July 31, 2007

Broadridge Speaks: Demystifying E-Proxy’s Implementation

Since we continue to get so many questions about voluntary e-proxy, I have decided to hold an emergency webcast - "Broadridge Speaks: Demystifying E-Proxy’s Implementation" - next Tuesday, August 7th, so that senior Broadridge executives can explain the nitty gritty about how they will help implement e-proxy.

Broadridge (formerly known as ADP) is driving the e-proxy process and will address all the items on this detailed agenda during the webcast. This is a great companion program for our popular June 2-hour webcast on e-proxy (audio archive and transcript now available).

Posted: "Mandatory" E-Proxy Adopting Release

Last Thursday, the SEC finally posted its adopting release regarding universal e-proxy. You may recall the Staff has been avoiding using the term "mandatory" with this rulemaking because that term implies that a company would have to deliver electronically. This is not true, companies can still deliver in paper under universal e-proxy - the only thing mandatory about it really is that companies will have to post their proxy materials on their website. And most companies already do that. The other change wrought by universal e-proxy is that the proxy materials would have to include another half-page worth of content, the "Notice of Internet Availability of Proxy Materials."

There continues to be a lot of misinformation out there about what mandatory e-proxy really means. In fact, there even is a bit of misinformation out there about voluntary e-proxy. I hear that some folks are recommending that companies sit out the first couple of years to see how things shake out. Remember that significant cost savings are available - although the calculations can be complex - and that a bi-furcated approach is allowable (ie. you can deliver paper and use access for different shareholders). Tune in to next Tuesday's webcast to learn more about how to conduct your e-proxy cost-benefit analysis.

Last Call: Executive Compensation Disclosure Tips

Don't forget that the deadline for our new game - "Executive Compensation Disclosures: 51 Tips” - is this Wednesday, August 1st (we will accept stragglers). We have had many great tips submitted so far, as well as some funny and curious ones. But we know a lot of you out there have more.

What's In It For You? Four things:

1. You participate in a fun game.
2. You learn practical tips to improve your compensation disclosure skills.
3. You share some practical tips with an eager audience.
4. You achieve fame (if you want). You get points and - if you are one of the five top scorers - get your name placed in the Hall of Fame. If you wish to remain anonymous, that is fine too. No one will be acknowledged publicly unless they consent.

How to Play: Send us some practice tips on how to best navigate or improve the compensation disclosure drafting process or draft better disclosures, including things that you have seen a lot of companies do wrong this proxy season. Keep your tips brief (three or four sentences and not more than 50 words). Send us at least one tip and not more than five tips before the deadline.

How to Win: Any tip earns you 10 points. The best tips receive a bonus score of 50 points, the second-best ones earn 30 points, and the third-best ones earn 15 points. If you are among the top five scorers, your name is added to our Hall of Fame (if you consent to being named). All participants will be sent an email with their point total.

How to "Cheat": Reflect on your own experience and derive important tips. We also encourage you to borrow ideas from your friends and coworkers. This really isn’t cheating - but my kids are always looking for the "game cheats," so I felt compelled to act like there might be "cheats" involved.

How to Send Your Tips: Just email them to broc@naspp.com. Remember the limit of five tips. The deadline is close of business on Wednesday, August 1, 2007.

- Broc Romanek

July 30, 2007

Posted: SEC's Dueling Shareholder Access Proposals

Late Friday, the SEC posted its dueling shareholder access proposals: this proposing release that would turn back the clock on Rule 14a-8 regarding director elections (even though some have called it the "status quo") - and this proposing release that would give 5% shareholders the ability to submit binding bylaw amendments regarding access. We have begun posting memos regarding these proposals in our "Shareholder Access" Practice Area.

Such a quick turnaround from Wednesday's open Commission meeting is odd given that the SEC still hasn't posted a press release about these access proposals, something that traditionally happens no later than a day after the related open Commission meeting. As one member remarked, this is almost as unexpected as the posting of the release that amended the executive compensation rules just before Christmas.

Congrats to Corp Fin Staffers Lily Brown, Tamara Brightwell and Steven Hearne for shepparding these proposals through the SEC HQ. Having witnessed the "aircraft carrier" proposal being pushed out a decade ago, I know moving controversial proposals through HQ can't be easy...

Today Marks 5th Anniversary of Sarbanes-Oxley

Today is the fifth anniversary of the signing of the Sarbanes-Oxley Act into law. I have a long tradition of marking this occasion by either barely blogging or not blogging at all, as it cause for those of us in the legal publishing business to celebrate as a piece of "full employment" legislation...

Are the Reviews Funnier Than the "Billy Broc" Videos?

Dave and I started the celebration of the 5th anniversary early last month, with the launch of our "The Sarbanes-Oxley Report" videos. Some of the comments on them have been pretty hilarious. Here are my three favorite so far:

- "Billy Broc EP was raw, pilot grade episode. Dave in the suit and looking scared for his career works as the straight guy to the LSD scarred Billy Broc. You guys damaged some stiff securities lawyers out there, who won’t be the same hereafter."

- "I like your new S.E.R.I.O.U.S. video, if I play it backwards will I find out the hidden meaning of S.E.R.I.O.U.S. (or if I spin my computer monitor at a certain speed while reciting the ’33 Act?) The best I could come up with is: “Shareholders Exercising Rights In Our United States” but I bet you or your readers can think of something better…"

- "I wanted to thank you for providing your profound commentary in "The Sarbanes-Oxley Report." In the midst of preparation to deliver a firmwide training session on the new e-proxy rules, I cannot tell you how helpful it will be to incorporate your sagacious insight into my training materials. The corporate department of our firm (and the securities bar in general) owes a debt of gratitude to "Billy Broc" and "the Animal" for raising awareness and sparking serious debate on the crucial issues of the day. Your thought leadership will make a significant contribution to the development of the securities laws. Please keep up the good work!"

What Song Is It That You Want to Hear?

Maybe "Free Bird"? Anyways, here are the results from our recent survey on what types of issues that you want to see addressed by "Billy Broc" and Dave "The Animal" going forward:

1. What is the oddest thing about the first installment of “The Sarbanes-Oxley Report”?

- I thought “Billy Broc” would have bigger teeth - 22.6%
- Dave “The Animal” smells pretty nice - 35.5%
- I thought this video would have real members of Congress involved - 25.8%
- The whole thing is completely ridiculous, geesh… - 16.1%

2. Future installments should tackle the topic(s) of:

- The future of backdating litigation - 23.3%
- The future of shareholder access - 50.0%
- The future of the world - 70.0%
- The future of the legal profession - 30.0%

- Broc Romanek

July 27, 2007

A New Regulator is Born: FINRA Lives!

The SEC has finally approved the consolidation of the member firm regulatory functions of the NASD and the NYSE. This combined organization will be responsible for regulating all securities firms that do business with the public, as well as operating things like trade reporting facilities and other over-the-counter operations. The new self-regulatory organization also regulates The Nasdaq Stock Market, the AMEX, and the International Securities Exchange under contracts with those organizations. NYSE Regulation, Inc. will continue to be responsible for the regulatory oversight of trading on the NYSE. This regulatory consolidation will not affect the individual exchanges’ regulation of their own listed companies.

The new SRO will be called the Financial Industry Regulatory Authority, or FINRA. It was originally contemplated that the entity would be known as the Securities Industry Regulatory Authority, or SIRA. Unfortunately, as this WSJ article notes, SIRA sounded too much like the Arabic word commonly spelled Sirah, which refers to the biographies of the Prophet Muhammad. After receiving complaints from those who found the SIRA acronym offensive, the already embattled regulator quickly scrapped the name in favor of the more catchy "FINRA."

Now FINRA is coming under fire, as the National Association of Professional Financial Advisors (with an acronym of NAPFA that doesn’t exactly roll off the tongue) complained in a press release that investors will be confused by the broad scope of the new regulator’s name. NAPFA believes that the sweeping name implies FINRA will have authority over all professionals offering financial products and services, when in fact FINRA has no regulatory sway over financial planners and registered investment advisers. A similar complaint was raised by the Financial Planning Association (FPA).

Caught up in the spirit of all this complaining, I will register a couple of my concerns with this new name. First off, if you didn’t know any better, it sounds like the Financial Industry Regulatory Authority regulates the SEC, rather than the other way around. Second, I am not too crazy about the term “authority.” I guess it reminds me too much of names like “port authority.” Ultimately, I suppose the name won’t matter too much as long as this new SRO regulates the industry in a way that promotes investor confidence in our brokers and markets.

Reverse Mergers: Latest Developments

We have posted the transcript from our recent DealLawyers.com webcast: "Reverse Mergers: Latest Developments."

Using Technology to Manage Rule 10b5-1 Plans

In this podcast, Greg Besner of Restricted Stock Systems provides some insight into how the latest technologies can facilitate administering Rule 10b5-1 plans, including:

- What are the latest tweaks to the Restricted Stock System's compliance software?
- How does it work with Rule 10b5-1 plans?
- What questions do clients typically ask regarding these plans and your software?

Hotel Nearly Full: Call Now

Even though we are several months from the Conference dates, the San Francisco Marriott is nearly sold out for all nights related to these four Conferences:

- “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
- “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
- “4th Annual Executive Compensation Conference” (10/11)
- “15th Annual NASPP Conference” (10/10-12)

Here is information about Hotel/Travel Discounts; use this to make your reservation TODAY – and make sure you mention the NASPP to get a discount.

If you call for a room and the Marriott tells you it is sold out, we have reserved rooms at the Westin Market Street (which is located on the same city block as the Marriott). If you are having any problems at all, it is important that you contact us at info@compensationstandards.com or 925.685.5111. Of course, you should also register for the Conferences you plan to attend.

Member Appreciation Package: For those watching via webcast, don’t forget the Member Appreciation Package to catch these October Conferences by video webcast.

Catch Corp Fin Director John White and Associate Director Paula Dubberly talk about how you should be preparing your executive compensation disclosures for next proxy season, among many other hot topics and key speakers. This will be three days of practical guidance that you will want to refer to over and over again.

- Dave Lynn

July 26, 2007

The Race is On: Proposals Compete to Govern Shareholder Access to the Proxy

It was high drama over at SEC headquarters yesterday, as the Commissioners staged a lively debate about how best to address the issue of shareholder access to company proxy materials. Much like the situation with pre-release “spoilers” about “Harry Potter and the Deathly Hallows,” the SEC’s approach on this front was widely anticipated – as it appears that the major newspapers may have had more time than perhaps some of the Commissioners to review the draft releases. Here is Corp Fin's opening statement.

The SEC took the unusual step of approving alternative proposing releases going in opposite directions. The 3-2 votes on both releases were right along party lines, except for Chairman Cox, who, in a remarkable display of dexterity, voted for both proposing releases. While this two-track approach will certainly buy some more time in what has already been a long and drawn out process since last fall’s AFSCME v. AIG decision, it is not clear at this point how the SEC will ever decide on which approach to adopt or whether it will adopt any approach at all. It is hard to imagine that commenters will sway the Commissioners from their hardened positions, particular since most of the pros and cons of these proposed approaches have already surfaced through the extensive comments on the 2003 access proposal and in the more recent Proxy Roundtable Month.

