bring to your attention something I had never heard of until yesterday through my son's high school principal: April 20th is a day when students are likely to skip school and get high. The 4:20 pm time of day referenced in this Wikipedia entry has morphed into 4/20 the day." It won't be long before every day is a holiday of some sort or another...

April 19, 2007

SEC Used Budget to Strong-Arm FASB?

A few weeks ago, CFO.com ran this article about how the SEC held up approval of FASB's budget for four-plus months until the accounting standards-setter agreed to give the SEC more say over the appointment of FASB members. Jack Ciesielski fleshes this story out more in his "AAO Weblog."

Here is a blurb from a member: "Under Section 109 of Sarbanes-Oxley, for the first time, the SEC arguably has the authority to set the pay of FASB Board members. I say "arguably" because some believe that Section 109 doesn't specifically provide the SEC with the authority to approve the budget of the “standard setting body” (ie. the FASB) for two reasons: (1) SOX recognized the existence and role of the Financial Accounting Foundation in approving the budget of the FASB; and (2) SOX was intended to maintain the then-current level of independence of the FASB from the Commission. If, as a number of recent articles have suggested, the SEC refused a 2007 pay raise for FASB Board members that had been previously approved by the FAF (which is FASB's parent unit), the SEC’s actions could be seen as inconsistent with the language and intent of Section 109."

I have no unique insight into what really is happening here, but bear in mind that all of the FASB board members, with perhaps the exception of academics, can make much more money in the private sector than at the FASB...so any shenanigans would likely scare off the most qualified candidates to sit on the FASB Board.

Whole Lotta Internal Controls

Yesterday, there were three new internal controls developments:

- PCAOB Report: 2nd Year Implementation of AS No. 2 - About 18 months after its first report, the PCAOB issued this 2nd one based on 275 inspections of audit firms

- SEC Chairman Cox's testimony on impact of Sarbanes-Oxley on Small Business

- PCAOB Chairman Olson's testimony on impact of Sarbanes-Oxley on Small Business

SEC Deputy Chief Accountant Warns of FAS 159 Fair Value Arbitrage

In FEI's "Financial Reporting" Blog, Edith Orenstein does a great job analyzing this recent speech by SEC Deputy Chief Accountant James Kroeker about principles-based accounting. Jack Ciesielski also analyzes the speech in his "AAO Weblog." More on this topic soon...

April 18, 2007

Fewer CEOs as Directors: A Disaster or a Blessing?

This recent Jim Drury study (posted in our "Board Composition" Practice Area) found that there has been a 53% decline in outside board service by Fortune 500 CEOs over the last 16 years - and that these CEOs have reduced the average number of outside boards they sit on from 2.2 boards to 1.4 boards, representing a decline of 36%. True that the study's time period is a bit long in the tooth, but it reflects a clear recent trend of CEOs cutting back on outside board service. "Overboarding" is not nearly the hot governance issue it was just two years ago.

The study's results were analyzed in a Chicago Tribune article last month. Although fewer CEOs on boards can justifiably be viewed as a "brain drain" as CEOs often are among the best at formulating strategy (and best at understanding and evaluating a CEO's job performance), I also think the views expressed by Nell Minow in the article hold some water. Nell believes that these statistics are good news because CEOs often are too busy to provide the oversight and guidance needed (and can be overly deferential to a fellow CEO, particularly when it comes to executive compensation).

I doubt this trend will ever reverse itself in the wake of recent "governance enlightenment." I simply can't envision any CEO having sufficent time available to serve on more than one outside board and meet their director obligations adequately, given the hundreds of hours necessary each year to attend and prepare for board meetings, committee meetings, etc.

The Inconvenient Location for an Annual Shareholders' Meeting

As most proxy season observers know, one of the oldest tricks in the book for defusing angry shareholders is to hold the annual stockholders' meeting in some far-flung location, as noted in this recent WSJ article. I've blogged about this topic once in a blue moon (or left comments on other blogs).

With the growing importance of annual shareholder meetings - due to the majority vote movement and the potential elimination of broker non-votes in director elections - I believe it's simply too risky from an investor relation's perspective for any company to hold their meeting at an inconvenient location. It's only a matter of time before some bright journalist starts an annual "Top Ten Inconvenient Locations" list. Trust me, no one wants to experience the heat that Home Depot did for its various annual meeting snafus last year...

By the way, even though it's a few years old, this webcast transcript regarding "Conduct of the Annual Meeting" is still a gem, loaded with practical guidance.

