July 31, 2008

SEC Adopts New "Corporate Use of Website" Guidance

Yesterday, the SEC adopted updated interpretive guidance regarding how companies can use their websites. Here is Corp Fin's opening statement - and here is the press release (which includes a video from SEC Chair Chris Cox). The interpretive release is not yet available.

Based on comments made during the open Commission meeting and the press release, we know the SEC's guidance is principles-based that relies on a facts-and-circumstances analysis and is divided into four parts as follows:

1. Reg FD Guidance - How information posted on a company's site can be considered "public" and provides guidance to help companies comply with Regulation FD. The upcoming release contains factors to help determine whether online information is considered "public" so that subsequent communications would not constitute disclosure of material non-public information, including whether:

(i) a company site is a recognized channel of distribution
(ii) online information is considered broadly disseminated
(iii) information has been posted for a sufficiently long period of time so that it has been absorbed by investors

In addition, the release addresses when disclosure of information on a site is considered adequate to make such information "public" for purposes of the alternative public disclosure prong of Regulation FD (the default prong is furnishing a Form 8-K). At the open Commission meeting, it was predicted that fewer Form 8-Ks will be filed under this guidance.

2. How Liability Standards Work Online - What the liability framework is for electronic disclosure, including how companies can provide access to archived data without it being considered reissued or republished; how companies can link to third party information; appropriate use of summary information; how antifraud provisions apply to statements made by the company in blogs and electronic shareholder forums, and more.

3. No Disclosure Controls Necessary for Website - How information posted on company sites would not be subject to rules relating to disclosure controls and procedures (unless the information is the type to satisfy a '34 Act obligation). This information remains subject to Rule 10b-5 liability.

4. Printer-Friendly Functionality Not Required - How information need not satisfy a "printer-friendly" standard, unless other rules explicitly require it.

Once the interpretive release itself is available, I'll blog more including how it stacks up against my ten cents. Dominic Jones has more on yesterday's open Commission meeting in his IR Web Report blog.

Gulp! The SEC's View on Lawyer Negligence

A few weeks ago, the SEC issued an order - regarding "In the Matter of Scott G. Monson" - dismissing an enforcement action against the former in-house lawyer of a broker-dealer (this action related to an appeal by the SEC from an administrative law judge's dismissal of cease-and-desist proceedings). The lawyer had a background in family and real estate law, etc. and took this job without any securities law background; he drafted an agreement based on a sample - and botched the job.

Although the issues in this action are fact-specific, the SEC's order has some interesting things to say about enforcement actions against lawyers in general. In the order, the SEC acknowledges that "as far as we are aware, we have not sanctioned attorneys in litigated enforcement proceedings based on alleged negligent acts or omissions they may have committed in providing non-public legal advice to clients."

But then the SEC's order goes on to list the types of cases that the SEC will pursue against lawyers - and notes that this case doesn't require the SEC to address the appropriate parameters of lawyer liability in administrative enforcement proceedings because the record didn't show that the in-house lawyer acted negligently by a preponderance of the evidence. Keith Bishop (who is now at his new firm Allen Matkins) served as an expert for Monson.

All the Latest: Two New Blogs to Check Out

Long-time blogger Bruce Carton - a former SEC Enforcement Staffer - is back with his UnusualActivity.com blog; check out his piece on the death of ShareSleuth.com.

And a former SEC Corp Fin accountant - John Feeney - who has been advising the CFO & audit committee community on strategic financial reporting issues for past ten years has launched his "StreetDisclosure.com Blog"; John provides his first-hand account working with IFRS in this entry.

- Broc Romanek

July 30, 2008

Wanted: More Disclosure and Transparency from Sovereign Wealth Funds

Over the past six months or so, sovereign wealth funds have increasingly been the subject of debate - in the media and in Congress - for taking stakes in distressed companies in the US and Europe. This debate has taken on many forms (eg. Boeing's loss of a $40 billion contract to a joint venture that includes AirBus) and arguments (eg. Warren Buffett's take from his annual letter).

As noted by RiskMetrics a while back, European Union regulators proposed guidance to member states to align policies on sovereign wealth fund investments and to aid international bodies in their efforts to craft a voluntary code of conduct to oversee these practices. Last Fall, the International Monetary Fund began to develop a code of conduct to address these issues, a project which continues - and the Organization for Economic Cooperation and Development is developing best practices guidance for countries receiving these types of investment.

During this upcoming DealLawyers.com webcast - “The Rise of Sovereign Fund Investing” - an expert panel will analyze the issues that should be considered for a sovereign wealth fund investment.

Sovereign Wealth Funds: The SEC's Perspective

Several months ago, John Olson posted this blog on Harvard Law School's "Corporate Governance Blog": "I’m posting a too little noticed speech by SEC Chairman Cox, delivered a month ago in Washington, in which he discusses the growing concerns with the role of sovereign wealth funds and government-affiliated public companies in global securities markets and the impact of such government-related concentrations of capital, and related market influence, on corporate ethics and policy, transparency and the integrity of financial reporting. What about the values of corporate governance, and shareholder power, when the controlling interest or “golden share” is held by a government, particularly a government that itself does not practice transparency or tolerate democracy as we know it?"

In addition, there is this Congressional testimony:

- "Sovereign Wealth Funds and Public Disclosure" - SEC Enforcement Director Linda Chatman Thomsen (2/7/08)

- "The Regulatory Framework for Sovereign Investments" - SEC Office of International Affairs Director Ethiopis Tafara (4/24/08)

Environmental and Social Surveys: Your Turn

A member recently asked how many companies participate in taking environmental and social surveys, ratings, etc., such as the Carbon
Disclosure Project, Dow Jones Sustainability Index, etc. Please take a moment for this survey:

- Broc Romanek

July 29, 2008

More on ProxyDemocracy.org

Recently, I blogged about an interesting new website that has the potential to empower investors more. In this podcast, Andy Eggers discusses his website "ProxyDemocracy.org," including:

- Where did you get the idea for the site? How long did it take to launch?
- What features does ProxyDemocracy.org currently have?
- Any plans to tweak things going forward?
- What have been the biggest surprises in how the site is used so far?

Just Mailed: July-August Issue of The Corporate Counsel

We have just wrapped up the July-August issue of The Corporate Counsel, which includes pieces on:

- Correcting CEO/CFO Certifications—New S-K Interps
- De-Mystifying the 135-Day Rule on the Age of Financial Statements When 1933 Act Registration Statement is Effected
- "No View" on Bebchuk Proposal
- Disclosing Pending Government Investigation—Qui Tam Actions
- Recent Uptick of Software Revenue Recognition Accounting Problems
- SEC Backs Off Inflation Adjustment
- PCAOB Inspection Tidbits
- Staff's Non-Use of E-Mail–A Few Insights
- Clarifying California's Updated Stock Option Regs—Expansion by Regulation of Its Rule 701-Like Statutory Exemption
- North Dakota's New Corporation Law—Now, We Get It!

Act Now: Take advantage of this “Half Price for Rest of ‘08” No-Risk Trial to have this issue sent to you immediately.

Wanna Feel Good? Remember You Aren't Taking the Bar Exam

A member sent this in: It's that time of year when graduating law school students find out what pain is really about - studying for the bar exam (I'll spare you my nutty bar exam experience). A member just sent me this: In this recent decision, the Delaware Supreme Court affirmed the decision of the Delaware Board of Bar Examiners refusing denying Papdima's request for partial certification of her qualifications to take the Delaware Bar Examination.

Papadima studied civil law for four years at the law schools of the University of Bucharest in Romania and the University of Paris receiving a joint degree in 2003 and received an LLM from the University of Paris in 2004 and an LLM from Harvard Law in 2006.

Unfortunately, the Delaware Board of Bar Examiners determined that Papadima failed to satisfy the qualifications to take the Delaware Bar examine because neither the University of Bucharest nor the University of Paris, from which she received undergraduate law degrees, is approved by the American Bar Association and the LLM. she received from Harvard Law School is not the equivalent of a juris doctor degree from an ABA approved law school.

What made this case particularly interesting was that Papadima has been a member of the Bucharest Bar since 2004, a member of the Paris Bar since 2006, and a member of the New York Bar since 2007 and is currently a member in good standing of all three Bars. In addition, Papadima spent several months in 2004-2005 practicing Romanian law with Linklaters in its Romanian office and after receiving her LL.M. from Harvard Law School in 2006, worked at Latham & Watkins in New York for approximately a year. Best of all, Papadima is currently employed for a one-year clerkship in the Delaware Supreme Court, assigned to Justice Jack B. Jacobs (who disqualified himself sua sponte).

