As noted in the D&O Diary Blog, earlier this week, the US Supreme Court issued its opinion in Merck v. Reynolds. The decision resolves a split in the circuit courts over the two-year statute of limitations for claims brought under Section 10(b) of the ’34 Act, the antifraud provision most frequently invoked by private plaintiffs.
The applicable statute – 28 U.S.C. § 1658(b) – provides that a private securities fraud complaint must be filed within two years after “the discovery of facts constituting the violation” or five years after the alleged violation itself, whichever comes first. The Supreme Court held that the two-year period begins to run when the plaintiff discovers – or a reasonably diligent investor would have discovered – facts showing that a materially misleading statement was made with the intent to deceive investors. We are posting memos analyzing the decision in our “Securities Litigation” Practice Area.
IRS Releases a Draft Schedule for Reporting of Uncertain Tax Positions
Here is news culled from this Sullivan & Cromwellmemo: Recently, the IRS issued IRS Announcement 2010-30 accompanied by the release of a highly-anticipated draft schedule and instructions to be used by certain corporate taxpayers to report uncertain tax positions on their annual income tax returns. Although the draft schedule provides space for reporting current and prior year tax positions, a transition rule provides that tax positions taken in a taxable year beginning before December 15, 2009, or in a short tax year beginning on or after December 15, 2009, and ending before January 1, 2010, would not need to be reported.
The draft schedule would require a concise description of each reported tax position as well as information about its magnitude, but would not require disclosure of the taxpayer’s risk assessments or tax reserve amounts.
More on our “Proxy Season Blog”
With the proxy season winding down, we are still posting new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net 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:
- Proxy Season Early Trends: More Proposals, and More Exclusions
- CII Backs Strict Majority Vote for Corporate Directors
- Director Attitudes Shifting: Laggards Should be Voted Off
- More on “Fixing the Problems with Client Directed Voting”
- The Need to Better Draft VIFs
Last year, as noted by Dominic Jones in his “IR Web Report,” there was a small spurt of companies holding annual meeting solely online, with Broadridge, Warner Music Group and Conexant Systems joining companies that have done it for a few years (eg. Herman Miller, see this blog).
Dominic notes that a number of new companies have announced plans to go “virtual-only” this proxy season, including Illumina, Artio Global Investors, Winland Electronics and PICO Holdings.
Intel originally intended to join this group – but decided to stay with the hybrid “both physical and online” meeting structure it pioneered last year (see this first-hand report of last year’s meeting), with the help of Broadridge’s online voting platform. Dominic notes that several new companies will try this hybrid model this year – Best Buy, American Water Works and Charles Schwab – with Charles Schwab relying on its transfer agent Wells Fargo to provide the online voting platform rather than Broadridge.
Broadridge’s E-Proxy Stats for ’10 Proxy Season So Far
As they have been doing for the past two years, Broadridge feeds us the latest statistics about e-proxy use during the proxy season through March 31st (which we have posted in our “E-Proxy” Practice Area).
As of March 31st, these stats included:
- 821 companies (technically, it’s not companies – it’s “distributions” which is a greater number than the number of companies) used voluntary e-proxy between June 30, 2009 and March 31st (compared to 526 for the same period in the year prior). 571 of these companies were using e-proxy for a second year – 8 companies distributed a second notice. Remember the cut-off is early in the meeting season and Broadridge reports having 655 commitments to use e-proxy for this year not yet processed.
- 96 jobs were bifurcated, nearly all of them stratified by the number of shares held (96%) although some were stratified by notice vs. full package (11%).
- 0.39% of shareholders requested paper after receiving a notice; this average is down 50% from last year’s 0.80% (and the prior year had been 1.05%). Note that this percentage doesn’t include Broadridge’s “standing order for paper” instructions (ie. shareholders who have said they wish to continue receiving paper copies indefinitely).
- 14% of companies using e-proxy had routine matters on their meeting agenda (way down from 54% last year); another 73% had non-routine matters proposed by management; and 13% had non-routine matters proposed by shareholders. None were contested elections.
