November 30, 2007

Our Critical January “Rule 144 Conference”

We have received so many requests from members for practical implementation guidance for the new Rule 144 rules that we are holding a Video Webconference on January 15th: "New Rule 144: Everything You Need to Know - And Do NOW." Here is a Conference Agenda and FAQs.

This Conference will lead off with the SEC Staffers who wrote the rules. Then, the Rule 144 experts - Jesse Brill, Alan Dye and Bob Barron - will provide the essential implementation guidance that you will need to protect yourself and your executives. With well over a century of Rule 144 experience among them, each of them continues to advise issuers, transfer agents and the major banks on Rule 144 issues on a daily basis - just as they have done since Rule 144 was adopted.

The Key Conference Materials alone – which will provide the specific procedures, new memos, legends, representation letters, etc. that you will need to protect yourself – make this Conference invaluable. Act now to take advantage of reduced rates for those of you that use the and The Corporate Counsel by registering online or via this order form.

Hot Topic: CEO Succession Planning

Earlier this week, the WSJ ran a column noting how relatively few boards (still) don't engage in the important practice of CEO succession planning. I say "few" even though the ratio is about 50%, because all boards should regularly engage in succession planning. In this podcast, Ron Garonzik of the Hay Group provides some insight into the CEO succession process and issues related to it, including:

- How should boards plan for orderly succession planning?
- What factors should a board consider when weighing internal vs. external succession candidates?
- How about emergency succession planning?
- Are there any developments recently changing how boards plan?
- Should boards have any written policies regarding planning - or is it more of an informal process?

Full Circle: Pfizer Adopts a Majority Voting Bylaw

Over two years ago, Pfizer kicked off the "majority vote movement" when it became the first company to adopt a director resignation policy. Last month, Pfizer joined the many companies that have taken a step further and adopted a majority voting bylaw (that requires director nominees to receive a majority of votes cast to be elected in an uncontested election). A plurality vote threshold would continue to apply in contested elections.

Many investors - including the Carpenters Union - argue that director resignation policies alone are not sufficient since it's unknown whether these policies could be enforced against a recalcitrant director. According to this report, nearly half of the S&P 500 now have a majority vote standard, with about another quarter having director resignation policies.

- Broc Romanek

November 29, 2007

SEC Quickly Adopts Non-Shareholder Access Rule - Then Fireworks Ensue

Perhaps exhausted by the ongoing controversy surrounding the dual shareholder access proposals - 34,000 comment letters! - yesterday's open Commission meeting failed to produce the type of confrontation that were widely expected. Many felt this Commission meeting could rival a WWF match. But alas, after each Commissioner read their statement, few questions were even asked of the Staff. Here is the SEC's press release, a Corp Fin Staff statement and the Chairman's statement.

The vote was 3-1 - with short-termer Commissioner Nazareth dissenting - for the Staff to overturn the AFSCME decision and adopt rules to reiterate the Staff's long-standing view that companies may exclude access proposals under Rule 14a-8(i)(8). As he had stated before this vote, Chairman Cox noted he would have preferred to do more and promised to revisit this topic next year - but said the SEC needed to clarify the ground rules ahead of this proxy season.

Following up on some thoughts expressed in comment letters, Commissioner Nazareth expressed concerns that this rulemaking might affect the SEC's other 14a-8 interpretations, such as on majority voting and declassifying boards, but the Staff said they felt comfortable that this would not happen.

The real fireworks began right after the meeting, when all sorts of investor groups, members of Congress, etc. issued statements disapproving the SEC's rulemaking (eg. CalPERS; CII; RiskMetrics; AFL-CIO; Rep. Frank; Sen. Dodd) - and some approved (eg. Marty Lipton). It's notable that the opposition is fairly organized on this issue; I can't imagine something like this happening even five years ago.

In addition, AFSCME submitted proposals to amend the bylaws of Bear Stearns and JP Morgan Chase to create proxy-access procedures (North Carolina's Treasurer joined in co-filing both proposals and New Jersey's Division of Investments joined in the Bear Stearns one). And I think we will be seeing more of these proposals submitted to companies soon enough - so expect this issue back in court fairly soon...

[Speaking of fireworks, check out this 1-minute video of the last classic hotel in Vegas being imploded a few weeks ago. The Rat Pack used to do their thing at the Frontier.]

SEC Adopts Rules to Facilitate Shareholder E-Forums: My Ten Cents (Sorta)

As noted in this press release and Corp Fin Staff statement, the SEC also voted to amend the proxy rules to facilitate the use of electronic shareholder forums. The rules enable participation in an electronic shareholder forum, which could potentially constitute a solicitation subject to the current proxy rules, to be exempt from most of the proxy rules if the exemption conditions are satisfied. Here is a statement from Chairman Cox.

What does this mean? The demise of the traditional annual meeting? No more shareholder proposals (the rule itself doesn't prohibit proposals, but maybe shareholders will find better avenues for their concerns and wishes)? Or will nothing happen? With Web 2.0 in its infancy, I think it's too soon to tell what the future holds.

Borrowing very liberally from Gary Lutin (who has done a related podcast described below), here is a 10,000 feet level perspective on how e-forums might work effectively:

- The nature of a forum process depends on the issue or agenda that's defined, and on who's attracted to participate. If a genuinely open forum is established to address value issues, I think it will attract a fairly broad range of "mainstream" investors interested in how management will make the company successful.

- Rather than a narrow constituency that's attracted to protest rallies,
corporate managers can - and should - make effective use of the "forum" processes themselves to define issues, rather than simply respond once someone else has defined an issue.

- A genuinely open forum can actually be a very effective means for management to understand and respond to investor concerns, assuming one defines the agenda properly and keeps it on track.

The Future? Independent Shareholder Forums

Quite an interesting person with some great ideas - and who has executed some of these ideas! (that's the hard part) - Gary Lutin, CEO of Lutin & Company and Founder of, shares some insight into how an independent shareholder forum works in this podcast, which includes discussion on:

- What is
- How do the shareholder forums work?
- Can you describe what happened recently with the forum devoted to Verizon?
- What should be the goals of independent shareholder forums?

- Broc Romanek

November 28, 2007

Corp Fin's New Chief Counsel: Tom Kim

Yesterday, Tom Kim was named Corp Fin's new Chief Counsel, filling the slot that Dave Lynn lit up until six months ago when he joined our team. Tom has rather large shoes to fill.

Tom has been serving in Chairman Cox's office and as Counselor to the General Counsel, focusing on Corp Fin issues. Before that, he worked under former Deputy Director Mike McAlevey at General Electric and for former Director John Huber at Latham & Watkins - so he's had plenty of exposure to the Division. Tom's new position also includes a title of "Associate Director," a new title (and more money) for the Chief Counsel position.

A Tale of Two Voluntary E-Proxy'ers

Over the past month, I have found only a few new companies trying voluntary e-proxy (eg. Fannie Mae; see full list in our "E-Proxy" Practice Area) - so maybe the initial reports of low retail shareholder turnout is driving companies to "wait and see." For the companies doing e-proxy, I am still disappointed about how they fail to clearly inform shareholders about what they're doing on their IR web pages - and more importantly for them, fail to make it easy for shareholders to vote.

