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Monthly Archives: March 2009

March 31, 2009

Just Announced: “4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference”

We just posted the registration form for our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – to be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference (we’ll be posting the agenda for the Executive Compensation Conference in the near future).

Special “Half-Off” Early Bird Rates – Act by April 24th: We know that many of you are hurting in ways that we all never dreamed of – and going to a Conference is the last thing on your mind. But with huge changes afoot for executive compensation and the related disclosures, we are doing our part to help you address all these critical changes—and avoid costly pitfalls—by offering a “half-off” early bird discount rate so that you can attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to obtain 50% off.

Rolling In: Rule 452 Comments

With comments due last Friday on the NYSE’s broker non-vote proposal as noted in this blog, below are links to comment letters submitted by notable groups so far (here is a link to all the comment letters):

NYSE Proxy Working Group

Shareholder Communications Coalition (aggregation of corporate associations)

Council of Institutional Investors

Business Roundtable

Society of Corporate Secretaries

National Investor Relations Institute

There are a surprising number of comment letters submitted by companies, including one from GM’s now-former CEO Wagoner submitted Friday. I guess they realize the significance of this proposal and have overcome their traditional reluctance to voice an opinion directly (as opposed to through an industry group).

In terms of analysis of voting returns, this comment letter from Broadridge covers how broker non-votes impacted shareholder meetings during 2007.

The Latest Proxy Season Developments

If you haven’t signed up to get our new “Proxy Season Blog” pushed out to you, here are a few of the items you’ve missed in the last week:

– Draft E-Proxy Standards: NIRI Seeks Comment
– More on “Another New E-Proxy Notice from Broadridge”
– Proxy Disclosure of Compensation Practices in a Volatile Equity Market
– Intel First to Offer Live Internet Voting
– The Growth of “Poor Economy” Disclosure
– Re-Thinking D&O Questionnaires

Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog (just like this blog).

Game Changer: Delaware Supreme Court Reverses in Lyondell

On the DealLawyers.com Blog last week, I blogged twice about a new important Delaware Supreme Court decision, Lyondell Chemical Company v. Ryan (No. 401, 2008). We’ve already posted a number of memos about the decision in the “Fiduciary Duties” Practice Area.

– Broc Romanek

March 30, 2009

Clinging to the “Bottom Rung”

A few weeks back, Moody’s Investor Service published its list called the “Bottom Rung,” which represents the roughly 20% of the companies that it tracks that are in most danger of defaulting on their debt. As noted in this Wall Street Journal article, Moody’s is estimating that approximately 45% of the Bottom Rung companies will default in the next year, and the number of companies falling into this category is rapidly increasing. Moody’s has been separately calling out these bottom tier credits for the last several months, and plans to update the Bottom Rung list on a monthly basis.

What are issuers doing that find themselves on the Bottom Rung list? Based on the WSJ article, Eastman Kodak came out swinging, noting in an e-mail statement that “Any speculation, however informed, suggesting that Kodak is less than financially sound, is irresponsible.” Similarly, Univision issued a statement stating that it “has more than ample liquidity to operate the business in the current environment.” But other companies contacted declined to comment, or didn’t respond, which after all is probably for the best.

I don’t think that a Bottom Rung designation necessarily changes anything that these companies are or should be disclosing in their SEC filings. Item 10(c) of Regulation S-K does not mandate disclosure of security ratings, but rather calls for additional disclosure concerning ratings and changes in ratings when a company voluntarily elects to include any security rating disclosure. (See our summary of the topic in the “Credit Ratings” Practice Area.) Many companies these days will include in their MD&A the actual ratings from the big rating agencies, along with disclosure of the rating agencies’ views that are expressed in addition to the ratings themselves. I would say that this practice is not ubiquitous, however, in that some companies may still resist including the rating information with a view that it is otherwise available to investors and can be difficult going forward to keep up to date.

In the SEC’s credit rating proposals from last summer, which sought to eliminate credit rating references from the SEC’s rules, the Commission proposed to keep this voluntary disclosure scheme, but solicited comment on whether that approach should be reconsidered in favor of specified mandatory disclosure. The SEC has not moved forward on those proposals, and it is unclear whether they will be revisited.

What’s Left to Do on Credit Ratings?

Credit ratings still remain at the forefront of the SEC’s agenda, as Chairman Schapiro noted in her testimony last week before the Senate Committee on Banking, Housing and Urban Affairs. Proposals are currently outstanding (in addition to the proposals referenced above) to require NRSROs (and possibly subscriber-based ratings services) to disclose ratings actions histories for all credit ratings issued on or after June 26, 2007 at the request of the obligor being rated or the issuer, underwriter or sponsor of the security being rated, no later than 12 months after ratings action is taken, and in an XBRL format.