TIAA-CREF's Policy Changes

One of the first institutional investors to draft model governance guidelines, TIAA-CREF, recently released the 5th edition of its closely followed "Policy Statement on Corporate Governance." This policy statement provides TIAA-CREF’s governance philosophy and strategic priorities, as well as calls for majority voting for directors, expanding the definition for director independence beyond those mandated by the exchange standards, shareholder access and enhanced executive compensation disclosure.

I recently caught up with John Wilcox, Senior Vice President and Head of Corporate Governance of TIAA-CREF, to learn more about the policy changes in this podcast, during which John covers:

- Why did TIAA-CREF revise its governance policies at this time?
- What changes were made in the executive compensation area?
- Where does TIAA-CREF come out on the majority vote and shareholder access issues?
- Where any other significant changes made?

April 17, 2007

SEC Explores Opening Door to Shareholder Arbitration

Yesterday's WSJ included an article that states that the SEC is exploring a new policy that could permit companies to resolve complaints by aggrieved shareholders through arbitration, limiting shareholders' ability to sue in court. FEI's "Financial Reporting" Blog goes into more detail about this interesting proposition.

North Dakota Races to the Top for Shareholders

From Jim McRitchie's CorpGov.net: North Dakota Governor John Hoevenhe signed into law the most shareholder friendly incorporation provisions in the United States. Among the most significant provisions of the new law are the following:

- Majority voting in election of directors - In an uncontested election of directors, shareholders have the right to vote "yes" or "no" on each candidate, and only those candidates receiving a majority of "yes" votes are elected.
- One year terms for directors
- Advisory shareholder votes on compensation reports - The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
- Proxy access - The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
- Reimbursement for successful proxy contests - The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation's board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
- Separation of roles of Chair and CEO - The board of directors must have a chair who is not an executive officer of the corporation.
- A "special meeting" shall be held if demanded by shareholders owning 10% or more of the voting power.

Chapter 10-35 of the North Dakota Century Code gives companies a choice, after July 1, 2007, to be subject to the new law by including a provision to that effect in their articles of incorporation. North Dakota only has two publicly traded companies chartered in the state, Dakota Growers Pasta, and Integrity Mutual Funds of Minot. ("Most support corporate governance option," in-forum.com, 3/5/07).

The 2007 Romeo & Dye Section 16 Deskbook

A few weeks ago, the 2007 Romeo & Dye Section 16 Deskbook was mailed. This critical resource is essential for anyone working with Section 16 - try a no-risk trial to the Romeo & Dye Section 16 Annual Service to receive a copy of the Deskbook immediately.

April 16, 2007

SEC Enforcement Shift May Lead to Lower Penalties

On Friday, this Washington Post article noted: "The SEC is changing how it negotiates settlements with companies in a way that could reduce the number and size of financial penalties that businesses pay, current and former officials said yesterday.

Under the change, which has not been made public, SEC enforcement lawyers must seek approval from the agency's five commissioners before they begin settlement talks that involve fining corporations, including seeking ranges for possible fines. Currently, staff members have the authority to negotiate with businesses and draft settlements in principle before they take the deals to the agency leaders for final approval.

The shift marks the latest development in a heated debate over whether companies or individual wrongdoers should bear the brunt of blame for legal violations. Penalties reached record proportions after destructive scandals at Enron, WorldCom and Adelphia Communications, creating concern among some commissioners that enforcement staff members are overreaching.

The initiative comes at the behest of SEC Chairman Christopher Cox, a former Republican lawmaker from California who is striving to avoid split votes at the agency. The pilot program will affect a relatively small percentage of cases and will result in more productive and fast-tracked negotiations between business and enforcers, according to spokesman John Nester. The plan, Nester said, "will increase investor protection because it will give our enforcement division a stronger hand in settlement negotiations."

The enforcement division was criticized by trade groups last month as "adversarial" and "overly punitive." Republican Commissioner Paul S. Atkins has argued that imposing fines against businesses in many circumstances unduly penalizes their stockholders. Rather, he and allies say, corporate executives who broke the law should pay the price.

Disagreement over the issue has slowed resolution of several cases, including some involving more than 160 companies that engaged in backdating of stock options for officials and employees. For example, staff members are continuing to deliberate whether Brocade Communications Systems, whose former chief executive was charged last year with criminal fraud, must shell out money for backdating offenses.

After months of behind-the scenes negotiations, Cox unveiled a policy statement in January 2006 laying out analytical steps the SEC would follow in deciding whether to levy penalties against businesses. Since then, the commission at times has sent the enforcement unit back to the drawing board in cases against Veritas Software and MBIA, among others, frustrating businesses and defense lawyers who seek quicker resolution of investigations.

The new policy on settlements is designed to prevent disconnects between SEC staff members and the commissioners. But the change is also contributing to lowered morale within the enforcement unit, which swelled in financial resources and prestige after widespread accounting frauds came to light five years ago.