The actual details of these proposals are of course still a little sketchy – perhaps even for the Commissioners who voted on them. Commissioner Nazareth complained at the open meeting about the fact that she had received a brand new draft proposing release on Tuesday which she termed the “Shareholder Non-Access Proposal.” Given the amount of time that the SEC has been considering these issues, it is certainly notable that the proposals were so fluid in advance of the meeting.

Rep. Barney Frank (D., Mass.) promised back in June that the House Committee on Financial Services will hold hearings on shareholder access once the rules are proposed. Yesterday’s alternative proposals should give the Committee plenty to talk about. We can only hope that the SEC’s indecision on this issue does not result in some sort of rash Congressional action that could ultimately make life more difficult for both companies and shareholders.

Status Quo versus Access by Significant Shareholders

Based on the Staff's description, one of the proposing releases debated at yesterday’s meeting looks like something that the SEC might have done last fall, when the agency confidently announced that it was calendaring a proposal to address the uncertainty created in the wake of the AIG decision. This proposing release will include a Commission interpretation of Exchange Act Rule 14a-8(i)(8) confirming the long-standing position that companies may exclude from their proxy materials any proposals that would result in an election contest, or that would initiate a process whereby shareholders could conduct a future election contest by requiring that the company’s proxy materials include director candidates nominated by shareholders. The proposing release will also include proposed changes to the text of Rule 14a-8(i)(8) reflecting the Commission’s interpretive position.

The second proposing release will contemplate a fairly straightforward procedure that would enable significant shareholders to include binding access proposals in company proxy materials. Chairman Cox noted at the meeting that lessons were learned from the aborted effort to adopt a new Rule 14a-11 governing shareholder access back in 2003, and the same mistakes were to be avoided with these proposed amendments to Rule 14a-8. Under the proposed amendments, a shareholder would be able to include a shareholder nomination bylaw proposal in the company’s proxy materials only if:

- the proposal relates to a change in the company’s bylaws that is binding on the company if approved;
- the proposal is submitted by a shareholder or shareholder group that has continuously held more than 5% of the company’s securities for at least one year; and
- the shareholder or shareholder group is eligible to, and has, filed a Schedule 13G that would contain expanded disclosure about the shareholder proponent(s) and the proponent(s) and prior interactions with the company (Schedule 14A will also require this comprehensive disclosure).

Not surprisingly, the release is going to include proposed amendments to the proxy rules that would encourage the use of electronic shareholder forums, a much-maligned approach that was floated during the May proxy roundtables. Finally, the proposing release will include questions about the Rule 14a-8 process generally, which could potentially open the door for broader changes to shareholder proposals.

Some further insights on the shareholder access proposals are provided by good ole’ Billy Broc in this week’s Sarbanes-Oxley Report entitled "Shareholder Access: S.E.R.I.O.U.S." Watch the short vidcast through to the credits (if you can bear it) for a special treat.

SEC Adopts the PCAOB’s Auditing Standard No. 5

One highlight of yesterday’s meeting is that the SEC hopefully closed the book on the most contentious aspect of the Sarbanes-Oxley Act’s implementation, by approving the PCAOB’s Auditing Standard No. 5 governing the audit of internal controls. Everyone is counting on this shorter, more principles-based and less prescriptive auditing standard as providing the basis for more reasonable and appropriately scaled audits of internal controls. The PCAOB has pledged to focus on ensuring that implementation of this standard by auditors is consistent with everyone’s noble vision, and the SEC has said it will keep up the heat on the PCAOB through the SEC’s oversight of the PCAOB inspection process. Here is Corp Fin Director John White's opening statement.

The SEC also adopted a definition of “significant deficiency” for the purposes of SEC rules. Surprisingly, no 3-2 vote there.

Concept Release on Use of IFRS by US Companies

The SEC also voted to publish a concept release that will solict comments on the topic of permitting US issuers to prepare their financial statements using International Financial Reporting Standards as published by the International Accounting Standards Board. This concept release is going to be out for an unusually long 90-day comment period.

- Dave Lynn

July 25, 2007

Enforcing Section 404 of the Sarbanes-Oxley Act

Earlier this month, I blogged about the potential Section 404 delay for non-accelerated filers that could result from the so-called Garrett-Feeney amendment to the Financial Services and General Government Appropriations Act (H.R. 2829). While the appropriations bill (including the Garrett-Feeney amendment) quickly passed in the House and was referred to the Senate, nothing further has apparently happened with the piece of the legislation regarding Section 404.

The Garrett-Feeney amendment specifically provides that “[n]one of the funds made available under this Act may be used by the Securities and Exchange Commission to enforce the requirements of section 404 of the Sarbanes-Oxley Act with respect to non-accelerated filers, who, pursuant to section 210.2-02T of title 17, Code of Federal Regulations, are not required to comply with such section 404 prior to December 15, 2007.” I thought that the language of this legislation was curious, because to date there really has been little evidence of SEC efforts to actually enforce the requirements of Section 404. In fact, I think that the SEC has generally sought to make implementation of Section 404 go as smoothly as it possibly could by not resorting to more drastic measures – such as delistings and Enforcement actions – as the means for compelling companies to finish their internal control assessments on time.

This “honeymoon” period with Section 404 may be coming to an end, as it looks like there is at least one ongoing Enforcement investigation involving a company that may not have completed its Section 404 work when required. In a Form 8-K filed last December, Hawk Corporation announced that the SEC Staff had made an informal inquiry requesting information about: Hawk’s preparations for complying with Section 404; transactions in the company’s common stock on June 30, 2006 by a stockholder not affiliated with the company and the impact of those transactions on when Hawk needed to comply with Section 404 (Hawk notes on its Form 10-K that it is a non-accelerated filer – therefore, it would have to complete its first Section 404 internal control assessment for next year’s 10-K absent any further extension); and communications between Hawk and a third parties regarding Section 404 compliance. Hawk also noted in the Form 8-K that it had been contacted by the Justice Department regarding that agency’s related investigation of the company. At the end of May, Hawk filed another Form 8-K announcing that Enforcement had obtained a formal order to investigate this matter, which was expanded to look at the company’s maintenance and evaluation of effectiveness of disclosure controls and procedures and internal controls over financial reporting, as well as Hawk’s periodic disclosure requirements related to these matters.

There is no telling if the SEC or DOJ will ultimately bring any charges as a result of their investigations, but Hawk’s situation certainly signals that, nearly five years following enactment of Sarbanes-Oxley, any forbearance in actually enforcing the requirements of Section 404 has probably run its course.

PCAOB Proposes Independence Rule Changes

Yesterday, the PCAOB proposed a new ethics and independence rule entitled “Communications with Audit Committees Concerning Independence.” This rule would replace the PCAOB’s interim independence requirement, Independence Standards Board Standard No. 1 (and two related interpretations), and would require independence communications with the audit committee prior to commencement of an engagement and then annually for continuing engagements. The Board also proposed amendments to current PCAOB Rule 3523, “Tax Services for Persons in Financial Reporting Oversight Roles,” as a follow-up to a favorably-received concept release issued earlier this year.

As Edith Orenstein notes in FEI's "Financial Reporting" Blog, the proposed amendments to the tax services rule “would exclude the portion of the audit period that precedes the beginning of the professional engagement period, from being deemed a ‘prohibited service’ under Rule 3523. As explained by PCAOB Assistant Chief Auditor Bella Rivshin, this will be accomplished by striking the words “audit and’ from the current text of Rule 3523. A number of PCAOB board members said they support this proposal, as it would not unduly limit choice among potential audit firms based on tax services provided to individuals at the company prior to commencing the audit engagement. PCAOB staff noted that registered audit firms would be still need to look at facts and circumstances and determine if independence is impaired under the SEC’s audit independence rules.”

The FEI Blog goes on to note that the proposed new rule on independence communications with the audit committee would “change the threshold of what needs to be communicated from matters which – in the auditors’ professional judgment – could impair independence, to matters that a reasonable investor (i.e. third party) may perceive as impairing the auditors’ independence.” The PCAOB will seek comment on whether there should be a specific look-back period for providing information about services that could impair independence, as well as the extent to which information about the independence of non-affiliated secondary auditors must be included in the communications with the audit committee.

These PCAOB proposals will be out for a 45-day public comment period.

Chuck Nathan on Appraisal Rights

In this DealLawyers.com podcast, Chuck Nathan of Latham & Watkins provides some insight into a recent Delaware case - In re: Appraisal of Transkaryotic Therapies (Del. Ch. Ct., 5/2/07) - dealing with appraisal rights, including:

- What happened in the recent Transkaryotic Therapies case?
- How might the case impact appraisal rights going forward?
- What might it mean in terms of the strategies that hedge funds pursue?

- Dave Lynn

July 24, 2007

Related Party Transactions: The SEC's Enron Lawyer Charges

While yesterday’s blog provided an example of one professional’s good fortune to dodge serious sanctions for securities law violations in two separate cases, I don’t think that means the SEC is likely to be going soft on “gatekeepers” any time soon, particularly when the gatekeepers have a direct hand in the violations. This is probably no better demonstrated than in an action the SEC filed earlier this year against Enron’s former in-house attorneys. The defendants in this ongoing civil case are Jordan Mintz, who was an in-house Enron tax lawyer and ultimately General Counsel to Andy Fastow’s Enron Global Finance department, and Rex Rogers, who was Enron’s principal in-house securities lawyer and a former SEC Staffer. In the complaint, the SEC charged both lawyers with primary violations of anti-fraud and reporting provisions. Mintz was also charged with books and records violations and lying to auditors, while Rogers was charged with aiding and abetting Ken Lay’s violations of Exchange Act Section 16(a).

This case focuses on violations arising from Enron’s failure to disclose, or to otherwise adequately disclose, related party transactions pursuant to Item 404 of Regulation S-K, as well as under the financial statement requirements. The allegations focus on efforts by the lawyers to hide the nature and scope of the related party transactions occurring between the company and the LJM partnerships, as well as the role of Enron executive officers in the transactions. As Enron’s stock price declined in 2001, pressure to avoid disclosure about the details of the related party transactions increased, and the lawyers are alleged to have come up with ways to delay or avoid the required disclosures, or ways to have omit or misrepresent material facts when disclosures were made. The SEC is going all out in seeking disgorgement, civil money penalties and officer and director bars in this proceeding.

Even though the outcome of this case is yet to be decided, the complaint in this matter is notable for its descriptions of the ways in which the in-house lawyers allegedly participated in the scheme to avoid disclosures – including their efforts, as Mintz wrote in an email to Rogers “to be ‘creative’ on this point [disclosure of Fastow’s compensation from the LJM partnership] within the contours of Item 404 so as to avoid any type of stark disclosure, if at all possible.” [Are people still writing emails like this?]

With the clock ticking, this case may be among the last that we will see filed against Enron defendants. Given that the SEC has pursued relatively few notable related-party transaction cases in the past, this one is certainly a must-win for the SEC.