The SEC also re-proposed rule changes that would make it a prohibited conflict of interest for an NRSRO to rate a structured finance product whose rating is being paid for by the product’s issuer, sponsor or underwriter, unless information about the product provided to the NRSRO to determine and monitor the rating is made available to the NRSROs not retained to issue a credit rating. In addition, the re-proposed rule changes would amend Regulation FD to permit disclosure of material non-public information to NRSROs, whether or not the NRSROs make their ratings publicly available.

Further, a roundtable is schedule for April 15 to examine the SEC’s oversight of credit rating agencies. As Chairman Schapiro mentioned in her testimony, further reforms may be considered based on what is discussed at the roundtable.

SEC IG Focuses on Senior Executive Officer Bonuses

Last Friday, the Office of Inspector General released a report on its 2008 Audit of Sensitive Payments. “Sensitive payments” are described as things such as “executive compensation, travel, official entertainment funds, unvouchered expenditures, consulting services, speaking honoraria and gifts, an executive perquisites.” On the executive compensation front, the SEC’s Inspector General did not find any fraud or payments that went over the established limits or budgeted amounts, but did question the lack of justification for seemingly large merit pay increases and bonuses for some SEC executives who worked directly for the Chairman.

As noted on page 10 of the report, the seven SEC senior officers studied who worked directly for former Chairman Cox received merit pay increases ranging from $24,657 to $65,082 for the performance year ending September 30, 2007 and bonuses of $20,000 each. The SEC’s Executive Director noted in his response to the report that these merit increases were unique and unlikely to recur, arising essentially as “catch-up” payments when then-Chairman Cox lifted a cap on the salaries of his direct reports, which had kept them all in line with his own salary of $152,000.

Suffice it to say that as a non-executive SEC Staffer, you are unlikely to see those sorts of increases or bonuses over the course of your career, much less in one year. It is perhaps most notable that the IG had the same question that many Corp Fin Staffers have when reviewing CD&As: “Where’s the analysis?”

– Dave

March 27, 2009

Regulatory Reform Kick-Off

Yesterday marked what I think was the big kick-off of several months of debate about the future shape of financial regulation. Treasury Secretary Geithner outlined the Administration’s framework in testimony before the House Committee on Financial Services and, as noted in this Treasury Department outline, yesterday’s remarks focused particularly on addressing systemic risk.

Not surprisingly, the Administration’s proposals echo much of the conceptual framework that has been floated over the last several months by some legislators, academics and groups such as the Group of Thirty. In particular, the four focal points of the regulatory reform are: (1) addressing systemic risk; (2) protecting investors and consumers; (3) eliminating regulatory gaps; and (4) fostering international coordination. The Administration’s systemic risk proposals contemplate one “independent” regulator who is responsible for overseeing “systemically important firms” (i.e., too big to fail firms) as well as the payment and settlement systems. Systemically important firms would be subject to heightened capital requirements, strict liquidity, counterparty and credit risk management requirements and would be subject to an FDIC-like “corrective action regime.” These special firms could be any type of financial business: banks, brokers, insurance companies, etc.

The SEC figures prominently in the proposed systemic risk efforts, not as the systemic risk regulator of course but rather as the regulator of hedge funds and money market funds. The Administration envisions that advisers of hedge funds meeting as yet unspecified size requirements would be compelled to register with the SEC, and the funds would be subject to mandatory disclosure and reporting requirements, with the details of their reports to be shared with the systemic risk regulator. The proposals also call on the SEC to “strengthen the regulatory framework” around money market funds to make them less susceptible to a run on the funds and to reduce the credit risk and liquidity risk profile.

It is not clear from the proposals what role the SEC would play in a proposed new regulation of credit default swaps and OTC derivatives. The Administration calls for a “strong regulatory and supervisory regime” over OTC derivative markets, focused on central clearing of standardized OTC derivatives, encouragement of more exchange traded instruments, mandated standards for non-standardized contracts, transparency around trading volumes and positions, and robust eligibility requirements for market participants.

Chairman Schapiro’s Remarks on the SEC’s Role

At the same time the Treasury Secretary was outlining the regulatory reform proposals in the House committee room, SEC Chairman Schapiro was at a hearing before the Senate Committee on Banking, Housing and Urban Affairs focused on the regulation of the securities markets. In her testimony, Chairman Schapiro called for maintaining the independence of a capital markets regulator, consistent with preserving the Commission’s role as the investor’s advocate. The Chairman noted that, as an independent capital markets regulator, the SEC would be integral to dealing with the overarching concerns about systemic risks and serve to help the systemic risk regulator in evaluating risks. It seems clear from this testimony that, as the battle lines are being drawn, the SEC is going to fight to preserve its independence within the overall financial regulatory structure.

