March 31, 2010

Supreme Court Decides Jones v. Harris Associates L.P.

Yesterday, the Supreme Court vacated the judgment of the Seventh Circuit in the much watched case of Jones v. Harris Associates L.P. The Court held that in order to demonstrate that a mutual fund investment advisor breached the "fiduciary duty with respect to the receipt of compensation for services," a mutual fund shareholder must show that the advisor charged "a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining." The holding essentially confirms a standard (known as the Gartenberg standard) that had been applied in most lower courts over the past 30 years, closing the door on the ability of judges to impose what they deem to be reasonable fees and instead letting the marketplace decide.

Of particular note in the case was that in the Seventh Circuit proceedings, Judge Posner's dissent questioned the ability of the market to police excessive compensation more broadly, noting that "executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation" and that "competition in product and capital markets can't be counted on to solve the problem." The Supreme Court did not pick up on any of these broader topics, noting "[t]he debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today's mutual fund market is a matter for Congress, not the courts."

The State of Shareholder Engagement Today

I think that one of the key observations about this year's proxy season is that we are seeing unprecedented levels of issuer engagement with shareholders on issues, including on corporate governance and executive compensation concerns. Movements such as "say on pay" are all about driving more engagement, although it is perhaps too soon to tell whether increased engagement is really making a difference.

The IRRC Institute and ISS recently announced that they are jointly conducting a study of the state of issuer-investor engagement in the United States. They just started the process of seeking input from issuers and investors on their engagement activities, utilizing a short web-based survey that investigates the issues, goals and outcomes of engagement. IRRCI/ISS hope that "[r]esponses will provide important information on the level and focus of engagement activity, as well as insight into the expectations and experiences of both issuers and investors. The goal of the study is to illuminate how the engagement process can become more productive and successful for both issuers and investors."

How to Prepare for ISS' New GRId

In this podcast, Ning Chiu of Davis Polk discusses how to prepare for RiskMetrics Group's new Governance Risk Indicators ("GRId"), including:

- What is ISS' new governance rating service?
- How does it differ from CGQ?
- What governance areas do you recommend that companies focus on most going forward?

- Dave Lynn

March 30, 2010

Corp Fin Posts "Dear CFO" Letter on Repos

The Corp Fin accounting Staff has posted an illustrative "Dear CFO" letter regarding the accounting and disclosure for repurchase agreements, securities lending transactions or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets.

The Staff is asking whether any of these sorts of transactions have been accounted for as sales as opposed to collateralized financings. In this regard, the Staff is looking for three years of historical data regarding these agreements, and additional detail supporting the sale accounting determination. The Staff is also seeking a justification as to why more disclosure was not provided in MD&A when these transactions were accounted for as sales.

As this Dow Jones Newswires story notes, the letter is being sent to nearly two dozen large financial and insurance companies, apparently reflecting concerns driven by recent revelations that Lehman may have used repurchase agreements to mask $50 billion in debt.

PCAOB Proposes Standard for Auditor Communications with the Audit Committee

Yesterday, the PCAOB proposed for comment a new standard on communications with audit committees, as well as some related amendments to interim standards. The new standard would replace interim standards AU sec. 380, Communication with Audit Committees and AU sec. 310, Appointment of the Independent Auditor. Comments are due on the proposal on May 28, 2009.

As noted in the press release announcing the proposal, the proposed standard would establish requirements relating to:

1. Communication of an overview of the audit strategy, including a discussion of significant risks, the use of the internal audit function, and the roles, responsibilities, and location of firms participating in the audit;

2. Communication regarding critical accounting polices, practices, and estimates;

3. Communication regarding the auditor's evaluation of a company's ability to continue as a going concern; and

4. Evaluation by the auditor of the adequacy of the two-way communications.

The proposed standard also includes requirements for engagement letters with auditors which seek to ensure that the engagement letter records the terms of the audit engagement.

More on "The Mentor Blog"

We continue to post new items daily on our blog - "The Mentor Blog" - for members. 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. Here are some of the latest entries:

- Restatements: Nine-Year Study
- Study: Link Between Withhold Votes and CEO Turnover
- Adjusted EBITDA Is Out of the Shadows as Staff Updates Non-GAAP Interpretations
- The IRS' Corrections Program to Cure Section 409A Defects
- US Banks: Are Audit Committees Going "Overboard"?

- Dave Lynn

March 29, 2010

Smith & Wollensky's "Steak for Stock" Promotion: The Rebuttal

One of my "throw-in's" in a recent blog created quite a stir - in the blog, I noted this "Steak for Stock" promotion from Smith & Wollensky. As one member noted: "If they accept their own stock (are they public?), do you suppose it is a tender offer? Or is there an exception if the steak is ordered well-done?"

Smith & Wollensky's competitors have taken notice. Maloney & Porcelli have now weighed in with this promotion...

Directors and Officers as Broker-Dealers? California Weighs In

From Keith Bishop: The California case of People v. Cole has caused some concern about whether officers and directors of issuers must be licensed as broker-dealers. Last October, the California Commissioner issued this release in an attempt to allay these concerns. Note that the Commissioner is considering - but has not yet formally proposed - a rule to mirror SEC Rule 3a4-1, which sets forth the conditions for a non-exclusive safe harbor for persons associated with an issuer who are not deemed to be brokers.

Just Mailed: March-April Issue of The Corporate Executive

The March-April Issue of The Corporate Executive was just mailed and includes analysis of:

1. IFRS 2, Income Statement Volatility, and Tax Expense
- Warning: Tax Expense Under IFRS 2 Could Be Significantly Higher
- A Slight Reprieve But, IFRS Marches On
- Accounting for Tax Effects Under IFRS 2
- Comparing the Two Approaches
2. Understanding the ESPP $25,000 Limitation
- The Controversy
- More Complexities
- A Humdinger of a Spreadsheet
- Penalties
3. Follow-Up: ESPP Expense When Purchases Are Limited
4. Cost-Basis Reporting
- Are You (and Your Brokers and Transfer Agents) Ready?
- A Primer on Cost Basis for Stock Compensation
- Transitioning to Cost-Basis Reporting
- Companies Need to Begin Preparing Now
5. IRS Audits
- IRS Stepping Up Audit Activity
- 409A Audits Started Already?
6. The SEC's New Compensation-Risk Evaluation: Is "Process" Disclosure Required?

Act Now: Try a no-risk trial to have this issue rushed to you.

- Broc Romanek

March 26, 2010

Nasdaq Tweaks Its Press Release Rules

A few weeks ago, the SEC approved changes to Nasdaq's rules regarding press releases to reduce duplicative disclosures by allowing more disclosures to be made by the filing of a Form 8-K or a press release. The rule changes became effective on March 15th.

Climate Change & Bowling

A member pointed out the following disclosure - in the form of a Risk Factor - about the possible impact of climate change on bowling from the Form 10-K filed recently by Brunswick:

Adverse weather conditions can have a negative effect on marine and retail bowling center revenues. Weather conditions can have a significant effect on the Company's operating and financial results, especially in the marine and retail bowling center businesses. Sales of the Company's marine products are generally stronger just before and during spring and summer, and favorable weather during these months generally has a positive effect on consumer demand.

Conversely, unseasonably cool weather, excessive rainfall or drought conditions during these periods can reduce demand. Hurricanes and other storms can result in the disruption of the Company's distribution channel. In addition, severely inclement weather on weekends and holidays, particularly during the winter months, can adversely affect patronage of the Company's bowling centers and, therefore, revenues in the retail bowling center business. Additionally, in the event that climate change occurs, which could result in environmental changes including, but not limited to, severe weather, rising sea levels or reduced access to water, the Company's business could be disrupted and negatively impacted.