Since that time, the enforcement budget has flattened and the U.S. Chamber of Commerce, the nation's largest business lobby, has called on SEC leaders to appoint an advisory panel to scrutinize the enforcement division's fairness.

Some staff members are balking at the change as a show of distrust in their judgment and another layer of red tape that could reduce the frequency and the size of financial penalties. But officials asserted yesterday that Cox and enforcement unit leaders are on the same page. Details of the plan continue to be worked out, agency officials said."

Milestone: US-Style Litigation Now in Europe?

Last week, members of the US plaintiff's bar made $47 million in legal fees from the second largest securities fraud settlement in Europe. Here is a press release from the lead plaintiff firm, Grant & Eisenhofer.

And here is more from the "Rule 10b-5 Daily": Royal Dutch Shell p.l.c. has announced a landmark settlement with non-U.S. shareholders resolving claims related to the company's recategorizations of certain proved oil and gas reserves. Under the settlement, which was executed pursuant to a new Dutch statute allowing the Amsterdam Court of Appeals to declare binding a collective resolution of a commercial dispute, Shell will pay $352.6 million plus administrative costs to shareholders who bought on non-U.S. exchanges and were resident or domiciled outside the U.S. from April 1999 to March 2004. The parties have also requested that the $120 million Shell paid to the SEC in a related settlement be distributed in a non-discriminatory manner among certain U.S. and non-U.S. shareholders.

Shell also announced that it plans to extend the same proportional settlement offer to shareholders who bought in the U.S. or were resident or domiciled in the U.S. during the same period. According to the press, it is the second-largest settlement of a securities fraud dispute by a European-based company, behind Royal Ahold's $1.1 billion settlement in late 2005. Media coverage can be found in the Wall Street Journal, Bloomberg, and the New York Times.

Transcript: SEC's Internal Controls Open Commission Meeting

The SEC has posted a 126-page unofficial transcript of its April 4th open Commission meeting devoted to internal controls.

April 13, 2007

First "Say on Pay" Shareholder Proposals Considered at Annual Meetings

As this Washington Post article notes, the first "say on pay" shareholder proposals were voted on this week: 47.3% of shareholders supported the proposal at the Bank of New York and 37% at Morgan Stanley. These are very high numbers for a first-time-like type of proposal.

This ISS article lists upcoming annual meeting dates for other major companies that will include "say on pay" on their ballots. Overall, over 60 companies will have shareholders vote on this issue sometime this year. Last year, there were 7 of these proposals, averaging a 40% level of support.

The ISS article also recaps the recent ISS webcast about how "say on pay" has worked in other countries that have tried it. You can still listen to the audio archive or access a transcript of that webcast via a free registration.

Internal Pay Equity: Pay "Cap" is a Misnomer

On this recent CNBC "On the Money" segment, I thought Professor Charles Elson does a pretty good job of explaining the difference between internal pay equity and pay "caps." Remember that internal pay equity is just an alternative benchmark to using traditional peer group surveys. Internal pay equity is no more of a "cap" than those ubiquitous peer group surveys are...

Internal Pay Equity: In Practice

I've been reviewing recently filed proxy statements and happy to note that several hundred mention that boards have considered internal pay equity when setting CEO pay levels. However, very few of these companies provide any details about (or if) they really use this methodology as an alternative benchmarking tool.

We are in the process of setting the agenda for our "4th Annual Executive Compensation Conference," which is being reconfigured this year to ensure we provide as much practical guidance as possible. We are planning to include a panel on internal pay equity that includes a number of panelists from companies that have used internal pay equity so they can explain how they do implement it. If you are from one of those companies, can you please drop me a line, even if you are unwilling to speak? My email address is broc.romanek@thecorporatecounsel.net. Thanks!

April 12, 2007

Dealing with Proponents at the Shareholder Meeting

With many companies about to hold their annual shareholder meetings, check out this timely podcast in which Andrew Gerber of Hunton & Williams gives tips on how to interact with shareholder proponents at annual meetings, including:

- What do you do if the proponent doesn't show up to present their proposal?
- What if the proponent sends someone else to present their proposal?
- If the proponent shows up to present their proposal, but yet stands up and starts talking about another topic - how should you handle it?

A Evelyn Y. Davis Sighting!

A few weeks ago, Evelyn was on CNBC's "On the Money" - here is an archived video of that appearance. And here is a humorous blog entry from someone who doesn't appear to be fan of Evelyn's.