- Broc Romanek

July 28, 2008

Summer Issue of InvestorRelationships.com

We just put the finishing touches on the Summer issue of our new newsletter, InvestorRelationships.com. This newsletter is complimentary, as well as all the issues for the remainder of '08. You simply sign-up online to gain free access to it (and be notified when the next issue is available).

Here are the articles from the Summer ‘08 issue:

- Non-Deal Roadshows: Latest Developments and Trends
- Lessons Learned: How Funds Vote on Proxy Proposals
- Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
- How Blogging Can Enhance Your Investor Relationships (and Your Career)
- My Ten Cents: The SEC's Coming Guidance on IR Web Pages
- SEC Staff Says “No” to Non-GAAP Financial Statements

Earning Trust: The Mantra of Bloggers

At the NIRI Annual Conference last month, one of the panels I served on was "Is Your Company or IR Dept Ready for a Blog? Innovative Communication Methods for the 21st Century." In describing why I think blogging is important for IROs, I discussed how effective a vehicle a blog can be to get people to trust you - if you do it right - because they can get a window into who you are. This allows IROs to get outside the staid press release environment that they typically live in to show their constituents - investors, analysts, employees and potential investors - that they can be trusted. And "trust" is the name of the game in investing (and also in life, but that is a different story.)

For the Summer issue of InvestorRelationships.com - the one noted above - I wrote a piece that persuasively argues why you should blog - and three considersations to determine if you have an inner blogger in you. The article will be relevant for lawyers as well as IROs. You can get this article for free if you provide us with your contact information.

More on Investor Relations and Blogs

Recently, I did a podcast with Lynn Tyson of Dell about the "DellShares" blog. Rob Williams, one of Lynn's co-bloggers, was on the panel mentioned above and was great. Learn what transpired during the panel from several others who covered some of our roundtabling in these blogs:

- John Palizza's blog

- Monika Maeckle's blog

- Ryan Lejbak's blog (and here is a follow-up video with IRO blogger Rob Williams from Dell)

By the way, Ryan also uploaded this interview with me on YouTube if you want to see what I really look like. It's pretty daunting to have a camera stuck in your face. I enjoyed doing the same thing to others during the Society's Annual Conference...

- Broc Romanek

July 25, 2008

A Delicate Disclosure Issue: Steve Jobs' Health

Lately, there have been plenty of rumors about the health of Apple CEO Steve Jobs and whether he remains healthy. Until Apple finally clarified the situation on Wednesday, the company's stock price had taken a hit since the market believes he is key to the company's future (actually, the company didn't clarify - rather, it was reported in this NY Times' article based on comments made by Jobs to some of his "associates").

And the market was wary of statements from the company that Jobs had a "common bug" or that "the matter was private" because the company has a history of not being upfront about his medical condition (Jobs had a rare form of pancreatic cancer four years ago; the company waited nine months to disclose it). In fact the company is still not being forthright, this reporter had to put clues together to come up with his own diagnosis of what surgical procedure Jobs recently had.

So the securities law issue arises: does Apple have a duty to disclose Jobs' current condition? This is not a new issue and one that pops up periodically on our "Q&A Forum" in all shapes and sizes. Under the SEC's rules, companies typically don't have an affirmative duty to disclose unless a Form 8-K is triggered or a periodic report (eg. 10-Q or 10-K) is due (I say "typically" because there are other 'disclose or abstain' circumstances to consider).

On the other hand, the company may have a duty to update if they have an outstanding statement that the CEO's health is sound. Given that an Apple spokesperson said Jobs' gaunt appearance at a recent event was due to a "common bug," there is an argument that the company had a duty to update (or was misleading to begin with).

Clearly, Jobs is very important to investors and many articles have been written that essentially argue that by taking the job of CEO, you relinquish your right to privacy; here are articles from the Financial Times; TheStreet.com; and below is an excerpt from this San Mercury News article:

No hard rules guide how companies handle health issues of their executives. But corporate governance experts say companies need to be forthcoming when health issues affect the ability of executives to perform. That does not mean, though, that Jobs has to submit details of his health simply to allay the worries of investors, said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. "If his health is such that he can't carry out his job, the company must disclose that," he said. "It's only material if it affects his ability to carry out his responsibilities. Up to that point, it's up to him."

But it is the board's role to keep tabs on the health of its chief executive and have emergency, and long-term, succession plans in place, said Nell Minow, editor of the Corporate Library, a corporate governance research group. "The primary issue is, the board needs to be on top of it," she said. In general, such information is best kept private, otherwise "it can create more uncertainty than is necessary," Minow said. However, she was critical of Apple CFO's Oppenheimer's response that "Steve's health is a private matter."

"That's what we in Washington call a non-denial denial," Minow said. "It's very important that investors are confident of his health. He is responsible for a large part of the company's success. He's the one who holds up the iPhone and says, 'Here's what I did.'"

Looking beyond the SEC's rules, companies also need to consider the rules of the stock exchange where their stock is listed. Since Apple is listed on Nasdaq, Rule 4310(16) requires the company: "except in unusual circumstances, a Nasdaq-listed issuer shall make prompt disclosure to the public through any Regulation FD compliant method (or combination of methods) of disclosure of any material information that would reasonably be expected to affect the value of its securities or influence investors' decisions. The issuer shall, prior to the release of the information, provide notice of such disclosure to Nasdaq's Market Watch Department if the information involves any of the events set forth in IM-4120-1." Under this guideline, the importance of disclosing a CEO's illness would depend on the "materiality," which would take into consideration a mix of factors including the relative importance of the CEO and the magnitude of the illness.

In comparison, Section 202.05 of the NYSE Listed Company Manual states that companies are "expected to release to the public any news or information which might reasonably be expected to materially affect the market for its securities." However, the SROs rarely enforce their own listing standards, particularly in this area where "materiality" remains relatively subjective.

The reality remains that since someone's health is such a sensitive topic, there isn't a standard practice - but that companies must take care not to be misleading nor create a duty to update. And I won't go down the path of when a CEO's health is so debilitated that their responsibilities are diminished to the point that they don't truly function in the position of that officer, which arguably could trigger a Form 8-K under Item 5.02...that's another kettle of fish to fully analyze...

California Finally Resolves Conflict with E-Proxy

On Tuesday, California Gov. Schwarzenegger signed Senate Bill 1409 into law, which amends Section 1501 of the California Corporations Code so that California's annual report delivery requirement piggyback's on the SEC's eproxy rules and resolve the conflict I've been blogging about for some time. It seemed like this bill would be signed back in February; obviously, not a high priority.

Specifically, the bill states that the California annual delivery requirement "shall be satisfied if a corporation with an outstanding class of securities registered under Section 12 of the Securities Exchange Act of 1934 complies with Section 240.14a-16 of Title 17 of the Code of Federal Regulations, as it may be amended from time to time, with respect to the obligation of a corporation to furnish an annual report to shareholders pursuant to Section 240.14a-3(b) of Title 17 of the Code of Federal Regulations."

This bill has been approved as an urgency statute and is effective immediately; obviously too late for the past proxy season but "good to go" for next year. Hat tip to Paul Blumenstein of DLA Piper and we have begun posting memos on this development in our "E-Proxy" Practice Area.

Lifehack: Enhance Your Productivity

Check out the website called "Lifehack" for some ideas about how to live your life. Here is a blurb about "10 Overrated Business Books & What To Read Instead." And my favorite is "How to Write in a Thousand Words or Less" - that's my philosophy for all our newsletters...

- Broc Romanek

July 24, 2008

In the Home Stretch: Accounting Industry Reform

On Tuesday, the US Treasury Advisory Committee on the Auditing Profession (ACAP) - co-chaired by former SEC Chair Arthur Levitt and former SEC Chief Accountant Don Nicolaisen - issued a Second Draft Report, which is now subject to a 30-day comment period. Here are the comments submitted on the first draft.

And on Monday, the International Accounting Standards Committee Foundation, which oversees the International Accounting Standards Board (IASB), issued a Discussion Document - the “Public Accountability and the Composition of the IASB - Proposals for Change” - that has a September 20th comment deadline.