S&P 100 Sustainability Report Comparison

Speaking of climate change disclosures, the Sustainable Investment Research Analyst Network (known as "SIRAN") has issued its latest review about how the S&P 100 are reporting on their sustainability. As noted by Dominic Jones, 93 of the S&P 100 firms reported on their sustainability programs in 2008, compared to only 58 in 2004.

Heading out on spring break vaca - catch you after Easter...

- Broc Romanek

March 25, 2010

SEC Files Partially Settled Regulation FD Charges

Recently, the SEC filed partially settled charges against Presstek and its former CEO for Regulation FD and other disclosure violations. The SEC's complaint alleges that the CEO selectively disclosed material non-public information regarding the company's financial performance to the managing partner of an investment adviser who then traded on that information. The company settled by paying a $400,000 civil penalty to the SEC, after the company took some remedial measures. The SEC is still pursuing the former CEO.

This is the second Reg FD action that the SEC's Enforcement Division has brought in the past six months after silence in this area for a while (here's a blog about the last one). We are posting memos regarding this action in our "Regulation FD" Practice Area.

Early Bird Discount Ending Soon: "5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference"

With Congress moving quickly on financial regulatory reform, huge changes are afoot for executive compensation practices and the related disclosures - that will impact every public company. We are doing our part to help you address all these changes - and avoid costly pitfalls - by offering a special early bird discount rate to help you attend our popular conferences - "Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference" - to be held September 20-21st in Chicago and via Live Nationwide Video Webcast (both of the Conferences are bundled together with a single price). 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 Early Bird Rates - Act by April 15th: Register by April 15th to take advantage of this discount.

More on our "Proxy Season Blog"

With the proxy season in full gear, we are posting new items regularly on our "Proxy Season Blog" for members. 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. Here are some of the latest entries:

- SEC Allows Banks to Omit AFSCME's "Bonus Banking" Proposal
- Even More on "Diversity Policies: Do You Need One? Samples Available"
- Companies Allowed to Omit Proposals on CEOs on Pay Panels
- Why So Many Preliminary Proxy Statements This Year?
- Note to SEC: "Reasonably Likely to be Enacted"? You Have Got to Be Kidding!

- Broc Romanek

March 24, 2010

Senate Banking Committee Amendments to Dodd's Bill: Two Big Governance Changes

Following up on my blog yesterday about the Dodd bill passing the Senate Banking Committee, I forgot to mention that there were two corporate governance amendments that made it into the 114-page Manager's Amendment on the Dodd bill, both offered by Sen. Menendez (D-NJ):

- Pay Disparity Disclosure - Section 953 (the executive compensation disclosures provision) was amended to add a provision that would direct the SEC to amend Item 402 to require companies to disclose (i) their CEO's annual total compensation, (ii) the median annual total compensation of their employees (excluding the CEO), and (iii) the ratio between CEO and employee pay. This disclosure would be required in registration statements, periodic reports and proxy/information statements

- Prohibit Use of Broker Non-Votes for Executive Compensation Matters - A new Section 957 was added to prohibit broker voting of uninstructed shares in director elections, executive compensation matters, or any other significant matter as determined by the SEC. While its language is general, this provision appears to be aimed at codifying the recent change to NYSE Rule 452, as well as precluding brokers from voting shares in "say-on-pay" votes (although Mark Borges notes that since it also applies to any shareholder vote involving "executive compensation," it appears that it could extend to numerous compensation-related matters, such as the adoption of an employee stock plan and the approval of severance agreements).

Here is Davis Polk's summary of the Manager's Amendment - and here is some member feedback on the broker non-vote provision that I included today on "The Mentor Blog."

And speaking of pay disparity, as a follow-up to my blog on the recent spate of shareholder proposals on pay disparity, it appears that the SEC Staff is rejecting requests from companies to exclude them under Rule 14a-8, as noted in this Reuters' article.

Nostalgic for Options Backdating

Ah, remember the good ole days when citizens were just mad at Corporate America solely over options backdating. Those were the days! Luckily, backdating continues to creep into the news every once in a while. For example, criminal charges were dismissed recently against Broadcom's former CEO and CFO - this may mark the end of new criminal cases (although there still needs to be a final disposition against the former Comverse CEO; here is an Ideoblog piece on this case) - while a securities lawsuit against Comverse was settled for $225 million (while a separate derivative lawsuit was also settled against Comverse a few weeks later, which includes a $60 million payment by the former CEO).

And this Bloomberg article noted that an investigation conducted by Treasury's Inspector General concluded that the Office of Thrift Supervision allowed six thrifts to improperly backdate capital injections.

Also, Kevin LaCroix of the "D&O Diary" Blog notes that former McAfee General Counsel Kent Roberts, accused of options backdating-related misconduct, was acquitted following a criminal jury trial and the SEC later dropped its separate enforcement action against him. But that apparently is not enough for Roberts - he wants vengeance and has filed a defamation lawsuit (see this Bloomberg article).

And last September, a three-judge panel of the Ninth Circuit Court of Appeals reversed a District Judge's order suppressing evidence related to information obtained by a law firm from Broadcom that helped conduct the internal investigation into options backdating by the company's former CFO. Then, Broadcom settled a backdating-related securities class action lawsuit.

Finally, a new academic study surfaced that purports to show that the practice of backdating may have been significantly more widespread than previously believed - identifying 92 companies that have not previously been publicly associated with allegations of backdating. So maybe more backdating news to come...and not related to backdating, here is a provocative piece from Bud Crystal about opportunistic option timing.

As noted in the "Securities Litigation Watch," Adam Savett is keeping updated options backdating stats as to how cases are being disposed. Here is an excerpt from that blog: "Of the 39 options backdating cases that have been filed as securities class actions, 30 have now reached a resolution. Of the resolved cases, 9 of those cases have been dismissed and 21 have settled. This is still in line with historical trends, where settlements outnumber dismissals by approximately 2-to-1.

The twenty one settlements total $1.56 billion, for an average of $74.38 million. But, removing the largest settlement (UnitedHealth Group) lowers the average back to $31.82 million. As could have been expected the averages are slowly creeping down over time, as the UnitedHealth settlement can now be viewed as a fairly clear example of an outlier in terms of the size of the settlement."

SOX Whistleblowing Procedure Axed by French Supreme Court

Below is news from Gibson Dunn (we have posted memos analyzing this decision in our "Whistleblowers" Practice Area):

On December 8th, the French Supreme Court issued a decision impacting companies having operations in France and subject to the "whistle-blowing" requirements provided for by Section 301(4) of Sarbanes-Oxley. In 2004 and 2007, Dassault Systèmes - the holding company of the Dassault group - adapted its "Code of Business Conduct" (the "Code") to provide for a whistle-blowing procedure.

The Code described the procedure as being "neither mandatory nor exclusive. Any person having knowledge of material breaches of the principles described in the Code of Business Conduct in financial, accounting or banking matters or relating to anticorruption issues and which deems it appropriate may communicate such breach to the designated persons within the DS Group. This procedure may not be used outside these areas. It may be used, however, in areas relating to the vital interest of the DS Group or the physical or mental integrity of a person (in particular in case of ... discrimination or moral or sexual harassment)."

The French Supreme Court held that the Dassault whistle-blowing procedure was in breach of the Act on Computing and Liberties dated January 6, 1978 ("Loi informatique et libertés"). As a matter of principle, the Act requires the National Commission on Computing and Liberties ("Commission Nationale de l'Informatique et des Libertés") (the "CNIL") to authorize the operation of any automatic data processing system in advance of its implementation. The CNIL, however, has created simplified declaratory procedures in a number of areas. Under a deliberation dated December 8, 2005 on the Unique Authorization on Personal Automatic Data Processing Implemented in Respect of Whistle-Blowing Procedures (the "2005 Deliberation"), whistle-blowing procedures may be subject to a mere prior declaration to the CNIL, provided the procedures do not exceed the scope of the 2005 Deliberation. The 2005 Deliberation limits the possibility to use the simplified declaratory procedure in connection with procedures implemented in connection with "financial, accounting or banking matters or relating to anticorruption issues".