As some of you undoubtedly know firsthand, Evelyn is still very active, meaning this tombstone was created prematurely. Evelyn made this tombstone years ago, which is evident from the photo because her third divorce was inscribed after its initial creation - it now will have to be further updated to list her fourth divorce, as I hear that her most recent marriage didn't take...

Private Offering Reform

At recent conferences, Corp Fin Director John White has indicated that some reform of the private offering process might be on the Division's agenda, although he also noted that any action would not involve a comprehensive overhaul of the private offering rules. The ABA's Subcommittee on Securities Registration recently sent this 40-page letter to the SEC with detailed suggestions about what might be reformed.

[Cheap Gas Prices - I know some people love to get a deal on gas for their car (I'm driving a Prius so I never have to fill the tank, but I have relatives who take great pride in obtaining the cheapest gas available). If this is you, just enter your zip code on this web site - and it will tell you which gas stations have the lowest prices (and the highest) on gas in your area. The site claims that it's updated every evening. ]

April 11, 2007

They're Heeeeeere! Final Section 409A Regulations

From Mike Melbinger's "Compensation Blog": Apologies to those not old enough to have seen Spielberg's Poltergeist in 1982 (and, thus, don't understand this reference), but something really scary happened today. The IRS published its long-awaited final regulations (397 pages) under new Code Section 409A. This is a significant event for every employer in America because employers now have until the December 31, 2007 deadline to take a series of required steps.

In the upcoming days and weeks, I will be highlighting the most significant issues and requirements under the final regulations. However, the first step for most employers and their counsel is to determine the impact of the new rules on their plans, programs and agreements. Remember, these regulations can apply to employment and change in control agreements, severance plans and even equity compensations plans, in addition to deferred compensation plans, which were the original target of Congress.

Tomorrow! NASPP Webcast: The IRS and Treasury Speak about the New 409A Regulations

Talk about good timing! Catch the NASPP webcast tomorrow - "The IRS and Treasury Speak: Mid-Year Tax Update" - to hear representatives from the IRS and the US Department of Treasury, along with two former Treasury employees, talk about the new 409A regulations. The panel includes:

- Stephen Tackney, Senior Attorney, IRS, Office of Chief Counsel
- Daniel Hogans, Attorney Advisor, US Department of the Treasury
- Elizabeth Drigotas, Partner, Deloitte
- Deborah Walker, Partner, Deloitte

Try a no-risk trial membership to the NASPP to catch this webcast!

Farewell to Two Former SEC Commissioners

We are saddened to have learned of the recent deaths of two former SEC Commissioners - J. Carter Beese, Jr., who served from 1992 to 1994 and more recently was a venture capitalist; and James Needham, who served from 1969 to 1972 and became the first full-time, salaried chairman of the New York Stock Exchange.

I had the pleasure of meeting Carter several times and the guy was quite a character with a very sharp wit. He was among the youngest Commissioners to ever serve; he was only in his mid-30s when he sat on the Commission.

April 10, 2007

The Media and the Executive Compensation Disclosure Rules

It's that time of the year: CEO pay in the news. Yesterday's WSJ included its annual executive pay report, with multiple pay-oriented articles - and this Sunday's NY Times included a number of articles on executive pay, including this special report that analyzes the recent trends - and this article that focuses more on the lack of clarity in recent disclosures. Another article analyzed the independence of compensation consultants - and there was an article on severance pay.

The NY Times even included an article about how to calculate the pay figures, which is no easy task. Bob Hayward of Kirkland & Ellis recently put together the following memo, which does a great job of describing how AP is calculating numbers for its media articles:

As more and more companies have been filing their proxy statements under the new SEC executive compensation disclosure rules, it has been interesting to observe how the media interpret and report the disclosures. For example, the Associated Press - a wire service that is often relied upon not just by local and regional newspapers but also by the Wall Street Journal, other national newspapers and Internet websites (such as Yahoo! and MSN) - is not simply copying the “total compensation” number out of proxy statements, but is trying to take a more reasoned approach to what it discloses in news reports about executive pay.

The AP calculation of "total pay" is not the same as the SEC's calculation of "total compensation." Total compensation under the SEC’s rules is the sum of the following categories in the Summary Compensation Table: Salary; Bonus; Stock Awards; Option Awards; Non-Equity Incentive Plan Compensation; Change in Pension Value and Nonqualified Deferred Compensation Earnings; and All Other Compensation.

However, the AP’s calculation only includes “Salary,” “Bonus,” “Non-Equity Incentive Plan Compensation,” “All Other Compensation,” above-market returns on deferred compensation (but not actuarial change in pension value) and the "estimated value" of stock and option awards. AP uses the FAS 123R grant date fair value of the stock and option awards (which is found in the last column of the Grant of Plan-Based Awards Table) and not the financial accounting compensation expense shown in the SCT under the Stock Awards and Option Awards columns.