Meanwhile, the SEC's Advisory Committee on Improvements to Financial Reporting (CIFiR) is expected to issue its final report sometime after meeting by teleconference on July 31st. The final report should look similar to its draft final report, with some editorial changes voted on during a July 11th meeting, as described in this entry on FEI's "Financial Reporting Blog." Hat tip to Edith Orenstein who write FEI's "Financial Reporting Blog" for keeping us up-to-speed on all these developments.

Marty Dunn's "Pro or Troll" on Shareholder Proposals

Test your skills with our new game – "Pro or Troll #9: Shareholder Proposal Process," to see if you are up to speed on all the lore and latest developments about the hottest topic, shareholder proposals - courtesy of Marty Dunn of O'Melveny & Myers.

RiskMetrics' Preliminary Post-Proxy Season Report

Earlier this week, RiskMetrics posted its "Preliminary U.S. Postseason Report." Interestingly, RiskMetrics observes that the bear market tempered activism at the end of the day, with notable exceptions relating to some executive compensation pay packages and hedge fund-led attacks. Here is an excerpt from the Report regarding "say on pay":

According to results available as of July 15th, "say on pay" proposals have averaged 42.7% support over 52 meetings this year, up slightly from 42.5% support over the same number of meetings in 2007. Shareholders at nine companies, including Lexmark International and Apple, gave greater than 50% support to “say on pay” proposals through July 15, compared with eight during all of 2007. Notably, all of this year’s proposals earned at least 30% support, except at Wal-Mart where officers and directors control a 43.4% stake.

- Broc Romanek

July 23, 2008

The Members Respond: My $1 Million Idea of an Online Voting Exchange

A few weeks ago, I blogged about the idea of someone creating an online auction of voting rights for annual shareholder meetings. I asked members if they saw any legal hurdles to this potential project. Here are a few of the responses:

1. No Idea is New - Your idea reminded me of a long-ago attempt to divide up the bundle of rights that are represented by a share of common stock. Twenty years ago, American Express developed the idea of Unbundled Stock Units - "USUs" - under which a shareholder could exchange a share of common stock for a unit consisting of a 30-year bond, an Incremental Dividend Preferred Share, and an Equity Appreciation Certificate.

Amex said the USUs would let shareholders “choose between the various investment attributes of Share ownership.” It's unclear from the prospectus what happened to the voting rights. I think you had to own all three parts of the USU to be able to vote. At the time, I recall that various commenters derided the concept because it separated out the rights of share ownership and USUs died on the vine. Here are the cover pages from the Form S-4 for the USUs.

2. Expect Screaming (and Lawsuits) - I think that state corporate legislatures, the SROs, proxy solicitation and advisory firms, underwriters, swap desks institutional investor-activists, academics and others will likely have 30 different views on the pluses and minuses of this, with plenty of lawsuits in between.

3. Practical Issues of Transferring Votes - One potential obstacle would be overcoming the trick of figuring out how the buyer would be able to get a proxy or voting instruction that ties into the record owner list. Perhaps what would trade would be the right to instruct the seller on how to vote the shares. Currently, exchanges prohibit trading of shares with proxies, so essentially the seller has to be selling the right to instruct the seller as to how to vote.

In particular, there would need to be a way for a broker to be instructed by the buyer (who might have a different broker) as to how to vote in time for the broker to instruct Broadridge to effect the instruction. I think this problem means you can't just buy from the "market"; you have to know who your seller is (and the seller's seller, if it's a resale of the voting rights), unless you can find a way to create a proxy/instruction instrument that would itself trade.

Also, I don't think management would be able to be a bidder as that would be vote-buying, unless they used their own money and not the issuer's funds. The H-P case stands for the proposition that shareholders can buy votes, but management can't (subject to an entire fairness test and maybe a shareholder vote).

July-August Issue: Deal Lawyers Print Newsletter

This July-August issue includes articles on:

- Distressed Debt Transactions: “Soup to Nuts”
- The SEC’s Cross-Border Proposal: Top Four Ways Deals Would Change
- The SEC’s New Cross-Border Guidance: Four “Don’ts” for Structuring Cross-Border Deals
- Follow-Up: How to Do a Deal Without Shareholder Approval: The Financial Viability Exception"
- Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
- Jumping Through Standstills
- The Shareholder Activist Corner: Spotlight on Shamrock Activist Value Fund
- The Implications of CSX: Beneficial Ownership Reporting Through Total Return Swaps

Try a "Half Price for Rest of '08" no-risk trial to get a non-blurred version of this issue for free.

What is the Reporting Chain for Your General Counsel?

Yesterday, a member posed a question in our "Q&A Forum" about whether some general counsels report to someone else other than the CEO. I agreed to do a poll:

- Broc Romanek

July 22, 2008

The Big 4000!

In our "Q&A Forum," we have reached query #4000 (although the "real" number is really much higher since many of these have follow-ups). Combined with the Q&A Forums on our other sites, there have been over 15,000 questions answered. That is one serious - and crazy - body of knowledge if I must say so myself.

You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply...

State of Restatements

In this report posted on our "Restatements" Practice Area, it appears as if perhaps Section 404 of Sarbanes-Oxley has had a positive effect on improving the quality of financial reporting (as well as quality of internal controls) at companies generally since restatements are now trending down, at least for companies over $75 million in market capitalization. On the other hand, it is possible that the Big Four (and the SEC Staff) have taken a more lax approach to restatements more recently compared to past years.

Analyzing trends is always dicey. For example, it is difficult to judge how the morphing of PCAOB Standard #2 into #5 has had on the number of material weaknesses being reported - albeit it is likely to have reduced the number of such instances. However, with a downward trend now in progress, those that argue that accounting rules are too complex have less to complain about...

Duty Of Disclosure: Delaware Chancellor Further Limits Availability of Damages

From Travis Laster: Recently, Delaware Chancellor Chandler - in In re Transkaryotic Therapies, Inc. - granted summary judgment in favor of three directors who were alleged to have breached their fiduciary duties by supporting and voting in favor of the acquisition of Transkaryotic Therapies by Shire Pharmaceuticals. Here is a copy of the opinion.

Much of the opinion consists of the Chancellor's rulings on the plaintiffs' allegations of bad faith and disloyalty. From a doctrinal and practitioner perspective, the more important discussion focuses on the duty of disclosure (pages 17-28).

In summary, the Chancellor characterizes the duty of disclosure as a doctrine designed for pre-vote adjudication, leaving very little room for any post-closing remedy. In his words, "the Court grants injunctive relief to prevent a vote from taking place where there is a credible threat that shareholders will be asked to vote without such complete and accurate information. The corollary to this point, however, is that once this irreparable harm has occurred --i.e. when shareholders have voted without complete and accurate information--it is, by definition, too late to remedy the harm" (page 25).

Based on this principle, the Chancellor granted summary judgment for the defendant directors: "I hold that this Court cannot grant monetary or injunctive relief for disclosure violations in connection with a proxy solicitation in favor of a merger three years after that merger has been consummated and where there is no evidence of a breach of the duty of loyalty or good faith by the directors who authorized the disclosures" (page 27).

As a practical matter, the Transkaryotic decision obviously favors defendant directors, and it should increase their settlement leverage in cases where plaintiffs primarily assert disclosure claims but do not pursue injunctive relief. In other words, the cost of a post-deal clean-up settlement involving disclosure claims should go down. The logical response from the plaintiffs' bar, however, should be to pursue more pre-closing disclosure-based injunction applications, since that is now the only real avenue available for a meaningful disclosure remedy and a commensurate fee award. In the long run, therefore, the Transkaryotic decision may result in more injunction applications and more disclosure litigation.

Two other points deserve brief mention. First, the Chancellor granted summary judgment on the claim that a director breached his fiduciary duties by soliciting so-called "empty votes" from stockholders who owned shares on the record date then sold them. The Court found that the director's efforts to support the merger was "consistent with - rather than at odds with - his fiduciary duties" (page 39).

Second, the Chancellor permitted the plaintiffs to proceed with a challenge to the statutory validity of the merger, based on their assertion that the merger had not received sufficient votes. This challenge rested in part on testimony to the effect that the inspectors of election tallied the vote very quickly, yet the plaintiffs produced evidence of over-vote situations that would have taken additional time to resolve. Notwithstanding the passage of three years since the merger closed, the Court permitted the challenge to go forward. This holding emphasizes the need for care when tallying merger votes and counsels in favor of hiring a reputable outside firm, such as IVS, to act as the inspector for close votes.