After the annual meeting season ends, Broadridge will be reporting out the full season’s numbers, including the latest retail voting trends. But this early report clearly shows that companies continue to use e-proxy, undaunted by the broker non-vote changes in the NYSE’s Rule 452.
With representatives from Goldman Sachs testifying – for 11 hours! – before the Senate Banking Committee yesterday (see this morning’s WaPo article, with over 500 comments already), the 24-hour coverage of Goldman’s perceived role in the financial crisis continues. Personally, I’m still puzzled by the all the coverage – the underlying theme of the stories is not really new news. Ever since the crisis came to light, it has been well known that Goldman was far less impacted by the housing market collapse compared to its brethren – and for the most part, they were called geniuses until now.
Here’s a hodge-podge of Goldman-related stories that I found interesting:
- This NY Times’ Dealbook column entitled “A Crowd With Pity for Goldman”
- In this article, Harvey Pitt provide his thoughts on the risks of the SEC losing the Goldman case
- In his “Ideoblog,” Prof. Larry Ribstein describes how the SEC’s Goldman case continues its war on “shorts” – and here is Larry’s analysis on how the case is mutating
- In his “SEC Actions” blog, Tom Gorman writes about “The SEC, the Goldman Case and Critics”
- A former Goldman Sachs director is alleged to have tipped Galleon Group, touching Warren Buffett’s investment in Goldman, as noted in this Reuters article
Although things are moving so fast, that it’s relevance may be limited – Ted Allen provides these notes from last Wednesday’s House hearing on the regulatory reform bill.
Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now
We have posted the transcript for the recent webcast: “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now.”
One topic discussed at length during the program is “when disclosure of an SEC investigation is required – or is recommended – to be disclosed?” (a topic also recently tackled by Marty Rosenbaum in his OnSecurities Blog.
SEC Agrees to Reduce Penalties in Exchange for Cooperation
The SEC’s new cooperation policy was one of the hot topics during our recent webcast with former senior SEC Enforcement Staffers. Here is news from Ted Levine, Wayne Carlin and Kevin Schwartz of Wachtell Lipton (also available in this memo):
In two recent insider trading actions, the SEC agreed to settlements with substantially reduced civil penalties based on the defendant’s agreement to cooperate with an ongoing investigation and related enforcement action: SEC v. Cutillo et al., No. 09 Civ. 9208 (S.D.N.Y. Mar. 30, 2010) and SEC v. Galleon Management, LP et al., No. 09 Civ. 8811 (S.D.N.Y. Apr. 19, 2010). These cases merit attention as the SEC reportedly considers revising its framework for assessing penalties against entities.
The Commission brought these two actions against Schottenfeld Group LLC — a registered broker-dealer — based on alleged insider trading by individuals who, at the time of the trading, were registered representatives and proprietary traders at Schottenfeld. The SEC is statutorily authorized to obtain civil penalties of up to three times the profit gained or loss avoided as a result of insider trading. Historically, the Commission’s practice in insider trading settlements has been to secure a “one-time” penalty equal to the amount of disgorgement.
In the Cutillo and Galleon actions, however, the Commission submitted and the courts approved settlements that included civil penalties equal to only 50% of the disgorgement amounts. In a joint submission to the court in Galleon, the parties explained that the penalty in that case represented a 50% “discount from a one-time penalty, in exchange for [Schottenfeld's] agreement to cooperate with the Commission.” The final judgments in both cases stated that penalties in excess of the amounts agreed were not being ordered “based on Defendant’s agreement to cooperate in a Commission investigation and related enforcement action.” While this is not stated explicitly in the filings, the settlements suggest that Schottenfeld may have entered into a formal cooperation agreement, as contemplated by the initiatives announced by the SEC in January. It is also unclear whether the settlements are based on the defendant’s forward-looking promise to cooperate or, rather, are based in whole or in part on cooperation that has already occurred.