The Views of the Former SEC Chairmen

Among the many folks testifying at the Senate hearing yesterday were former SEC Chairmen Richard Breeden and Arthur Levitt. Breeden and Levitt both supported Chairman Schapiro’s call for maintaining a strong SEC as a separate capital markets regulator – and not subsuming the agency into some larger financial regulator. In his testimony, Levitt stated:

“The proper role of a securities regulator is to be the guardian of capital markets. There is an inherent tension at times between securities regulators and banking supervisors. That tension is to be expected and even desired. But under no circumstance should the securities regulator be subsumed – if your goal is to restore investor confidence, you must embolden those who protect capital markets from abuse. You must fund them appropriately, give them the legal tools they need to protect investors, and, most of all, hold them accountable, so that they enforce the laws you write.”

Breeden’s testimony called for merging the SEC, CFTC and PCAOB into a single regulator charged with overseeing trading in securities, futures, commodities and hybrid instruments. In this role Breeden would envision that the combined agency would also set disclosure standards for issuers and the related accounting and auditing standards.

Levitt didn’t mince words on his views about the SEC in an interview with the Washington Times, noting in this article that “The SEC has been grievously hurt over the past eight years” and that “It’s lost its best people. It’s been demoralized. It’s been humiliated [to the] point it is no longer the pride of government agencies.” As for the Congress’s oversight of the SEC, Levitt said it “is a function of perfectly terrible oversight of the SEC on the part of Congress. It’s neither a Democratic nor a Republican issue. It’s a national disgrace.”

– Dave Lynn

March 26, 2009

Corp Fin Updates Exchange Act Rules CDIs

Yesterday, the Corp Fin Staff updated the Exchange Act Rules CDIs to include interpretations of Exchange Act Rule 10b5-1. Rule 10b5-1 interpretations had not been included in the Exchange Act Rules CDIs back when they were first published in September 2008, and were last addressed in the Fourth Supplement to the Manual of Publicly Available Interpretations from May 2001.

The new Exchange Act Rules CDIs largely repeat the Rule 10b5-1 interpretations from the Fourth Supplement without substantive change. There are, however, a few revised or new interpretations of note. In CDI 120.19 – which deals with the question of whether cancelling one or more plan transactions affects the availability of the affirmative defense in Rule 10b5-1(c) – the Staff notes that if a new contract, instruction or plan is put in place after the termination of a prior plan, then you would have to look at all of the facts and circumstances, including the period of time between termination of the old plan and establishment of the new plan, to determine whether a plan was established “in good faith and not as part of a plan or scheme to evade.” In order to address this concern, it has become relatively common to impose a significant waiting period before a new plan can be adopted (i.e., six months), as well as a cooling off period (i.e., 30 days) before any sales are made following a plan termination.

In CDI 120.20, the Staff notes that the Rule 10b5-1(c) affirmative defense is not available when a person establishes a 10b5-1 plan while aware of material nonpublic information but delays any plan transactions until after the material nonpublic information is made public. Further, CDI 220.01 provides guidance on how a 10b5-1 plan can be transferred to a new broker when the original broker goes out of business (something to think about these days), while CDI 220.02 indicates that an issuer contemplating a repurchase plan relying on Rule 10b5-1 and 10b-18 could not structure the plan so that the amount to be repurchased by the broker under the plan could be automatically reduced by publicly disclosed block purchases, given the potential for the issuer to effectively modify the plan through the block purchases.

Even though the Rule 10b5-1 CDIs don’t necessarily break new ground, it is a good time now to go back and review Rule 10b5-1 policies (or adopt such policies if none are in place). Some very useful resources are posted in our Rule 10b5-1 Practice Area. To date, we have not heard of any significant Rule 10b5-1 developments from the Division of Enforcement, but it is likely some of the cases that the Division began looking at a couple of years ago remain ongoing.

FASB Takes Quick Action on Fair Value and OTTI

Last week, the FASB took action to address fair value criticisms by issuing proposed FSP FAS 157-e, Determining Whether a Market is Not Active and a Transaction is Not Distressed, which clarifies when an issuer is dealing with an “inactive market” and a “distressed sale” under fair value standards. The FASB also released proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, which would revise guidance on determining other-than-temporary impairments. As noted in this Morrison & Foerster memo, concern has already been expressed as to whether the FASB’s actions on these standards have gone far enough. The guidance is subject to a 15-day comment period and the FASB expects to finalize the guidance at its April 2 board meeting.

In testimony yesterday before the House Financial Services Committee, SEC Acting Chief Accountant Jim Kroeker commended the FASB for its quick action and called for guidance to be in place for the first quarter.

Earlier this week, the FASB and the IASB announced that, in order to help address issues arising from the financial crisis, “the two boards have agreed to work jointly and expeditiously towards common standards that deal with off balance sheet activity and the accounting for financial instruments. They will also work towards analysing loan loss accounting within the financial instruments project.”

A Washington Tradition Goes Nationwide

One of the more interesting (or perhaps odd is the better word) White House traditions is the annual Easter egg roll on the South Lawn. This tradition dates back to 1878, and the current financial crisis is by no means going to stop the eggs from rolling this year. In fact, the White House is taking steps to make the egg roll more open to the general public, by distributing tickets online to the nation rather than in person the weekend before the event. If you are interested in rolling some eggs on Monday, April 13 you can try to sign up today for tickets.