The AP has indicated that it is trying to show a more realistic picture of what an executive was offered during a given fiscal year and to create parameters that permit better comparability between peer companies. Although using the grant date fair value as the “estimated value” of stock and option awards still overstates the amount of compensation (because such awards are likely subject to time- and/or performance-based vesting), the AP reported amount is a closer indicator of how much an executive was offered in a given fiscal year than is the SEC’s total compensation amount. Some (but not all) local and regional newspapers are following the AP or a similar formulation. Because it is the local papers that usually focus most intensively on hometown executives, it is important that the PR staff at the company understand the AP formulation and why in many cases they may want to encourage the local or regional newspaper to follow it.

Investors, the SEC, the public, employees and activists often obtain their initial information about executive compensation from “sound bites” in news stories. Although companies can make CD&A and the narrative disclosure accompanying the tables as clear as crystal, the key talking points may still get lost in the reporters’ rush to get the story out. Because all reporters have deadlines, it is critical that companies be proactive with the media on the day the proxy statement is filed. It appears that most of the AP and local reporters have been generating their stories on the very day proxy statements have been filed with the SEC.

Below are five points to consider as part of your proxy PR planning process:

1. Brief the PR staff - Prior to releasing the proxy statement to the public, brief the company’s PR staff on the key talking points and educate them about the numbers disclosed in the various compensation tables. The PR staff should develop a well-informed talking points agenda that is consistent with the information disclosed in the proxy statement.

2. Don’t be naive; be proactive - Expect the AP (and most likely the local paper) to report on the compensation disclosed in the company’s proxy statement. If you want the story told right, open the lines of communication with the media. Most reporters welcome a phone call from a well-informed PR executive who can explain the numbers and any nuances. For example, one company was recently required to report a "super-charged" level of equity compensation in the SCT for a retirement-eligible executive solely as a result of accounting rules.

Although the CD&A and narrative disclosure discussed the accounting rules were causing the anomaly, it was the PR executive’s conversation with the reporter -- focusing him on the key messages in the proxy statement -- that convinced the reporter to indicate in the article that the new SEC rules forced the company to disclose the “super-charged” amount and that such amount was not actually received. Making sure the key messages are adequately described in the proxy statement will assist the PR staff in focusing reporters on the overarching messages.

3. Don’t neglect the footnotes - Clear disclosure in the CD&A and the narrative disclosure accompanying the tables is important, but reporters only have time to skim the tables and footnotes (especially since many proxy statements are much longer this year). If you want to make an important point, make it in CD&A and the narrative disclosure but also add a footnote next to the likely headline-generating number in the table. This will flag the key point for the reporter and direct him or her to the more descriptive disclosure found elsewhere in the proxy statement.

4. Sensitize the compensation committee and board on what the media may report and why - Many compensation committees have expressed frustration that the new SEC rules obscure how the compensation committee (and its consultant) look at compensation for a given year. Being proactive with the media on the day the proxy statement is filed will go a long way to address this frustration.

5. Compile, study and learn - Once the company’s proxy statement is on file with the SEC, collect every news story written about the proxy statement and the information disclosed therein. Determine what key messages were missed or distorted by the media and formulate a game plan on how to address those deficiencies next year.

AFL-CIO's 2007 "Paywatch" Website

For over a decade, the AFL-CIO has maintained a "Paywatch" website that included a calculator that would allow workers to compare their pay to the CEO's pay at their company. Recently, the AFL-CIO updated the Paywatch site for 2007, including new case studies regarding severance packages, options backdating, etc.

Houses of Glory, Mansions of Shame: CEOs’ Homes and Corporate Performance

On the "D&O Diary" Blog, Kevin LaCroix does a nice job of waxing about a recent study from Crocker Liu of the Arizona State University Business School and David Yermack of the NYU Business School entitled “Where Are The Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Company Performance.”

April 9, 2007

Our CD&A Quick Survey

With CD&As rolling in and being a focal point for SEC Chairman Cox (see Mark Borges' take on the Chairman's speech), we have posted a survey to gauge who drafted the first draft of the CD&A - as well as how many hours were spent preparing and reviewing the CD&A by different categories of personnel.

Please take a moment to fill out the survey - I promise it will take less than a minute! So far, over 375 people have responded...