One of these new e-proxy'ers - Pike Electric - has put together a 6-minute video annual report. As noted in this press release, the purpose of providing the video is "provide viewers with highlights of Pike Electric's key accomplishments in fiscal 2007, and includes an overview of Pike Electric and its strategic initiatives. The short documentary also provides stockholders and other interested parties the opportunity to see and hear directly from Pike Electric's management team."

The idea of an annual report video is pretty interesting on its face, but more important in my mind is that the Pike Electric IR web page contains a prominent link to Broadridge's page where shareholders can vote. This is something that I urge every company to do, even if they are not doing e-proxy!

In the "CEO's Letter to Shareholders," Pike Electric informs shareholders that they are doing e-proxy - and explains briefly how the company is using a video this year rather than a 10-K wrap. Two points - one substantive and one not:

1. I guess I'm a little confused why the video is called an "annual report." I understand the theory that it's part of a 10-K wrap, but looking at the video's contents, my guess is that the company will be relying on the 10-K itself to satisfy Rule 14a-3(d) - so it doesn't really matter what the video's content is except from a 14a-9 perspective. However, by calling it a "video annual report," it might imply that the video standing along somehow meets the 14a-3 requirements, which I don't think it does. Anyone else have thoughts on this?

2. In my opinion, it would be better if the CEO's letter was in HTML rather than a PDF. In this alert, Jakob Nielsen - the godfather of online usability - does a fantastic job of explaining why the PDF format not good for online reading.

In comparison, another new e-proxy'er - Itex - also has a bunch of videos with the CEO describing its business - but this company doesn't label any of them as an annual report. I really don't view Pike Electric's video as being different than what Itex has done (although some of the statements in Itex's latest video scare me - check out the CEO's statements about "how buying Itex's stock is no different than buying Microsoft and Intel, just call your broker").

I like the idea of companies using video to illustrate what they are doing, but I hope that the legal department screens these before posting. To play it safe, I would ensure the CEO refrains from ever mentioning the term "stock" in a video.

Regarding e-proxy, Itex's "Annual Meeting" page has a link to enroll in e-delivery - but it doesn't mention that Itex is doing e-proxy nor does it provide a link to allow shareholders to vote. It's also notable that Itex didn't bother to update their "Investor FAQs" to indicate they are doing e-proxy; rather the FAQs note that shareholders can request e-delivery if they want. Although companies that do e-proxy may also want to collect consents, I worry that shareholders may find this FAQ confusing if there is no mention of e-proxy in any of the FAQs.

I randomly selected these two companies for this blog; I easily could have selected almost any other company trying e-proxy so far because I haven't seen many that do a solid job of clearly communicating to shareholders what they are doing - and making it easy for them to vote...

Another Potential E-Proxy Implementation Issue?

Believe it or not, Keith Bishop recently came upon another potential e-proxy implementation issue. If a company has issued stock options in California at a time when it was not listed on the NYSE or the Nasdaq Global Market (fka National Market), it's likely that the company's option plan requires delivery of financial statements to security holders.

The reason is that California's exemption for option plans required plans to provide for shareholders to receive financial statements (except when the issuance was limited to key employees with access to equivalent information; see 10 CCR Sec. 260.140.46). This same requirement applied if the company qualified the plan.

Although the requirement was amended this year to be inapplicable to Rule 701 compliant plans, Keith suspects that many companies still have plans requiring delivery of financial statements to shareholders. This could present a problem if they intend to use the new notice and access alternative. Therefore, Keith recommends that companies check their option plans if they intend to use e-proxy.

- Broc Romanek

November 27, 2007

Officer Exposure for Stock Option Backdating

Travis Laster notes: On November 21st, Chancellor Chandler of the Delaware Court of Chancery issued a further decision in Ryan v. Gifford, the stock option back-dating litigation involving Maxim Integrated Products, Inc. This ruling addressed whether certain officer defendants could be subject to jurisdiction in the Court of Chancery, but has broader implications for potential officer exposure.

Under 10 Del. C. sec. 3114, officers and directors of Delaware corporations implicitly consent to the jurisdiction of the Delaware courts for actions relating to their duties. Section 3114(b), the implied consent statute for officers, became effective on January 1, 2004. Certain officer defendants in Ryan argued that they could not be subject to jurisdiction in Delaware because they did not take any action in their official capacities after this date. The Chancellor agreed. He specifically held that the following acts are NOT sufficient to establish Delaware jurisdiction: (i) holding allegedly back-dated options, (ii) allowing allegedly back-dated options to vest, and (iii) exercising allegedly back-dated options.

The Chancellor went on to hold, however, that officers who were alleged to have participated in some way in the purported scheme after January 1, 2004 could be subject to Delaware jurisdiction. He based this ruling on his holding that steps allegedly taken to conceal stock option backdating constitute a breach of fiduciary duty sufficient to give rise to Section 3114(b) jurisdiction. In Ryan, it was enough that the plaintiffs had alleged facts suggesting that the officer (i) the officer knew of the back-dating and (ii) he kept silent and concealed his knowledge of the backdating in order to escape detection. The officer's alleged breach post-2004 breach was thus not his role in the granting of the options, but rather his subsequent participation in the alleged concealment.

Although the Chancellor's jurisdictional ruling will have importance for officers sued in Delaware, the more important and wide-ranging aspect of the holding is the additional clarification on how a claim can be stated against an officer for involvement in stock option backdating. Practitioners investigating stock-option backdating or who are involved in stock option backdating litigation should take particular note of this ruling.

We have posted a copy of the opinion in the "Backdated Options" Practice Area on

Options Backdating and Loss Causation

Last week, Kevin LaCroix weighed in on his D&O Diary Blog on the recent dismissal of the backdating lawsuit filed against Apple. As Kevin notes, "Judge Fogel's opinion is seemingly important, particularly his comments with respect to loss causation, given that many of the options backdating cases have been filed in his judicial district – and indeed many backdating cases are pending before Judge Fogel himself. However, in issuing his opinion, Judge Fogel has repeated his unfortunate practice of issuing his opinions as 'Not for Citation.'"

Note last week's WSJ article about the growing numbers of backdating lawsuits being settled or dismissed...

Options Backdating: Mercury Interactive Settlement

As noted above, private litigants are making headway with settling backdating cases. In this podcast, Chris Keller of Labaton Sucharow discusses options backdating lawsuits and the recent settlement of the Mercury Interactive options backdating litigation, including:

- What is options backdating securities fraud (not just derivative) and how do you distinguish these cases?
- What are the terms of the Mercury Interactive settlement?
- Why did Mercury settle for a large sum ($117.5 million) when most have been talking down the significance of such cases?
- How is this settlement significant for those companies out there still facing backdating lawsuits?

- Broc Romanek

November 26, 2007

Quick Survey: Compensation Committees and Compensation Consultants

Three years ago, we posted an online survey regarding how companies are dealing with compensation committees and compensation consultants (here are those old results; I believe that survey's low response rate was because the survey was ahead of its time). A lot has changed dramatically in this area since then - so we have posted a new survey on the same topic. Go ahead and participate now!