The Dassault whistle-blowing procedure going beyond these areas, the French Supreme Court decided that it was in breach of the Act as it should have received the CNIL's prior authorization. The French Supreme Court also held that the Dassault procedure was breaching the Act in that it failed to provide for a right for any person affected by the whistle-blowing procedure to be informed, and have a right of access to, and of rectification of, any information collected in this manner.

- Broc Romanek

March 23, 2010

Dodd Bill Peculiarities: The SEC's Reg D Preemption Gets Hammered

Yesterday, the Senate Banking Committee voted along party-lines, 13-10, to send Senator Dodd's reform bill to the Senate floor. As noted in this NY Times article, the Committee's Republicans decided not to offer amendments during the bill's markup, preferring instead to seek changes before the full Senate vote.

As I imagine exists in every Congressional bill - particularly ones that weigh over five pounds - there is some weird stuff in the Dodd bill. One of the odder ones for me is Section 926 which would qualify the Regulation D preemption. Although this Section doesn't quite reach the level of "complete deletion" of the preemption, it allows the SEC, by rule, to disqualify certain offerings from the preemption - and then any other Reg D offering that the SEC does not review within 120 days after filing loses the preemption.

My reaction when reading this was "What issue is Congress chasing? I can't think of any problems that seemly caused the financial crisis to warrant this?" I pondered possible answers to these queries - perhaps fraud in the private offerings and hidden shaddy deals that don't ordinarily get reviewed? Payment of fees to unregistered brokers? None of these really rung a clear bell (but I guess NASAA is behind it per this article).

Anyways, this Section 926 would be a substantial rewrite of Section 18(b)(4)(D) of the '33 Act (unlike the simple repeal in Section 928 of Dodd's original draft bill back in November) by:

(1) requiring the SEC to designate certain Rule 506 offerings as not qualifying as "covered securities," considering the size of the offering, the number of States in which the security is being offered, and the nature of the offerees;

(2) requiring that the SEC review any filing made with regard to a Rule 506 offering within 120 days, and that any filing which is not reviewed within the 120 day period would no longer be a covered security unless a state securities commissioner determines that (a) there's been a good faith and reasonable attempt by the issuer to comply with all applicable terms, conditions and requirements of the filing, and (b) any failure to comply with such terms, conditions and requirements "are [sic] insignificant to the offering as a whole";

(3) permitting states to impose notice filing requirements "substantially similar to filing requirements required by rule or regulation under section 4(4) that were in effect on September 1, 1996"; and

(4) requiring the SEC to implement procedures not later than 180 days after enactment of the Act, after consultation with the States, to promptly notify the States upon completion of its review of Rule 506 filings.

Alan Parness of Cadwalader adds these thoughts on Section 926:

- Condition (2) would result in total uncertainty as to the covered security status of a claimed Rule 506 offering for 120 days or more while the SEC and the states mull over the filing, is ambiguous as to whether only one state securities commissioner need determine that the offering qualifies as "covered securities" if the SEC fails to act, is unclear as to when the state's determination must be made, and doesn't address the consequences if the offering is determined not to constitute "covered securities." Thus, does this condition mean that an offering which doesn't pass muster as "covered securities" could be unwound under applicable Blue Sky laws as a sale of unregistered securities, in the absence of another exemption from registration?

- In Condition (3), the reference to Section 4(4) is incorrect (as of 9/1/96, any state filing requirements for Rule 506 offerings were governed solely by the relevant Blue Sky law, not federal law). Also, what if state filing requirements were imposed by law, and not by "rule or regulation"? And does this mean that a state couldn't impose a filing fee for a Rule 506 notice filing substantially in excess of what was charged as of 9/1/96?

Help to

A site has been launched - by Joe Wallin and Bill Carleton - to push back on Congress keeping this Section in final legislation - see ""

An "Office of Investor Advocate" for the SEC? They Already Have Thousands

Since the SEC was born back in 1934, its mission statement has been the protection of investors. And having worked there twice, I can tell you that the Staffers believe in that mission - even when there sometimes are politically-appointed Chairs and Commissioners who believe otherwise.

So the notion of a new "Office of Investor Advocate" - which would be created under Section 914 of the Dodd bill - seems redundant to me since the entire SEC is supposed to essentially be part of that office already. Creating this new Office just adds another layer of middle-management complexity - and won't really do anything to check a SEC Chair with an anti-investor viewpoint since the SEC Chair appoints the head of this new Office under the Dodd bill. This is a bad idea, plain and simple.

Congress and Its Study-a-Palooza

As noted in this NY Times article recently, both the Dodd bill and its House counterpart call for dozens of studies. The article correctly notes this is a common technique to punt an issue into oblivion. Maybe I'll print some T-shirts that say, "I voted for my Congressman and all I got was this lousy study"...

- Broc Romanek

March 22, 2010

Second Circuit Decision Underscores Importance of Indenture Terms

Below is news of a development from Davis Polk (as culled from this memo):

In a recent Second Circuit decision, Law Debenture Trust Co. of New York v. Maverick Tube Corp and Tenaris, the court rejected the plaintiff's argument that a reference to "a class of common stock traded on a United States national securities exchange" should be read to include American Depositary Shares trading on the NYSE, underscoring the importance of clearly defining terms in indentures.

At issue was the interpretation of the indenture's "Public Acquirer Change of Control" definition, which depends in relevant part on whether: "a Person who ... acquires the Company ... has a class of common stock traded on a United States national securities exchange or the Nasdaq National Market." The trustee argued that "common stock" would include ADSs because they are traded on the NYSE and, as a matter of custom and usage, the trading of ADSs is a form of trading common stock. The trustee also argued that to exclude ADSs from the Public Acquirer definition would be a commercially unreasonable interpretation because there was never any intention to exclude foreign issuers from the Public Acquirer definition.

The court, however, refused to find that ADSs implicitly qualified as "a class a common stock traded on a national securities exchange" for purposes of the Public Acquirer definition. Noting that the indenture included more than 100 defined terms and explicitly referred to ADSs in other provisions, the court asserted that it was not its role to rewrite the Public Acquirer definition to give it a commercially reasonable effect but rather to give effect to intentions expressed in the agreement's own language, particularly in light of the "pains taken by the parties to have the Indenture set out detailed definitions of numerous terms."

The phrase "common stock traded on a United States national securities exchange or the Nasdaq National Market" is usually relevant in convertible debt to define repurchase rights or conversion rights (typically at a make-whole premium) upon a "change of control," "fundamental change" or similar event. Many indentures specifically include ADSs as part of that definition, which is an important term issuers should consider in structuring their convertible debt. More generally, this decision underscores that courts in New York are generally reluctant to apply the "intent" or "spirit" behind a contract provision but instead apply the literal terms of the contract. Companies entering into complicated credit arrangements such as indentures should make sure they hire experienced counsel to ensure that the language does in fact reflect the intent behind the provisions.

Seller's Key Issues in 2010: Still a Tough Seller's Market

Tune in tomorrow for the webcast - "Seller's Key Issues in 2010: Still a Tough Seller's Market" - to hear Wilson Chu of K&L Gates, Mary Korby of Weil Gotshal and Carl Sanchez of Paul Hastings discuss the latest issues for sellers doing deals.

Governance Risk Assessments in M&A

In this podcast, Paul Hodgson of The Corporate Library discusses his recent report on "How Governance Could Have Saved $100 Billion: AOL and Time Warner," which demonstrates how incorporating an assessment of corporate governance risk into due diligence prior to a merger or acquisition could save billions of dollars in shareholder value, including:

- Why was this study undertaken?
- What were the major findings?
- Based on the findings, what do you think companies should consider before entering into a deal?