– Dave Lynn

March 25, 2009

Nasdaq Extends Suspension of the Bid Price and Market Value Requirements

Nasdaq has filed with the SEC to extend the ongoing suspension of the bid price/market value of publicly held shares requirements until July 19, 2009. In support of the continued suspension, Nasdaq notes that market conditions have not improved since the suspension began last October, and that both the number of securities trading below $1 and the number of securities trading between $1 and $2 on Nasdaq has increased since the initial suspension. This is the second extension of the suspension, which would have otherwise expired on April 19, 2009. The NYSE recently filed with the SEC, on an immediately effective basis, a suspension of its $1 price requirement and an extension of the lowering of the market captialization requirement, lasting until June 30, 2009.

Nasdaq also recently re-filed its new listing rule book, which is now scheduled to become effective on April 13, 2009. In this project, the Nasdaq has sought to make the listed company rules more transparent and clear, without making substantive changes to the requirements.

More Extension News: The FDIC’s TLGP Debt Guarantee Program Extended

Just in case you are losing track of the alphabet soup of government programs, TLGP is the FDIC’s Temporary Liquidity Guarantee Program. The Debt Guarantee Program component of TLGP was set to expire at the end of June, but last week the FDIC board adopted an interim rule extending the program until October 31, 2009. Further, for any debt issued on or after April 1, the TLGP guarantee will extend until December 31, 2012. The interim rule also adopts new surcharges on guaranteed debt issuances that have a maturity of one year or more and are issued on or after April 1, 2009.

On the Way: Romeo & Dye Section 16 Deskbook

Peter Romeo and Alan Dye just completed the 2009 edition of the Section 16 Deskbook and it’s now at the printers. In addition, they are in the process of wrapping up their latest version of the popular “Forms & Filings Handbook,” with numerous new – and critical – sample forms included. To receive these critical Section 16 resources, try a ’09 no-risk trial to the “Section 16 Annual Service” (or renew).

– Dave Lynn

March 24, 2009

Treasury Finally Fleshes Out Its Financial Stability Plan

To the roaring approval of the stock market (even though details are fairly scarce and it’s been known for a week that this was coming), the Treasury Department provided more details about it’s plans to bailout banks and handle their toxic assets by providing a fact sheet and white paper about its new “Public-Private Partnership Investment Program.”

Boiling down the PPIP, it will use a combination of public and private capital, managed by private sector managers to purchase toxic (now known as “legacy”) assets from banks and investors. The PPIP proposes to use $75-100 billion of TARP funding along with with private investor capital and FDIC-guaranteed debt to generate an initial $500 billion in purchasing power, which could grow to $1 trillion over time.

The PPIP has multiple components, including a Legacy Loans Program and a Legacy Securities Program. Since more details are needed, the government will need to create regulations to get these programs off the ground. We are posting memos in our “Credit Crunch” Practice Area.

SEC Commissioners Speak Out on Enforcement Policy

Last week, in this speech, Commissioner Luis Aguilar predicted the SEC will impose more fines on companies going forward – and expressed a desire to rescind the SEC’s policy statement that guides the Enforcement Division on how to determine financial penalties because he believes it doesn’t deter misconduct. As you may recall, the SEC issued the policy statement back in early 2006 amid a fight among the five Commissioners that existed at the time over the level of fines levied against public companies.

Commissioner Troy Paredes also got into the act, delivering this speech regarding the Enforcement Division, its jurisdiction and available resources – and the methods used to select cases for investigation, among other topics.

Finally, Commissioner Elise Walter gave this testimony to Congress about the SEC’s enforcement efforts in response to the financial crisis. She noted that possible areas of investigations include possible insider trading at subprime lenders; misleading, inadequate or non-existent disclosures regarding subprime exposure by investment banks; abusive short selling; and improper valuations of illiquid assets.

How Boards Should Manage Risk

We have posted the transcript from our recent webcast: “How Boards Should Manage Risk.”

– Broc Romanek

March 23, 2009

More on the Problems Caused by Naked Short Selling

Just a few days after I weighed in on the problems caused by naked short selling, the SEC’s Inspector General issued a report noting that the SEC received 5,000 complaints over a year and a half period about aggressive short selling (of which, 2.5% of those were investigated) and the SEC’s failure to bring any enforcement cases in this area (and Congress may consider legislation restricting short selling ahead of the SEC adopting a new uptick rule). Here is a Bloomberg article.

According to this WSJ article: “In a written response, the SEC’s enforcement staff played down the likelihood of naked short-selling abuses. It noted that most trades settle on time. The SEC staff said the agency needs to “intelligently leverage” its resources and a large number of complaints provide “no support for the allegations.” The SEC said it is looking to improve its handling of tips.”