The Schottenfeld settlements suggest a willingness on the part of the SEC to extend quantifiable benefits in return for cooperation, at least in some cases. In insider trading cases, a “discount” has verifiable meaning, in view of the historical baseline of one-time penalties. Yet even here, the Schottenfeld settlements do not articulate what the cooperation entailed (or promised for the future), or by what criteria the SEC determined that the appropriate discount level was 50%. In other types of cases, whether a penalty amount is discounted for past or future cooperation is a much more subjective question. As the Commission revisits its framework for seeking penalties against entities, some meaningful transparency from the SEC as to its methodology for determining penalty amounts and discounts is important.
Below are three items that I recently blogged on CompensationStandards.com’s “The Advisors’ Blog“:
As noted in the excerpt below of this article from Manifest (a European proxy advisor service), Australia may take the concept of say-on-pay further than proposed here in the US (here is the Australian’s full response on this topic):
Australian Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen has delighted Australian shareholders with plans to introduce extensive executive remuneration reforms designed to force boards to be more accountable and give shareholders more power.
In a ringing endorsement of the Productivity Commission’s review of executive pay which was published in January this year, the Rudd administration has announced that it will introduce legislation to implement many of the PC’s 17 recommendations, including the “two strikes” proposal, which will strengthen the non-binding vote on remuneration and set out consequences where companies do not adequately respond to shareholder concerns on remuneration issues.
As currently proposed, the two strikes and re-election resolution would work as follows:
- 25 per cent ‘no’ vote on remuneration report triggers reporting obligation on how concerns addressed; and
- Subsequent ‘no’ vote of 25 per cent activates a resolution for elected directors to submit for re-election within 90 days.
It is not clear whether it would be the entire board to be submitted for re-election, just the remuneration committee or the chairman, however there will be a further opportunity for input as there during the consultation process ahead of the final drafting of amendments to the Corporations Act 2001.
An unexpected but welcome addition to the proposals is a “claw-back” provision which would require a director or executive to repay to the company any bonuses calculated on the basis of financial information that subsequently turned out to be materially misstated. Bowen asserted that the introduction of a claw-back provision “warrants further analysis, as it would help strengthen the ability of shareholders to recover overpaid bonuses that have occurred as a result of materially misstated financial statements.”
Issuers have expressed their concerns in the Australian media calling the proposals “heavy handed”. Speaking to ABC News, John Colvin from the Institute of Company Directors said: “We’re a bit perplexed and quite frankly bemused at why we would have such a heavy-handed, red-taped, legislative approach to this area,”
“Whilst there are examples of, and we acknowledge those, of pay outcomes which haven’t been in line with either company expectations… on the whole Australian remuneration of corporate governance has been very good.” The Australian Shareholders Association (ASA) said that the response was “much stronger than they had anticipated.”
“We think that it’s a very well-measured, very well-considered report,” said an ASA representative “from the ASA’s point of view it certainly went a little bit further than we had asked, but we’re very positive about the recommendations and we’re very hopeful that they’ll have the effect of making boards much more accountable on this issue which is very important to shareholders.”
AFL-CIO Actively Attacking Bank Pay
Recently, the AFL-CIO launched “PayWatch 2010” and announced it is focusing on the six largest banks this year – Bank of America, Citigroup, Wells Fargo, Morgan Stanley, JPMorgan Chase and Goldman Sachs – when the companies hold advisory votes on executive compensation later this month and in May. They also are focusing on the bank’s lobbying on financial reform.
As part of this focus, the AFL-CIO plans to stage protests at the banks’ annual meetings and may oppose compensation committee members. The AFL-CIO also is planning a rally this Thursday on Wall Street, with hope for more than 10,000 demonstrators.
Here’s a silly AARP video on big banks and financial reform that might tickle you entitled “A Financial Protection Sing-A-Long.”