- Broc Romanek

March 19, 2010

A Fuss Over Semi-Annual Bonuses

Here is something I recently blogged on's "The Advisors Blog":

Just when "bonus" has become the equivalent of a four-letter word in households across the country, the WSJ ran this article noting that at least 50 companies have recently disclosed plans to pay semiannual bonuses, with more than half of them having adopted the plans since 2008 (fyi, the Hay Group did the research for the WSJ on this). This piece ignited a hailstorm in my world as nearly 2 dozen journalists called me yesterday seeking comment.

My immediate take was that there wouldn't seem to be justification for such a widespread move and that this short-term approach fostered by more frequent bonuses could cause even more managers to manipulate the numbers and all the other perils of short-termism. And for the most part, that is still my position.

However, I checked in with some of the responsible experts that we deal with frequently and got this feedback:

Semi-annual bonuses were adopted by a small fraction of companies due to those companies' inability (or unwillingness) to set 12 month financial targets due to the uncertainty of the economy. I've seen companies adopt the semi-annual approach and they seem to only pay the bonus when the calendar year is over. I imagine the compensation committees made sure the goals were stretch-based on the best available information at the time the goals were set. Some of these same companies retained the discretion to reduce bonuses prior to payment after taking stock of the year as a whole.

I do not disagree with you that using six-month measurement periods is too short-term, but it's possible that the compensation committees took comfort in the fact that LTI represented the largest component of pay and most executives have substantial ownership, so the risk of maximizing short-term results at the expense of long-term performance was fairly modest.

This too shall pass, as compensation committees hate negotiating bonus targets two times per year (or even four times if you count the end-of-the-period negotiations on what to include - or exclude - in the final performance calculations).

Another expert noted that the two industries highlighted - tech and retail - are long-time users of semi-annual and quarterly bonuses. Take those out of the data and this is only a handful of companies. See Fred Whittlesey's blog about "when is a trend not a trend"...

FINRA Files Revised Proposal to Regulate IPO Abuses

In the fall of 2003, the NASD (now, "FINRA") proposed rule changes to prohibit certain abuses in the allocation and distribution of shares in an IPO - at approximately the same time, the SEC proposed amendments to SEC Regulation M that would have also regulated several of the IPO practices proposed to be regulated by the NASD/NYSE proposed rules. Neither of the proposals have been adopted yet.

Recently, FINRA filed Amendment #3 to the NASD's rule filing to move this proposal along and the SEC issued this notice to solicit comments (note the comment period is only 21 days long). The revisions proposed by FINRA are intended to address comments submitted so far and to otherwise clarify the proposal- but the scope of the revised proposal is only moderately changed from the original '04 proposal and would apply to any equity security registered under either Section 12 or 15(d) of the '34 Act (i.e., the rule is not limited to "hot" IPOs nor does it include the exemptions for REITs, direct participation programs or other securities found in FINRA's Rule 5130).

More on our "Proxy Season Blog"

With the proxy season in full gear, we are posting new items regularly on our "Proxy Season Blog" for members. 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. Here are some of the latest entries:

- "Executive Officers": One Con of a Larger Group
- How Socially Responsible Investors View Companies in 2010
- Interview: T. Rowe Price's Donna Anderson
- Even More Samples: Companies Complying with the SEC's New Rules
- Even More on "Shareholder Proposals: Chevedden Sued Over Eligibility"
- Understanding the New Director Qualification CDI
- Do Last Year's Risk Factors Look Good? Not So Fast

- Broc Romanek

March 18, 2010

The Citizens Decision: Now What?

As noted in this Politco article, according to a bipartisan poll, voters oppose by a 2-to-1 ratio the US Supreme Court's ruling in Federal Election Commission v. Citizens United. As I blogged, that decision cleared the way for companies and unions to more broadly run political advertising.

In response to the decision, a large group of shareholder organizations and major investors have announced that they are working together to advance a three-pronged response. Led by, the group is targeting legislative changes from Congress and rule changes by the SEC (this topic recently was added to the Investor Advisory Committee's agenda). Until that happens, the group will focus on submitting shareholder resolutions to companies.

Meanwhile, another group - including the Center for Political Accountability, Council of Institutional Investors and nearly 50 institutional investors and shareholder advocate groups - have started a letter campaign urging companies in the S&P 500 index to adopt transparency and board oversight for political spending. I expect lots of change in this area in a relatively short period of time.

As this Sonnenschein alert notes, Congress already has a range of bills that have been introduced, including three constitutional amendments, that respond to the Citizens decision. And I'm just loving the satirical campaign being waged by Murray Hill Inc. (as noted by this Washington Post article).

Check out Bob Monk's blog for a series of interesting commentary on the consequences of Citizens. And Larry Ripstein recently blogged this commentary on Ideoblog.

Chamber Outspends RNC & DNC Even Before Citizens United

Below is an entry from Jim McRitchie's blog:

"For the first time in recent history, the lobbying, grassroots and advertising budget of the U.S. Chamber of Commerce has surpassed the spending of the national committees of BOTH the Republican National Committee and Democratic National Committee," begins a recent article in the Atlantic. And, of course, that is before the decision in Citizens United. The article goes on to note, "Republican lawyer Ben Ginsberg went so far as to say that the parties would be 'threatened by extinction.' And Ginsberg supports the CU decision!"

According to The Center for Responsive Politics, the U.S. Chamber of Commerce and its national subsidiaries spent $144.5 million in 2009, far more than the RNC and more than double the expenditures by the DNC. None of the contributions that made up this $144.5 million were subject to disclosure. The article discusses expenditures around defeating health care and expenditures of about $1 million each in Virginia and Massachusetts.

And this front-page article from yesterday's Washington Post describes how much the Chamber is planning to spend on this year's mid-term elections...

My Annual March Madness Predictions: Georgetown over West Virginia in the final; Duke and Syracuse round out the Final Four.

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:

- The Deal Lawyer's Guide to Hidden Employee Benefit Issues
- "Testing the Waters" Ahead of Exchange Offers
- Formula Pricing: "Day 20" Pricing Has Finally Arrived for Debt Tender Offers!
- Competitive Bidding in M&A Transactions: Delaware Enforces Deal Protections and Recognizes Common Law Fraud Claims
- Sealing the Deal: Drafting Contracts Today

If you're not yet a subscriber, try a 2010 no-risk trial to get a non-blurred version of this issue on a complimentary basis.

- Broc Romanek

March 17, 2010

A Self-Funded SEC: A Good Idea

Recently, CII and others sent a letter to both the Senate Banking Committee and the Senate Appropriations Committee supporting SEC self-funding. Given that self-funding is included as Section 991 of the new Dodd bill, the support may have worked.

As I have blogged before, it's an idea that is not new (20 years old? 30?) - and in my opinion, long overdue. I simply don't feel the concerns expressed by academics like in this "blog" are in the realm of reality. The level of fees levied on the filing of registration statements has little impact on the decision of whether to register securities. Ask anyone in the biz...

FASB & IASB Publish Joint Exposure Draft on Conceptual Framework

Recently, the FASB and IASB issued this joint exposure draft on the reporting entity phase of their conceptual framework project (note the existing conceptual frameworks do not include a reporting entity concept). Comments are due by July 16th (learn more in this memo).

Between the aggressive schedule and volume of joint standard-setting projects flowing out of the FASB and IASB Memorandum of Understanding and the FASB's own separate projects, interested parties will need to significantly increase their involvement in the FASB's due-process efforts while also planning for implementing the numerous new standards that will result from these efforts. Accountants and lawyers alike will continue to be extremely busy with all the change wrought by reform...

A few weeks ago, the SEC issued this order approving the PCAOB's changes to its inspections rules.

All the Rage: Tender Offers

We just posted the transcript for the webcast: "All the Rage: Tender Offers."