While I agree that a large number of complaints doesn’t prove anything – and the Staff certainly needs more resources to do it’s job – I sure hope the SEC is taking the problems caused by naked shorts seriously and realize that adopting an uptick rule alone doesn’t do the trick. I strongly urge folks to read Carl Hagberg’s clear explanation of how naked short selling damages the markets and his suggestion for an easy fix.

Another Ten Cents: The Problems of Share Lending

Thanks to the many members who sent me emails last week, agreeing with the sentiments in my naked short selling blog. Below is one of those emails; this one highlights another issue that the SEC should consider:

Thanks for publishing the blog on naked short selling. I completely agree that rules against failing to deliver should be more aggressively enforced. I have had some clients in the past that have come under attacks from shorts, with their issues being listed on the “Reg SHO Threshold List” for months, while being unable to get any regulatory attention through the SEC or FINRA.

Another – admittedly less pressing – issue that needs to be considered is changing the rules governing when brokers are allowed to lend shares held in their accounts. As I understand the current system, brokers can lend shares unless the account holder has specifically asked that this not be allowed. I imagine most people who take a long position in a stock are under the belief that once they’ve bought the shares, they’ve essentially taken those shares out of circulation, which would normally be expected to reduce supply and help push the price up.

By allowing brokerages to lend shares without affirmative consent (e.g., though an “opt in”), these shares remain available to be traded many times over without the consent or even knowledge of the “holder.” By requiring affirmative consent, brokerage firms may also end up choosing to share part of their stock loan revenues with the account holders, which may provide for some modest hedge and result in better pricing for share lending and more accurate price information in the market for short selling in general.

Webcast: “Compensation Arrangements in a Down Market”

Tune in tomorrow for the CompensationStandards.com webcast – “Compensation Arrangements in a Down Market” – to hear Blair Jones of Semler Brossy, Mike Kesner of Deloitte Consulting and James Kim of Frederic W. Cook & Co. discuss how boards are rethinking compensation practices in the wake of the down market.

– Broc Romanek

March 20, 2009

The Systemic Dismantling of the System

Below are a dozen pearls of wisdom from former SEC Chief Accountant Lynn Turner:

I am taken aback when people like President Obama say our problem is we had an outdated regulatory system. I beg to disagree. It was a regulatory system that in the past two decades had not become out-of-date, but rather had been almost entirely dismantled by Congress and the various Administrations as they:

1. Passed Gramm-Leach-Bliley guaranteeing large financial supermarkets that can only be too big to fail, while prohibiting the SEC from being able to require regulation of investment bank holding companies. When legislation was passed saying one could put all these businesses under one roof, without a single word in the law requiring regulation of the inherent conflicts, it was sealed in stone that there would be huge institutions the government would HAVE to bail out if they failed. And this legislation was specifically passed to permit the merger of CitiBank and Travelers to form CitiGroup, now one of the largest institutions requiring a bailout.

2. Cutting budgets at CFTC and SEC year-after-year dismantling those agencies block-by-block. They sent these agencies to do a gunfight with an empty gun all too often.

3. As new products such as credit derivatives were created and introduced to the credit markets, Congress and the Administrations took action to ensure those products could not be regulated. Companies such as Enron and AIG used the law to avoid regulation of these products. And history now has another chapter on how these products became financial weapons of mass destruction.

4. As hedge and private equity funds grew exponentially in the past two decades, Congress again exempted them from any regulatory oversight, even as they took in increasing amounts of retail money.

5. The banking regulators became “Prudential Supervisors” and not regulators, as they allowed the banks to engage in unsound lending practices, notwithstanding the 1994 legislation giving the Fed the power to stop such destructive business practices. Congress passed legislation that even allowed the Federal Home Loan Banks to expand their lending and compete with one another for the same bank’s business, with significantly increased risk.

As a result, today they have balance sheets loaded up with lousy mortgage securities and loans to the like of Citi, WaMU, Countrywide and Wachovia. It use to be they were simply in the business of making loans to local community and regional banks. And when Congress passed this legislation, they also allowed the compensation for the executives of these banks, whose business is guaranteed in the same manner as Freddie and Fannie were, to jump significantly.

6. Congress failed to provide authority, tools and resources for OFHEO, the regulator of Fannie and Freddie, blocking attempts to provide for effective oversight and regulation. These agencies watched as their assets and guarantees grew to trillions of dollars without effective oversight, while the government backed them up with the guarantee of taxpayer dollars. These agencies were allowed to grow their balance sheets unchecked, and with insufficient capital in light of the risks they were taking on and imposing on the taxpayer.

7. The credit rating agencies were granted exemption from accountability by the investing public it turns out they were misleading as well as by the securities regulators. Yet it was mandated that their ratings be used. To this day, the SEC must judge the work of these credit rating agencies by the policies and procedures the rating agencies themselves decide are sufficient, even if the rating results in a bad rating. That is quite simply still the law today.