I've been saying that companies should hire independent inspectors for a long time - and since you sometimes don't know if your vote will be close until the last minute - you need to line up the inspector well in advance because they are in short supply!

- Broc Romanek

July 21, 2008

The Grasso Decision: Makes the Case for Clawbacks

As you have read, Dick Grasso won his case against the New York Attorney General a few weeks back. But if you read the media reports closely, you will notice he won on a technicality - he won because the NYSE changed its "form" since the lawsuit was filed, from a non-for-profit to a public company (a dissenting judge argues that NYSE still has a non-profit subsidiary, and thus is still subject to the New York non-profit rules).

Thus, according to the New York State Supreme Court's decision, the Attorney General didn't have the authority to challenge his compensation anymore, and Dick gets to keep his money without any adjudication of whether the amount was reasonable, whether he breached his fiduciary duties, or whether he (or anyone else) ever did anything wrong or improper in connection with his compensation. So although Dick's been saying he was "vindicated," it's hardly so.

So what does this mean for you? It reminds us that a proper clawback can save a company the embarrassment of a lengthy court battle - and many millions of dollars (reportedly, the Grasso lawsuit cost the NYSE more than $70 million in legal fees). It's time for you to go back and read our Winter 2008 issue of Compensation Standards to learn the "Ten Steps to a Clawback Provision with "Teeth."

We are pleased to note a recent pair of reports from The Corporate Library that note the trend of clawback usage on the rise; one report noting the upward trend generally (13% of companies surveyed have them now, up from a handful a few years ago) and one report noting how clawbacks are more common at larger companies.

The Consultants Speak: How the Latest Compensation Disclosures Impacted Practices

We have posted the transcript from our recent CompensationStandards.com webcast: "The Consultants Speak: How the Latest Compensation Disclosures Impacted Practices."

John Wilcox on "Say on Pay" as a Listing Standard

My good friend John Wilcox and I have been corresponding on "say on pay" and he's given me permission to post his following thoughts on the topic. John recently left his job as TIAA-CREF's SVP and Head of Corporate Governance (although he remains a senior advisor to TIAA-CREF) to become Chairman of Sodali. John constantly travels around the globe and is an intense student of governance frameworks used in other countries:

I agree that federal legislation or SEC rulemaking would probably not be the best way to implement an advisory vote on executive compensation. Nevertheless, I think the advisory vote would work best if it were applicable to all companies, rather than just to the few who act voluntarily. The best means to achieve universality without becoming prescriptive would probably be for the New York Stock Exchange and Nasdaq to adopt a listing standard calling for an advisory vote.

For example, a shareholder vote is now mandated for equity compensation under NYSE Rule 303A.08, “Shareholder Approval of Equity Compensation Plans.” The rule is straightforward. It reads as follows: “Shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereof . . . .”

If this approach were applied to an advisory vote, it would be minimally invasive and would permit a range of proposal formats. The rule might be entitled “Shareholder Advisory Vote on Compensation Disclosure,” and might read as follows: “Shareholders must be given the opportunity to cast a non-binding advisory vote on compensation plans disclosed in the proxy statement.”

A rule stated in such simple terms would enable companies to customize their advisory vote proposals to suit their circumstances. My belief is that companies drafting compensation disclosures with a view to a “pass/fail” advisory vote would try harder to achieve clarity and to highlight features of concern to shareholders, such as strategic links to performance and the creation of long-term value. Experience with mandatory votes under NYSE Rule 303A.08 demonstrates that companies are capable of making a good case for equity compensation when a vote is required.

I think it is unwise to argue that an advisory vote applied universally would be overly burdensome to shareholders. Shareholders must already shoulder the burden of reading dense and opaque compensation disclosures. Complaining about this responsibility surely does not serve the cause of transparency and good corporate governance, nor does it inspire confidence in the diligence of shareholders. Instead, shareholders should be pressuring companies to improve the quality of their disclosure, to provide summaries and to explain how pay and performance are linked. Incidentally, I have never heard shareholders complain about the burden of disclosure and voting rights on equity compensation plans under NYSE Rule 303A.08.

A fair argument can be made that CD&As are too complicated and the links between compensation and value creation are not clearly articulated, thereby creating an unacceptable burden on shareholders to digest and make sense of the data. If this is true, it is company executives, boards and compensation committees – not shareholders - who should be accountable. Simplification, clarification and better explanation of how compensation drives performance should be the responsibility of companies, not shareholders.

Shareholders have to read and evaluate compensation disclosures. However, if a company’s compensation narrative is not clear and convincing, shareholders should send the drafters back to the drawing board. An effective way to do this would be through an advisory vote.

If we see the advisory vote as the means to push for better compensation practices and clearer disclosure, rather than a means to punish companies, the concerns of both companies and shareholders are largely eliminated.

- Broc Romanek

July 18, 2008

CA v. AFSCME: The Delaware Supreme Court Giveth and the Supreme Court Taketh Away

Some pretty fine analysis - and quick - from Travis Laster: Yesterday, the Delaware Supreme Court issued its much anticipated decision in CA, Inc. v. AFSCME Employees Pension Plan, No. 329, 2008 (Del. July 17, 2008), which resolved two questions of law certified to the Court by the SEC. AFSCME proposed for inclusion on CA’s proxy statement a bylaw that would require the CA board of directors to reimburse the reasonable fees of any stockholder that sought to elect less than 50% of the board (i.e. a short slate) and succeeded in electing at least one director. Here is the court opinion and the related Corp Fin no-action response.

The Delaware Supreme Court split the baby on the two certified questions. Answering the first in the affirmative, the Court held that the bylaw was a proper subject for stockholder action. Answering the second in the negative, the Court held that if adopted the bylaw would violate state law. The net result is that the bylaw can be excluded from CA’s proxy statement under SEC Rule 14a-8(i)(2).

This is a very significant decision that will prompt much practitioner commentary and scholarly discussion. It is also a decision with implications that will take time and future decisions to work out. Here are some highlights:

As a threshold matter, the Supreme Court cut the recursive loop between Section 109 and Section 141(a) of the DGCL. Section 109(a) gives stockholders the statutory right to adopt bylaws, and Section 109(b) provides that the bylaws may contain "any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." Section 141(a) vests the power to manage the business and affairs of every corporation in the board of directors, except as otherwise provided in the DGCL or in the certificate of incorporation. This has led to a running debate as to whether a bylaw under Section 109(b) can limit a board’s power under Section 141(a).

Consistent with Delaware’s historic model of director-centric governance, the Supreme Court makes clear that Section 141(a) has primacy over Section 109(b). After quoting Section 141(a), the Supreme Court notes that "[n]o such broad management power is statutorily allocated to the shareholders." (p. 7).

The Court then holds "[t]herefore, the shareholders’ statutory power to adopt, amend or repeal bylaws is not coextensive with the board’s concurrent power and is limited by the board’s management prerogatives under Section 141(a)." (p. 7). In footnote 7, the Court addresses the statutory language of Sections 109 and 141(a), stating that Section 109 is not an "except[ion] … otherwise specified in th[e] [DGCL]" to Section 141(a). "Rather, the shareholders’ statutory power to adopt, amend or repeal bylaws under Section 109 cannot be ‘inconsistent with the law,’ including Section 141(a)."

In addressing the first certified question (whether the bylaw was a proper subject for stockholder action), the Supreme Court established an initial test for bylaw validity: "whether the Bylaw is one that establishes or regulates a process for substantive director decision-making, or one that mandates the decision itself." The Court recognized that a bylaw that is appropriately process oriented can have some implications for board decision-making and the expenditure of corporate funds, giving as an example a bylaw that would require that all board meetings take place at the corporation’s headquarters and thereby necessitate expenditures for travel. (p. 16). Applying this test, the Court found that the primary function of reimbursement bylaw was process oriented. Although it called for the expenditure of funds, it sought to regulate "the process for electing directors –a subject in which shareholders of Delaware corporations have a legitimate and protected interest." Based on this analysis, the Court held that the bylaw was a proper subject for stockholder action, thus answering the first questioning the affirmative.