Survey Results: Director Resignations

Under at least two scenarios these days, a director may be required to submit a resignation letter – either when the company’s corporate governance guidelines require it when a director has a change in his/her job responsibility or as part of a majority vote provision. Below are survey results from the questions recently posed in this area:

1. If a director resignation scenario arises, the process our company uses to obtain the letter involves:

- Corporate secretary or general counsel reminds the director of the need to submit the resignation letter - 68.4%
- Board chair or governance committee chair reminds the director of the need to submit the resignation letter - 15.8%
- Full Board reminds the director of the need to submit the resignation letter at a board meeting - 0%
- Nobody reminds the director of the need to submit the resignation letter - 10.5% [ed. note: yikes!]
- Other - 5.3%

2. After a director resigns, the process our company uses as part of an “exit” interview – and to ensure that a Form 8-K under Item 5.02(a) is not required – involves:

- Board meets in executive session without the "resigning" director - 5.3%
- Board chair meets with the resigning director - 21.1%
- Nominating/governance chair meets with the resigning director - 15.8%
- CEO meets with the resigning director - 15.8%
- General counsel meets with the resigning director - 31.6%
- Corporate secretary meets with the resigning director - 0%
- Other - 15.8% [ed. note: I wonder what constitutes "other" here; please shoot me an email if you know.]

"The Dog Ate It" Excuse: Ain't Got Nothing on Amnesia!

Before I left on vacation, I blogged about a company that made plenty of excuses for a late filing. Now that I am back in the saddle, I see that I missed an SEC enforcement action on Thursday regarding an investment advisor who can't account for $134 million - due to his alleged amnesia! Genius!

As this Washington Post article notes, the implicated South Carolina professor is known for his flamboyant suits and million-dollar pen collection...

April 5, 2007

SEC Open Commission Meeting: Internal Control Doings

Here are items related to yesterday's SEC open Commission meeting on internal controls:

- SEC's press release

- SEC Chair Cox's statement

- PCAOB Chair Olson's statement

- FEI's "Financial Reporting" Blog's summary of meeting

Warfare’s Capital Casualty

This week, there has been two articles on the topic of foreign policy interfering with capital market regulation, one in the Wall Street Journal and the other in the Financial Times; the latter, which blames Chairman Cox before he joined the SEC, is discussed in Werner Kranenburg's blog.

TV Special: "Sarbanes-Oxley: Five Years Later"

Tune in tomorrow night on PBS stations for a Nightly Business Report "holiday" program: "Sarbanes-Oxley: Five Years Later." A little odd I confess, a special holiday program about Sarbanes-Oxley...but I'm definitely stoked that the "Special Features" for this program includes a link to this blog!

April 4, 2007

PCAOB Proposes New Hierarchy of GAAP Auditing Standard and More Tax Services and Independence Guidance

Yesterday, the PCAOB proposed an auditing standard, Evaluating Consistency of Financial Statements, and a concept release concerning Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles. In addition, the Board provided guidance, in the form of questions and answers, on Rule 3522, Tax Transactions, and Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles.

Food for Thought: Minute-Taking Practices

Marty Lipton and Paul Rowe recently wrote the following in a Wachtell Lipton memo on the Netsmart Technologies case's implications for minute-taking: "In a recent Delaware decision Vice Chancellor Leo Strine condemned the common practice of providing drafts of board and committee meeting minutes to directors for approval a substantial (several months in the case in question) period of time after the meeting. He said thus practice is “to state the obvious, not confidence-inspiring.” It bears emphasis that not only Delaware courts, but even more so courts in other jurisdictions, frequently regard minutes as the best record of what happened at the meeting. So too the SEC and other regulatory agencies. Courts and regulators will consider the minutes more reliable than the description in a proxy statement or the directors testimony, which is frequently (and understandably) characterized by lapses of memory and lack of precision

Minutes should be reasonably detailed, reflect the substance of the discussions at the meeting and make clear reference to the documents that were furnished to the directors before and at the meeting. If there were significant discussion with or among directors prior to the meeting consideration should be given to making appropriate reference to them in the minutes. Drafts of minutes should be prepared promptly after the meeting and circulated promptly to the directors and other; persons involved in the meeting."

Lessons Learned in Auction Process: Netsmart Technologies

Below is what I blogged about Netsmart Technologies on DealLawyers.com a while back:

From Travis Laster: A few weeks ago, Vice Chancellor Strine of the Delaware Court of Chancery issued an opinion - In re: Netsmart Technologies - enjoining the cash sale of a small public corporation to a private equity firm until the directors (i) supplemented the disclosures regarding the sale process and (ii) disclosed their investment bankers' projections. Vice Chancellor Strine was quite critical of the sale process used in the case, which he described as "a microcosm of a current dynamic in the mergers and acquisitions market." Here are some high points from the 75-page opinion (ed. note: we have posted memos analyzing the opinion in the "Auctions" Practice Area):

1. VC Strine found that the Board and Special Committee did not act reasonably in failing to contact strategic buyers. The defendants attempted to justify this refusal based on sporadic contacts with strategic buyers over the half-decade preceding the deal. VC Strine held that "[t]he record, as it currently stands, manifests no reasonable, factual basis for the board's conclusion that strategic buyers in 2006 would not have been interested in Netsmart as it existed at that time." In later discussion, he carefully distinguished such informal contacts from a targeted, private sales effort in which authorized representatives seek out a buyer. He viewed the record evidence regarding prior contacts as "more indicative of an after-the-fact justification for a decision already made, than of a genuine and reasonably-informed evaluation of whether a targeted search might bear fruit."