Survey of Recent Disclosures: Board’s Role in Risk Oversight
Below is an excerpt from this Akin Gumpmemo, based on their survey on recent risk oversight disclosures:
To assess the types of disclosures that companies are providing about the board’s role in overseeing risk management, we reviewed preliminary or final proxy statements filed by 50 randomly selected S&P 500 companies since the February 28, 2010 effective date of the new disclosure rules. The results of our survey, categorized by the various types of disclosures, are set forth below.
Separate Section Devoted to Risk Oversight
Ninety-two percent of surveyed companies had a designated section in their proxy statements for risk oversight. This section typically stood alone, but sometimes was combined with the section addressing board leadership structure. Typically, the section was located in the portion of the proxy statement discussing corporate governance matters and was often titled “The Board’s Role in Risk Oversight” (or words of similar effect).
Statements about Management’s Primary Risk Management Responsibility
Twenty-four percent of surveyed companies included a statement to the effect that management is primarily responsible for risk management, while the board’s role is one of oversight.
Sample disclosures are set forth below:
Sunoco, Inc.: “Management of risk is the direct responsibility of the Company’s CEO and the senior leadership team. The Board has oversight responsibility, focusing on the adequacy of the Company’s enterprise risk management and risk mitigation processes.”
Peabody Energy Corporation: “Management is responsible for the day-to-day management of the risks we face, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management.”
AT&T Inc.: “Assessing and managing risk is the responsibility of the management of AT&T. The Board of Directors oversees and reviews certain aspects of the Company’s risk management efforts.”
Forty-two percent of surveyed companies explained that oversight of risk management was an important or integral part of the board’s role in the strategic planning process.
Several illustrative examples are set forth below:
Valero Energy Corporation: “The Board also believes that risk management is an integral part of Valero’s annual strategic planning process, which addresses, among other things, the risks and opportunities facing Valero.”
Stryker Corporation: “A fundamental part of setting the Company’s business strategy is the assessment of the risks the Company faces and how they are managed.”
Bristol-Myers Squibb Company: “Our Board meets regularly to discuss the strategic direction and the issues and opportunities facing our company in light of trends and developments in the biopharmaceutical industry and general business environment. Our Board has been instrumental in determining our strategy to combine the best of biotechnology with pharmaceuticals to become a best-in-class next generation biopharmaceutical company. Throughout the year, our Board provides guidance to management regarding our strategy and helps to refine our operating plans to implement our strategy. Each year, typically during the second quarter, the Board holds an extensive meeting with senior management dedicated to discussing and reviewing our long-term operating plans and overall corporate strategy. A discussion of key risks to the plans and strategy as well as risk mitigation plans and activities is led by the Chairman and Chief Executive Officer as part of the meeting. The involvement of the Board in setting our business strategy is critical to the determination of the types and appropriate levels of risk undertaken by the company.”
Enterprise Risk Management
Fifty-four percent of surveyed companies expressly used the term “enterprise risk management.”
Sample disclosures are set forth below:
American Express Company: “The Company relies on its comprehensive enterprise risk management process (ERM) to aggregate, monitor, measure and manage risks. The ERM approach is designed to enable the Board of Directors to establish a mutual understanding with management of the effectiveness of the Company’s risk management practices and capabilities, to review the Company’s risk exposure and to elevate certain key risks for discussion at the Board level. The Company’s ERM program is overseen by its Chief Risk Officer who is an executive officer of the Company and a member of the Company’s most senior management.”
Express Scripts, Inc.: “In order to assist the board of directors in overseeing our risk management, we use enterprise risk management (“ERM”), a company-wide initiative that involves the board of directors, management and other personnel in an integrated effort to identify, assess and manage risks that may affect our ability to execute on our corporate strategy and fulfill our business objectives. These activities entail the identification, prioritization and assessment of a broad range of risks (e.g., financial, operational, business, reputational, governance and managerial), and the formulation of plans to manage these risks or mitigate their effects.”
Primary Responsibility at Board vs. Committee Level
Eight percent of surveyed companies stated that the primary responsibility for risk management oversight rests with the entire board, 34 percent of surveyed companies stated that primary responsibility is vested in one or more committees and 52 percent reflected that both the board and various committees have responsibility for risk management oversight.