In addressing the second certified question, the Supreme Court held that the mandatory reimbursement bylaw as drafted by AFSCME was facially invalid because it could require a board to reimburse expenses in a situation where it could breach the board’s fiduciary duties to do so. Citing its QVC and Quickturn precedents, the Court held that a bylaw could not require the Board to breach its fiduciary duties. Despite the fact that the reimbursement bylaw permitted the board to determine what expenses were "reasonable," the Court held that that language "does not go far enough, because the Bylaw contains no language or provision that would reserve to CA’s directors their full power" to deny all expenses. (p. 23). In other words, because there were hypothetical situations in which the bylaw could require a board to breach its fiduciary duties, the Court held the bylaw facially invalid.

Each of these holdings potentially has big implications for the future. Although many will likely view this as a loss for stockholders, I believe they should view the case as a significant win. Yes, the director-reimbursement bylaw was held invalid, but the Court held that the election process was a proper subject for stockholder action. A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis.

Outside the election process, the case is generally negative for stockholder-adopted bylaws. For example, the strong QVC/Quickturn analysis should doom any substantive component to a pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year.

In the unforeseen consequences department, CA opens the door to the broad use of facial challenges by creating a regime where it is actually easier to make a facial challenge than an as-applied challenge. Under the approach articulated in CA, a facial challenge must be granted and a bylaw stricken if there is any situation in which the bylaw could be held invalid. In contrast, in an as-applied challenge, the CA court noted that a bylaw is presumed valid. Traditionally in a facial challenge, a provision would be upheld if there are circumstances in which it could be valid, such that invalidity can only be tested in an as-applied context. The CA court reverses this approach.

Also in the unforeseen consequences department, directors may find that the CA decision’s broad extension of a fiduciary trump card causes more problems than it solves. Under the CA analysis, mandatory bylaws may no longer be mandatory. They rather appear to be subject to the directors’ overarching fiduciary duties. Directors who take action in reliance on a mandatory bylaw therefore can now be second-guessed on fiduciary duty grounds.

The most obvious circumstance where this can arise is with a bylaw providing for mandatory advancements. The Delaware courts have consistently enforced mandatory advancement bylaws, even if the board of directors believes the recipient of the advancements is a bad actor and that it would be a breach of the board’s duties to provide the advancements. Under CA, a board can argue that a mandatory advancement bylaw cannot trump its fiduciary duties, and therefore it has the discretion not to pay. The converse, however, is also true, and a board that advances funds pursuant to a mandatory advancement bylaw is now open to a claim that their fiduciary duties required them not to advance.

This could be particularly problematic for sitting directors, because a permissive decision to provide advancements is a self-interested transaction subject to entire fairness. While I expect that the Delaware courts will find a way to uphold mandatory advancement bylaws, they will have to distinguish CA to do it.

Similar arguments could arise in less obvious circumstances. For example, a common defensive bylaw eliminates the right of stockholders to call a special meeting. Under CA, if a stockholder asks the board to call a special meeting, it could be argued that the board cannot simply rely on the bylaw and inform the stockholder that it has no right to the call. Because the bylaw cannot trump the board’s fiduciary duties, the board must consider as a matter of fiduciary discretion whether to call the meeting notwithstanding the bylaw.

Here again, I expect that the Delaware courts will support boards who act in accordance with mandatory bylaws. The CA Court was careful to leave itself wiggle room for the future, cautioning that it could not "articulate with doctrinal exactitude a bright line" rule for stockholder-adopted bylaws (p. 12) and stressing that "[w]hat we do hold is case specific" (n.14). In the near term, however, CA may open directors up to fiduciary challenges on decisions that previously were not subject to challenge.

There is not inconsiderable tension between the holding that the reimbursement provision was procedural and thus a proper subject of stockholder action and the holding that the same provision was invalid because it mandated substantive board action without a fiduciary carve out. CA is thus a decision that simultaneously gives and takes away. It gives stockholders the ability to propose bylaws addressing the election process. At the same time, it takes away the ability to adopt mandatory bylaws (or at least those providing mandaotry reimbursements) by holding such bylaws invalid if they could force the board to violate its fiduciary duties. Only future decisions will reveal how this tension plays out.

- Broc Romanek

July 17, 2008

Reminder: Some Shelfs Begin Expiring in December

As part of the changes wrought by the SEC's securities offering reform in 2005, some companies now need to refile some shelf registration statements at least once every three years. As a result some shelf registration statements will begin to expire on December 1st - the three year anniversary of the reform rules' effectiveness. In this memo, Goodwin Procter lays out which companies should begin taking action to avoid potential timing problems that may affect their ongoing market access - and what specific planning steps there are to keep shelfs up and running.

Corp Fin Goes "Live" with Shareholder Proposal No-Action Letters

Yesterday, Corp Fin posted the no-action letters relating to Rule 14a-8 that it processed during the recent proxy season. These letters include any responses provided by the Staff after January 1st of this year (and incoming request going back as far as October '07). We should expect to see new 14a-8 no-action letters posted going forward - although not likely on a real-time basis during the proxy season given the burden involved in doing so when they get bunched up like they do...

Nasdaq's Index of Listing Council Decisions

Yesterday, Nasdaq posted a new master index for all of the decisions of the Nasdaq Listing and Hearing Review Council. This is the appellate body that hears appeals of decisions by the Listing Qualifications Hearings Panels to delist or deny listing to a company. The decisions from 2002 forward are summarized on the website.

- Broc Romanek

July 16, 2008

Corp Fin's New Regulation S-K CDIs: The Redlined Version

Everyone has been anxiously awaiting a redlined version of the SEC Staff's new Regulation S-K Compliance and Disclosure Interpretations. This is no easy feat as there are no fewer than nine source documents. Thanks to Dan Adams of Goodwin Procter, we have posted this redlined version, with a heap full of caveats and qualifiers. In fact, all of these caveats can be lumped into one - the complexity of the task and the limitations of redlining software mean that you should proceed at your own risk when using it.

It's just too big a job without the payoff required for volunteer labor to do it justice, but Dan did a great job in a short period of time. So consider it "bootleg" and just be happy to have it as a secondary source to your own eyeballing...

A "Wow" Moment: The SEC's Emergency Freeze on Naked Short-Selling

During his testimony yesterday before the US Senate Banking Committee, SEC Chairman Cox revealed an emergency action aimed at reducing short-selling in the shares of Fannie Mae, Freddie Mac and 17 other financial firms, as the SEC will immediately begin considering new rules to extend those trading limits to the rest of the market. This comes on the heels of a SEC press release from Sunday - yes, Sunday (see Floyd Norris' thoughts on that move) - that seeks to stem rumor mongering. We have posted memos on that announcement in our "SEC Enforcement" Practice Area. Here is the SEC's press release regarding the emergency action, which is expected to go into effect on Monday.

As this WSJ article notes, the SEC's plan is controversial. Here is a paragraph from that article: "It's far from clear whether the move, which sparked a barrage of criticism, will curb the activity of short sellers. While its aim is to curb abuses, it also would add an additional layer of bureaucracy to legitimate transactions." In fact, one member e-mailed me this thought: "This is a pretty drastic move. So much for the free market."

Nasdaq Speaks '08: Latest Developments and Interpretations

We have just posted the transcript from our webcast: "Nasdaq Speaks '08: Latest Developments and Interpretations."

- Broc Romanek

July 15, 2008

A Cautionary XBRL Tale

There are gonna many good things that come along with XBRL. But there also will be a learning curve - just like anything else that is new - and that's what scares me about implementing it next year for larger companies (whose XBRL tagging projects will be more complex than for smaller companies). Unlike Edgar, I believe your XBRL process will need to include someone who is familiar with XBRL - for things like error checking, to be sure the data is tagged correctly, that the taxonomy "builds" correctly (particularly with an extension taxonomy), etc. - even if you outsource tagging to a third-party or use a tagging tool to automate the process.

Here is a case in point: what to do about “bad” tagging that may be invisible when looked at through a viewer or other rendering tool, but can create errors when end-users try to slice and dice the data?

It's possible that your financials can be tagged and everything will seem okay when you look at it, but there might be "hidden" errors. In other words, the human readable view may look correct, but the machine readable version may not be. I'm not sure how to fix that - but picking a reliable service provider or tool obviously will be important. Maybe the SEC's proposed validation software - discussed on page 57 of the proposing release - will help here?

Or the SEC may rely on the market to self-correct this potential problem - that is, software would be available that enables users to catch tagging errors as market pressure forces companies to tag correctly because of the fear of reputational harm. Once again, this points to third-party assurance as the big issue for XBRL.