2. VC Strine rejected a post-agreement market check involving a standard window-shop and 3% termination fee as a viable method for maximizing value for a micro-cap company. He noted that such an approach has "little basis in an actual consideration of the M&A market dynamics relevant to the situation Netsmart faced" and would not have attracted topping bids "in the same manner it has worked ... in large-cap strategic deals."

3. VC Strine was quite critical of the lack of minutes for key board and Special Committee meetings, as well as the fact that most of the minutes were prepared in omnibus fashion after the litigation was filed.

4. VC Strine criticized the Special Committee for permitting management to conduct the due diligence process without supervision. "In easily imagined circumstances, this approach to due diligence could be highly problematic. If management had an incentive to favor a particular bidder (or type of bidder), it could use the due diligence process to its advantage, by using different body language and different verbal emphasis with different bidders. 'She's fine' can mean different things depending on how it is said." The Vice Chancellor ultimately found no harm, no foul on this issue because management did not have a favored PE backer and there was no evidence that they tilted the process in favor of any participant.

5. VC Strine found that the proxy's disclosures regarding the company's process and its reasons for not pursuing strategic buyers had no basis in fact. Adhering to his opinion in Pure Resources, he also found that the latest management projections relied on by the Special Committee and their financial advisor in its fairness opinion needed to be disclosed.

Each of these issues underscores the benefits of bringing Delaware counsel into the transactional process early, both for purposes of structuring the exploration of alternatives and reviewing the proxy statement. The issues that VC Strine addresses in his opinion are frequent subjects of counseling by Delaware practitioners. Although this is the first opinion to bring many of them to judicial light, all have been on the radar screen for some time. There are many other nuggets to be gleaned from this important decision, particularly for those of us currently involved in processes with PE players (and in this market, who isn't?).

April 3, 2007

Corp Fin Updates Rule 144 Interps

Yesterday, Corp Fin updated its Rule 144 telephone interps...gonna be tougher than I thought blogging on vaca...

Tellabs Oral Argument

Below is an excerpt from the notes of the oral argument in the important US Supreme Court case - Tellabs v. Makor Issues & Rights - prepared by Lyle Roberts of the "The 10b-5 Daily":

Predicting how the Supreme Court will rule based on oral argument, especially where there are multiple possible approaches to the issue, is difficult. That said, the Court appeared likely to reject the Seventh Circuit's "reasonable person" standard as incompatible with the "strong inference" scienter pleading requirement. As noted by Justice Roberts and Justice Breyer, the "reasonable person" standard appears to allow for the possibility that the case will go forward even if the plaintiffs are only able to allege facts establishing a weak inference of scienter. There also appeared to be considerable support for the need to weigh competing inferences.

A few notes on the main issues discussed:

Is There A Seventh Amendment Violation? - Perhaps to the surprise of Tellabs' counsel, who had argued in his briefs that the Court did not have to reach this issue, the justices spent a fair amount of time discussing whether there needed to be uniformity between the pleading and proof standards for scienter. In their brief, the shareholders had argued that the heightened pleading standard for scienter improperly required a court to act as a fact-finder on the merits of the suit. Justice Scalia and Justice Breyer expressed skepticism over the idea that Congress could not create a heightened pleading standard, noting that there are lots of barriers to entry to federal courts (including diversity and amount in controversy requirements). Justice Breyer wondered whether there was really any difference between saying a plaintiff's case has to be "really strong" and saying that a plaintiff has to be "really suffering." That said, a number of justices (Justice Breyer most of all) seemed concerned that the "strong inference" pleading standard was higher than the "preponderance of the evidence" proof standard. Tellabs' counsel and government counsel both argued that if the Court wanted to address this question, it would need to reconsider the standard of proof, as opposed to watering down the PSLRA.