8. Congress interceded to block attempts to bring greater transparency to financial reporting of equity compensation that grew to hundreds of millions of dollars in some cases, as the use of stock options became a drug many executives and their boards became addicted to.

9. The courts and Congress stepped in to prevent investors from getting justice through legitimate legal actions. It ultimately led to the Supreme Court of this land ruling it was legal and quite fine for people to assist others in the commission of a securities fraud – in essence drive the get away car – and there would be no justice or legal course of action for those who had been their victims.

10. Shareholders were stripped of their rights, as we saw the SEC first in 1992, and then again in 2007, denying them the right to have the same access as the management who work for them, to the proxy of the companies they owned. While Congress was well aware of compensation abuses, they failed to pass legislation that would have reined in such abuses. While two to three years ago, the House passed such legislation, it went no where in the Senate.

11. We now have Congress stepping in to put undue pressure to undo transparent accounting practices. The FASB has become most accommodating as the new rules they are proposing, with only a two week comment period, will effectively become a moratorium on fair value accounting for banks.

They will no longer have to report the effect of their bad investment decisions in their income statements – much like suspended disbelief occurs at the movies. We are now going back to accounting that the GAO in 1991, in a report titled “Failed Banks,” said raised the cost to taxpayers of the S&L bailout.

12. And finally, people were put in charge of the key agencies who did not believe in regulation. Inspector General reports on the OTS, OCC and SEC cite serious lapses in regulation. From Greenspan at the Fed who failed to act on the 1994 Hoepa legislation, to Dugan and Hawke at the OCC who opposed state regulators attempts to rein in predatory lending practices, to the SEC’s Chris Cox, these were all regulators who publicly opposed regulation and engaged in the dismantling of the regulatory system we once had.

It wasn’t that we didn’t have an effective system as much as it was the system we had was dismantled during the past two decades. And now tens of millions of Americans are paying for this with their jobs, the loss of their retirement, having to work for many more years when they have grown old, and kids having to leave college, no longer able to afford it. It is no wonder the public is so outraged by what they see going on with Congress and at companies such as AIG.

More on Notorious A.I.G. – and B.A.D. Congress

Rightfully so, many of the folks I know have as equal disdain for the House of Representatives as for AIG itself, due to the silly – and potentially harmful – legislation which passed yesterday that imposes a huge tax on bonuses to anyone earning over $250,000, who happens to work for a TARP company that received $5 billion or more in funds. Those same people also show disdain for the Treasury’s bait and switch, wherein some companies were forced to accept TARP money. The processes of the bailout from start to finish so far have been the stuff of comedy (except unfortunately this is all reality).

Even though I believe changes in the way senior executives get paid need to happen, I don’t think that Congress should be dictating them. As I’ve said before, until boards want change, they will find a way around any artificial restrictions. And those work-arounds typically end up being more excessive than the pay arrangements that would have originally been implemented.

My blog about AIG a few days ago resulted in a record level of member correspondence. Here are just a few from the many I received:

1. This letter from a former AIG Financial Product unit executive has been in the hands of Congress since October. After the fact, it is clear that AIG mispriced the risk on the credit default swaps – they took in a lot less premium than they should have, given the scope of risk. I don’t know if the board has gone back and determined if the mispricing was error, or done deliberately to make a commission-generating and bonus-generating product more attractive. I would want to know that before paying out any bonuses, particularly in light of the red flag raised in that letter.

2. Congress will do something stupid and penalize AIG – which is realizing penalizing taxpayers given that we own the thing – rather than just try to get the money back from the rouges.

3. No first-year corporate lawyer would ever let her or his client invest billions in a company without doing, apparently, ANY DUE DILIGENCE.

4. As I read the news stories, these severance agreements have been in place for a very long time, perhaps before the first government advance.

5. The recipients are not to blame. Whoever approved these agreements is to blame, if, and only if, their actions are not protected by the business judgment rule (as things existed at the time; not with the benefit of 20-20 hindsight). I’ve seen nothing to indicate that to be the case (see the recent Citigroup case).

6. Be very careful, my friend, whatever the government concocts to punish these recipients, they can also do to you. Trust me, my friend, you really do not want to start meandering down that path.

7. I think the board could only be justified in paying bonuses to those employees whose services directly related to the winddown, and presumably those bonuses were only earned in the last few months so its hard to see how they got to be 165mm; anything else smacks of gross negligence. Further, the bonuses clearly didn’t need to be at the same rate as they were before the meltdown – are there that many jobs available to these employees.

Finally, it seem likely that at least some of these employees violated fiduciary or other duties to the corporation – so the only bonus should be that “if you get the corporation successfully out of the mess you got it into, the corporation won’t sue you for breach of those duties”. In this environment, how successful do you think a claim for a bonus would be when matched up against a counterclaim by the corporation?