XBRL: Understanding the New Frontier

Print off these course materials and join us tomorrow for this webcast - “XBRL: Understanding the New Frontier” – and hear from these experts (audio archive available if you miss it "live"; but no transcript for this webcast):

- David Blaszkowsky, Chief, SEC's Office of Interactive Disclosure
- Rob Blake, Senior Director, Interactive Services, Bowne & Co.
- Jim Brashear, Partner, Haynes & Boone
- Lou Rohman, Director of XBRL Operations, Merrill Corp.
- Michelle Savage, Vice President, Communication, XBRL US
- John Truzzolino, Director, E-Solutions, RR Donnelley Global Capital Markets

XBRL for Dummies

In this podcast, Wilson So, Director of the XBRL Business Unit of Hitachi, talks about his "XBRL for Dummies" book, including:

- What led you to write the book? How many copies have been picked up so far?
- What is the intended audience of the book? The relative sophistication?
- Any surprises as a result of the book?

Note the book is free, but you have to pay about $10 for shipping & handling. I still haven't seen the book myself and can't personally vouch for its utility.

- Broc Romanek

July 14, 2008

Broadridge's "Near-Final" E-Proxy Stats for the Proxy Season

In our "E-Proxy" Practice Area, we have posted the latest e-proxy statistics from Broadridge. As of May 31st:

- 634 companies have used voluntary e-proxy so far (this pretty much is the head count for this proxy season)

- Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 32% had less than 10,000 shareholders)

- Bifurcation is being used more as the proxy season progresses (but still not all that much); of all shareholders for the companies using e-proxy, now over 10% received paper initially instead of the "notice only" (up from 5% a few months ago)

- 1.0% of shareholders requested paper after receiving a notice; this average is about double what the trend was a few months ago

- 57% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 12% had non-routine matters proposed by shareholders. None were contested elections.

- Retail vote goes down dramatically using e-proxy (based on 468 meeting results); number of retail accounts voting drops from 21.2% to 5.7% (over a 70% drop) and number of retail shares voting drops from 31.3% to 16.4% (a 48% drop)

By the way, the SEC Staff has posted this "E-Proxy Compliance Guide for Smaller Companies." No new guidance is provided by the Staff - but it's a clearly written starter piece if you are a blank slate on this topic.

E-Proxy's First Season: Lessons Learned

We have posted the transcript for the popular webcast: "E-Proxy's First Season: Lessons Learned."

And Just to Prove Paper Isn't Dead...

How to Handle Hedge Fund Activism

Catch this DealLawyers.com webcast tomorrow - “How to Handle Hedge Fund Activism” - featuring:

- Joele Frank, Founding Partner, Joele Frank Wilkinson Brimmer Katcher
- David Katz, Partner, Wachtell Lipton Rosen & Katz
- Christopher Young, Director of M&A Research, RiskMetrics Group
- Veronica Rendon, Partner, Arnold & Porter LLP

- Broc Romanek

July 11, 2008

Coming Soon? Revised DOJ Sentencing Guidelines

On Wednesday, the US Senate's Judiciary Committee held an oversight hearing of the U.S. Department of Justice at which Attorney General Michael Mukasey was the witness. In response to questions from Senator Arlen Specter (the sponsor of S. 186, which was reborn recently as I blogged about last week), the Attorney General promised that a letter would be sent that would be sent "within a day or so" that would contain "real, significant" improvements to the process.

When pressed by Senator Specter, the Attorney General allowed that the letter could be the basis for a new Justice Department memorandum that would supercede the McNulty Memo. He said that there are "adjustments" that can - and will - be made. In particular, he noted that cooperation would no longer be measured by waiver. The Attorney General said that the memorandum could be prepared "in short order." Senator Specter responded "the shorter the order the better."

It appears that the Justice Department is still dedicated to an incrementalist approach to waiver policy in an effort to forestall Congressional action. Here is a WSJ article on this development. We are posting memos regarding this development in our "Sentencing Guidelines" Practice Area. And thanks to Keith Bishop, who starts a new gig at Allen Matkins on Monday!

The SEC's Credit Rating Proposals

In this podcast, Joe Hall, Partner of Davis Polk & Wardwell and former Managing Executive for Policy for SEC Chairman William Donaldson, discusses the SEC's recent credit rating proposals, including:

- What has the SEC proposed to change regarding credit rating agencies?
- What sleepers exist in the proposal that might impact public companies?
- What concerns do you have about the SEC's proposal?

Activists, Swaps & the SEC: A CSX Update

In this DealLawyers.com podcast, Ron Orol, Senior Writer for The Daily Deal, discusses activists, swaps and the SEC in light of the CSX decision, including:

- Can you explain how activist fund managers are attempting to use cash settled swaps to evade SEC reporting?
- How did The Children's Investment Fund use swaps with respect to CSX and what was the impact?
- Do you expect the CSX decision to have any effect on the SEC's rules or interpretations?

By the way, Gibson Dunn recently held a webcast on the CSX decision and has posted this archive.

- Broc Romanek

July 10, 2008

The Delaware Supreme Court's AFSCME/CA Hearing: All the News Fit to Post

With a hearty thanks to J.W. Verret, our man on the ground during yesterday's Delaware Supreme Court hearing about the important issue certified from the SEC regarding AFSCME's "reimbursement of expenses" binding bylaw proposal. J.W. is a rising star and Assistant Professor at George Mason University School of Law. Here is J.W.'s report:


The American Federation of State, County, and Municipal ("AFSCME") Employees Pension Plan submitted a shareholder proposal for inclusion in CA's (formerly known as Computer Associates) proxy materials for their annual meeting scheduled to be held on September 9, 2008. That proposal sought to amend CA's bylaws to require that the company reimburse the reasonable expenses incurred by a dissident nominating a rival slate of directors, provided that at least one nominee from the dissident slate was victorious. CA sought no-action relief from the SEC permitting it to exclude that proposal under Rule 14a-8 as illegal under Delaware law, and the SEC certified the question to the Delaware Supreme Court a few weeks ago (here is Broc's blog on that development).

Part of the SEC's submission read ominously: "[N]o-action requests regarding substantially similar proposals have been submitted in the past....The extent to which the Division can expect to receive future requests to exclude proposals similar to the AFSCME Proposal will necessarily be affected by the outcome (of these proceedings)."

My essay on this issue - published in the March edition of the Corporate Governance Advisor - predicted that the SEC would certify the bylaw question to Delaware soon. Broc and I also had an interesting discussion during a podcast regarding this question back in February. For more on the growing trend of shareholder democracy behind this challenge, see my article "Pandora's Ballot Box, or a Proxy with Moxie: Majority Voting, Corporate Ballot Access, and the Legend of Martin Lipton Re-Examined."

Anticipating that the opinion in this difficult case might make use of dicta guidance, see also my article with Chief Justice Steele on the "Delaware Guidance Function." Also, a shorter posting on this case is available here.

The Overriding Question

Section 109 of the Delaware General Corporation Law grants shareholders the right to adopt bylaws. Section 141(a) reads that "the business and affairs of every corporation...shall be managed by...a board of directors." To what extent do shareholder-adopted bylaws conflict with the Board's discretion under 141? And to what extent does this election bylaw limit that discretion? Indeed, is it really an election bylaw at all?

The Briefing

CA argues that:

1. This bylaw mandates a payment of expenses, rather than relates to an election, and control over corporate expenditures is part of the business and affairs of the corporation described in Section 141 and Paramount v. QVC and JANA v. CNET;

2. Any limits on the board's authority under 141 must be contained in the Certificate of Incorporation. A bylaw in conflict with the certificate of incorporation is a nullity. Since CA has a provision in its Certificate of Incorporation that mirrors 141, a bylaw in conflict with 141 would therefore be a nullity. The practical result of this argument is that, since CA's certificate of incorporation provides that it may only be amended by the Board, a common provision, the shareholders have no way to mandate proxy reimbursement;

3. CA distinguishes bylaws that regulate the process by which Boards act, which they argue describe the majority of bylaws constraining directors which the Delaware Courts have upheld, from bylaws mandating a specific policy, which CA argues describes the bylaw at issue;

4. CA argues that since Delaware law permits reimbursement of proxy expenses only where contests benefit all shareholders, rather than a mere subset, mandatory reimbursement may cause directors to violate Delaware law and their fiduciary duties. This is especially likely in short slates, because of their assumption that minority interests would be the only aim of the dissident slate, and thus the Board may be constrained from preventing this threat to the other shareholders;

5. An affirmative decision in this case would lead to a host of new contests, and could lead to corporate waste of assets causing directors to violate their fiduciary duties;

6. CA distinguishes cases cited by AFSCME, such as Unisuper, relating to board-approved limitations on board authority as permitting shareholder limitations, by arguing that contractual and equity principles were applied to board action to justify those self-imposed limitations that make them irrelevant to a determination of whether shareholder approved limitations are permissible.