Can You Infer A CEO's Knowledge About Financial Issues Based On His Position? - Justice Kennedy appeared anxious to get an answer to this question, asking it of both parties. Tellabs' counsel responded that the CEO's title was insufficient; plaintiffs needed to provide particularized facts regarding the CEO's scienter. Shareholders' counsel, however, suggested that it was unlikely that a CEO would not know about important financial issues. Moreover, the confidential witnesses cited in the complaint confirmed the existence of scienter for Tellabs' CEO.

Competing Inferences - Justice Alito took center stage on the issue of how to evaluate competing inferences with the following analogy: if you see a person walking down the street toward the Supreme Court, this fact would create a strong inference that the person is going to the Supreme Court if it is the only building around. If there are a lot of other buildings, however, doesn't a court have to consider the inference that the person is going to another location? In response to this analogy and further prodding from Justice Ginsburg and Justice Souter, shareholders' counsel conceded that the court could consider other facts that were subject to judicial notice, but stopped short of agreeing that this constituted an evaluation of competing inferences.

How To Decide This Case - Justice Ginsburg noted that the phrase "strong inference" is not "self-defining" and other justices also appeared to struggle with its meaning. As to how to decide the case in front of them, Justice Scalia expressed a desire to provide lower courts with guidance on what is a "strong inference" of scienter and, during his rebuttal time, Tellabs' counsel urged the same course.

Prof. Miller v. Justice Scalia - By his own admission, Prof. Miller has a more "colloquial" argument style. That got him into some hot water with Justice Scalia, with whom he traded barbs. Justice Stevens asked Prof. Miller if he could translate the "strong inference" standard into a probability percentage. Justice Scalia quipped that he thought it was 66 2/3%, in response to which Prof. Miller asked if that was "because you never met a plaintiff you really liked?" Justice Scalia got his revenge a few minutes later when Prof. Miller stated "don't take me literally" on a certain comment and Justice Scalia replied that he would write that down. At that point, Justice Roberts called it a draw.

After McNulty: Changes in the Attorney-Client Privilege and Investigations

We have posted the transcript from the recent webcast: "After McNulty: Changes in the Attorney-Client Privilege and Investigations."

The SEC's April Fuhrst Prank

As a big believer in April Fool's jokes (my poor wife), kudos to the SEC for their fake press release announcing “plans” to require publicly-listed companies to reveal the pay and perks of the “top 100 people who make more than the CEO.”

April 2, 2007

Corp Fin Updates Trust Indenture Act Interps

On Friday, Corp Fin updated another set of its phone interps, this set relating to the Trust Indenture Act.

Another SEC Rule Vacated

On Friday, the SEC continued its losing streak in the courts when the DC Circuit Court of Appeals - in Financial Planning Association v. SEC - vacated Rule 202(a)(11), a rule adopted in 2005 which deems certain broker-dealers not to be investment advisers. The Court held that the '40 Act does not authorize the SEC to except from the '40 Act any group that is already covered by another exception.

"Say on Pay" Bill Moves Forward

From Mark Borges' "Proxy Disclosure Blog" on CompensationStandards.com: On Wednesday, H.R. 1257 (the "Shareholder Vote on Executive Compensation Act") was approved by the House Financial Services Committee on a vote of 37-29. The bill, which would give shareholders an annual non-binding advisory vote on executive pay, now moves to the House floor for consideration. According to media reports, no date has been set for a vote by the full House.

One of the more interesting aspects of the bill is exactly what shareholders would be voting on. The approved bill text indicates that the vote would be based on the compensation discussion and analysis and the compensation tables. This approach could be problematic, however, given the length and complexity of these disclosures.

To address potential liability concerns, the bill was amended to make it clear that private rights of action are prohibited if the board of directors fails or refuses to comply with the shareholder vote. Again, this is fairly ambiguous language. I'm not sure how one responds when shareholders indicate that they don't agree with a company's compensation program as reflected in its proxy disclosure. Presumably, it means that the board (or compensation committee) needs to talk with shareholders. That's what the bill is trying to encourage.

And from yesterday's WSJ article: Even if the bill passes the House (which seems likely), its prospects in the Senate are uncertain. It could wind up sitting for a while, although I expect that Representative Frank, the bill's sponsor, will continue to push this initiative forward over the next several months.

The next step is a vote in the full House, and Rep. Barney Frank (D., Mass.), chairman of the committee and sponsor of the bill, says that the House leadership has promised that they will make time available on the floor for a vote, although a date hasn't been set. The prospects of the advisory-vote bill are uncertain, especially since the Senate Banking Committee's chairman, Christopher Dodd (D., Conn.), hasn't indicated plans to push a similar measure through his panel.

And lastly, some information from ISS' "Corporate Governance Blog."

Our April Eminders is Posted!

We have posted the April issue of our complimentary monthly email newsletter. Sign up to receive it today by simply inputting your email address!