The New Related Person Transaction Disclosure Rules: Life After Enron

The efforts to be “creative” at Enron likely had a big hand in shaping the changes that the SEC made to Item 404 of Regulation S-K last summer. In this way, the Enron complaint is a good guidance for what not to do when preparing your related person transaction disclosures under the new rules.

While Item 404 had really been a principles-based rule before “principle-based” was cool, the SEC attempted to make the rule more principles-based by stripping off some of the instructions and provisions that it thought could lead to outcome-oriented, tortured readings of the rule. The SEC also very purposely revised the wording to broaden the requirement, changing the old “related party” to “related person” and calling for disclosure if a company is a “participant” in (rather than a “party” to) a transaction. As the Staff has noted, these changes were designed to elicit disclosure about more than just contractual parties, and should reach arrangements – such as the side deals highlighted in the Enron complaint – that are not necessarily memorialized in deal documents or signed up on a dotted line.

The SEC also tried to clarify the broad scope of the term “transaction” as used in Item 404 – a transaction is defined to include, but not be limited to, any financial transaction, arrangement or relationship (including any indebtedness or a guarantee of indebtedness) or any series of similar transactions, arrangements or relationships. The new rules also make it much clearer that you have to disclose the dollar value of the amount of the related person’s interest in the transaction, which is to be computed without regard to the amount of profit or loss, removing the “where practicable” exception from the rule that could be used to creatively avoid disclosure.

The SEC also expanded the related persons covered by the rule to include stepchildren, stepparents and any person (other than a tenant or employee) sharing the household of a related person. The rule now requires disclosure of transactions involving the company and a person (other than a significant shareholders or immediate family member of a significant shareholder) that occurred during the last fiscal year, if the person was a “related person” during any part of that year, in an apparent effort to prevent folks from avoiding the disclosure requirements by artificially timing transactions or appointments. Finally, the SEC seemed to adopt the Item 404(b) disclosure requirement regarding review and approval of related person transactions as a means of encouraging companies to adopt some management or director oversight of related person transactions, which was starkly lacking at Enron based on the allegations in the complaint.

Compliance with Item 404 has always been tough, because the rule requires significant materiality judgments about very sensitive transactions, without a lot of helpful guidance or parameters. Following the SEC’s efforts to “streamline and modernize” the rule, compliance was certainly made even more difficult, now that some of the guidelines disappeared. Nonetheless, the principles-based nature of the rule is not going to prevent folks from figuring out creative ways to avoid sensitive disclosures, nor will it prevent the SEC from continuing to bring cases questioning judgments about related person transaction disclosures. Be sure to check out our “Related Party Disclosures” Practice Area and our “Related Party Transactions” Practice Area for the latest developments in this area.

Early Bird Expires Tomorrow: 3rd Edition of Romeo & Dye Section 16 Treatise

Peter Romeo and Alan Dye are hard at work updating their two-volume Section 16 Treatise. The Treatise is the definitive work in this area with thousands of pages of reference material.

Order your set by tomorrow, July 25th to receive a pre-publication discount now - you can order online or by fax/mail with this order form. The Treatise will be completed and delivered to you in the Fall.

- Dave Lynn

July 23, 2007

Dodging the SEC Bullet a Second Time

For most senior executives, in particular top legal officers, an SEC action can often be considered the ultimate CLM – a Career Limiting Maneuver. Apparently that is not the case for David Drummond, who serves as Senior Vice President, Corporate Development and Chief Legal Officer of Google. With two SEC actions now behind him, Drummond seems to be going strong.

Last week, the SEC announced a settlement of its actions against four former executives of SmartForce PLC, its former outside auditor, and the company’s former audit engagement partner. In what boiled down to a revenue recognition case, the SEC alleged that SmartForce’s senior financial personnel had prepared financial statements that recognized revenue improperly from various types of transactions, including multiple-element arrangements, reciprocal transactions and reseller agreements. The SEC noted that Drummond, who served as Chief Financial Officer of SmartForce, was ultimately responsible for the financial statements and violated the Exchange Act reporting provisions by failing to determine whether SmartForce was improperly recognizing revenue on reseller agreements, failing to communicate information about a reciprocal transaction to accounting staff, and failing to determine whether the reciprocal transaction complied with GAAP. As noted in an article from Friday’s WSJ, David Drummond’s attorney stated: “In retrospect, Mr. Drummond acknowledges that he would have been better served in his role at SmartForce had he possessed an accounting background.” In the settlement, Drummond agreed to disgorgement and a civil penalty totaling over $600,000 plus a cease & desist order, but he faces neither an officer and director bar nor any improper professional conduct penalty.

David Drummond also got caught up in a 2005 SEC action involving Google’s failure to register employee option transactions under the Securities Act and to provide required information to option recipients. That proceeding focused on Drummond’s role, this time as General Counsel of Google, in determining whether Rule 701 or another Securities Act exemption applied to the company’s employee stock options transactions prior to its IPO. The company filed a rescission offer for those options transactions after it determined that the claimed exemptions were not available. In settlement of that Enforcement proceeding, Drummond agreed to a cease and desist order for Securities Act registration violations.

With those serving in the roles of General Counsel and Chief Financial Officer seemingly in the SEC cross-hairs with the recent spate of options backdating cases, these two cases demonstrate that settling an SEC action is not always the end of the world. You really need to examine the circumstances of each case, and the penalties imposed, in judging the overall impact of the case on the individuals involved.

Disclosing the SEC’s Enforcement Interest in an Executive Officer

The then-pending SEC investigation of David Drummond’s role at SmartForce surfaced shortly before Google’s high profile IPO back in 2004. The company’s prospectus included somewhat ugly disclosure about the Staff’s intention to recommend that the SEC bring a case against Drummond, and noted that the Staff had offered him the chance to make a Wells submission and that he intended to make such a submission.

This situation highlights the often difficult question: “When is the right time to disclose an SEC investigation against the company and/or one of its executive officers?” While Item 103 of Regulation S-K provides that governmental proceedings “known to be contemplated by governmental authorities” against the company need to be disclosed, Item 401(f) of Regulation S-K – which covers legal proceedings involving officers and directors – includes no such language about “contemplated” proceedings. Practices continue to vary as to when companies will choose to disclose pending SEC investigations involving a company, its officers and directors, although certainly a “Wells” call from SEC Staff is more likely today than ever to result in public disclosure about the investigation. In the absence of a bright-line test for determining when to disclose a pending investigation, some have criticized how long it takes for ongoing investigations to come to light. In fact, last summer an individual sent a rulemaking petition to the SEC asking that it adopt a rule requiring a Form 8-K filing shortly after the company receives a Wells notice. I suspect that, given all of the other things on Corp Fin’s plate and the general sense of “8-K fatigue,” this petition won’t be acted on anytime soon.

As demonstrated by the situation with David Drummond, disclosing the SEC’s interest in an executive at the Wells stage can result in disclosure that the company may have to live with for some time. Three years have gone by since the initial disclosure in Google’s IPO prospectus about the investigation, and Google has included the same disclosure in each 10-K for the last three years about the existence of the Wells request and Drummond’s Wells submission – with no update as to the status of the investigation. Had the case not been settled, this disclosure could have certainly gone on indefinitely.

For more information about disclosure of SEC investigations, check out our “FAQs re: Disclosure of Enforcement Proceedings” and our “Sample Disclosures of SEC Actions” in our “SEC Enforcement” Practice Area.

Posted: July-August issue of Deal Lawyers print newsletter

We have just sent our July-August issue of our new newsletter - Deal Lawyers – to the printer. Join the many others that have discovered how Deal Lawyers provides the same rewarding experience as reading The Corporate Counsel. To illustrate this point, we have posted the July-August issue of the Deal Lawyers print newsletter for you to check out. This issue includes pieces on:

- The Leveraged Buy-Out with a Public Stub: Deals So Far and Factors to Consider
- "I'll Swap Two Derek Jeters and a Pack of Cherry Bazooka for Five Barry Bonds"
- Taming the Tiger: Difficult Standstill Agreement Issues for Targets
- Drafting Forum Selection Provisions
- The "Sample Language" Corner: Joint Governance Provisions in Merger of Equals Transactions

Act Now: Try a no-risk trial today; we have special "Rest of 2007" rates, which includes a 50% discount - and a further discount for those of you that already subscribe to The Corporate Counsel. If you have any questions, please contact us at info@deallawyers.com or 925.685.5111.

- Dave Lynn

July 20, 2007

Chart: What to Do When Auditing Goes Awry

We have posted a new nifty chart that analyzes what the SEC and NYSE rules, disclosure, lenders and D&O insurer issues are implicated under six different scenarios involving auditing crisises, including:

- Auditor gives SAS 71 letter with exceptions
- Auditor unable to perform SAS 71 review
- Failure to file Section 906 certification
- Failure fo file a Form 10-Q
- Unable to file clean 906 CEO/CFO certification in a timely manner
- Auditor pulls opinion
- Decision made to reaudit

CEO Turnover and Succession

In this podcast, Steve Wheeler of Booz Allen Hamilton analyzes the latest trends regarding CEO turnover and succession planning (as reflected in Booz Allen’s recent study), including:

- What are the most notable trends you found in your study?
- What do you see happen to most CEOs at targets in the wake of a merger?
- What do you see happen to CEOs at companies that are not performing well?
- What are the timeframes that companies are looking at for CEO performance?
- Are the trends different on a global scale?
- Your study talks about the end of the imperial CEO and the beginning the era of the inclusive leader – what does that mean for companies and CEOs?

It's Just Human Nature: Playing "Fast and Loose" in the Credit Market

This WSJ article is one of those that you read and it gives you pause. This excerpt says it all:

"In a new report that assesses the status of the market, the Moody's Corp. unit said it was passed over and not hired for 75% of the commercial mortgage-backed securities rating assignments issued in the past few months as a result of its requirement that issuers add an extra layer of credit enhancement. Moody's said issuers are "rating shopping" -- meaning they were hiring competitors that would hand out higher ratings on securities. Because Moody's makes money rating the creditworthiness of bond issuances, blacklisting could potentially eat away at the firm's bottom line if the trend continues."

Brings back memories of why Congress forced the SEC to conduct a study back in 2003 regarding the role and function of rating agencies in the markets - which then led to the Credit Rating Agency Reform Act of 2006 (which gave the SEC more power over rating agencies). Learn more in our "Rating Agencies" Practice Area.

- Broc Romanek

July 19, 2007

Next Wednesday: Big Doings at the SEC

As the rumors predicted, the SEC will hold an open Commission meeting next Wednesday - July 25th - to propose some version of shareholder access; adopt a definition of "significant deficiency"; approve the PCAOB's AS #5; and issue a concept release on IFRS.

Is the SEC Allowed to Float Drafts of Proposals?

As Dave blogged last week, the WSJ reports that a draft of the SECs' shareholder access proposal has been making the rounds - but until we see what is announced at the open meeting, it is hard to know what version of it will actually be proposed.