AFSCME's argument:

1. In response to CA, AFSCME argues that the language in 109 which permits shareholder bylaws "not inconsistent with law" would be a redundant phrase if the legislature's intent were to only permit bylaws authorized by other statutory provisions;

2. The validity of bylaws are not judged based on who adopted them;

3. In response to claims that mandating expenditure of funds would interfere with Director's authority under Section 141, or may leave the corporation open to payments that flow from fiduciary violations, AFSCME points to prior cases upholding the validity of bylaws requiring indemnification of directors despite the Board's wish to withhold indemnification. Further, they argue that the mandated payment does not implicate fiduciary concerns precisely because the payment would be mandatory, and thus could not be based on a director or manager's self-dealing motives;

4. The Blasius, Unitrin, and MM Companies cases also evidence a dim view of attempts to thwart the shareholder franchise, which is the underpinning of the business judgment rule. Also, Harrah's v. JCC provides that the shareholder franchise includes a meaningful right to nominate an opposing slate, and not simply vote in an election. Thus, AFSCME essentially argues that this amounts to a heightened standard of review, or a presumption in favor of the shareholder, in cases resolving shareholder bylaw validity;

5. AFSCME skillfully leaves a trail for the Court to limit its holding, arguing that even if there is a tension between 141 and 109, and 141 limits the types of bylaws shareholders may adopt (this is the area in which poison pill bylaw fights would come up), that limitation does not extend to election bylaws;

6. They respond to a number of CA's examples of specific bylaws determined to be inconsistent with the DGCL as irrelevant, because all of them related to Board bylaws, also noting that the Court has never struck down a shareholder adopted bylaw for being inconsistent with the DGCL or restricting the Board's ability to fulfill their fiduciary duties.

Here is CA's brief - and here is AFSCME's brief (and appendix).

Oral Argument

Arguing on behalf of Computer Associates was Robert Guiffra of Sullivan & Cromwell. Arguing on behalf of AFSCME was Michael Barry of Grant & Eisenhofer. The issues from the briefs central to the oral argument were whether this bylaw relates to an election, or control over the corporate treasury, and then whether a mandatory reimbursement requirement could cause directors to violate their fiduciary duties to the company. The mix of questions from the Court during oral argument make any predictions difficult.

The Justices pushed counsel for CA over whether the prospect of reimbursement was inextricably linked to the success of an election, and whether the bylaw would be legal if adopted by the board. The Justices pushed counsel for AFSCME over whether there might be any circumstances under which a bylaw could force inequitable reimbursement and whether the board's authority to adopt bylaws was co-extensive with that of shareholders.

Interestingly, Justice Berger, when she served as a Vice Chancellor on the Court of Chancery, suggested in dicta that stockholders create a bylaw limiting the board's power to amend a stockholder adopted by-law in American Int'l Rent a Car, an opinion from 1984, which may indicate her view on whether the right to adopt bylaws is co-extensive. The Court also questioned whether the "reasonable" qualifier in this bylaw left enough room for board discretion not to reimburse wasteful expenses.

One open thread that may not be resolved: If this bylaw is included in the corporation's proxy, and if it passes, can the board simply amend that bylaw? Meaning the Court could conceivably rule that the bylaw was legal, and thus the SEC would have no basis to allow the company to exclude it, but in a subsequent challenge to the board's decision to amend the shareholder bylaw would the company get business judgment protection?


This is a particularly controversial and intricate case, and the Delaware Supreme Court has only a week and a half to craft a decision. It is probably best to save substantive practice advice until the opinion is issued. See you then...

SEC Releases Credit Rating Agency Study

Two days ago, the SEC issued this study that summarizes issues identified during the Staff's examinations of credit rating agencies. Not good news for the rating agencies (here is a WSJ article). Here is the related press release - and a statement from SEC Chairman Cox.

The "Swearing In" Press Release

I'm excited about Elisse Walter being named as a SEC Commissioner, but I can't help but note that yesterday's press release about her being sworn in is a "first." It contains the nitty-gritty about who attended.

I know I've said it before, but it seems the SEC does a press release at the drop of a hat now. It's probably to show that a Democrat is now on the job at the SEC, but we already had the press release about Elisse and the other new Commissioners being confirmed by the US Senate. Anyways, I'm looking forward to the details of who attends the swearing in of the other two new Commissioners...

- Broc Romanek

July 9, 2008

In-House Counsel's Role in CEO Pay Setting Process

In this CompensationStandards.com podcast, James Williams, General Counsel of Liquidity Services, provides insights into the role of in-house counsel in the executive compensation setting process, including:

- How much of your time do you spend on compensation-related issues?
- What is your role in scheduling, attending and preparing for compensation committee meetings?
- Where do you think you add the most value in the process?
- How do you handle the tricky issues of supporting the board as well as supporting senior management?

Thirty Now Blogging: "The Advisor's Blog"

I just added ten executive compensation lawyers to the mix of the new - and popular - "The Consultant's Blog" on CompensationStandards.com. With the group of bloggers now comprising of twenty compensation consultants and these ten lawyers, I have renamed it: "The Advisor's Blog." For those who haven't, members should input their email addresses on the left side of that blog so they can be alerted when a new entry is made (nearly one entry per day has been the average and that should continue with the influx of new talent).

Mark Borges struck "Gold, Jerry, Gold" in his analysis recently of the new Item 402 interps in his "Proxy Disclosure Blog." Meanwhile, Mike Melbinger continues to deliver on his "Melbinger's Compensation Blog," last week covering a new IRS revenue ruling on Section 162(m).

The Latest Compensation Disclosures: A Proxy Season Post-Mortem

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

- Broc Romanek

July 8, 2008

Will Sarbanes-Oxley Fall? Federal Appellate Decision Expected Soon

With a decision in the Free Enterprise v. PCAOB lawsuit expected soon - and some rumblings that the DC Circuit Judges could strike SOX based on the discussions during an April hearing - it's probably time to start thinking "what if" the court does indeed kill Sarbanes-Oxley. Here's an analyst report that goes down that road - and here is a transcript from the hearing. Both are posted in our "Sarbanes-Oxley Reform" Practice Area.

Survey Results: Audit Committees and Earnings Releases

We have posted our survey results on audit committees and earnings releases, repeated below:

1. Does your Audit Committee review your company's earnings releases prior to their release to the media?
- Yes - 92.1%
- No - 7.9%

2. If the answer to #1 is "Yes," how many days prior to public issuance of the earnings release is a draft typically sent to the Audit Committee?
- One day or less - 25.9%
- Two days - 31.0%
- Three days - 20.7%
- Four days or more - 22.4%

3. Does the Audit Committee hold a meeting for the purpose of discussing each earnings release prior to their release to the media?
- Yes, and mostly (or all) by telephone meetings - 80.7%
- Yes, and mostly (or all) by face-to-face meetings - 8.1%
- No - 11.3%

4. If the answer to #3 is "No," is the Audit Committee informed about issues that will be discussed in the related earnings release?
- Yes, in writing - 16.7%
- Yes, at a meeting - 50.0%
- No - 33.3%

5. Does your Audit Committee hold a single meeting to review both the earnings release and draft Forms 10-Q and 10-K?
- Yes - 50%
- No - 50%

It's interesting to compare these survey results with an identical survey that we conducted three years ago. Don't forget to take a moment and take our new "Quick Survey on Disclosure Committees"!
UK Regulator Issues Guidance on Auditor Liability Limitation Agreements

With IFRSs making front page news in Saturday's NY Times (here is the article) and CIFiR's final reform recommendations due in August, it's instructive to see how other jurisdictions are handling similar challenges to reforming the audit industry.

One of the biggest concerns is how auditors will survive being sued (see this CFO.com article, which highlights this CAQ comment letter). A few months back, I blogged about auditor liability caps in the UK. Recently, the United Kingdom's Financial Reporting Council - the FRC is the UK's independent regulator for corporate reporting and governance - issued guidance on the use of agreements between companies and their auditors to limit the auditor’s liability, as provided for under the UK's Companies Act 2006.