- Broc Romanek

March 16, 2010

The Dodd Bill: Weighing In at a Portly Six Pounds

Given the heft of the 1300-plus pages of Sen. Dodd's reform bill that was released yesterday, I was inclined to first read the 11-page summary. Unfortunately, the summary is a pretty high-level document and I was forced into the abyss. Yesterday's draft differs quite a bit from Dodd's bill released in November - and substantially different from legislation passed by the House in December (and the exec comp provisions differ from Sen. Menendez's bill that I blogged about on Friday). [We'll be posting the inevitable onslaught of memos in our "Regulatory Reform" Practice Area.]

As could be expected from such a comprehensive bill, there is a lot of ground covered. Here are most of the highlights that pertain to our community:

- The Table of Contents omits Title IX, Subtitle E "Accountability and Executive Compensation" and Subtitle F "Improvements to SEC's Management" (ie. Sections 951-966 on pages 868-895) for some reason. Wishful thinking?

- Investor Advisory Committee made permanent (Section 911, pages 760-766)

- SEC clearly authorized to gather investor feedback (Section 912, pages 766-767)

- SEC's Office of Investor Advocate created (Section 914, pages 776-782)

- SEC required to approve SRO proposals faster (Section 915, pages 782-790)

- SEC able to reward whistleblowers for reporting fraud (Section 922, pages 795-811)

- State regulator authority over Reg D offerings (Section 926, pages 816-819)

- Whistleblower protections apply to subsidiaries (Section 929A, page 820)

- Non-binding say-on-pay (Section 951, pages 868-869)

- Compensation Committee independence and consultant/lawyers independence (including authority to hire and "reasonable" of their compensation)(Section 952, pages 869-876)

- Disclosure of executive pay vs. performance (Section 953, pages 876-877)

- Clawbacks (Section 954, pages 877-878)

- Disclosure of executive and director hedging (Section 955, page 879)

- Excessive compensation paid by financial holding companies (Section 956, pages 879-880)

- SEC required to adopt majority voting rules (Section 971, pages 895-898)

- SEC allowed to adopt proxy access, but not mandated to do so (Section 972, pages 898-899)

- Disclose whether chair and CEO roles split; something SEC has already done (Section 973, pages 899-900)

- SEC self-funded (Section 991, pages 980-996)

Note that the Dodd bill does not include an exemption for non-accelerated filers from Section 404(b) of Sarbanes-Oxley. The bill also no longer includes provisions to require a separate shareholder vote on severance arrangements nor shareholder ratification of classified boards.

The Dodd Bill: How's the Road Ahead?

Here's what to expect going forward from Sonnenschein: Chairman Dodd plans to have the Committee begin its markup of his revised bill on Monday, March 22 at 4:00 p.m., and to continue as necessary with the goal of completing the markup by the end of the week. Emphasizing that he wants the Senate to "move quickly" to pass financial regulatory reform, Senate Majority Leader Harry Reid (D-NV) indicated that he wants to bring the bill to a vote on the Senate floor before the Memorial Day recess at the end of May.

If this goal is met, the hope is that a conference committee will reconcile the House and Senate bills by the July 4 recess. Because the House and Senate bills are expected to be considerably different, a difficult conference is anticipated. Signaling his intention to protect the House bill, House Financial Services Committee Chairman Barney Frank (D-MA) stated that he wants all conference committee deliberations to be televised on C-SPAN.

Suspending '34 Act Reporting Obligations: Corp Fin Issues Staff Legal Bulletin

Yesterday, Corp Fin issued Staff Legal Bulletin No. 18 regarding Rule 12h-3 and when companies can suspend their Section 15(d) reporting obligations. This guidance should dramatically reduce the number of no-action requests that the Staff must process - as it's an increasingly common scenario (the Staff posted two responses just yesterday, including this one) - as the SLB notes:

Because of the routine nature of these requests, the large body of no-action precedent and the guidance in this legal bulletin, the Division is of the view that, on a going-forward basis, an issuer that fits within either of the two situations identified above and satisfies the conditions set forth in this legal bulletin does not need a no-action response from the Division before filing a Form 15 to suspend its Section 15(d) reporting obligation in reliance on Rule 12h-3.

And of course, this relief from seeking no-action relief will reduce the legal bills for the type of companies that probably need it most...

- Broc Romanek

March 15, 2010

The SEC's New Rules: Corp Fin Issues Three More CDIs

Even though calendar-year fiscal companies are pretty close to finalizing their proxy materials, Corp Fin continues to issue interpretations on the SEC's new rules. On Friday, these three new CDIs were issued:

- New Question 119.25
- New Question 119.26
- New Question 133.12

In his "Proxy Disclosure Blog," Mark Borges provides some commentary on these new CDIs.

Something Novel: Proxy Statement Shareholders' Letter from the Board

We're all familiar with the glossy annual report's letter to shareholders from the CEO. But what about an annual letter from the board for the proxy statement? On Friday, Prudential filed its preliminary proxy materials and it includes just such a three-page letter. Plain English, lots of rationale and detail into decisions. Good stuff.

Remember that Prudential also is trying a novel way to increase the level of voting by its registered holders with a novel initiative that ties to its environmental & sustainability program.

What the Top Compensation Consultants Are NOW Telling Compensation Committees

Tune in tomorrow for the webcast - "What the Top Compensation Consultants Are NOW Telling Compensation Committees" - to hear Ira Kay of Ira T. Kay & Company, Mike Kesner of Deloitte Consulting and James Kim of Frederic W. Cook & Co. analyze what types of risk assessments companies are putting into place as well as what are companies doing in the areas of equity grants pay-for-performance and 280G gross-ups.

- Broc Romanek

March 12, 2010

Dave & Marty on Apache, Proxy Disclosure Trends and Jobs

This just in! In this 20-minute podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance and pop culture, including:

- Analysis of the new shareholder proposal decision in Apache Corporation v. John Chevedden
- What are the proxy disclosure trends under the new rules
- What Marty and Dave would be doing if they weren't securities lawyers (hint: Marty gets his hands dirty!)

The Senate's Say-on-Pay Bill: Lots to Chew On

As Senator Dodd races to release his comprehensive financial regulatory reform bill on Monday in the Senate (without Republican support according to this announcement), it is believed that the say-on-pay part of that package has already been unveiled - courtesy of Sen. Robert Menendez, D-NJ - in the form of S. 3049, "The Corporate Executive Accountability Act of 2010." Senator Menendez, a member of the U.S. Senate Banking Committee, introduced his bill a few weeks ago - and I've seen reports that it's expected to be part of the Democrat's larger reform package (but it's possible it could be changed before then of course).

Under the Menendez bill:

- Shareholders at public companies would have a nonbinding vote on the proxy disclosure of compensation packages for the company's named executive executives
- Shareholders would have a nonbinding vote on the merger proxy disclosure of golden parachute arrangements for the company's named executive executives
- Investment managers would annually have to disclose how they voted on the two items above
- SEC required to adopt rules eliciting internal pay ratio disclosure from publicly traded companies (ie. disclose the ratio of pay for CEOs compared to the median of all employee's pay)
- Stock exchanges would required to adopt listing standards giving regulators and investors authority to clawback incentive-based compensation from executives if the company has a restatement due to material noncompliance of the company (the "misconduct" standard would be struck from Sarbanes-Oxley)
- A "senior" executive officer "terminated for cause" (which is defined in this Act) would be barred from receiving a severance package as determined by the company's board
- Section 16 would be amended to limit executive officers from selling more than certain amounts of vested equity compensation; the bill has a 4-year formula where only 20% could be sold after the first year of vesting, 40% after the second year; 60% after the third and 80% after the fourth)

As noted in this article, one sticking point for the Republicans in a reform bill is proxy access. The prospects for Sen. Dodd's bill being passed is mixed right now...

Our "Q&A Forum": The Big 5500!

In our "Q&A Forum," we have reached query #5500 (although the "real" number is really much higher since many of these have follow-ups). I know this is patting ourselves on the back, but it's over eight years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been over 18,000 questions answered.