Another US Competitiveness Report

Hat tip to Werner Kranenburg of "With Vigour and Zeal" for alerting us to yet another report on the competitiveness of US companies in a global market. This one comes from the Financial Services Roundtable and is entitled "The Blueprint For U.S. Financial Competitiveness." We have posted a copy in our "Sarbanes-Oxley Reform" Practice Area.

Compensation Arrangements for Private Equity Deals

We have posted the transcript from our recent webcast: "Compensation Arrangements for Private Equity Deals."

[Ever wondered why you went to law school...]

- Broc Romanek

November 21, 2007

Corp Fin's New Deputy Director and Chief Accountant

Yesterday, the SEC announced that Brian Breheny has been promoted to be Corp Fin's Deputy Director for Legal and Regulatory Policy (which was Marty Dunn's former job). Brian has been Chief of Corp Fin's Office of Mergers & Acquisitions since 2003. A new Chief of OM&A will be forthcoming, but not likely for at least several months.

Corp Fin also announced that Wayne Carnall will rejoin the SEC to serve as the Division's Chief Accountant (a job that has been vacant for six months since Carol Stacey left). Wayne has been working in the National Office of PricewaterhouseCoopers since he left the SEC in 1997.

It's On! SEC's Open Commission Meeting Calendared for November 28th

Despite many objections (as I blogged yesterday), the SEC intends to forge ahead on shareholder access next Wednesday. And #2 on the meeting's agenda (repeated below) is a shocker that nearly knocked me out of my chair:

1. The Commission will consider whether to adopt amendments to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, to clarify its longstanding interpretation of that rule.

2. The Commission will consider whether to adopt amendments to the proxy rules under the Securities Exchange Act of 1934 to facilitate the use of electronic shareholder forums.

A Little British Banker Humor

With a hat tip to Kevin LaCroix, here's some British humor dealing with investment bankers, subprime, etc. Gobble, gobble!

- Broc Romanek

November 20, 2007

RiskMetrics Publishes '08 Policy Updates

Yesterday, RiskMetrics’ ISS Governance Services unit issued updates for its US, Canadian, International and UK proxy voting policies. These new policies will be applied to all companies with shareholder meeting dates starting February 1st. RiskMetrics intends to release summary policy guidelines in mid-December and its full proxy manual after the new year. We have posted the policy updates in our "Proxy Advisors" Practice Area.

Among other topics, the policy updates deal with the following (note these brief descriptions were written by ISS):

1. Say on Pay - With several U.S. companies having committed to shareholder advisory votes on executive compensation, and several successful shareholder resolutions and the possibility of legislative action on the subject, the Say on Pay issue has arrived in the US. ISS has developed a framework for evaluating remuneration reports according to five global principles that emphasize linking pay and performance, board independence in the pay-setting process – and sufficient disclosure to allow shareholders to evaluate both the package and the process. From these global principles, we have developed market-specific guidelines that reflect local best practices in the U.S. and internationally.

2. Poor Pay Practices - Our U.S. Poor Pay Practices policy has been updated to reflect the better information available in new compensation disclosures – identifying specific poor compensation practices that may trigger withhold recommendations, including egregious employment contracts, severance and make-whole provisions, perks and retirement benefits, and poor disclosure practices.

3. Equity Plan Costs - A majority of our Policy Survey respondents indicated support for plans where employees have been holding vested in-the-money options for a significant amount of time. As such, ISS Governance Services will consider carving out a portion of cost attributable to overhang for companies with sustained positive stock performance and high overhang cost attributable to in-the-money options outstanding in excess of six years. ISS will adopt a case-by-case approach considering the following criteria: company performance, overhang disclosure, dilution, and compensation practices.

4. Independent Chairs - Since over 45% of companies in our Board Practices study now separate the chair and CEO positions, and investors show strong support for separation of CEO/chair positions, ISS will continue to support shareholder resolutions calling for an independent chair at U.S. companies. However, if a company meets certain performance tests and good governance practices, including the appointment of an independent lead director, we will recommend on a case-by-case basis. We are also adding two additional factors for consideration in this analysis: first, the disclosed comparison of the specific duties of the lead director and chair, and second, the company's disclosed rationale for combining the two positions. These additional disclosures will aid in evaluating board independence in the case there is a combined CEO/chair.

5. Product Safety - Heightened attention to product safety, plus strong investor interest for companies to disclose their social and environmental practices led us to enhance our policy to support shareholder proposals requesting that companies report on policies and oversight mechanisms related to toxic materials across their supply chains. In fact, 66-75 percent of Policy Survey respondents believe it is very important or somewhat important to report performance on social and environmental criteria to shareholders as part of routine disclosure.

Latest Rumors: Democratic Commissioner Nominees?

We try to stay away from rumors on this blog - as they often don't pan out - but it's noteworthy that the Washington Post ran this article last week noting that Luis Aguilar and Elisse Walter may be tapped to fill the SEC Commissioner vacancies since the shareholder access proposals are so controversial and there won't be any Democratic Commissioners once Annette Nazareth leaves her post (which is expected next month). Some members of Congress (and a score of investors) have asked SEC Chairman Cox to hold off on acting on shareholder access - since it appears that the current Cox plan is to hold a meeting on November 28th to deal with the AFSCME decision and then revisit shareholder access next year.

Citing unnamed sources, the Post reports that Senate Majority Leader Harry Reid has submitted both names to the White House for approval. Under federal law, two of the SEC's five Commissioner spots must be filled by members of the political party that doesn't control the White House.

Luis Aguilar is a securities lawyer at McKenna Long & Aldridge in Atlanta and a former SEC Staffer. Elisse Walters rose through the Corp Fin ranks to serve as Deputy Director and also served in the SEC's Office of the General Counsel and has been the General Counsel of the CFTC; for quite some time, she has worked at the NASD (now FINRA), where she now serves as Senior Executive Vice President, Regulatory Policy & Programs.

FINRA Looking for Marketing Bang?

I couldn't resist repeating the following entry from Mark Astarita's "SECLaw Blog":

"In what some believe is a marketing ploy and an attempt to increase its Google search ranking, FINRA is requiring all member firms to provide a hyperlink to The deadline for compliance is November 17, so get your web designers moving. While I am certain that this is not a Google-driven event, but rather an attempt to brand their corporate identity, it is a bit strange. The NTM simply requires a link, not any special language, or the logo, and it is not an attempt to educate customers of the existence of a regulator.

It appears that FINRA is spending way too much time worrying about its name. At a SIFMA conference yesterday, a senior FINRA executive repeatedly referred to "legacy-NASD" every time he referred to the NASD. It was so cumbersome and silly, that he had to explain that if he didn't do that, he would "have to put a dollar in the jar" indicating that the organization thinks "NASD" is a bad word. Seems to me that the time could be better spent addressing a new rule book, or investigating firms that caused this massive $400 billion subprime scandal. How long before that filters down to investors?"