8. It’s obviously a very complicated legal issue totally swamped by the idiocy of the players. You certainly can’t blame the public for being outraged.

9. With all the layoffs, there is plenty of talent available (and having created the mess, its hard to see that the talent that AIG has is all that talented or irreplaceable).

10. People must be held accountable for their actions, and inactions – in this case, the directors. A few lawsuits will bring a new sense of vitality to them, and given the failures revealed by the recent past, I don’t think the argument that current boards are irreplaceable and no one will serve is sufficient – certainly a better balance needs to be struck.

– Broc Romanek

March 19, 2009

Another New E-Proxy Notice from Broadridge

Back in January, I blogged about Broadridge’s new e-proxy notice for beneficial owners. It looks like they have gone back to the drawing board and improved their Notice some more in an effort to better educate shareholders and boost their willingness to vote. [Personally, I think this process would have gone smoother had Broadridge posted a draft Notice for public comment, both last year - and this year. And I don't mean to single Broadridge out here. All the providers with Notices should post drafts for comment - so they can get input into enhancing usability.]

Although there has been no statement from the SEC Staff, Broadridge informs us that the Staff has reviewed these changes in this Notice. This is important to know since the new notice fails to satisfy a few of the requirements of Rule 14a-16(d). For example, the new notice doesn’t seem to have a place for directions to the meeting (Rule 14a-16(d)(8)). And although the requisite text for the legend required by Rule 14a-16(d)(1) seems to be included in one form or another, it doesn’t track the exact wording from the Rule.

We have received a number of inquiries from members nervous about relying on Broadridge’s representation that the Staff has blessed this departure. Hopefully, the Staff can make some type of public statement to alleviate the fears of those that want to be in compliance.

To help educated shareholders learn more about Notice & Access, Broadridge has created this Resource Center. Originally, it seemed like they would use the simple URL of ShareholderEducation.com for this new portal. But now that simple URL routes folks to Broadridge’s home page – and they’re using a long complicated URL for this new page. The original idea seemed more shareholder-friendly…

Pension Assets: Another Shoe to Drop?

One item to be closely watched in the annual reports being filed now is how the pension liabilities of companies are faring. For example, this recent report states that among the 100 largest corporate pensions, they suffered asset losses of $49 billion – partially offset by declines of $26 billion in liabilities due to changing the discount rates used to calculate the amount of the liabilities. The report notes that the funded status of these plans has fallen by 22% over the past twelve months, a decrease in funded status of $308 billion. Learn more about this development from the memos posted in our “Pension Plan” Practice Area.

It’s Tournament Time, with both my alma maters – Michigan and Maryland – representing! Go down memory lane and recall the miracle run by Michigan 20 years ago when their coach quit/got fired just before the tourney commenced.

March-April Issue: Deal Lawyers Print Newsletter

This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Lessons from the Meltdown: Remedies
– Poison in a Pen: Recent Trends in Drafting Shareholder Rights Plans
– The Ultimate Takeover Defense? RiskMetrics’ New View on Net Operating Loss Poison Pills
– Delaware Upholds Private Equity Deal Structures
– Recent Developments under the Delaware Short-Form Merger Statute
– Section 13(d): The Challenges of “Group Membership”

If you’re not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue for free.

– Broc Romanek

March 18, 2009

Got My Pitchfork: Get Me a Job at AIG!

Yes, I’m angry too. I drafted a profanity-laced blog on Sunday, but held it back to calm down (you can get the profanity if you need it at “Daily Kos” – and the extremism at “Zero Hedge“). Even though I can understand why paying $165 million in guaranteed bonuses (plus another $239 million later) to wind down $2.7 trillion in risky derivatives (now wound down to 1.7 trillion) could make sense to a board (as Andrew Ross Sorkin argues), I’m still having trouble buying into the arguments made in this letter from AIG’s CEO Edward Liddy and AIG’s White Paper for these reasons:

1. Why Did the Government Wait So Long? – One maddening thing is the lost opportunity in dealing with these problems last Fall when the government started to shell out big bucks. The Obama Administration says it just learned about this bonus program, but ignorance is not an excuse when you own 80% of the company.

In any pre-bankruptcy workout, employees can be forced to make compensation concessions as a condition to the restructuring. The employees are given a reality check, based on the compensation they would receive if the company goes into Chapter 11. In the case of AIG, you and I were the lenders – but no one represented our interests to ensure the right people gave the right things up before the company was “saved.” Paulson, et al. screwed us from the start. As noted in this Washington Post column, the same negotiation tactics could be used today.

And what’s the response now that this fiasco has come to light? All sorts of “innovative” solutions are being promised from newly enlightened politicians (or some not so innovative: Geithner is talking about withholding $165 million from a $30 billion payment due to AIG now – as if that is a real solution). As one member told me: I’m from Iowa, so I understand the process of closing the barn door after the horse has bolted.