Some members have asked whether the SEC is permitted to circulate a draft outside of the SEC before the Commission meets to formally propose a rule. I guess that depends on one's interpretation of the Administrative Procedures Act (which is the Act that governs rulemaking by the federal government). I am far from an APA expert, but I think that the biggest issue is not so much that someone at the SEC gave a copy of a draft proposal rule to someone - the issue may be that the SEC did not process any comments received on a draft in accordance with the APA (ie. make them publicly available). Every so often, you will see a memo briefly summarizing a meeting between SEC Staffers and outside parties that is posted on the public comments section of the SEC's website; this is done to comply with the APA.

On the other hand, some members have distinguished between talking about the general concepts with outside parties (as being generally okay) - from releasing specifics about a proposal even before the Commission has voted on it. One member points out that "leaks" are nothing new and occurred way back in the day when the tender offer rules were revised in the early '80s - and that this resulted in some quasi-whistleblowing activity. I suspect that floating drafts goes on more than we know - but I would bet the final product probably is the better for it...

IRS Agents: Reading SEC Comment Letters (and Responses)?

McGuire Woods put out this interesting client memo earlier this week:

"IRS officials continue to explain how the IRS will use FIN 48 Disclosures and SEC correspondence in examining taxpayers. As previously reported (see "IRS Releases Internal Memoranda on FIN 48"), the IRS is studying whether its policy of restraint on tax accrual workpapers remains sufficient in the new world of uncertain tax position disclosures. For now, the policy of restraint remains in effect with respect to FIN 48 workpapers. Nevertheless, the IRS is forging ahead with training examiners to more effectively audit taxpayers using FIN 48 Disclosures, as well as publicly available Securities and Exchange Commission (SEC) correspondence on those disclosures. In fact, FIN 48 Disclosures are the "centerpiece" of this year's training for IRS agents, according to Robert D. Adams, Senior Industry Advisor to LMSB Division Commissioner Deborah Nolan.

In addition to the FIN 48 Disclosures, IRS agents are being trained on reading SEC comment letters issued to taxpayers and the accompanying taxpayer responses. Some disclosure filings made to the SEC are selected for review. SEC staff may provide filers with comments on these filings in situations in which the SEC believes the filings could be improved or enhanced. Once the SEC reviews are completed, the comment letters and responses are made available online in 45 days. Although the purpose of SEC filings is to give investors the information they need to make informed decisions about the financial position of companies, including risks associated with tax positions, comment letters and responses with respect to these filings may provide 'helpful' tax information to IRS agents."

Last Chance: Early Bird Discount Expires Tomorrow

For those watching via webcast, don’t forget that the Early Bird deadline expires tomorrow - Friday, July 20th. So this is your last chance to take advantage of a nice discount on the Member Appreciation Package to catch these October Conferences by video webcast:

- “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
- “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
- “4th Annual Executive Compensation Conference” (10/11)

We know that next proxy season will be as challenging as this past one, as the SEC continues to tweak its rules or interpretations of them – and as companies tweak what they disclosed after they see what emerging best practices are. So take advantage of this discount while you can.

We promise that these Conferences will be as practical as they were last year. These Conferences focus on developing practical skills with proven effectiveness. If you have questions, please contact me - or our HQ at info@thecorporatecounsel.net or 925.685.5111.

- Broc Romanek

July 18, 2007

Some Thoughts on Board "Engagement" with Shareholders

Recently, Pfizer made an announcement - see "Press Release – Directors to Initiate Face-to-Face Meetings with Institutional Investors" - that has generated some interesting commentary, with legal titans Marty Lipton and Ira Millstein squaring off on whether shareholders should meet with directors. These memos are posted in our "Shareholder-Director Communications" Practice Area.

In this podcast, Peggy Foran of Pfizer explains the company’s new policy regarding board engagement, including:

- What does Pfizer’s new policy entail?
- How will the board’s activities under the new policy differ from what the Pfizer board has done in the past?
- Some commentators have urged that the Pfizer board’s "engagement" be webcast so that more shareholders can participate. Why won’t it be?

Management-Shareholder Engagement: The Results Are "In"

Speaking of "engagement," did you catch this WSJ article on Monday that summarizes how the proxy season unfolded? This quote from ISS' Pat McGurn encapsulates the piece: "We've never had a season that had so much activity going on in the wings and much less taking place center stage."

What really struck me was that "24% of shareholder proposals for annual meetings were withdrawn this year, as of July 6." Wow! That's truly amazing, particularly given that there are many proponents with whom it's a waste of time to even attempt to negotiate a proposal "out." But clearly, more and more companies are realizing it's worth the time to "engage" with those proponents who are willing to meet somewhere in the middle on the issues raised (and remember, those issues are not always those presented in a shareholder proposal - many proponents have ulterior motives, which they cannot include in a proposal because it might be excludable under the bases in Rule 14a-8).

In our "Shareholder Proposals" Practice Area, I encourage you to check out the piece - "Negotiation and Settlement of Proposals" - that Beth Young and I wrote a while back that is a pretty good primer on how to conduct successful negotiations with proponents.

Internal Controls Update: AS #5, Management Reports and All that Jazz

Tune in tomorrow for our webcast - "Internal Controls Update: AS #5, Management Reports and All that Jazz" - to hear Linda Griggs, John Huber and Armando Pimental discuss the latest guidance from the PCAOB and SEC on internal controls.

- Broc Romanek

July 17, 2007

The Whole Foods' CEO Message Board Fiasco: It's the '90s All Over Again!

Over the last few days, plenty has been written in the media about how the Whole Foods CEO John Mackey has been posting messages - anonymously - about his company and his competitor on this Yahoo! message board devoted to Whole Foods' competitor Wild Oats (if you want to read some of the CEO's posts related to Wild Oats, scroll down for the URLs in this blog). Wild Oats is now in the process of being bought by Whole Foods, but first needs anti-trust clearance from the Federal Trade Commission - and the FTC has sued to block the deal. The CEO's postings came to light when they were mentioned in the FTC's memo filed last week to support its motion for a preliminary injunction (and here is the FTC's original complaint). According to this NY Times article regarding "sock puppets," Mackey has been posting anonymously for 8 years.

Lord knows why Mackey has been doing this, particularly given that he is one of those rare CEOs that has his own blog, which he can use to express his views. For more on issues raised by employees that blog, see our "Employee-Blogger" Practice Area.

My take on the provocative story is that I didn't realize that folks were still using message boards. That's so '90s! Back then, everyone was concerned about cybersmears and message boards - and how they could impact your stock price. It was such a big issue that I got halfway through writing a book on the topic, that I ended up scrapping because the issue dropped off the edge of a cliff, as everyone migrated away from message boards as "bigger and better" things to do on the Web emerged.

Apart from potential legal issues and liabilities, the biggest problem I have with this CEO's activities is that it sets a poor example by the company's leader. Back when I wrote on this topic, one area I would focus on is how companies should adopt policies to ensure employees didn't post messages about their employer due to legal and other reasons. Here is a set of FAQs on Cybersmears and Message Boards that I wrote at least five years ago - note that it includes a section on "Potential Employer Obligations Arising from Employee Messages" that probably holds water even today. I didn't think to include a statement that anonymous postings by a CEO could tank a merger...

The Whole Foods Fiasco: What are the Disclosure and Securities Laws Issues?

On his "The Race to the Bottom" Blog, Professor Jay Robert Brown does a great job of analyzing the securities law issues implicated by the Whole Foods anonymous posting incident as follows:

"The WSJ has reported that the Commission has opened an investigation into the activities of Whole Foods CEO John Mackey. It seems that Mackey over an eight year period made posts on an online stock forum run by Yahoo using a pseudonym. Mackey, according to the WSJ report, "lauded Whole Foods' stock, cheered its financial results and bashed a company Whole Foods made a bid to acquire." Some of the posts are here. The Journal speculated that the SEC might be looking into whether Mackey's statements contradicted statements made by the company, were "were overly optimistic about the firm's performance," or violated Regulation FD.

We talk often about SOX, particularly in the context of investor confidence. Accurate disclosure is, in the end, at the core of investor confidence. But, while Mackey may have exercised very poor judgment, does that equate to a violation of the securities law?

There are two broad categories of possible violations. They include fraud (making materially incomplete or inaccurate statements) and selective disclosure (providing material information to select persons in the market). My book, The Regulation of Corporate Disclosure, examines these topics in detail.

Selective disclosure is not per se improper, a legacy of Chiarella. (We have criticized the awful reasoning of this case on my blog. Suffice it to say that it validated deliberate selective disclosure by corporate insiders in some cases). Regulation FD was a regulatory response to this case and the problem of selective disclosure. Regulation FD does not exactly prohibit selective disclosure. Instead, to the extent a company (through its agents) deliberately discloses material non-public information to certain investors/market professionals, it must simultaneously make public disclosure of the information. A company that accidentally disclosed material non-public information on a selective basis has 24 hours to disclose it to the entire market. See 17 CFR 243.100, et seq.

These provisions will be very difficult to apply to Mackey. First, with respect to Regulation FD, the SEC will have to show that Mackey disclosed material nonpublic information. Second, once disclosure occurs, it is not the disclosure of the information that violates Regulation FD but the failure to disclose the information to the entire market. This burden rests with Whole Foods. The SEC will need to show that Whole Foods knew about the disclosure and failed to meet the requirements of Regulation FD. While the CEO made the disclosure and he is an agent of Whole Foods, the SEC and courts may have a hard time attributing the information to the company given Mackey's the possible stealth involved (indicated by the reported use of a pseudonym). Finally, Regulation FD only applies to disclosure to certain types of investors or market professionals such as analysts. It really was not intended to apply to disclosure that was arguably to the entire market. Disclosure in the Yahoo forum is arguably to the entire market (and, in any event, would arguably meet the defintion of "public dislcosure" for purposes of Regulation FD).

As for the antifraud provisions (primarily Rule 10b-5), there is no question that the prohibition on fraud applies to material disclosed on the Internet. Posting false information or making inaccurate statements in chat rooms or threaded discussions can be the basis of a fraud suit much the same was as false statements in press releases. The SEC will need to show that Mackey made materially false or incomplete statements. The problem here is materiality. Since he used a pseudonym, the market was arguably unaware that he was directly connected to Whole Foods. As a result, the market may have not treated his statements as material but instead viewed them no different than uninformed statements from ordinary investors.

This is not, however, the end of the story. Even without disclosing his identity or role in the company, the depth of the comments, the accuracy over time, and the uniqueness of the information, may well have alerted the market to the fact that he had unique information that could only come from an insider (either because he was an insider or because he was communicating with an insider). In those circumstances, those in the market may well have treated the statements as material. Analysts who follow Whole Foods in Yahoo could probably resolve this.

We shall see where this case goes. At a minimum, it suggests that top officers ought not to be communicating (perhaps at all but certainly not through pseudonyms) in chat rooms and investor forums."

Romeo & Dye Analyze New Section 16 Interps

Recently, the SEC Staff issued long-awaited Staff interpretations on Section 16 issues. In the latest issue of Romeo & Dye Section 16 Updates – which was just mailed - Peter and Alan analyze the numerous new and modified interps, including a controversial one regarding aggregate reporting that will have a widespread impact on many Section 16 filings.