- Broc Romanek

November 19, 2007

Broad Auditing Overhaul to be Considered By Treasury's Committee

This "Auditing Profession Discussion Outline" from the Treasury Department's Advisory Committee on the Auditing Profession (co-chaired by Arthur Levitt and Donald Nicolaisen) is an eye-opening list of topics that the Committee expects to take up, obtain comment and issue a report on next summer. Among other broad topics, the Committee will consider: how to improve the quality of audits; whether auditors should be provided caps on their legal liability; whether auditors should be able to organize in structures that would seek private or public capital; governance and transparency of the firms; independence rules; how to attract more students into accounting as opposed to seeing them go into other professions; the dwindling supply of college professors; and how to improve the competitiveness among the small and large firms. The Committee seeks input for its outline, with comments due by November 30th.

Meanwhile, the SEC's Advisory Committee on Improvements to Financial Reporting continues to plug along, holding its latest meeting a few weeks ago. The SEC has posted a host of reports from various subcommittees (scroll down to November 2nd meeting). There are some pretty interesting ideas being kicked around - particularly those in this report on restatements.

Restatements: Timing and Disclosure Issues

Speaking of restatements, a recent study from the Huron Consulting Group found:

- average filing time between initial filing of a Form 8-K and restated financial statements was 7 weeks (and the median was 3 weeks)

- One out of every 6 restatements analyzed was filed within one day of a Form 8-K being filed (while one-third of the restatements were filed within two weeks of the initial Form 8-K filing)

- 20% of the companies reviewed took more than 4 months to complete the process (typically missing at least one timely filing of a Form 10-K or Form 10-Q)

- 4 out of 5 restatements are filed within 4 months of the initial filing of the Form 8-K announcing the existence of a material error

- Most prevalent accounting issues were: Equity and Debt; Capitalization and Expense of Assets; Reserves/Accruals/Contingencies; Revenue Recognition; and Taxes

- Neither company size nor industry appeared to be significant factors in the length of the restatement process

- 19% of Form 8-K filings announcing the existence of a material error reported fewer accounting issues than were ultimately included in the restated financial statements.

In our "Restatements" Practice Area, we have posted a copy of the Huron Consulting Group study - as well as a recent PCAOB working paper regarding changes in market responses to restatements.

SEC's Concept Release: Disclosure of Business Activities in Terrorist Countries

On Friday, the SEC issued a concept release regarding how the public should access disclosures about material business activities in the five countries on the State Department's list of State Sponsors of Terrorism. This is a follow-up to the SEC's discontinued practice of listing companies that disclosed certain matters relating to the countries (the concept release explains the filters that the Staff had used before - long story).

Given the topic, we might see more comments than one would think - even though this potential rulemaking only impacts how the SEC would list information filed through Edgar and not require companies to do anything differently than they already do. Personally, I think the reputational stakes are too high if a mistake is made by the SEC and a company is inadvertantly placed on this type of a list. Let the media and others do Edgar searches to create their own list...

- Broc Romanek

November 16, 2007

SEC Adopts Major Changes to Rule 144

At yesterday’s open meeting, the SEC adopted the most significant amendments to Rule 144 in over a decade, largely as they were proposed. The SEC decided not to combine Form 4 and Form 144 at this time – even though the concept was favorably received by commenters – but the Staff did say that they will continue to consider the issue and may take it up soon as a separate project. The final rules will not include the proposed provision that would have tolled the holding period for up to six months while a security holder is engaged in hedging transactions. Here are Corp Fin's opening remarks.

As noted in this press release, under the final rule amendments (to be effective 60 days after publication), the holding period for restricted securities of reporting companies will be shortened to six months. In addition, under the substantially simplified conditions of the amended rule, non-affiliates of reporting companies will be able to freely resell restricted securities after satisfying a six-month holding period (subject only to the Rule 144(c) public information requirement until the securities have been held for one year), while non-affiliates of non-reporting companies will be able to freely resell restricted securities after satisfying a 12-month holding period.

For affiliates’ sales, the SEC amended the manner of sale requirements for equity securities – while eliminating them for debt securities – and relaxed the volume limitations for debt securities. In addition, the Form 144 filing requirements for affiliates’ sales will be raised to 5,000 shares or $50,000. A number of Staff interpretations will be codified as proposed, and the preliminary note to Rule 144 will be streamlined.

In connection with the Rule 144 amendments, Rule 145 will be changed to eliminate the presumptive underwriter provision – except with respect to transactions involving blank check or shell companies. The resale provisions of Rule 145(d) will also be revised.

While the revisions to Rules 144 and 145 will certainly provide much needed relief in terms of liquidity for those purchasing restricted securities, the opening up of the rules may also potentially increase the possibility for non-compliance. As a result, issuers, brokers and transfer agents will need to significantly change – and tighten – their procedures.

We will be providing detailed guidance in The Corporate Counsel over the next few issues on everything you will need to know to address these changes to Rules 144 and 145. Stay tuned…

Smaller Public Company Reporting System and Compensatory Options Exemption Adopted

The SEC also adopted two other components of its efforts to improve the small business regulatory regime. The proposals to drop Regulation S-B – and to expand the universe of smaller reporting companies that may use a scaled reporting regime – were adopted largely as proposed. As a result of these changes, an additional 1,500 smaller companies will now be able to utilize, on an “a la carte” basis, the “scaled” disclosure requirements incorporated into Regulation S-K. The SEC Staff said that it plans to issue a short guide on how to prepare filings under this new regime. These rule changes will be effective 30 days after publication.

Amendments to Exchange Act Rule 12h-1 were also adopted to provide an exemption for private non-reporting issuers from the registration requirements under Exchange Act Section 12(g) for compensatory employee stock options issued under employee stock option plans, as well as an exemption for reporting issuers from Section 12(g) registration for compensatory employee stock options. These rules will be effective immediately upon publication, so that the exemptions can be in place by the end of 2007 for calendar year-end companies. Here is the Staff's opening statement on all of the small business proposals, including Rule 144.

The Staff indicated that the other small business-oriented proposals are still being actively considered and should come up for adoption soon.

GAAP Reconciliation Eliminated for IFRS Financial Statements

The SEC eliminated the requirement for a US GAAP reconciliation when foreign private issuers file financial statements prepared using International Financial Reporting Standards as issued by the International Accounting Standards Board. Here are Chief Accountant Hewitt's opening remarks.

As noted in this press release, Chairman Cox also announced that the SEC will hold two roundtables on December 13th and 17th to discuss the concept of permitting US issuers to use either IFRS or US GAAP. For an in-depth discussion of yesterday’s proceedings on the IFRS changes, take a look at Edith Orenstein’s FEI Financial Reporting Blog.

- Dave Lynn

November 15, 2007

Shareholder Access: Cox Testifies Before the Senate Banking Committee

Yesterday, the Senate Committee on Banking, Housing and Urban Affairs conducted a hearing on shareholder rights and proxy access. SEC Chairman Cox testified at the hearing, as did representatives of business and shareholder groups.