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 (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don't contain legal advice.

- Broc Romanek

March 11, 2010

Court Allows Apache to Exclude Chevedden's Shareholder Proposal

Just hours after supporters of John Chevedden issued this press release predicting victory, Judge Lee Rosenthal in Federal District Court for the Southern District of Texas delivered this 30-page order and memorandum in an expedited manner allowing Apache Corporation to exclude Chevedden's shareholder proposal by granting the company's motion for declaratory judgment (and denying Chevedden's motion). After the decision, Chevedden supporters issued this press release saying that the bigger picture of the order tilted the "split-decision" in Chevedden's favor.

As noted in this blog (with follow-ups in this blog), Apache filed this novel lawsuit rather than attempt to exclude the proposal through the normal SEC channels - thereby challenging a position of the Staff regarding the use of introductory letters from brokers as evidence of ownership under Rule 14a-8(b). All the various documents filed in court during this case are in our "Shareholder Proposals" Practice Area.

Post "Apache v. Chevedden": What Will Companies (and the SEC) Do Now?

With the Apache's court decision now behind us, one must wonder "What do you think the SEC Staff will do now?" It's likely that a number of companies received letters from Chevedden with proof of ownership from an introducing broker, but not all of them from the same entity involved here or with the same inadequacies that drove this judge to allow the exclusion (the judge didn't rule on what Chevedden would have been required to submit to prove ownership under Rule 14a-8).

Since we are late into the proxy season, timing can be an issue even if a company hasn't mailed its proxy materials yet. Although the shareholder proposal rule has a 80-day deadline for a company to submit an exclusion request, Rule 14a-8(j) provides the SEC with the ability to make an exception if a company demonstrates good cause for not filing the exclusion request earlier as follows:

Rule 14a-8(j): Question 10: What procedures must the company follow if it intends to exclude my proposal?

1. If the company intends to exclude a proposal from its proxy materials, it must file its reasons with the Commission no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the Commission. The company must simultaneously provide you with a copy of its submission. The Commission staff may permit the company to make its submission later than 80 days before the company files its definitive proxy statement and form of proxy, if the company demonstrates good cause for missing the deadline.

In her order, Judge Rosenthal provides a basis for the SEC allowing companies to file late exclusion requests - since the Staff would not have decided those requests if they had submitted earlier anyway due to this pending lawsuit - but it's possible the SEC could reject companies that file last-minute exclusion requests, partly because the SEC is behind in processing exclusion requests this year due to the snow. Remember that, five years ago, the SEC expounded on what might be "good cause" in Staff Legal Bulletin No. 14B. So this timing issue is an unknown quantity at this point.

Also, it's unclear what application the case has beyond its specific decision, since the Judge noted her opinion is narrow - and yet it could be argued that some of her reasoning throws into question the SEC's Hains position and other forms of proof of ownership. So the waters are a little murky here too.

The reality is that it's too late for most companies that have received proposals from Chevedden as they have already printed or will be printing soon. We'll be providing more analysis of this decision as it definitely has application beyond this proxy season.

How ShareGift USA Collects Odd Lots for Charity

In this podcast, Barbara Vogelstein of ShareGift USA and Andy Brownstein of Wachtell Lipton discuss how ShareGift USA collects odd lots of shares, aggregates them and gives the money to charity, including:

- What is ShareGift USA?
- How does it work in practice? How can companies get comfort that there are no securities issues?
- What can corporate secretaries and in-house counsel do to help?

- Broc Romanek

March 10, 2010

Ramping Up for Nasdaq's Delisting Procedures

The bid price grace periods are running out for quite a few Nasdaq companies next week. In this podcast, Dave Donohoe of Donohoe Advisory Associates explains the impact of that as well as other Nasdaq delisting issues, including:

- How is Nasdaq dealing with bid price deficient issuers in the delisting hearing process?
- Is it possible to delay implementing a reverse stock split once you are in the hearing process?
- Have any significant rule filings related to delistings been adopted by Nasdaq recently?
- How is Nasdaq applying its reverse merger rule?
- Are there particular issues that companies should be aware of when transitioning from Nasdaq or Amex to the OTCBB or the Pink Sheets? Are there other over-the-counter options available?

Broadridge Enters Transfer Agent Business

Game on! Yesterday, Broadridge announced it acquired StockTrans, thereby moving into the stock transfer business for small- and mid-size companies. Broadridge's move into the transfer agent biz seems like a natural extension of the proxy management and shareholder communication services that the company currently provides to companies and should make it more easy for client companies to communicate with their own shareholders.

As I've been saying for a while, I normally don't recommend a stock to buy since I'm certainly no expert - but buying BR sure has made sense for me as it's nearly doubled over the past year.

More on "The Mentor Blog"

We continue to post new items daily on our blog - "The Mentor Blog" - for members. 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. Here are some of the latest entries:

- Framework: Succession Planning Discussion by Boards
- Law Firms and Their Dead Pages
- Recent Court Case Confirms the Importance of Well Drafted Forward-Looking Statement Disclosure
- Auditor Engagement Letters: Time for a Review
- What Has Your Bar Done for You Lately?

- Broc Romanek

March 9, 2010

Our New Regulator? The "National Institute of Finance"

As we all anxiously await for Senator Dodd's draft financial markets reform bill - expected this week - and find out what survived the behind-the-doors horsetrading, I thought I'd not that for a while now, as noted in this Business Week article, a Committee has been pushing to create a new "National Institute of Finance," which would be an independent research institute that would support the existing federal agencies that deal with financial institutions. Now that dream is coming closer to reality as Senate Bill S.3005 was introduced recently by Sen. Jack Reed for just that purpose. Here is Senator Reed's statement.

I agree that the federal agencies need to better coordinate - but creating an entirely new agency to serve as the back office seems like it will create waste and turf wars. Better to build up the research capabilities of the existing agencies IMHO. Not to mention that I can't bear the thought of a federal agency with "Institute" in the name. Sounds straight out of a cartoon...

Security of Board Communications

In this podcast, Kris Veaco of the Veaco Group runs down some frequently-asked questions about how to keep board communication secure, including:

- For hard-copy board materials, what methods of delivery are used and are considered "secure" (i.e., Fedex, courier service, etc.)? Should a signature be required for home deliveries?
- Regarding electronic delivery of board materials, what are the security risks of using regular e-mail, and what are some more secure electronic delivery alternatives (i.e., board portals, e-mail encryption, encrypted CDs or flash drives, etc.)?
- For board/committee teleconferences, how do you ensure a teleconference system is secure?
- Should a board have an informal policy about directors e-mailing each other and with management?

Poll: Do You Remember the "Big 8" Audit Firms?

With the consolidation of the auditing profession now far in the rear mirror, I thought I poll on the identities of the "Big 8" audit firms - which were indeed the primary eight firms for most of the 20th century, until they became the "Big 6" after 1989 - was in order. See if you can pick five of the "Big 8" in the poll below - in other words, only five of the ten listed in the poll were part of the "Big 8" and you will only be able to make five selections:

- Broc Romanek

March 8, 2010

Examples: Companies Trying to Increase Voting Levels

As the SEC pushes every association known to humankind to make a big deal of their new "Proxy Matters Spotlight" page, some companies are trying novel ways to alert shareholders to the change in the NYSE's Rule 452. For example, Boeing just filed this preliminary additional soliciting material consisting of a card notifying shareholders of the recent change in the ability of brokers to vote in director elections. This card is being sent in advance of the proxy materials. [And as a Boeing shareholder I received an email about this letter a few days ago from Schwab (probably written by Broadridge and not Boeing); a follow-up blog is warranted regarding the deficiencies of that email. Coming soon.]

Boeing's shareholder letter is a noble effort - but I still think bigger measures are gonna be needed to increase voting levels (as I've blogged before). Thanks to Kevin O'Neil of Vorys for bringing the Boeing notice to my attention.