Act Now: To receive this critical guidance, take advantage of our “Half-Off for the Rest of 2007” No-Risk Trial for Romeo & Dye’s Section 16 Annual Service. Note that this Annual Service is a print service and this guidance is NOT available on Section16.net.

- Broc Romanek

July 16, 2007

Final Piece of E-Proxy Puzzle: Broadridge's Fees

With voluntary E-Proxy now effective, many companies have been waiting to see what fees will be charged by Broadridge (formerly known as ADP) in order to run a cost-benefit analysis and determine whether cost savings would truly be realized by using E-Proxy (don't forget our "Cost-Benefit Worksheet"). Broadridge's fees have finally been announced - and I believe they work like this:

1. Existing fee rates remain in place for beneficial owner processing.

2. If an issuer decides to use voluntary E-Proxy, the following incremental/step-based fees apply for sending a notice, etc. to beneficial owners:

- First 10,000 accounts @ $0.25 per
- Next 10,001 - 100,000 accounts @ $0.20 per
- Next 100,001 - 200,000 accounts @ $0.15 per
- Next 200,001 - 500,000 accounts @ $0.10 per
- 500,001 + accounts @ $0.05 per

Regardless of the number of accounts that an issuer wants to "E-Proxy," Broadridge will charge a minimum fee of $1500. In other words, if an issuer wants to E-Proxy to just a few accounts, the fee will be $1500 regardless of step-based fee formula above (but this floor is not a fee that is tacked onto the step-based fee).

As an example of how this works, an issuer using E-Proxy for 100,000 beneficial owner accounts would incur fees as follows:

- First 10,000 accounts @ $0.25 = $2,500

- Next 90,000 accounts @ $0.20 = $18,000

Total Cost = $20,500

3. Rather than have separate fees for various services, Broadridge will provide the following services as part of the step-based fees above (ie. they are "inclusive"): print and fulfillment (ie. mail) services for the notice; fulfillment and fulfillment support for hard copy requests; 800# set up; Internet and 800# voting, support two work flows (sending notices and hard copy proxy materials), and will also provide a standard landing web page (ie. where shareowner inputs control number) and standard shareowner portal (ie. where shareowner arrives once the control number is recognized; this is where proxy materials, voting platform and place to request hard copy is located).

Issuers can upgrade and have a customized landing page and shareowner portal, where the fee will vary depending on what features an issuer wants. Annual storage fees for hard copies are approximately $1,000 per document (so storage is cheaper if you have a combined proxy and annual report vs. two separate documents) for the first 5,000 copies and $800 for every 5,000 after that.

4. Note that same rates in #2 above apply if Broadridge is hired to send notice, etc. to registered owners. However, when calculating costs, the registered accounts are not combined with beneficial accounts. In other words, when making your registered owners calculation, you start at the top of the step-based fee ladder.

5. Broadridge's suppression fees remain in place for large issuers (>200,000 positions) at $0.25 per suppression, and changes slightly for small issuers (<200,000 positions) to $0.40 per suppression for householding, etc. The e-delivery suppression fee, however, remains at $0.50 for small issuers.

The NYSE's and SEC's (Lack of) Role in Broadridge's E-Proxy Fee-Setting

Note that the NYSE and SEC aren't directly involved in Broadridge's fee-setting process regarding E-Proxy. In contrast, the SEC requires issuers, brokers and banks to ensure that proxy materials are distributed to beneficial owners - and NYSE Rule 465 governs the fees paid by listed companies to brokers and banks for their distribution of proxy materials and other communications to the shareholders. Nearly every broker and bank have contracted with Broadridge to perform the functions related to these beneficial ownership obligations, including distribution of proxy materials, proxy tabulation and responses to requests for shareholder lists; resulting in a near-monopoly.

Under Rule 465, the NYSE and SEC are required to bless how much Broadridge charges brokers and banks to forward proxy materials to shareholders (issuers reimburse these brokers and banks - in practice, issuers directly get billed by Broadridge). This rate-setting exercise occurs every few years, with the last rate-setting transpiring in 2002. As part of this fee-setting process, the public is allowed to comment.

Under E-Proxy, Rule 465 comes into play only to the extent an issuer continues to rely on affirmative consents to e-delivery - or chooses to send paper to some beneficial owners. So, the SEC and NYSE largely remain uninvolved in setting Broadridge's E-Proxy fees - something that has a number of issuers concerned, judging by the e-mails I recently have been receiving from some in-house members.

E-Proxy: The Issue of "Usability"

When E-Proxy was proposed, one fear expressed by commentators was that companies aren't sufficiently prepared to provide proxy materials and a voting platform that enables shareholders to easily access the materials and vote. By looking at the first handful of companies that have revealed that they are trying E-Proxy, this fear may not have been far off the mark.

Here is one thought from an anonymous member: "What gets me about these initial E-Proxy companies is that everyone is following the prevailing vendors' (some say manipulative) leads - in requiring people to enter their voting codes in order to view the proxy materials. The voting code should only be required to execute a proxy - not to view or print.

To my eyes, the SEC rule plainly states that the url/link provided to shareholders needs to link directly to the materials, no navigation required. I'd venture that the fact that a code is required to view could be interpreted by some as not being "public" in the general understanding of the word, as well. This technique is likely to make the first shareholder experiences less palatable and chase people back to paper. All those people who try to go to a site without the code in hand will bail and opt for paper. We have nanosecond tolerances these days on the web."

If you read the transcript from our recent E-Proxy webcast (or listen to the audio archive), Dominic Jones did a great job talking about usability. Here are three recent blogs from Dominic that delve more into the usability of the first E-Proxy volunteers:

- AMERCO’s shareholder forum, e-proxy

- Is Shareholder.com client breaching SEC privacy rules?

- My bad experience with first e-proxy notice

"E-Proxy: Chilly"

Speaking of E-Proxy, check out the latest adventures of "Billy Broc" Oxley and Dave "The Animal" Sarbanes in this segment called: "E-Proxy: Chilly."

- Broc Romanek

July 13, 2007

Executive Compensation Disclosures: 51 Tips

Let the games begin! Our new game is called "Executive Compensation Disclosures: 51 Tips.” Our goal is to generate a bunch of practical tips that can increase the effectiveness of the processes for – and content of – your company’s executive compensation disclosures.

What's In It For You? Four things:

1. You participate in a fun game.
2. You learn practical tips to improve your compensation disclosure skills.
3. You share some practical tips with an eager audience.
4. You achieve fame (if you want). You get points and - if you are one of the five top scorers - get your name placed in the Hall of Fame. If you wish to remain anonymous, that is fine too. No one will be acknowledged publicly unless they consent.

How to Play: Send us some practice tips on how to best navigate or improve the compensation disclosure drafting process or draft better disclosures, including things that you have seen a lot of companies do wrong this proxy season. Keep your tips brief (three or four sentences and not more than 50 words). Send us at least one tip and not more than five tips before the deadline.

How to Win: Any tip earns you 10 points. The best tips receive a bonus score of 50 points, the second-best ones earn 30 points, and the third-best ones earn 15 points. If you are among the top five scorers, your name is added to our Hall of Fame (if you consent to being named). All participants will be sent an email with their point total.

How to "Cheat": Reflect on your own experience and derive important tips. We also encourage you to borrow ideas from your friends and coworkers. This really isn’t cheating - but my kids are always looking for the "game cheats," so I felt compelled to act like there might be "cheats" involved.

How to Send Your Tips: Just email them to broc@naspp.com. Remember the limit of five tips. The deadline is close of business on Wednesday, August 1, 2007.

The Latest Compensation Disclosures: A Proxy Season Post-Mortem

We have posted the transcript from our recent CompensationStandards.com webcast: "The Latest Compensation Disclosures: A Proxy Season Post-Mortem."

It's a Wrap! California's Stock Option Proposal

A few weeks ago I blogged about the status of the proposed changes to the California Department of Corporations' proposed stock option regulations. These regulations are now final - and we have posted related memos in our "Rule 701" Practice Area. Below is an excerpt from a Fenwick & West memo (which contains a nice chart):

"Effective July 9, 2007, California liberalized its regulations concerning the permissible provisions of stock option plans. Practically every stock option plan of a privately-held company that has employees in California that participate in the plan can take advantage of this liberalization.

For decades, California was unique among the 50 states in the stringency of its regulation of the scope of permissible provisions that a stock option plan or restricted stock plan could contain. For example, only California required that stock options granted to non-officer employees in California must “vest” (meaning that the shares could not be repurchased on termination of employment by refunding the purchase price) at an annual rate of at least 20% of the shares subject to the stock option.

Non-compliance with even one of the regulatory requirements meant that rather than the company being able to file a simple notice, and pay a small fee to, California, the company would have to submit a pages-long application to the California Dept. of Corporations, which could easily cost $10,000 or more to prepare. The liberalization of the regulations means this is far less likely to occur."

Congress Tightens "National Security" Reviews of Foreign Investment in the US

On Wednesday, Congress passed the "Foreign Investment and National Security Act of 2007" to formalize and tighten the process for reviews of foreign acquisitions of businesses in the US that raise potential national security concerns. The new Act amends the "Exon-Florio Amendment to the Defense Production Act" and codifies - as well as extends - recent trends toward more stringent review of foreign acquisitions by the Committee on Foreign Investment (CFIUS), which is an interagency committee chaired by the Treasury Secretary and composed of various representatives of the executive branch. There are also enhanced Congressional reporting requirements.

The new Act cleans up many of the provisions of earlier proposals considered problematic by the business community. We have posted memos regarding this development in our "National Security" Practice Area.

Friday the 13th: Be Scared

Did you know that thieves can steal your checks, etc. by having the ink "wash" off the payee and amount (with acetone), leaving your signature, write in any amount, and cash it? Check out this video to understand more (it may take a while to load as its 6 minutes long). Apparently, the Uniball 207 is the only pen whose ink chemically bonds to the paper so it won't wash off...

- Broc Romanek

July 12, 2007

Proxy Access: The Numbers Game Begins

An article in yesterday’s WSJ previewed the SEC’s plans for providing shareholder access to the proxy statement. The near-term timing of this proposal should come as no surprise, given that Chairman Cox committed to an aggressive timetable during his appearance before the House Committee on Financial Services last month. Unfortunately, the SEC is already generating controversy around the proposal because it is apparently considering a 5% ownership threshold for those seeking to propose a shareholder access bylaw amendment.

According to the WSJ article (written by Judith Burns):

“Critics of the SEC’s proposal say a 5% ownership stake is so high that it would make the plan usable only by hedge funds. Mr. [Richard] Ferlauto [director of pension investment policy at AFSCME] called that ‘totally irresponsible,’ and predicted that if the SEC sticks with such an approach, it would ‘create a field day for hedge funds.’ Some think the 5% level is meant to be a starting point for discussion and could be lowered to 3%, a level that would still be seen as too high by some pension fund groups and might be viewed as too low by business groups. … Mr. Cox is aiming to have the five-member commission consider floating a proxy-access proposal at a public meeting on July 25, according to individuals familiar with the matter. Final adoption of any changes would require a second vote by the SEC. Even many large institutional investors would have to band together in order to meet a 5% threshold. The SEC proposal calls for such groups to comply with the current disclosure requirements for individual owners holding 5% or more of a company’s shares. Such an approach would require groups seeking to propose proxy-access plans to file reports on their finances, an annual process for passive investors. Requiring shareholders who individually hold less than 5% of a company's shares to file such reports may be a deterrent to some activists, including hedge funds, say those familiar with the proposal.”