In his testimony, Chairman Cox indicated that while the SEC would go back to the drawing board on the broader question of establishing a means for shareholders to nominate directors and get them on the company’s ballot, action was still needed before the upcoming proxy season to deal with the uncertainty arising from last year’s AIG v. AFSCME decision. Based on these remarks (and similar remarks over the past few months), it now appears likely that the proposed amendments to Rule 14a-8(i)(8) seeking to clarify the SEC’s interpretation of that rule will be adopted in the coming weeks, probably during the week after Thanksgiving. If adopted, then the Staff could again express the view during the proxy season that shareholder proposals seeking to establish an access procedure are excludable from the proxy statement under Rule 14a-8(i)(8). As noted in the Bloomberg article, “Democrats on the banking panel criticized Cox for saying the agency might pass a rule this year and revise it in 2008. Senator Robert Menendez, a New Jersey Democrat, said he was ‘perplexed and deeply disturbed’ by that possibility.”

Chairman Cox noted in his testimony that “there is a widespread assumption that having published the two proposals, the Commission has only a binary choice — that we must adopt one of them, or do nothing. But in fact we may also adopt a rule that is different than either of those proposed. The only requirement is that the proposed rule, and the questions the agency has asked, provide fair notice to the public of what the Commission is contemplating and the issues involved. So long as the final rule or rules are a logical outgrowth of what was proposed, we are free to amend the proposals and to consider improvements that the public comment process has brought to our attention.” That is true enough, but it raises the question of whether there is really that much wiggle room with the access proposals to address all of the concerns coming from the shareholder and business groups sitting at opposite ends of the spectrum. Cox told reporters after the hearing that the much-maligned 5% threshold contemplated in the proposal was one of the “fundamental” areas that needed to be addressed.

Interestingly, at the end of his prepared testimony, Chairman Cox noted that “none of the 22 SEC Chairmen since the agency first looked at this issue in 1942 has successfully taken this step” of going back to the drawing board and taking a fresh look. That is an awful lot of history to overcome.

And Now We Are Off to See the Wizard

At last week’s PLI Annual Institute on Securities Regulation, Professor Joseph Grundfest gave this entertaining speech advocating for majority voting over shareholder access. Just as Dorothy learned from Glinda the Good Witch of the North, the solution to our governance problems may already be in our own backyard. Grundfest notes that at least 63% of the S&P 500 have already adopted bylaws or board guidelines that either implement or come reasonably close to implementing what is effectively the same as the “advice and consent” model for appointments under Article II, Section 2 of the US Constitution. [For the 63% figure, Grundfest cites the RiskMetrics Group 2007 Postseason Report at 17.] Under Grundfest’s analogy to the federal government system, shareholders can be cast in the role of the Senate and the incumbent board can be cast in the role of the Executive. The resulting set of checks and balances “forces incumbent boards to pay careful attention to shareholder concerns, and induces incumbent directors to reflect the shareholder sensitivities as the price of re-election.”

Grundfest argues that we should give majority voting a chance before going down the road of shareholder access. He notes that if there are recalcitrant companies out there that do not voluntarily adopt majority voting, then the SEC could adopt regulations that impose additional disclosure requirements and filing liabilities on corporations that fail to implement effective advice and consent regimes – and these regulations could replace the flawed shareholder access proposals that are currently pending.

In the immortal words of the melting Wicked Witch of the West: “Ohhhhh... What a world! What a world!”

Market Reg Goes Retro: Re-Introducing the Division of Trading and Markets

The SEC announced that it has changed the name of the Division of Market Regulation to the Division of Trading and Markets, in an effort to “better reflect the Division’s full range of responsibilities.” This “new” name is actually the Division’s old name, which was changed in connection with a restructuring back in 1972.

Floyd Norris of the NY Times notes in his blog that it is odd how the word “regulation” is being removed from the Division’s title, amidst the announcements of huge losses at major broker-dealers that the Division regulates and at a time when the bond rating agencies that the Division oversees are being blamed for the collapse of some securitization markets.

Will Corp Fin be next? Perhaps in the near future your 10-K might be reviewed by the Division of Registration, which was Corp Fin’s name from 1935 to 1941.

- Dave Lynn

November 14, 2007

Share Buybacks Do Not Always Result in Ratings Downgrades

Recently, we have been seeing a number of questions in our Q&A Forum regarding issuer and affiliate share repurchase programs. When share prices are down and issuers have available excess cash or credit, buybacks can be a very effective tool to consider. One concern with share buybacks, however, has been that they are often perceived as unfriendly to an issuer’s bondholders because they use up cash or credit that the bondholders would rather see available for debt service.

Moody’s Investors Service recently conducted a study of 100 buyback programs announced over the last 19 months and determined that - in their sample - the announcement of a share repurchase program prompted no rating action 56 percent of the time. However, there was a change in rating outlook or a downgrade of the issuer’s credit rating in 44 percent of the situations that Moody's sampled.

Moody’s notes that some of the factors which may potentially head off downgrades or changes in outlook following announcement of a repurchase program include:

- the funding for the share repurchases comes from excess cash on the balance sheet, predictable future operating cash flow, or asset sales (so long as the asset sales have no impact on collateral values or future earnings), rather than from incremental debt;

- the buyback program is too small to be material to credit quality;

- the buyback program leaves the issuer still adequately positioned at the current rating; or

- the repurchases will only place temporary pressure on credit metrics (for example for only one or two years).

Beyond the ratings concerns, there are of course a number of legal issues to consider when designing and implementing a share buyback program. For example, structuring the program under Exchange Act Rule 10b-18 is important in order to have a safe harbor from manipulation claims, and the issuer must be cognizant of potential anti-fraud liability for trading on material nonpublic information when it is buying back in its own securities. Issuers also need to consider any Williams Act or Regulation M implications of a buyback program, and disclosure of repurchases is now required in periodic reports under Item 703 of Regulation S-K. For more information, check out our “Stock Repurchases” Practice Area.

Are You DRS-Eligible?

As noted in this recent memo from Skadden Arps Slate, Meagher & Flom LLP, by January 1, 2008 all issuers whose securities are listed on the NYSE, Nasdaq and Amex must ensure that their listed securities are eligible for participation in the Direct Registration System – also known as DRS. Given the amount of time necessary to complete the process of becoming DRS-eligible, any issuers who are not already DRS-eligible have less than a month to take all of the necessary actions.

In this podcast, Allison Land of Skadden describes the latest issues with DRS, including:

- When is the DRS-eligible deadline and what happens if a company misses the deadline?

- What do companies need to do to become DRS-eligible?

- What are the common pitfalls that you are seeing for companies trying to become DRS-eligible?

November-December Issue: Deal Lawyers Print Newsletter

The November-December issue of Deal Lawyers has just been dropped in the mail - and includes articles on:

- The Demise of the Broadly Written MAC: Will the Plain Language Standard Replace the Reasonable Acquiror Standard?

- Full “Walk-Away” Values at Termination and Change in Control

- How to Calculate the Full Walk-Away Value

- Merging Qualified Plans: Five Steps to Eliminate Post-Closing Headaches

- Due Diligence Review of Internal Controls: Focusing Beyond the Numbers

As all subscriptions are on a calendar year basis, it is time for you to renew your subscription. If you are missing these critical issues, try a 2008 no-risk trial to get a non-blurred version of this issue for free.