Congrats to local Sandra Bullock for her "The Blind Side" Oscar. My family has experienced something similar to that movie's theme over the past year. We welcomed a 21-year old Sudanese man - Deng - into our home (along with another family up the street) and his English has improved remarkably. And he passed his citizenship test last week. It's been one of the most rewarding experiences of my life. Here is Deng giving remarks at a surprise party his extended family held for him.

Corporate Governance Trends: Survey Results

Recently, Shearman & Sterling released its annual survey on corporate governance practices of the 100 largest US public companies. Among the trends described in the survey are:

- In the past three years, more than half of the Top 100 Companies have abandoned the plurality voting standard for director elections in favor of a majority voting standard, with 75 of the Top 100 Companies now with a majority voting standard in place.
- The number of companies that have separate people serving as CEO and chairman of the board continues to rise, increasing from 28 to 31 from 2008 to 2009. While 75 of the Top 100 Companies address the topic of whether the two offices should be separated, only 7 of those companies have adopted an explicit policy of splitting the two offices. And of the Top 100 Companies, 69 still have their CEO also serving as chairman of the board.
- With the increased complexity of board membership and decision-making, companies continue to limit the number of outside boards a director may serve on. For the second year in a row, 92% of companies addressed the issue of outside board membership, way up from just 76% in 2004.
- In 2009, 55 of the Top 100 Companies included governance-related shareholder proposals in their proxy statements.
- Of the Top 100 Companies, only 10 have a shareholder rights plan or "poison pill," down from 33 just five years ago.
- E-proxy notification continues to gain in popularity. Fifty-seven of the Top 100 Companies now use an e-proxy "notice-and-access model," way up from 35 just a year ago.
- Say-on-pay proposals were presented at 44 of the Top 100 Companies and at over 100 other US public companies. The proposals were approved at 8 of the Top 100 Companies and received majority approval at approximately 10 other US public companies.
- The number of Top 100 Companies that publicly disclosed that they maintain a "clawback policy" has significantly increased over the last three years―35 companies in 2007, 50 in 2008 and 56 in 2009. An additional five Top 100 Companies have disclosed that they have adopted clawback polices that became effective in 2009.

More on our "Proxy Season Blog"

With the proxy season in full gear, we are posting new items regularly on our "Proxy Season Blog" for members. 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. Here are some of the latest entries:

- More on "Diversity Policies: Do You Need One? Samples Available"
- Delaware Law: How to Count Abstentions and Broker Non-Votes
- Proxy Access: Seven Law Firms Comment on "Opt-Out"
- Survey: Number of Investors Holding 1% of a Company's Stock
- Suing for Attorney Fees: Causing Company to Add Proxy Disclosure
- RiskMetrics Group Releases 2010 Proxy Season Watchlist

- Broc Romanek

March 5, 2010

More on New York's Power of Attorney Law and Securities Law Filings

Several times over the past six months, I have noted potential issues with New York's new power of attorney law (egs. this blog - and this one). Cravath, Swaine & Moore recently informed me that it has been considering various issues raised by law and has concluded that, based on principles of statutory construction, this new statute is best understood as not applying beyond powers of attorney that convey to the agent power over the principal's money and property. Understood in this light, the statute does not apply to powers of attorney that only authorize signatures required in SEC filings. These include powers of attorney used in registration statements and annual reports on Form 10-K, as well as Section 16 filings. Here are more thoughts from Cravath:

The Statute speaks of two types of power of attorney - the "statutory short form power of attorney" and a "non-statutory power of attorney" - and then directs that, among other requirements, these two types of power of attorney must contain the "exact wording of the 'Caution to the Principal'" that is set forth in the Statute. The "Caution to the Principal" reads: "As the 'principal,' you give the person whom you choose (your 'agent') authority to spend your money and sell or dispose of your property during your lifetime without telling you."

The Statute does not provide that these two types of power of attorney are the only types of power of attorney recognized in New York, nor does the Statute define "non-statutory power of attorney". The obligation to include the "Caution to the Principal" legend with any power of attorney governed by the Statute reveals the necessarily limited scope of the term "non-statutory power of attorney" and thus the limited reach of the Statute.

Cravath's analysis concludes that, in light of the legend, the Statute should be interpreted to regulate only powers of attorney that convey authority to the agent to spend the principal's money and to sell or dispose of the principal's property. Otherwise, one would have to accept:

(a) that the Statute requires the inclusion of a false legend, which would be an absurd result and a reading that is inconsistent with basic principles of statutory construction, or

(b) that the Statute requires that every power of attorney executed by an individual in New York must convey power over the principal's money and property, which would be an absurd result in the absence of any evidence in the Statute or legislative history of the legislature's intent to effect such a dramatic change in the law would be even more absurd given the clear intention of the legislature in enacting the Statute to protect individuals from the abuse of that power by their agents, or

(c) that notwithstanding the plain words of the Statute a valid "non-statutory power of attorney" does not require the "Caution to the Principal" legend unless it includes power over the principal's money and property.

Rather than be forced to adopt any of these absurd interpretations or ignore the plain words of the Statute, our analysis suggests a more straight-forward result - the otherwise undefined term "non-statutory power of attorney" should be interpreted not to cover powers of attorney unless they convey authority to the agent to spend the principal's money and to sell or dispose of the principal's property.

Treasury Proposes "Volcker Rule" Legislative Text

On Wednesday, the Treasury Department proposed legislative text to implement the "Volcker Rule" announced by the Obama Administration back in January. This Davis Polk memo briefly summarizes the provisions of Treasury's proposal, which takes the form of new Sections 13 and 13a of the Bank Holding Company Act of 1956.

SEC Adds Six New XBRL FAQs

Yesterday, the SEC posted six new items (Q. 36-41) to its XBRL Staff Interpretations and FAQs. Note that on March 23rd, the SEC is holding a free XBRL seminar.

- Broc Romanek

March 4, 2010

Survey Results: Proxy Drafting Responsibilities & Time Consumed

Below are the results from a recent survey we conducted on the topic of proxy drafting responsibilities (including items such as the amount of time consumed):

1. The following takes the lead in drafting the proxy statement at our company (excluding the executive compensation disclosures):

- In-house Securities Attorney - 63.4%
- In-house Human Resource Staff - 1.0%
- In-house Accounting Staff - 3.0%
- General Counsel - 11.9%
- Corporate Secretary/Assistant Corporate Secretary - 18.8%
- Outside Counsel - 1.9%
- Outside Consultant - 0.0%
- Other - 1.9%

2. The following takes the lead in drafting the CD&A/other executive compensation:
- In-house Securities Attorney - 45.9%
- In-house Human Resource Staff - 29.4%
- In-house Accounting Staff, including CFO - 1.8%
- General Counsel - 12.8%
- Corporate Secretary/Assistant Corporate Secretary - 11.0%
- Outside Counsel - 4.6%
- Outside Consultant - 1.8%
- Other - 1.8%

3. The following provides significant assistance in drafting the CD&A/other executive compensation disclosures:
- In-house Securities Attorney - 32.4%
- In-house Human Resource Staff - 32.4%
- In-house Accounting Staff, including CFO - 18.1%
- General Counsel - 14.3%
- Corporate Secretary/Assistant Corporate Secretary - 17.1%
- Other NEO(s) - 0.9%
- Outside Counsel - 21.0%
- Outside Consultant - 8.6%
- Other - 4.8%

4. The following are involved in reviewing and providing comments on the draft CD&A/other executive compensation disclosures:
- In-house Securities Attorney - 38.6%
- In-house Human Resource Staff - 46.6%
- In-house Accounting Staff, including CFO - 54.6%
- General Counsel - 54.6%
- Corporate Secretary/Assistant Corporate Secretary - 37.5%
- Other NEO(s) - 38.6%
- Outside Counsel - 60.2%
- Outside Consultant - 42.1%
- Communications Staff - 19.3%
- Independent Auditor - 20.5%
- Other - 15.9%

5. For the lead drafter, the following is the estimated amount of time devoted to drafting proxy disclosures for this year:
- Less than 100 hours - 14.5%
- 100-200 hours - 53.0%
- 200-300 hours - 16.9%
- 300-500 hours - 6.0%
- Too many hours to even estimate - 9.6%

6. For all those involved in drafting proxy disclosures (including the lead drafter as well as people outside the company), the following is the estimated amount of time devoted to drafting proxy disclosures for this year:
- Less than 100 hours - 3.5%
- 100-200 hours -14.9%
- 200-300 hours - 32.2%
- 300-500 hours - 24.1%
- 500-700 hours - 9.2%
- Too many hours to even estimate - 16.1%

Please take a moment to respond anonymously to our "Quick Survey on 'More on Blackout Periods'."