Of course, the SEC’s last attempt at proxy access never made it past the comment stage, as the Commissioners divided over the best approach. Whether the current proxy access efforts devolve into a numbers game remains to be seen, but there is no doubt that – as with 2003 proposals – the SEC is going to have a hard time satisfying the various sides in this debate.

[By the way, whatever happened to the good old “Sunshine Act Notice” for announcing the date of SEC open meetings?]

XBRL for Mutual Fund Risk/Return Summaries

The SEC published an adopting release for rules extending its interactive data voluntary reporting program to the risk/return summary section of mutual fund prospectuses. Under these rules, mutual funds will now be able to voluntarily tag the information included in the risk/return summary. The release notes the SEC’s accomplishments so far in realizing the potential of XBRL, including notable progress toward developing standard taxonomies.

The risk/return summary section of a mutual fund prospectus is largely presented in a narrative format, so the voluntary participants will be breaking some new ground when tagging that type of data. The SEC is relying on a taxonomy developed for this purpose by the Investment Company Institute. The final rules include generous protections from liability for the tagged exhibits, including express protection from liability under Section 11 of the Securities Act.

Now all the SEC needs to do is to sign up some volunteers for the program, and mutual fund investors can start to see XBRL’s potential for disclosures beyond just financial schedules. That potential could be realized for operating companies as well, if interactive data concepts are ultimately deployed to narrative portions of prospectuses, proxy statements and 10-Ks.

SEC Speaks on Recent Private Equity Fund IPOs

Andrew Donohue, Director of the SEC’s Division of Investment Management, provided testimony yesterday to both the House Domestic Policy Subcommittee of the Oversight and Government Reform Committee and the Senate Committee on Finance. Those Committees are considering issues around the recent IPOs of private equity titans Fortress Investment Group and Blackstone Group. In his testimony, Donohue provided very specific information about the SEC Staff’s consideration of whether Fortress and Blackstone are investment companies.

The testimony notes that Corp Fin Staff referred the Fortress and Blackstone registration statements to Investment Management, following the normal procedures when Corp Fin is reviewing a filing. My experience has been that the Corp Fin Staff is always on the lookout for investment company issues, particularly in IPO reviews.

Donohue provides a great primer on what the Staff looks at when determining whether an entity is actually an “orthodox” investment company or an “inadvertent” investment company. In the case of Fortress and Blackstone, Donohue indicated that they do not meet the orthodox investment company test because they “are engaged primarily (and hold themselves out as being engaged primarily) in the business of providing asset management and financial advisory services to others and not primarily in the business of investing in securities with their own assets.” With respect to inadvertent investment company status, the Staff’s analysis apparently turned on the predominance of Fortress’s and Blackstone’s investments in general partnership interests that would not be deemed investment securities for the purposes of the ’40 Act.

For more resources about inadvertent investment companies, be sure to check out our “Inadvertent Investment Companies” Practice Area.

- Dave Lynn

July 11, 2007

Plaintiffs Take a Break: Securities Class Action Litigation Remains Low

The latest study from Stanford’s Securities Class Action Clearinghouse and Cornerstone Research finds that securities class action filings remain at historically low levels in the first six months of 2007, with only 59 filings made in courts nationwide. We have posted a copy of this study, along with other securities litigation studies, in our "Securities Litigation" Practice Area.

While the study notes that filing activity was up slightly compared to 53 filings in the same period last year, the overall trend for the past two years has been surprisingly low filing rates when compared to historical averages. The types of allegations made in the filings for the first half of 2007 remained relatively steady, with 92% of cases alleging misrepresentations in financial documents (unchanged from 2006), and a slight drop-off in the number of cases alleging false forward looking statements at 64% of all cases (down from 72% in 2006). Among the new developments noted in the study is that there have been at least 3 filings so far this year with allegations relating to the meltdown in the subprime mortgage market.

The obvious question is: are we living in a brave new world where directors and executive officers of public companies have less to fear from securities class action lawsuits? The Securities Class Action Clearinghouse/Cornerstone Research study examines two possible hypotheses for explaining the recent trends, citing the stepped-up SEC and Justice Department as deterring fraud and the overall strength and low volatility of the stock market as providing little reason to sue. Professor Joseph Grundfest of Stanford states his opinion that “increased enforcement activity and a heightened awareness among corporate insiders may have led to a permanent shift in the incidence of securities fraud litigation.” On the other hand, John Gould of Cornerstone Research notes in the study that he “would not be surprised to see filings move back to the 200 per year level if the stock market were to weaken.” I suspect that the market hypothesis may be the stronger of the two for explaining the most recent trends – any observer of the federal securities laws could attest to the fact that the regulatory zeal of the government and the litigiousness of investors each swing with the overall strength or weakness of the markets and the broader economy.

Further, class actions only tell part of the story. As noted in this recent PricewaterhouseCoopers 2006 Securities Litigation Study, the recent options backdating scandal demonstrates that even when federal securities class actions may not be attractive because there is little in the way of potential damages to recover, shareholders still opt to express their disapproval in court by filing state derivative actions. Further, while the number of securities class action cases remains relatively low, the PwC study notes that settlement costs remained high at a whopping $6.17 billion in 2006, which was down 20% from $7.67 billion in 2005.

Is There a Milberg Weiss Effect?

In the Securities Class Action Clearinghouse/Cornerstone Research study, Professor Grundfest rejects the notion that the recent downtick in securities class action filings is attributable to a chilling effect from the indictment of legendary plaintiffs’ firm Milberg Weiss & Bershad. I guess that remains to be seen, as the controversy around the practices of Milberg Weiss and its principals continues to play out. Earlier this week, the US Attorney for the Central District of California announced that name partner David Bershad agreed to plead guilty to a federal conspiracy charge. Under the plea deal, Bershad will forfeit $7.75 million, pay a fine of $250,000 and cooperate with the government’s efforts to prosecute the other participants in the alleged conspiracy. Along with Bershad, one of the former Milberg Weiss named plaintiffs Steven Cooperman also agreed to plead guilty to a conspiracy charge.

The allegations concerning kickbacks to named plaintiffs came into sharper focus with the Bershad plea, as the details of scheme start to sound more like an episode of the Sopranos than a day in a life of your typical plaintiff’s attorney. As Kevin LaCroix notes in his D&O Diary Blog: “Another interesting feature of the Statement of Facts is its description of the personal cash pool that Bershad and other Milberg partners supposedly formed to be ‘used by the Conspiring Partners to supply cash for secret payments to paid plaintiffs and others.’ The contributions to the pool, which was maintained in Bershad’s office, were proportionate to the contributing partners’ respective partnership interests. The contributing partners then ‘caused Milberg Weiss to award “bonuses” to them’ to reimburse them for the cash contributions to the pool. Among the partners alleged to have contributed to and made cash payments out of the fund are the pseudononymous ‘Partner A’ and ‘Partner B’ whom some commentators (refer here and here) believe to refer to Melvyn Weiss and Bill Lerach, respectively. Neither Weiss nor Lerach has been charged with any crime, nor even mentioned by name in any of the government documents in the criminal matter.”

There is no doubt that this case has the attention of other class action firms, although there seems to be nothing yet to suggest that the practices at Milberg Weiss were more widespread.

Latest Developments about the European Union Whistleblower Laws

In this podcast, Mark Schreiber of Edwards Angell Palmer & Dodge discusses the latest developments as several more countries have issued whistleblower guidelines in recent months, including:

- What are the latest whistleblower developments in the European Union?
- What are the new German guidelines?
- What should companies with operations in the EU be doing in response?

- Dave Lynn

July 10, 2007

More SEC Relief: Simplified Reporting for Smaller Companies

The summer reading just keeps on coming from the SEC, with last week bringing two more releases geared toward reducing regulatory burdens for smaller companies. Under proposed changes to rules and forms outlined in last Friday’s proposing release, a significantly expanded category of “smaller reporting companies” could benefit from reduced disclosure and reporting requirements that would be integrated into the big company rules and forms. Regulation S-B as we know it today, along with the associated S-B forms, would be eliminated under these proposals.

The SEC’s proposed changes to the reporting requirements for smaller public companies come out of specific recommendations from the Advisory Committee on Smaller Public Companies. The Advisory Committee had raised concerns that, among other things, the current definition of “small business issuer” picks up only the smallest companies, and that Regulation S-B and the S-B forms carry with them a stigma making life difficult for small business issuers using the system. The SEC did not fully embrace the Advisory Committee’s recommendation to establish a tiered disclosure regime for microcap and smallcap companies, opting instead to extend scaled-back disclosure and reporting requirements to essentially those companies that fall under the definition of “non-accelerated filer.” A new proposed term “smaller reporting company” will be defined to include companies with a public float of less than $75 million, or revenues below $50 million if the issuer cannot calculate its public float. As with some other recent SEC proposals, the dollar thresholds in the definition will be automatically adjusted for inflation on a 5-year timetable.

Under the proposals, Regulation S-B would be folded into Regulation S-K by expanding the relevant S-K items to include a scaled down version for smaller reporting companies, with some slight tweaking of the current S-B requirements along the way. The reduced financial statement requirements under Item 310 of Regulation S-B would remain intact and would be extended to the broader group of smaller reporting companies. If adopted, these proposed changes could result in a very long, and perhaps a little more complicated, version of Regulation S-K. An interesting component of the proposed changes is that smaller reporting companies could choose, on an “a la carte” basis, whether to comply with regular or modified S-K requirements. As a result, a company could choose in a particular filing to comply with the full-blown Item 101 of S-K requirement for its description of business, while in the same filing providing executive compensation disclosure under the stripped-down smaller reporting company requirement. Transitioning into and out of smaller reporting company status would be easier to determine than under current small business requirements, by essentially following the current model for accelerated filer status. The proposed rule and form changes will be out for a 60-day comment period.

Proposed Registration Relief for Employee Stock Options

The SEC also published its proposing release for two new Exchange Act registration exemptions for compensatory employee stock options. As with the S-B proposals, this idea also comes out of the Advisory Committee report. I think that these proposals should be welcome news for companies that are not yet public (and don’t want to be public just yet, or ever for that matter) and that use stock options as a means of compensating employees. It can be quite a shock to find out that you are all of the sudden a public company just because you granted options to 500 or more employees. I know from experience that it can be even more of a shock to try to get a no-action letter from the Staff in order to avoid the registration requirements.