The guidance:
- explains what is - and is not - allowed under the 2006 Act
- sets out some of the factors that will be relevant when assessing the case for an agreement
- explains what matters should be covered in an agreement, and provides specimen clauses for inclusion in agreements
- explains the process to be followed for obtaining shareholder approval, and provides specimen wording for inclusion in resolutions and the notice of the general meeting

Anything can happen. As this CFO.com article notes, regulators are talking about a three-year moratorium on new accounting rules if IFRS is adopted.
- Broc Romanek

July 7, 2008

Corp Fin Consolidates - and Issues New - CDIs

Late Friday, Corp Fin issued a new set of Regulation S-K Compliance & Disclosure Interpretations. This new set consolidates all of the existing Reg S-K CDIs and adds some new ones, including a few under Item 402. It also re-numbers all of the CDIs.

On Friday, the SEC also finalized its guidance and amended the rules to streamline how the self-regulatory organizations - SROs - conduct their rulemaking, including broadening the circumstances under which SRO rules (and rule changes) become immediately effective.

More on the "B" Corporation: Duties to Constitutiencies Beyond Shareholders

Last month, I blogged about the "B" Corporation and a member asked: Ohio Revised Code Section 1701.59 expressly permits directors to consider the interests of, among others, the community and society, the economy of the state and nation, employees, suppliers and creditors. I guess that makes Ohio a "B" state?

Keith Bishop notes in response: Many states have adopted "other constituencies" statutes. For example, Nevada provides in NRS 78.438(4) that both directors and officers, in exercising their respective powers with a view to the interests of the corporation, may consider the interests of other constituencies (and Florida has this one). However, I believe that the motivation behind these statutes was anti-takeover rather than encouraging "B" corporations.

Notably absent from the list of states with other constituencies statutes are California and Delaware. Delaware has addressed by case law consideration of other constituencies in the takeover context.

FINRA Proposes Private Placement Rules

A few weeks ago, FINRA filed a proposal with the SEC to create new Rule 5122, which would require broker-dealers engaged in private placements to make certain disclosures in the private placement memorandum, file the PPM with FINRA and commit at least 85% of the offering proceeds to the business purposes identified in the PPM.

FINRA published an initial version of this rulemaking initiative in NASD Notice to Members 07-27 - the new proposal has not significantly changed from the initial version, but provides additional clarity and extends the list of exemptions.

- Broc Romanek

July 3, 2008

Rebirth of Proposed Attorney-Client Privilege Legislation

Last week, Senator Arlen Specter reintroduced his attorney-client legislation in the form of the "Attorney Client Privilege Protection Act of 2008," whose Senate bill remains S.186 (the '08 version text of the bill is not yet available; but I believe it's the same as '07). Supporting the bill, 36 former federal prosecutors wrote this letter to Senator Leahy.

Already approved by the House, the bill would prohibit federal prosecutors and agencies - including the SEC - from requiring companies to produce privileged documents in exchange for leniency, but companies would still be able to voluntarily waive privilege under the bill. Here is a New York Times article on the bill - and here is a press release from the Association of Corporate Counsel supporting it.

Nasdaq's Master Index of Interpretative Letters

As mentioned during last week's "Nasdaq Speaks" webcast, the Nasdaq Staff recently posted a "master index" of their interpretative letters. It should make it easier to search for their letters…

ESOARS in Flux

The battle over ESOARS continues - the latest missives about them from the CII and Zions Bancorp to the FASB's Emerging Issues Task Force are posted in our "ESOARS" Practice Area. These letters were written because the EITF published guidance in March that seemingly undercuts the SEC’s plan to see how ESOARS fare in the open market.

- Broc Romanek

July 2, 2008

Delaware Supreme Court: CA/AFSCME Certification Accepted and Fast Tracked

Yesterday, the Delaware Supreme Court accepted the questions certified to it by the SEC relating to the battle between CA and AFSCME over the proponent's binding bylaw proposal seeking reimbursement for third-party solicitations. The Court sure didn't lose any time taking the case - and look at the quick briefing and argument schedule they have set (given CA's mailing date is July 17th, this was necessary): briefs are due on Monday, July 7; oral argument is scheduled for July 9. We will have a guest blogger giving us news live from the hearing.

We have posted the Supreme Court's order in our "Shareholder Proposal" Practice Area.

SEC Announces "21st Century Disclosure Initiative"

Last week, the SEC revealed a long-standing project - dubbed the "21st Century Disclosure Initiative" - that now will be conducted by a team led by Dr. Bill Lutz. Corp Fin has been quietly working on this project for several years.

It's a pretty far-ranging project where anything could happen; for example, the notion of forms being required is up-for-grabs (see IR Web Report for more). The idea is to rethink the entire disclosure framework in the wake of new technology and changes in investor needs; a clean slate to envision how the reporting framework would be created if today were '33 and '34.

The first part of this study is expected to be completed by the end of this year, with a "blueprint" of a new framework being the ultimate goal. This is pretty interesting stuff. I can't help but chuckle because a decade ago, the "Aircraft Carrier" was widely panned as trying to take on too much at once...

SEC Chairman Cox Responds to WSJ Criticism

I hadn't planned on blogging about the scathing criticism of SEC Chairman Cox in this WSJ article - that delves into details of where the Chairman was during the Bear Stearns crisis, etc. - but I can't help it now that a response of the Chairman to the SEC Staff was the subject of this CFO.com article.

Did the Chairman's office provide a copy of his internal memo to CFO.com? If so, as someone who served in Congress, I would expect thicker skin if the "internal" memo was indeed leaked by the former Representative from California.

Our July Eminders is Posted!

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

- Broc Romanek

July 1, 2008

Coming Soon: Shareholder Proposal No-Action Responses Online

On Friday, Corp Fin Director John White said that the Staff was working to put this year's batch of processed no-action requests related to Rule 14a-8 on the SEC's website within the next few weeks. This will result in about 400 letters being posted (and I imagine will include all the correspondence related to the request as well as the Staff's response). Going forward, the Staff is thinking about posting letters closer to "real-time" rather than waiting until the end of the proxy season.

Among other things that John discussed, he touched on:

- executive compensation review for this year, that I blogged about yesterday
- Section 16 and Form 8-K updates, that I blogged about Friday
- "21st Century Disclosure" project, that I will blog about manana
- proposal to modernize oil & gas reserve disclosures that just came out
- how the Staff intends to have all the Phone Interps updated by the end of the year
- how the Staff intends to review e-proxy results from this year and possibly take further action in the Fall
- "use of corporate website" guidance coming soon
- importance of the SEC's IFRS rulemaking
- SEC's credit rating proposals that came out recently

John White: Five Tips on Shareholder Proposals

Here is my paraphrasing of the five tips that John relayed from Corp Fin's Shareholder Proposal Task Force:

1. Send in your no-action requests to exclude shareholder proposals sooner - so they get processed faster by the Staff and don't get caught up in a crush of them that are received around Christmas time. Once the crush comes, turn-around times become longer.

2. Provide all correspondence from all proponents to the Staff when you submit your no-action requests.

3. Don't assume that a Rule 14a-8(b) defect from a proponent one year will extend to the next; the proponent might have fixed the problem.

4. When making your arguments, don't throw in the kitchen sink and argue points that are not likely to win the day. The Staff has to hassle processing all of those trivial arguments.

5. If a proponent withdraws its proposal, inform the Staff right away so they don't bother processing it.

As always, it's a good idea to read Staff Legal Bulletin #14 (and its progeny) when dealing with proposals - they really lay out the process and provide useful tips...

My Masterpiece: Conference Performance Art

Perhaps to prove that I have the power to bend a conference audience to my will, I had a little fun with my panel on executive compensation disclosure Saturday at the Society's Annual Conference. See the first video after clicking the link below.

Here are the last of the videos I uploaded to the FriendFeed room I created (all videos are no longer than a minute):

- My Masterpiece: Conference Performance Art
- AFSCME's Rick Ferlauto: SEC Certifying to Del. Supreme Ct.
- Lydia Beebe/Carol Strickland: Former Society Chairs
- Former Corp Fin "Masters of the Universe"
- Terry Helz on Membership Benefits
- Corp Fin Director John White: Lots of SEC Developments
- Francis Byrd, Dave Dixon, Ginny Fogg: Having Some Food

- Broc Romanek