Of those companies where primary responsibility is vested in one or more committees, 65 percent (22 percent of all surveyed companies) identified their audit committees as having primary responsibility, 18 percent had a separate committee expressly dedicated to risk management (all of these companies were in the financial services or insurance industries) and 18 percent stated that various board committees were responsible for overseeing the management of risks relating to the committee’s primary areas of responsibility.
Regardless of where primary responsibility rested, over half of the surveyed companies included descriptions of the specific types of risks that various committees of the board oversee.
Compensation Committee Responsibility for Determining Compensation Risk Disclosure
As discussed above, the new SEC disclosure rules require companies to discuss their compensation policies and practices for employees as they relate to risk management practices and risk-taking incentives if the risks arising from those policies and practices are reasonably likely to have a material adverse effect on the company. The new rules do not require a company to include any disclosure if the company has determined that the risks arising from its compensation policies and practices are not reasonably likely to have a material adverse effect.
RiskMetrics has announced that it does not take a position regarding whether companies should disclose their risk determinations where the company has determined that a material adverse effect is not reasonably likely. RiskMetrics does, however, advise companies “at a minimum” to discuss their process in reaching a determination and any mitigating features (such as clawbacks or bonus banks) that they have already adopted. RiskMetrics views this disclosure “as an opportunity for communication, not simply compliance” and expects that shareholders will be looking for a reasonably substantive discussion of the board’s process for determining whether the company’s incentive pay programs motivate inappropriate risk-taking and what they are doing to mitigate that risk.
Our survey shows that many companies elected to provide disclosure about their compensation risk determinations and the process the company undertook to make the determination.
- Compensation Committee Responsibility to Assess Risks. Sixty-eight percent of surveyed companies stated that their compensation committee was charged with either determining that the compensation policies and practices do not encourage excessive risk-taking or determining whether the risks arising from such policies and practices are reasonably likely to have a material adverse effect on the company.
- Disclosure of Determination. Seventy-four percent of surveyed companies expressed a determination that their compensation policies and practices either did not encourage excessive or unnecessary risk-taking (or used words of similar effect) or were not reasonably likely to result in a material adverse effect on the company. Of the 37 companies that disclosed a determination, 17 of them (46 percent) phrased their conclusion in terms of the absence of a material adverse effect, 15 companies (41 percent) expressed their conclusion in terms of not encouraging excessive or unnecessary risk-taking and the remaining companies phrased their conclusions in terms of a determination of an “appropriate level of risk-taking” or an “effective balance of risk and reward” or words of similar effect.
- Who Made the Determination. Companies varied widely as to who made the risk determination regarding compensation programs and policies. Twenty-three companies (62 percent of those disclosing the determination) stated that the determination was made by the compensation committee, 10 companies (27% of those disclosing the determination) phrased the determination as being made by the company or “we” and, in the remaining instances, “management” made the determinations.
- Process for Determination. Sixty-five percent of those companies disclosing a risk determination provided disclosure of the process that the company or compensation committee undertook to make the determination.
- Location of Determination. Companies varied widely on the location of the disclosure in their proxy statements. Almost half of the companies included the disclosure in Compensation Discussion and Analysis. Other popular disclosure locations included under a separate heading in the corporate governance section, in the discussion of board oversight of risk or under a separate heading near discussions of compensation committee interlocks and compensation consultants.
- Risk-Mitigating Features. Regardless of whether a company disclosed a risk determination with respect to its compensation policies and practices, almost three-quarters of the surveyed companies discussed various features of their compensation programs and policies that are designed to mitigate excessive risk-taking.