- Dave Lynn

November 13, 2007

Big Uptick in SEC Enforcement Cases

SEC Enforcement Director Linda Thomsen recently announced a surprising 14 percent jump in enforcement cases in fiscal 2007. As noted in this Bloomberg article, the 656 cases in fiscal 2007 represented the first increase in Enforcement’s new case tally in four years.

One contributing factor to the big increase in cases was options backdating, with 24 cases brought in 2007. Cases alleging improper financial disclosures (a category which includes options backdating cases) made up 33 percent of the 2007 total, up from 24 percent in 2006. 47 insider trading cases were brought in 2007, as compared to 46 such cases in 2006. Among these insider trading cases was one of the largest since the 1980s, involving employees at several investment banks. Cases against financial advisers and delinquent filers represented less of a share of total cases in 2007 as compared to 2006.

With Section 404 Deadline Fast Approaching, Chamber of Commerce Calls for Delay

Despite the SEC, PCAOB and COSO efforts to make the internal controls assessment process more manageable for smaller companies, the US Chamber of Commerce is calling for yet another one year delay in Section 404 implementation. The Chamber of Commerce is asking Congress to hold hearings on the issue. In this press release, Michael Ryan of the Chamber notes that their recently conducted survey of Section 404 costs demonstrates “why small companies complying for the first time with SOX 404 should not be the guinea pigs for the improved rules adopted by the SEC and the PCAOB.”

As recently as this past summer, the SEC has rebuffed attempts to push back the Section 404 implementation timetable. As it now stands for non-accelerated filers, management must begin providing its own internal control assessment in the annual report filed for the fiscal year ending on or after December 15, 2007, however an auditor’s internal control attestation is not required until the annual report filed for the fiscal year ending on or after December 15, 2008.

The Chamber of Commerce survey of smaller companies attempts to show that compliance costs are expected to be high for these issuers. Over half of the survey respondents with a public float of less than $75 million except costs to implement the management assessment portion of the requirement to exceed $200,000, while slightly less than half of the respondents expected implementation of the auditor attestation component to also exceed $200,000. Despite the “staged” implementation approach adopted by the SEC, over 80% of the non-accelerated filer respondents have already engaged an auditor as part of their preparations for rendering management’s assessment.

Not surprisingly, 79% of the respondents to the Chamber’s survey indicated that a delay in the compliance deadline for Section 404 would be helpful to their company.

Annual Reports: How to Create Them for an Online World

Tune in for Thursday's webcast - "Annual Reports: How to Create Them for an Online World" - to learn how to create more effective – and more “usable” – annual reports. Too many companies continue to make the same mistakes with their online documents and put themselves at a disadvantage when soliciting votes, particularly if a third-party mounts a counter-solicitation or a “just vote no” campaign.

Broc makes this case in point: “For those companies doing voluntary e-proxy so far, the proxy materials they are posting are merely “dumb” PDFs. Not even a linked table of contents. These are far less usable than the HTML filings made on EDGAR. Why have we gone backwards in this age of interactive documents – particularly given the SEC’s push for interactive data? As one member emailed me, ‘I think it passes regulatory muster, but only barely?’”

- Dave Lynn

November 12, 2007

FIN 48 – Effective Date for Nonpublic Companies to be Postponed

The FASB has decided to postpone the effective date of Interpretation 48, Accounting for Uncertainty in Income Taxes (June 2006), for those nonpublic entities that have not yet applied the interpretation. Under the postponement, FIN 48 would be applied by those nonpublic entities for periods beginning after December 15, 2007. The FASB’s proposal to delay effectiveness of the Interpretation is now out for a 30-day comment period.

Interpretation 48 will continue to be effective for public companies for fiscal years beginning after December 15, 2006. For more on FIN 48, check out our “Tax Uncertainties” Practice Area.


In a recent national survey of chief financial officers and senior comptrollers conducted by Grant Thornton, 47 percent of the CFOs polled said that they were not aware of XBRL. About half of the responding CFOs believed that XBRL would not become mandatory for SEC filings until 2010 and beyond. Apparently these CFOs are not big followers of Captain XBRL.

The CFOs may be in for a surprise, as the interactive data momentum clearly continues to build at the SEC. On Friday, the SEC announced that Chairman Cox had been holding bilateral talks at the International Organization of Securities Commissions (IOSCO) conference on the timetable for implementation of XBRL for regulatory filings. Cox noted that “[w]ithout question, 2008 will be a watershed year for interactive data.”

The Grant Thornton survey also found that a surprisingly high 43 percent of the CFOs polled said that they did not want to be CEO of a company in the future. In the survey, 61 percent of the CFOs felt that their CEO was paid at a level that is appropriate, while approximately 16 percent believed that their CEO was underpaid.

Good News for Portal

A few months ago, I blogged about the “summer of alternative trading platforms for unregistered securities” (kind of like the "Summer of Love" for traders), noting that a number of investment banks were developing platforms for trading in Rule 144A securities. As noted in this article from today’s Wall Street Journal, those efforts have now been abandoned in favor of revamping Nasdaq’s Portal system. Efforts have been underway for some time to make Portal a useful trading system, and now it looks like the threat of competition from Wall Street will not undermine those efforts.

Corporate Governance Lawsuits

Lawsuits remain a means for compelling corporate governance reform, especially in situations where other methods for accomplishing reform have not worked. In this podcast, Stuart Grant of the law firm Grant & Eisenhofer describes the latest developments in corporate governance reform lawsuits, including:

- What are examples of companies that have been targeted for governance reform through lawsuits in the past year or two?
- Typically, how does the filing of a governance lawsuit impact whether the company’s management will consider governance changes?
- What do you recommend that management groups faced with these lawsuits consider when entering a dialogue with those that file the lawsuit?

- Dave Lynn

November 9, 2007

Updating D&O Questionnaires for the 2008 Proxy Season

We've been getting quite a few questions about whether D&O questionnaires should be tweaked for this proxy season. Alan Dye notes that, other than the possible NYSE independence issues if they get adopted in time, he's not aware of any new rule or regulation that would cause the questionnaire to change (assuming it was up-to-date last year).

The Corp Fin Report on executive compensation (and John White's "Where's the Analysis?" speech) is more for drafters of the proxy statement, and doesn't necessarily impact the questionnaire. However, Alan notes that some companies continue to uncover perks they hadn't known about - so some companies may need to beef up their questions regarding perks to cover more examples, including spousal travel and matching charitable gifts. And reviewing the February and August Corp Fin interpretations of S-K 402 (and our compilation of Staff comments) vis a vis your questionnaire is a good idea.

Anyone else have items to consider for this year's questionnaire? Please email me if you do...

E-Proxy and California Law

In our "Q&A Forum," we continue to receive follow-on questions related to the issues raised by California law as it intersects with the SEC's new e-proxy rules - so I decided to go to the source who first raised the issue in this blog.

In this podcast, Keith Bishop of Buchalter Nemer, and a former California Commissioner of Corporations, describes how the SEC’s new e-proxy rules might conflict with California law, including:

- I understand that the SEC's new e-proxy rules may conflict with California law. What might the conflict be? And which companies might it impact?
- Can the problem be solved by mailing annual reports only to actual shareholders of record?
- Should companies ignore the California conflict if the risk of enforcement is low?
- Any other potential conflicts that companies should be aware of when they implement e-proxy?