2. Avoiding a Lawsuit? – One of the primary reasons that the government – which controls just under 80% of AIG – allowed these bonuses to get paid was that it didn’t want to “risk a lawsuit” in paying out the bonuses. Risk a lawsuit? That was your worst case scenario in deciding not to challenge these bonuses? [Prof. Cunningham provides some examples of ways payment might have been avoided under the bonus plan; here is analysis from others.]

How many times in your life have people broken a contract to drive you to a better deal? This is “Business 101″ stuff. Real business people realize that breaking contracts is an acceptable way to renegotiate terms – for starters, look at all the broken merger deals over the past year. The government is probably right to be wary of unilaterally abrogating employment contracts willy-nilly. But a little renegotiation could have gotten a lot of results here.

For example, I don’t understand why they didn’t offer to swap cash for equity (e.g., restricted stock that doesn’t get paid back until after AIG gets back on its feet.) That approach would recognize market realities and still provide a decent incentive for current employees. It’s done all the time by Silicon Valley companies that have fallen on hard times. I suppose a disgruntled employee could still file a wage claim, but it’s hard to see a court ruling in favor of a well-compensated employee that refused a reasonable settlement.

3. Feels Like Blackmail – One of AIG’s arguments is that “retention” bonuses were necessary to retain the employees of their Financial Products unit because they are the only ones who could understand AIG’s complicated mess (note when the bonus plan was created last year, the stated purpose was not retention!). It sure sounds like blackmail on the part of the quants who control AIG’s derivatives book. There have been a lot of layoffs on Wall Street lately – would hiring talented individuals to work for AIG really be so difficult?

My personal favorite is Liddy’s claim that these bonuses were necessary to prevent the competition from stealing these outstanding employees. Some reports say that some of these employees are indeed being courted because knowledge of counterparty strategies can be lucrative; others claim that the employees getting paid the biggest bonuses no longer have any relevance to AIG since that unit is no longer soliciting new business. I imagine both of these thoughts might be correct, but there are bigger issues at stake here (not to mention that a total of 52 bonus recipients are not even employed by AIG anymore, including one who received over $4 million).

4. Who’s In Charge Here? – I guess owning 80% doesn’t get you much when you’re the government – not even the courtesy of transparency when you repeatedly request it. Now under heavy fire, AIG has started to disclose counterparties that received some of the bailout money. I can’t imagine any other situation where a 80% owner appeared to have so little clout.

5. Some Will Be Connecting Dots – It’s already being reported that bonuses were paid out to some executives at some of the institutions who received money from AIG. Brace yourself as this story has “legs” and I imagine is just the first in what will be a long series of pieces about misuse of taxpayer money. The cycle will be the government rushing to bail someone out (sometimes against the recipient’s will!), abuse of the bailout money, Congressional outrage, repeat.

6. Can Everyone Stop Treating Us Like Children? – I’m so sick of the corporate executives and the government feeding us a bunch of bull. I’m having trouble trusting anyone. I imagine this is a widely-held belief. It doesn’t help when so many lies are thrown at us to explain the latest foul-up.

Executive Pay: Once Again, Where Do We Go From Here?

I sure hope the furor over these AIG bonuses is yet again a wake-up call for the pay apologists among us. As I recently wrote, it’s time for all board advisors – lawyers and consultants – to start providing responsible advice and get their head out of the sand. Times have changed and it’s not going back. The days of arguing that excessive pay is necessary to retain an executive who might jump ship are over. Excessive pay is never justifiable. It’s just excessive.

Unless – and until – boards and their advisors take charge of their own destiny and fix all that is broken, all the legislative and regulatory fixes in the world won’t stop them from finding loopholes and continuing the excesses. When boards recognize that the causes of these excesses are a relatively recent phenomenon (for starters, read this) – and that excessive pay arrangements aren’t some type of birthright for CEOs – it’s easy to go back two decades and recreate what was a more reasonable way of doing things in the executive compensation area.

A board with the proper mindset can employ the few simple tools we have identified to fix CEO pay and save themselves a lot of heartache easily. They just need the will to do so, along with advisors with the backbone to speak full truths.

I’m the kind of guy who likes to think in terms of T-shirts. For this AIG debacle, my idea of a cool T-shirt would look like this:

– Front – “AIG, I love you even more today than yesterday…”

– Back – “…Yesterday, you really pissed me off.”

The SEC Staff on M&A

Tune in tomorrow for this DealLawyers.com webcast – “The SEC Staff on M&A” – to hear all the latest from:

Michele Anderson, Chief, SEC’s Office of Mergers & Acquisitions
Dennis Garris, Partner, Alston & Bird LLP and former Chief, SEC’s Office of Mergers & Acquisitions
Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions

And stay tuned for this DealLawyers.com webcast: “Deal Protection: The Latest Developments in an Economic Tsunami.”

Express Yourself Anonymously: An AIG Poll

Feel free to select more than one choice in this poll:

Online Surveys & Market Research


– Broc Romanek