Warren Buffett's Annual Letter to Shareholders

As noted by Kevin LaCroix in his "D&O Diary Blog," Warren Buffett's annual letter to shareholders is now available. Straight talk at its best...

CII's White Paper on Proxy Plumbing

Recently, CII issued this 48-page White Paper - entitled "The OBO/NOBO Distinction in Beneficial Ownership: Implications for Shareowner Communications and Voting" - that reviews a number of the problems with the current proxy processing system and discusses several of the reforms which have been proposed by various stakeholders. This is a good read as it serves as one of the better outlines of proxy mechanics and the issues involved in today's debate over the process. Interestingly, the paper's authors are from a law firm (Cleary Gottlieb's Alan Beller, Janet Fisher and Rebecca Tabb).

- Broc Romanek

March 3, 2010

Just Announced: "5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference"

We just posted the registration information for our popular conferences - "Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference" & "7th Annual Executive Compensation Conference" - to be held September 20-21st in Chicago 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 Early Bird Rates - Act by April 15th: With anger over CEO pay at record levels, Congress and the regulators are intent on shaking things up and huge changes are afoot for executive compensation practices and the related disclosures - that will impact every public company. We are doing our part to help you address all these changes - and avoid costly pitfalls - by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 15th to take advantage of this discount.

Corp Fin Revises the Non-GAAP Section of Its "Financial Reporting Manual"

Yesterday, Corp Fin posted a revised version of its "Financial Reporting Manual" with revisions to "Topic 8: Non-GAAP Measures of Financial Performance, Liquidity and Net Worth" to include "Section 9500: Critical Accounting Estimates-Goodwill Impairment" and other changes.

On Friday, the SEC posted the 334-page adopting release related to amending Regulation SHO and short selling.

Delaware Chancery Court Finally Rules in Selectica

Below is news from Steven Haas of Hunton & Williams (we are posting memos analyzing this decision in our "Poison Pills" Practice Area):

On Friday, the Delaware Court of Chancery issued its long-awaited opinion in Selectica v. Versata Enterprises, addressing the first modern triggering of a rights plan. The court provided judicial validation of NOL poison pills, upholding the directors' adoption and implementation of the rights plan and their subsequent decision to dilute an acquiring person who deliberately crossed the pill's threshold.

The court delivered a well-reasoned opinion that employed a very straightforward Unocal analysis. It found that the NOLs were a valuable corporate asset and, therefore, an "ownership change" which might jeopardize their value constituted a valid threat to corporate policy and effectiveness. It made clear that because "NOL value is inherently unknowable ex ante, a board may properly conclude that the company's NOLs are worth protecting where it does so reasonably and in reliance upon expert advice." Central to the Court's analysis was the board's reliance on outside financial, tax, and legal advisors.

The Court then found that the plan, with a 4.9% trigger, was not preclusive or coercive, notwithstanding the acquiring person's argument that no stockholder would run a proxy contest against Selectica's staggered board. The Court explained that "[t]o find a measure preclusive..., the measure must render a successful proxy contest a near impossibility or else utterly moot...."

The Court went on to find that the use of the rights plan fell within Unocal's "range of reasonableness." It rejected the acquiring person's argument that, among other things, the Selectica board should have adopted a more narrowly tailored response. "[O]nce a siege has begun," the court stated," the board is not constrained to repel the threat to just beyond the castle walls." It concluded that "[w]ithin this context, it is not for the Court to second-guess the Board's efforts to protect Selectica's NOLs."

While Selectica is not the Chancery Court 's first foray into the world of poison pills, this opinion marks the first time the Court has upheld a modern pill that has been actually triggered by an acquiror.

- Broc Romanek

March 2, 2010, RiskMetrics...Sold (Again)

Yesterday, RiskMetrics announced it had been sold to MSCI at a price not far from RiskMetrics' IPO price level when it went public two years ago. Based on the conference call related to the deal, MSCI's CEO stated in response to questions that the ISS corporate governance services are considered a "non-core" unit that will be operated to generate cash flow for debt reduction. MSCI is a provider of investment decision support tools.

My guess is that nothing much will change for those of us that deal with ISS - but you never know. I do think the ISS branding will come back to where it used to be (ie. without the "MSCI" label before it). By my count, this is the fourth sale of ISS during this decade...

One thing that could change now that RiskMetrics will no longer be a public company is a company that pushed the envelope with it's own corporate governance practices. RiskMetrics really help itself up to high governance standards once it went public. As one member noted: "Did you know that MSCI's CGQ is better than 2.3% of S&P 400 companies and 22.7% of Diversified Financials companies?"

US Sentencing Commission Proposes New Requirements

Below is news taken from Sullivan & Cromwell's memo on the topic:

On January 21st, the U.S. Sentencing Commission proposed important amendments to the Sentencing Guidelines applicable to organizations, including the definition of what constitutes an effective corporate compliance program. Because the Sentencing Guidelines serve as a principal reference point under federal law for minimum standards in the design and structure of compliance programs, corporations should examine their programs to determine whether they comply with these proposed standards.

As described in our memo, the proposed amendments address four important areas: (1) the steps a corporation should take when responding to the discovery of criminal conduct; (2) document retention policies; (3) the use of independent corporate monitors; and (4) the governance of corporate compliance functions.

Our March Eminders is Posted!

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

- Broc Romanek

March 1, 2010

Corp Fin Cleans Up Its Executive Compensation CDIs

Now that the SEC's new rules went into effect over the weekend (ie. February 28th), Corp Fin cleaned up all of their Compliance & Disclosure Interpretations this morning that deal with the old Summary Compensation Table reporting scheme. It's unusual to see CDI activity so early in the morning. That certainly woke me up!

Here's the changes:

- Withdrawn Question 119.04
- Withdrawn Question 119.05
- Withdrawn Question 119.11
- Withdrawn Question 119.12
- Withdrawn Question 119.15
- Revised Question 119.16
- New Question 119.24
- Withdrawn Question 120.05
- Revised Interpretation 220.01

Understanding Investor Perception Studies

In this podcast, David Calusdian of Sharon Merrill Associates explains the importance of investor perception studies, including:

- In a nutshell, what is an investor perception study?
- What types of companies should conduct one?
- Can you provide more details about how one is conducted?
- What ways do you recommend that a company use the study once it's conducted?
- Should there be a follow-up study?

More on our "Proxy Season Blog"

With the proxy season in full gear, we are posting new items regularly on our "Proxy Season Blog" for members. 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. Here are some of the latest entries:

- More on "Registered Holders: Broadridge vs. Transfer Agent?"
- Proponents Wanted: Blatant Online Ads for Alter Egos
- Survey Results: Proxy Access Issues
- Now Available: Glass Lewis' Policies
- Diversity Policies: Do You Need One? Samples Available
- More on "Shareholder Proposals: Chevedden Sued Over Eligibility"
- Determining Who is "Most Highly Compensated": More Complicated Than You Think

- Broc Romanek