The following excerpt from Kraft Foods’ proxy statement discusses the compensation committee’s process in evaluating compensation risks, risk-mitigating features contained in the company’s compensation policies and practices and the conclusion of the compensation committee with respect to such risks:
“Analysis of Risk in the Compensation Architecture
In 2009, the Human Resources and Compensation Committee evaluated the current risk profile of our executive and broad-based compensation programs. In its evaluation, the Human Resources and Compensation Committee reviewed the executive compensation structure and noted numerous ways in which risk is effectively managed or mitigated. This evaluation covered a wide range of practices and policies including: the balance of corporate and business unit weighting in incentive plans, the balanced mix between short-term and long-term incentives, caps on incentives, use of multiple performance measures, discretion on individual awards, a portfolio of long-term incentives, use of stock ownership guidelines, and the existence of anti-hedging and clawback policies. In addition, the Human Resources and Compensation Committee analyzed the overall enterprise risks and how compensation programs impacted individual behavior that could exacerbate these enterprise risks. The Human Resources and Compensation Committee collaborated with the Audit Committee in this analysis.
Additionally, we engaged an outside independent consultant to review our incentive plans (executive and broad-based) to determine if any practices might encourage excessive risk taking on the part of senior executives. The outside consultant noted several of the practices of our incentive plans (executive and broad-based) that mitigate risk, including the use of multiple measures in our annual and long-term incentive plans, Human Resources and Compensation Committee discretion in payment of incentives in the executive plans, use of multiple types of long-term incentives, payment caps, significant stock ownership guidelines, and our recoupment and anti-hedging policies. In light of these analyses, the Human Resources and Compensation Committee believes that the architecture of Kraft Foods’ compensation programs (executive and broad-based) provide multiple, effective safeguards to protect against undue risk.”
As previously discussed, the SEC suggested in the adopting release that, where relevant, companies disclose in their proxy statements whether the officers responsible for risk management report directly to the board or to a board committee or how information is otherwise received from such persons. Thirty-eight percent of surveyed companies identified their principal risk officer or officers by title and disclosed that the officer or officers reported directly to the board or a board committee.
Frequency of Entire Board Review
One-third of surveyed companies reported that the full board reviews risk management at least annually, 22 percent stated that the full board reviews risk management issues “periodically” or “regularly” and a few companies reported quarterly or semiannual reviews by the entire board.
Length of Disclosure
Most companies devoted at least two or three paragraphs to their discussion of the board’s role in risk oversight. The average length of the disclosures was 10 sentences, with the length of the discussion ranging from a high of 27 sentences to a low of three sentences. These numbers do not reflect any specific discussions of risks relating to compensation policies and practices or factors mitigating those risks.
Effect of Board’s Role in Risk Oversight on Leadership Structure
Only 20 percent of the surveyed companies specifically addressed the effect of the board’s role in risk oversight on the board’s leadership structure. Instead, most companies simply stressed in the discussion of their leadership structure the role that a lead director or the independent directors play in providing strong, effective oversight of management.
Set forth below are disclosures by several companies that expressly addressed the matter:
IBM: “The Board’s role in risk oversight of the Company is consistent with the Company’s leadership structure, with the CEO and other members of senior management having responsibility for assessing and managing the Company’s risk exposure, and the Board and its committees providing oversight in connection with those efforts.”
Teco Energy: “We believe that our Board leadership structure promotes effective oversight of the company’s risk management for the same reasons that we believe the structure is most effective for our company in general, that is, by providing unified leadership through a single person, while allowing for input from our independent Board members, all of whom are fully engaged in Board deliberations and decisions.”
The Coca-Cola Company: “The Company believes that its leadership structure, discussed in detail [above], supports the risk oversight function of the Board. While the Company has a combined Chairman of the Board and Chief Executive Officer, strong Directors chair the various committees involved in risk oversight, there is open communication between management and Directors, and all Directors are actively involved in the risk oversight function.”
Last week, FINRA issued Regulatory Notice 10-22 to provide guidance to broker-dealers regarding the conduct of due diligence in Regulation D private placements. As noted in this press release, the Notice reminds broker-dealers of their obligation to conduct a reasonable investigation of the issuer and the securities they recommend in offerings – and the Notice highlights three recent enforcement actions involving private placements. In fact, this guidance may very well have been issued as a result of those actions, particularly SEC v. Tambone (1st Cir.; 3/10/10).