Under the proposed exemptions, the SEC would eliminate the need for companies faced with this uncomfortable situation to either avoid crossing the 500 holder threshold or seek individual no-action relief. An exemption for companies that are not already reporting would be conditioned on the compensatory nature of options that are granted to eligible Rule 701 option plan participants, restrictions on transferability, and the delivery of risk and financial information required by Rule 701 when the $5 million threshold is exceeded. For reporting companies, a proposed exemption would be available so that the compensatory employee stock options would not give rise to an independent obligation to register those securities under the Exchange Act. The SEC notes in the proposing release that public reporting companies may be "unclear" regarding the need to comply with Exchange Act Section 12(g) for compensatory employee stock options, so the exemption would provide some welcome relief for a problem that many quite possibly did not know that they have.

The SEC is soliciting comments for 60 days on these proposals, so hopefully they could be in place before the next round of mandatory Exchange Act registrations surface for companies with a fiscal year ending on December 31.

Reverse Mergers: Latest Developments

Join us tomorrow for a DealLawyers.com webcast – “Reverse Mergers: Latest Developments” – to hear David Feldman of Feldman, Weinstein & Smith, Tim Keating of Keating Investments and Nanette Heide and Michael Dunn of Seyfarth Shaw discuss the latest issues in the area of reverse mergers.

- Dave Lynn

July 9, 2007

First Companies Try Voluntary E-Proxy

With the effective date of voluntary E-Proxy just a week old, a few companies have already filed proxy materials indicating that they will be the first to "give it a go." In our "E-Proxy" Practice Area, we have begun a list of those companies, complete with a link to their proxy materials.

Interestingly, one company's proxy statement even has a statement from the company's President in the "Letter to Stockholders" touting the use of E-Proxy:

"I am also pleased that we are one of the first companies to take advantage of the new Securities and Exchange Commission rules allowing issuers to furnish proxy materials over the Internet. Please read the proxy statement for more information on this alternative, which we believe will allow us to provide our stockholders with the information they need while lowering the costs of delivery and reducing the environmental impact of our annual meeting."

This particular company also includes a FAQ about E-Proxy on its IR web page. I would expect many companies that utilize voluntary E-Proxy to include a note on their IR web page to explain what they are doing this year - and I understand that some companies have already posted explanations (even though I haven't seen any others; if you do, let me know). Remember that the more complete - and clearer - an explanation about what the company is doing on your website, the fewer the number of calls to your IR department...

Note that the SEC's new rules require the Notice & Access to inform shareholders that they have an option to request a paper copy, but there is no requirement for companies to make that statement on their IR web page.

How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations

We have posted the transcript from our recent two-hour webcast: "How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations." It was a great webcast and the panelists fleshed out a lot of issues that I believe many companies have not yet considered. And the course materials are superb. Hats off to our fine panelists on this one!

More on the E-Proxy California Conflict

Here is a query from our "Q&A Forum": "Following up on #2881 and Broc's blog on Monday about California conflict with e-proxy, I note that Section 18(a)(2)(B) of the Securities Act (added by the NSMIA) provides that no law, regulation etc. of any state shall "directly or indirectly prohibit, limit, or impose any conditions upon the use of . . . any proxy statement, report to shareholders, or other disclosure document relating to a covered security or the issuer thereof that is required to be and is filed with the Commission or any national securities organization registered under section 15A of the Securities Exchange Act of 1934, except that this paragraph does not apply to laws, rules, regulations, or orders or other administrative actions of the State of incorporation of the issuer." Doesn't this solve the dilemma?"

And here is an answer from Keith Bishop: "I don't think that this preemption would apply to the the California provision. Section 1501 does not refer to either a proxy statement or the annual report to shareholders required by the federal proxy rules. Section 1501 applies to both SEC reporting companies and non-reporting companies. It requires that a corporation send a report containing basic financial statements. While this requirement can be fulfilled by sending a Rule 14a-3 annual report to shareholders, the requirement itself in no way prohibits or imposes any conditions on the use of the 14a-3 annual report.

If, for example, the SEC were to amend Rule 14a-3 to eliminate the requirement that the annual report include financial statements, Section 1501 would not prohibit a corporation from sending that annual report. In other words, compliance with the SEC's annual report requirement is independent of the requirement of Section 1501.

I think that the only possible argument is that by imposing an independent requirement, Section 1501 indirectly "limits" the use of a report to shareholders. However, I think that interpretation is a stretch. Also, Rule 14a-3 annual reports are technically not required to be filed with the SEC and I'm not certain that the NYSE and Nasdaq requirements are encompassed by the reference to any national securities organization registered under Section 15A of the SEA."

- Broc Romanek

July 6, 2007

The SEC's "Anti-Terrorism" Tool: Needs Some Work

Back in early 2004, as part of an omnibus appropriations bill, Congress has been requiring companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism. Since then, Corp Fin's Office of Global Security Risk has been gradually growing in size and issuing comments eliciting such disclosure (see this memo as well as #2911 in our Q&A Forum to better understand the specific rules that allow the Staff to seek such disclosure). And remember that SEC Chair Chris Cox served as the Chairman of the House's Committee on Homeland Security before he came to the SEC (and often is rumored to be the next head of the Department of Homeland Security).

I was on the road last week when the SEC launched its new "anti-terrorism" tool, but just by reading the SEC's press release, I guessed that it would be an imperfect "blacklist" and could mislead investors about which companies are truly doing business in countries associated with terrorists.

This opinion column from yesterday's WSJ does a great job of explaining how my hunch appears to be right.

Here is an excerpt from that column, penned by Todd Malan, president of the Organisation for International Investment (which represents the interests of the roughly 1,200 foreign companies with US stock market listings):

"Under U.S. law, corporations listing on American capital markets must disclose ties to state sponsors of terror. Many (but not all) companies have been doing so for years, but without the wherewithal to comb through thousands of filings, investors are unlikely to be fully informed. In that light, the SEC's Web tool appears a welcome response to those investors and policy makers who are hungry for such data.

Unfortunately, the SEC simply compiles a list of companies with the words "Sudan," "Iran," "North Korea," "Syria" or "Cuba" in their annual reports without regard to context.

The SEC's tool could easily mislead investors. For example, Baker Hughes, a company on the SEC's Sudan page, states in its 2006 annual report that its subsidiaries will 'prohibit any business activity that directly or indirectly involves or facilitates transactions in Iran, Sudan or with their governments, including government-controlled companies operating outside of these countries.' In other words, Baker Hughes withdrew from Sudan nearly two years ago.

Another company on the SEC's Sudan page, Immtech Pharmaceuticals, appears because it conducted clinical studies for the treatment of first-stage African sleeping sickness in Sudan. We hope this isn't the sort of corporate behavior the SEC would define as "subsidizing a terrorist haven or genocidal state.'

Not only has the SEC named and shamed the wrong companies, it's missed many with significant operations in countries like Sudan. Not one of the companies generally identified as enabling the Sudanese government's genocidal capacity appears on the SEC list even though some (such as PetroChina) list on U.S. capital markets."

Last Chance: Early Bird Discount Extended Until July 20th

In the wake of the mad rush for last week's Early Bird deadline, we have decided to extend the deadline - just this once - until July 20th. So this is your last chance to take advantage of a nice discount on the Member Appreciation Package to catch these three October Conferences by video webcast:

- “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
- “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
- “4th Annual Executive Compensation Conference” (10/11)

[Media Oddity: Detroit rocker Ted Nugent pens an opinion column for WSJ. Egads.]

Disclosing Spousal "Leisure Activities"

Mark Borges continues to do excellent work in his CompensationStandards.com blog. Here is an item he blogged about on Tuesday: Joann Lublin had an interesting article in Saturday's Wall Street Journal on executive spouses who get to enjoy corporate perquisites (see "For CEO Spouses, Corporate Jets are the Perfect Perk" (subscription required)). Using the disclosures in this year's proxy statements, she writes about how the families of top corporate officials often get to indulge in many of the perquisites and other personal benefits provided to the executives.

One particular item - leisure activities - caught my eye since Alan Dye and I had spoken about this in our session about perquisites at last year's Proxy Disclosure Conference. This is one of those tricky areas, where the disclosure decision often turns on the tiniest of details.

As I recall, we highlighted several of the challenges in determining whether the ancillary activities (such as spa treatments or sightseeing trips) provided to spouses who attend a business-related function are disclosable perquisites. Take, for example, a typical situation where a company's senior executives attend a Board of Directors' retreat at which golf and other recreational events are paid for by the company. Frequently, the executives' spouses also attend the retreat, with the company incurring expenses for their airfare, meals with the directors, and "leisure activities."

To me, these events raise two questions: are the executives' recreational activities considered a perquisite and, even if not, what about the activities for the spouses?

While any perquisites analysis is going to be situation-specific, I typically start with the assumption that the executives' leisure activities are related to the business purpose for the event. In the case of spousal activities, I start from the opposite end of the spectrum, and assume that they should be considered perquisites. Of course, in both cases, I have to apply the SEC's "directly and integrally related" test to the specific facts. If, ultimately, I conclude that the activities constitute a personal benefit to the named executive officer then they will need to be included as part of his or her total compensation if aggregate perquisites exceed the $10,000 disclosure threshold, and quantified if their incremental cost to the company is $25,000 or more (which is highly unlikely). For an example of a company that included spousal "leisure activities" as part of its executives' perquisites disclosure, see the Rockwell Automation proxy statement (see footnote 1).

The other question that comes up here is whether describing a spa experience as a "leisure activity" is sufficient for disclosure purposes. I think it is. The Adopting Release only requires that a company's perquisite description give investors a sense of the particular nature benefit received - it doesn't seem necessary to me to disclose whether the spouse spent an hour in the amethyst steam room or received a hot stone massage.

- Broc Romanek

July 5, 2007

A Chat with One of the Activist Nuns

For those of you that deal with shareholder proposals, you undoubtedly have heard about the "nuns" that are shareholder activists. A recent Washington Post article prompted me to call upon one of the more active nuns to discuss what led her into this field.

In this podcast, Sister Valerie Heinonen draws upon her experiences from three decades of shareholder activism to give us a perspective on the shareholder proposal process from the proponent’s viewpoint, including:

- How did you get started in the shareholder proposal arena?
- What do you find most challenging about the shareholder proposal process? What do you find the most frustrating?
- If you could change the shareholder proposal process, what would you change?
- In terms of communicating with proponents, what do you recommend to companies that they do?

[Personal Note: My family and I walked in the DC "4th of July" parade yesterday carrying a large 5-point fabric star. Quite a trip marching past thousands and thousands. Next year, we graduate to manning the ropes on a big balloon.]

A Director "Retirement": Two Tales

Below is a stark example of the differences between why a director really resigns from a board and what a company is willing to disclose about it:

1. Here is a Tuesday press release from the CtW Investment Group:

"Last night, CVS/Caremark shareholders succeeded in removing embattled director Roger Headrick from the company’s board of directors and, in so doing, holding him accountable for his past failures to protect Caremark shareholders. As lead independent director and audit committee chair at Caremark, Mr. Headrick bears principal responsibility for approving a sweetheart deal with CVS that nearly cost shareholders $3.3 billion and for the ongoing DOJ and SEC investigations into possible stock option backdating.