My Midlife Facebook Crisis? Nah...

I make my living primarily on the Web these days, but I still feel too old for the social networking craze (although I would argue that all of our sites are "closed" social networks since they are all community-themed). Last Saturday, the WSJ ran this great article - "My Midlife Facebook Crisis" - on what it's like for us old-timers to join the social networking bandwagon.

In the middle of last year, Facebook began allowing anyone to join its network and start accumulating "friends." So I spent a few minutes - very few - creating a profile for my alter ego, "Billy Broc Oxley." A friend of mine took one look at Billy Broc's profile and promptly said "it probably violates the laws of all states but Utah and Nevada (for different reasons)." Not sure how he got that, but I don't think this experiment is gonna go anywhere...

[Boo-yah! For the past several months, whenever I have appeared on the speaking circuit, I have said "if you don't get anything else out of this seminar, buy Broadridge stock." Based on what Broadridge has done over the past two days, I can say "I told you so!" And thus ends my stock-picking career.]

- Broc Romanek

November 8, 2007

The Main Event: Vote for Your Favorite 10-K Pointers

Five brave souls have volunteered for our latest contest (and one anonymous contributor), setting forth some practice pointers regarding “Preparing Your Form 10-K.” Each contributor took a moment out of their busy life to write up something that might help you during the proxy season; they had no restrictions on what they could submit, so the format and nature of their pointers vary. Thanks to Carrie Darling, Linda DeMelis, John Newell, Jeff Taylor and Mike Woodard for entering our inaugural contest; each deserves much praise for giving this a try!

How to Vote: Now, you need to do your part and cast a vote. You are free to vote more than once - and when you vote, you can vote for as many of the contributors as you wish (even all six contributors if you want). Voting is completely anonymous.

[Dave "The Animal" was bounced before the competition even started when he submitted these pointers:

1. First, get yourself a six-pack. In fact, you might need a case if you are one of them there large accelerated filers.
2. Don't be making yourself a fool by filing your 10-K under an 8-K header submission type - it hurts.
3. Speaking from experience, its not a good idea to file the CEO's credit card numbers and social security numbers as as an exhibit.
4. I don't like too many commas.
5. Don't listen to all those pesky little voices coming out of your refrigerator when you are trying to draft some disclosure. My tin foil hat tends to drown them out.]

The SEC's "Small Business-ish" Open Commission Meeting: Next Thursday

Late yesterday, the SEC published a Sunshine Act notice to announce an open Commission meeting for next Thursday to consider adoption of these proposals:

- Streamlined Smaller Public Company Reporting
- Amended Rules 144 and 145
- Stock Option Registration Exemption
- Financials prepared in accordance with IFRS without Reconciliation

Note that these three proposals are not on the agenda: shareholder access; Form-Reg D; simplified Form S-3 - so there may be another open Commission meeting around the corner (or maybe there won't be - we don't know yet).

At next Thursday's meeting, the Commission will also consider proposing new rules to improve mutual fund disclosure by requiring more plain English - and enhancing the availability of more detailed fund information on the Web.

Some CD&A Guidance

As I alluded to yesterday, we have just wrapped up our just-completed “Special Fall/Winter 2007 Supplement” of the Compensation Standards newsletter, which should help you (and your board) address the CD&A disclosures that the SEC will be looking for this proxy season. Don't forget to renew - or try a no-risk trial.

- Broc Romanek

November 7, 2007

51 Tips: Executive Compensation Disclosure

The community has spoken! On, we have posted the 51 executive compensation disclosure tips that we received in response to our contest seeking ideas from our members. We will be announcing awards for these tips soon - take a look at them and let me know which ones you like best. Here's the strange thing - I billed the contest as "51 tips" and I received exactly that number!

What is a "Severance Package"?

In the wake of Merrill Lynch CEO Stanley O’Neal's resignation, there were some articles noting that he didn't have a severance agreement with the company. Here are some thoughts from The Corporate Library on the topic:

"In a study released last week, The Corporate Library reports that the “non-severance” package awarded to O’Neal is not what it seems. Long rated a high concern board by The Corporate Library, Merrill Lynch’s actions are deemed too little, too late, by Paul Hodgson. 'Stanley O’Neal’s departure from Merrill Lynch with ‘no severance’ and no 2007 bonus would seem to present a picture of a decisive board in control. Yet, when ‘no severance’ equals $161.5 million and an office and executive assistant for three years, what else did they think they needed to give him?'” Notably, Mr. O’Neal’s separation package comes in at #5 on a list of 10 of the most excessive severance packages this decade.

In addition to the severance panel discussion during the recent "4th Annual Executive Compensation" Conference, we have written quite a bit on severance and steps you should be taking to fix outstanding arrangements (and not make the same mistakes going forward) - look for more in a Special Supplement to the Compensation Standards print newsletter coming out very soon. Sign up for complimentary copies!


Back in September, the Council of Institutional Investors sent this letter to the SEC explaining what it seeks from companies when it comes to the "Compensation Analysis & Disclosure" section of the proxy statement. It's interesting to compare CII's letter to John White's speech and the Corp Fin Staff Report that came out subsequently. For the Jan-Feb issue of The Corporate Executive, we are busily writing analysis (and model language) about what CD&As should look like next year - we hope to have that available within a month.

- Broc Romanek

November 6, 2007

Corp Fin's New Operations Office: Beverages, Apparel and Health Care Services

With the elimination of the S-B Forms (and Regulation S-B) probable in the near future, Corp Fin has reorganized the operations group headed by Assistant Director John Reynolds so that it's now the "Office of Beverages, Apparel and Health Care Services." John's group used to handle all the small business filings and was called the "Office of Emerging Growth Companies." Going forward, small business filings (including SPACs) will be processed in the operations group based on the industry they are in - just like any other company.

Note that Gerry LaPorte's Office of Small Business Policy continues to exist and serves as the advocate and policy-maker for smaller companies. Our organization chart - as well as Corp Fin's chart - has been updated.

Corp Fin: Who to Contact with EDGAR, CTRs, FOIA, Etc. Queries

A few months ago, I blogged that Patti Dennis took over Herb Scholl's old job as Chief of Corp Fin's Office of Disclosure Support and that Herb's old office was formerly known as the "Office of EDGAR and Information Analysis." What I neglected to clarify is that Herb's old office has been split into two as follows:

- Office of Disclosure Support, which is responsible for EDGAR posting/dissemination of comment letters, confidential treatment and FOIA requests

- Office of Information Technology, whose Chief is Cecile Peters and which answers general EDGAR questions about '33 Act and '34 Act filings the Division processes (so this is the office that handles many of the functions that Herb's OFIS used to do)

We have updated our "Corp Fin Organization Chart," which includes phone numbers.

SEC Staff Issues SAB 109 on Fair Value Accounting for Written Loan Commitments

Yesterday, Corp Fin and the Chief Accountant jointly issued Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings." SAB 109 provides the Staff's views on the accounting for written loan commitments recorded at fair value under GAAP - and the SAB revises and rescinds portions of SAB 105.

As noted in this press release, the SAB revised the Staff's views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the Staff's views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment.

- Broc Romanek

November 5, 2007

Verizon's Say on Pay: A Take-Away

Feeling the heat of a majority vote on a "say-on-pay" proposal, Verizon Communications became the second company to adopt a policy to put its compensation plans to an annual vote by shareholders in 2009. AFLAC became the first company to adopt such a policy earlier this year. Notably Verizon's “say-on-pay” proposal barely received majority support with 50.18% votes cast supporting it. RiskMetrics reports that a majority vote has been achieved at 7 companies so far this year for "say-on-pay" proposals (e.g. 69% at Activision).

So why is Verizon the first of these 7 companies to adopt a "say-on-pay" policy? I have no inside scoop, but one reason might be that they want to abide by the will of the majority, even if it's barely a majority. Another reason might be that the company's executive pay practices have been widely criticized - and publicly so, ranging from being on The Corporate Library's short "pay-for-failure" list to this Union press release (also see this letter from a group of institutional investors).

And of course, you shouldn't forget the novel Electronic Shareholder Forum that I blogged about a few months ago. The Forum’s Verizon program was organized with the support of the Association of BellTel Retirees, the source of the Verizon shareholder proposal - and clearly, this Forum had some role in obtaining the majority vote given how close the vote was. Gary Lutin, who is responsible for conducting the Forum (with rigorous standards of independence), speculates that the higher vote may have been attributable to the broader range of investors involved in an open program - that had previously established principles based on shared management and shareholder interests - rather than the confrontational approach of the “say on pay” campaigns currently being waged by others.

So the lesson learned is that companies are really gonna need to learn to leverage - and monitor - the Web better, which ties into the subject of our upcoming November 15th webcast, "Annual Reports: How to Create Them for an Online World."

[By the way, Verizon also approved a revised policy that more specifically defines the types of payments that will be included in the calculation of a severance payment - and adopted a policy that addresses the independence of its compensation consultant.]

The "Pink Sheets" Speak

Over the past few years, there have been a lot of changes in the pink sheets. In this lengthy podcast, Cromwell Coulson, CEO of the Pink Sheets, describes the latest upgrades to his market, including:

- How have the Pink Sheets gone electronic?
- What are your OTCQX market tiers?
- What are the new Pink Sheets disclosure categories?
- What is the role of securities counsel in the OTCQX market tiers and Pink Sheets disclosure categories?
- What are your thoughts on the SEC’s Rule 144 proposals?

Cromwell is always colorful - and we have more information about what is happening with the Pink Sheets in our "Pink Sheets" Practice Area.


You may want to check out BRIBEline, which is a secure, multi-lingual site through which companies and individuals can anonymously report bribe demands by answering 9 multiple-choice questions. The site is operated by TRACE, a non-profit membership association of multinationals.

Here is some info from the BRIBEline website: No names are requested or collected, and reports made to BRIBEline are not used for investigations or prosecutions. Instead, the information is aggregated and publicly reported by country and by sector (the customs service, the judiciary, etc.), shining a spotlight on the worst offenders, providing companies with an additional risk mitigation tool, encouraging governments to reduce corruption in their ranks and helping those working to increase transparency and reduce bribery more effectively target their efforts.

- Broc Romanek

November 2, 2007

Lies, Damn Lies & Statistics: Sufficiency of Statistical Correlation for Books and Records Inspections

From Kevin Miller of Alston & Bird: In a recent decision - Louisiana Muncipal Police Employee's Retirement System v. Countrywide Financial Corp. - Vice Chancellor Noble of the Delaware Chancery Court addressed "what would appear to be the outer limits of the minimal quantum of evidence a shareholder must adduce in order to demonstrate a credible basis to suspect corporate wrongdoing that would constitute a proper purpose to inspect corporate books and records under 8 Del. C. § 220."

The only evidence presented to support LAMPERS allegation of corporate misconduct was a statistical correlation suggesting the possibility of backdating or springloading of certain stock options granted to executive officers of Countrywide Financial. The question before the Court was not whether the backdating or springloading of stock options had occurred, but whether LAMPERS had established a credible basis, by "presenting “some evidence,” from which the court could infer possible issues of corporate misconduct warranting further inquiry through a limited inspection of corporate books and records."

The court expressed concern that by finding in favor of the plaintiff solely on the basis of a mere statistical correlation that it risked "opening a floodgate of demands from shareholders seeking to inspect the books and records of Delaware corporations on the basis of spurious or contrived statistical correlations purporting to suggest the possibility of corporate wrongdoing." The court emphasized that indiscriminate “fishing expeditions” cannot be tolerated in Section 220 actions, that each case is fact specific and must be individually analyzed to avoid abuse of the Section 220 process.

Ultimately the court concluded that "although statistics alone must not be enough to establish the ultimate issues underlying these cases, i.e., that corporate wrongdoing in fact occurred, the Court discerns no compelling reason why a statistical correlation, if adequately supported by a sound, logical methodology and competent expert testimony, cannot constitute “some evidence” of possible corporate wrongdoing sufficient to permit a shareholder limited access to a narrowly circumscribed set of corporate books and records."

Nevertheless, the court found that the statistical evidence presented by LAMPERS was just barely sufficient to carry the minimal burden imposed by Delaware law and only permitted a limited inspection of Countrywide Financial’s books and records. We have posted a copy of the opinion in our "Books & Records" Practice Area.

Europe's “Big Bang”

As described in this article from the Economist, the "Markets in Financial Instruments Directive" took effect yesterday and effectively creates a common market for share, commodities and derivatives trading across 30 countries in Europe. The new rules should have a big impact as it reduces the hold of national stock exchanges over share trading and throws open the field to newer electronic exchanges and even big investment banks.

Required Reading? Nah...

A member found this old memo among his papers and sent it along - it's scary to see a sampling of your writing from your youth, particularly when its dated before there was widespread use of personal computers. I wonder if the SEC Historical Society has this among it's gems...

- Broc Romanek

November 1, 2007

Pro or Troll #2: Board Agendas

Thanks to Kris Veaco of the Veaco Group, we have posted a second "Pro or Troll?" quiz that will test your knowledge about board agendas. Give it a try (and let me know if you want to compile your own quiz for our amusement)!

Survey: CFOs and Controllers on Governance Issues

Grant Thornton recently conducted a national survey of CFOs and senior comptrollers on some governance issues. Here are the results:

1. Do you believe the roles of CEO and chairman of the board should be independent of each other? Yes - 79%; No - 21 %

2. Should the SEC revise 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations and for all instances in which the auditor chooses not to stand for reappointment? Yes - 76%; No - 21%

3. Do you believe shareholders in public companies should have greater access to the proxy? Yes - 66%; No - 30%

4. Do you believe that small cap companies who test internal controls (according to Sarbanes-Oxley) will be looked upon more favorably by investors than those who do not test internal controls? Yes - 69%; No - 30%

5. Do you consider the newly issued guidance (AS 5) from the SEC on internal controls and the new audit standard for auditing internal controls to be a significant improvement over previous rules? Yes - 44%; No - 48%

Our November Eminders is Posted!

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

- Broc Romanek