Mr. Headrick’s resignation required extraordinary efforts after the CVS/Caremark board initially failed to respect the shareholder vote in its May 9 director election. In addition to communications from major institutional shareholders—including the California Public Employees’ Retirement System, New York City Comptroller William C. Thompson, Jr. and North Carolina State Treasurer Richard H. Moore—members of the House Committee on Financial Services questioned SEC Chairman Christopher Cox regarding the impact of the broker vote on Mr. Headrick’s tainted election during last Tuesday’s hearing on investor protection and market oversight.

The adoption of majority vote standards in director elections by hundreds of companies, including CVS/Caremark, should finally make director elections meaningful. The extraordinary measures required to remove Mr. Headrick, however, underscore the need for swift SEC approval of the NYSE proposal to eliminate the broker vote in all director elections to ensure their integrity going forward."

2. Here is CVS/Caremark's version of the director departure, as disclosed in the company's Form 8-K:

"CVS Caremark Corporation has announced that Roger L. Headrick has decided to retire from its Board of Directors, effective immediately. The Company also announced that its Board of Directors has designated William H. Joyce to succeed Mr. Headrick as Chairman of its Audit Committee.

'We are enormously grateful to Roger Headrick for the many years of distinguished service he has provided to Caremark,' said Mac Crawford, Chairman of the Board of Directors of CVS Caremark Corporation. 'During his tenure on the Caremark board, Roger helped guide Caremark through a series of large and successful transactions that rewarded Caremark shareholders and transformed our company into the nation’s leading pharmacy services provider. He will be greatly missed by me and his fellow directors of CVS Caremark.'

'We thank Roger Headrick for his service to CVS Caremark and will miss his wise counsel and stewardship,” added Tom Ryan, President and Chief Executive Officer of CVS Caremark. “We wish him well in his retirement. We are also grateful to Bill Joyce for agreeing to succeed Roger as Chairman of our Audit Committee.'”

Survey Results: Blogging Anniversary

With five years of blogging under my belt (and now, a new partner-in-crime), I asked a few questions last month about how you might want to see the direction of this blog change. Here are the results:

1. I have been reading Broc’s blog since:

- Way back when Broc was blogging on RealCorporateLawyer.com (ie. 2002) - 41.5%
- For two-three years - 38.5%
- Just the past year - 20.0%

2. If I had my druthers, Broc would:

- Never mention his personal life again - 6.6%
- Mention his personal life occasionally, just as he does now - 83.8%
- Blog more about his personal life (because it makes my life appear so much better in comparison) - 9.6%

3. On TheCorporateCounsel.net, I wish Broc would do more of these types of podcasts:

- More podcasts about offering techniques - 34.7%
- More podcasts about governance practices - 64.5%
- More podcasts about disclosure analysis - 69.4%
- More podcasts about latest legal developments - 62.9%
- More podcasts of a human interest nature - 8.1%

Thanks for the feedback; Dave and I will heed your wishes about podcast topics - and letting our personal lives only occasionally pop up in our daily musings...

- Broc Romanek

July 3, 2007

SEC Posts IFRS Proposing Release

Yesterday, the SEC posted its proposing release for accepting financial statements without a US GAAP reconciliation when they are prepared in accordance with International Financial Reporting Standards (IFRS), as published by the International Accounting Standards Board (IASB) in its English language version. The SEC posted a Staff Observations Report and Staff Review Correspondence.

Under the proposed amendments to Form 20-F, portions of Regulation S-X, Rule 701 and various Securities Act forms, in order to be eligible to omit the US GAAP reconciliation, an issuer must state “unreservedly and explicitly” that the financial statements comply with IFRS as published by the IASB, and the independent auditors’ report must similarly opine on compliance with IASB-IFRS. The proposing release describes and solicits comments concerning a number of areas where the IASB has not yet developed standards or where IFRS permits disparate treatment. These areas include: accounting for insurance contracts and extractive activities; accounting for mergers of entities under common control, recapitalizations, reorganizations and similar transactions; and the lack of any specific conventions for the format and content of income statements.

The SEC has established a 75-day comment period for the proposed amendments, which should keep this proposal on track toward being effective for reports filed in calendar year 2008.

ISS Reports on the 2007 Proxy Season

ISS highlights trends from the 2007 proxy season in its latest "Corporate Governance Bulletin." As noted in the bulletin, clearly the come-from-behind shareholder proposal of 2007 was the “say on pay” proposal. This season saw nearly 40 proposals seeking an annual shareholder vote on executive compensation, which is a significant jump from the handful of such proposals last year. The “say on pay” proposals were remarkably successful (as these things go), with four proposals garnering a majority vote.

Beyond the “say on pay” proposals, over 60 proposals sought shareholder input on improving the link between executive pay and performance. Among the notable developments with these proposals was more shareholder support for “clawback” proposals, which generally call for recouping payments made to executives in the event that a later investigation or restatement results in their incentive goals having not been met. Also, not surprisingly, investor support for proposals requesting a shareholder vote on golden parachute packages saw an uptick in 2007, with a number winning majority votes. ISS notes that among the new executive pay proposals this year were those requesting that companies disclose, cap or permit shareholder votes on supplemental executive retirement plans, those addressing a company’s option grant practices, and those seeking information relating to the independence of compensation consultants.

ISS reports that proposals seeking majority voting continued to fare well in the 2007 season, with the most novel approach seeking to have companies reincorporate in Delaware. Proxy access proposals at H-P and UnitedHealth received strong, but less than majority support. Proposals seeking a separation of the Chairman and CEO positions did not fare as well as they had in the past. ISS also highlights continued strong shareholder support for proposals targeting anti-takeover defenses, most notably poison pills, classified boards, supermajority voting and dual-class equity structures.

Options Backdating: SEC Staff Provides Guidance on RSU Awards

One of potential collateral consequences faced by companies in the midst of investigations and pending restatements arising from options backdating troubles is that they find themselves in the unenviable position of having to suspend their equity-based employee benefit plan transactions while the company gets its financial house back in order. Oftentimes, switching over to cash-based incentive compensation can present a financial hardship at the worst possible time for the company.

Recently, the Corp Fin Staff addressed these circumstances in a no-action letter to Verint Systems. Verint had been a wholly-owned subsidiary of Comverse Technology until an IPO in 2002, and is still majority-owned by Comverse. Verint’s options backdating troubles are intertwined with those of Comverse, and the company switched to cash awards in order to retain employees while it remained delinquent and delisted. As an alternative, Verint proposed to make broad based grants of restricted stock units and deferred stock to non-affiliate, non-management employees. These awards vest in at least 3 installments over a 3-year period, except that the awards would not vest on the applicable vesting date if Verint is not current in its Exchange Act reporting obligations or if its shares are not listed on an exchange. Awards failing to vest due to either of these circumstances only vest when the later of these events occur. Further, Verint indicated that it will not deliver any shares under the awards until it is current, and that any issued shares will be treated as restricted securities (in the Rule 144 sense, that is), so that no shares can be sold until the company has an effective registration statement in place.

The Staff indicated that it would not recommend enforcement action if the awards were made to Verint employees without Securities Act registration, based on counsel’s opinion that the grants did not constitute an offer or sale under Securities Act Section 2(a)(3). In providing this relief, the Staff did not stray too far from its prior precedent in this area, most notably its no-action letter to Goldman Sachs (Aug. 24, 1998).

- Dave Lynn

July 2, 2007

US House Passes Section 404 Delay for Non-Accelerated Filers

One of the many topics that the SEC Commissioners discussed during last week’s testimony before the House Committee on Financial Services was the SEC’s ongoing efforts to scale back the implementation of Section 404 of Sarbanes-Oxley. When asked whether more of a delay in implementing Section 404 was necessary for smaller companies, the Commissioners rejected any notion of extending the compliance timetable.

Just a couple of days later, the US House of Representatives passed an amendment to the SEC’s appropriations bill that would limit the agency’s ability to require Section 404 compliance by non-accelerated filers for all of fiscal 2008 (that is, through September 30, 2008). Having not had much luck getting traction in the House with more comprehensive Sarbanes-Oxley reform, the sponsors of the amendment (Rep. Scott Garrett (R-NJ) and Rep. Tom Feeney (R-FL)) sought to use the often more reliable “power of the purse” to give smaller companies additional time for digesting new SEC and PCAOB guidance. Despite lobbying efforts by groups such as the AFL-CIO, the Council of Institutional Investors, AARP, a coalition of consumer groups and even leaders from the House Committee on Financial Services, the amendment passed by a vote of 267 to 154.

While the amendment’s prospects in the Senate are unclear, the fact that it passed so shortly after the SEC’s reassurances that it was making progress in reducing Sarbanes-Oxley compliance burdens certainly raises the pressure on the agency to reconsider giving smaller companies another break. At this point, can't we just bite the bullet and get on with it? [Note that the bill itself is the appropriations bill, H.R. 2829, which doesn’t say anything about 404. The Garrett-Feeney amendment was introduced on the floor, and the text of it is reported here in the Congressional Record.]

More House Action: Compensation Consultant Conflicts

As Broc noted back in May, Rep. Henry Waxman (D-CA), Chairman of the House Committee on Oversight and Government Reform, had sent letters to a number of compensation consulting firms seeking information about their potential conflicts of interest when recommending pay packages for executives. Based on this article from Saturday’s NY Times, it looks like Rep. Waxman means business on this matter, issuing a subpoena to Towers Perrin seeking the previously requested information about the firm’s clients and the services that it provides to those clients.

When adopting the executive compensation rules last year, the SEC rejected suggestions from some commenters that the rules require disclosure about the actual or potential conflicts of interest that compensation consultants may have when designing or recommending executive pay. Given that Rep. Waxman’s inquiry shows no signs of abating, this issue will potentially be a hot topic among shareholders (and perhaps the SEC) going into next proxy season.

SEC Posts Electronic Form D Proposing Release

In yet another installment of the proposals directed at making things easier for small business (and in this case, anybody doing Reg. D private placements), the SEC posted its proposing release for simplifying Form D and establishing an online filing system for the Form. This one has been on the Corp Fin to-do list for a while now, so it is nice that this proposal is now seeing the light of day.

Under the proposal, Form D would be reorganized into 14 numbered items that would solicit information generally along the lines of what Form D requires now, with some tweaking (and in some cases expansion) of the current disclosure requirements. More explicit direction on when to file amendments to Form D are also proposed, which would hopefully clarify those situations where there is most likely a material change in the previously submitted information.

The proposed electronic filing capability would be available to anyone using a computer with Internet access. Filers would obtain the same codes necessary to file using the EDGAR system, and would utilize an online Form D filing system with drop-down menus designed to assist in preparation of the Form. In terms of output, the filed Form D would be available to the public through the SEC’s website in either normal text or XML. With the proposed XML feature, the tagged data would be searchable and “interactive.” The SEC proposes to take care of any general solicitation and general advertising concerns arising from the ready availability of Form D by proposing a safe harbor for the electronically filed information, so long as it was provided in good faith and the issuer made reasonable efforts to comply with the Form D requirements.

The SEC has established a 60-day comment period for this proposal. We will be posting memos about this and other smaller company capital-raising reform proposals in our “Private Placements” Practice Area.

- Dave Lynn