In 12 pages, the Notice describes specific issues that relate to a broker-dealer’s due diligence investigation responsibilities (e.g., b-d’s affiliation with the issuer) and describes practices that have been adopted by some broker-dealers to discharge their due diligence obligations. The Notice includes a recommendation that a broker-dealer should retain records documenting the diligence process – and provides a detailed list of recommended diligence practices while pointing out that “reliance upon a single checklist may result in an inadequate investigation.”
Banks Getting Grilled: California and Credit Default Swaps
A few weeks ago – before the SEC’s action against Goldman Sachs – the California Treasurer sent letters to six major underwriters of California’s state bonds asking a series of questions about credit default swap trading related to California bonds. The key question was: “Describe, in your view, how State of California CDS trading, in recent years, has affected the State, its bond sales and the borrowing costs paid by taxpayers.” Last week, the Treasurer posted the responses of all six banks.
I think that Goldman Sach’s response concerning the impact of CDS trading is typical: “We believe that CDS trading has had little or no effect on California’s borrowing costs. The State’s credit, budget and debt management (and not CDS prices) are the primary drivers of the State’s borrowing costs.”
Smaller Company M&A: The Latest Developments
Tune in tomorrow for the DealLawyers.com webcast – “Smaller Company M&A: The Latest Developments” – to hear Diane Holt Frankle of DLA Piper, Mark Filippell of Western Reserve Partners, John Jenkins of Calfee, Halter & Griswold and Bob Kuhns of Dorsey & Whitney discuss all you need to know about doing private and public deals when smaller companies are either the acquirer or the acquiree.
Last week, Senator Dodd formally introduced an updated version of his bill (S. 3217), now weighing in at 1410 pages rather than a portly six pounds.
This version is the one officially filed with the Senate by the Senate Banking Committee (and which passed the Committee) – so it incorporates the Manager’s Amendments added by the Banking Committee. There are lots of other changes to the bill compared to the one released in mid-March – but there were no further changes to any of the corporate governance or executive compensation sections.
SEC’s Statement on Its Independence: Proof that Self-Funding is Necessary
On Wednesday, SEC Chair Schapiro issued this statement about the agency’s independence from the President, Congress, et. al. As noted in this NY Times article, this statement primarily was made to respond to a letter from Republicans on the House Oversight Committee that accused the SEC of political motivations in its pursuit of a case against Goldman Sachs. The article also notes that President Obama addressed charges of collusion by stating, “never discussed with us anything with respect to the charges.”
To me, the need for the SEC to issue such a unique statement is one more example of why it needs to be self-funded (here is my first blog on the topic). As I recently noted in a comment to this blog, self-funding is not really about paying Staffers more to do their jobs (or adding more resources generally) – it’s freeing the SEC from the Congressional appropriations process so that it can do its job free from political interference.
The SEC’s 3-2 Vote on Charging Goldman Sachs: Is That Unusual?
In his “Race to the Bottom” Blog, Professor Jay Brown blogs about the 3-2 decision in a closed Commission meeting to bring the charges against Goldman Sachs. Jay bemoans the leak to the press – and notes that the split vote fell along party lines.
As noted on our webcast last week with former senior SEC Enforcement Staffers, it is relatively rare for the Commission to be so split behind closed doors (it’s more common for 3-2 votes on rulemaking proposals). But it does happen (eg. cases a few years ago imposing penalties on public companies) – and obviously, this is an important case. The fact that the split would be along party lines is something that is probably new to this era of a politicized independent agencies. I doubt it happened like this 20-30 years ago.
As noted in this Washington Post article today, the divided decision has no bearing in court (at least directly) – I take the divided decision to either mean that it was a close case or that there was some political aspect that produced the split. Harvey Pitt notes in the article that the split decision could harm the SEC’s reputation. Goldman officials will testify before the Senate Permanent Subcommittee on Investigations on Tuesday.
Poll Results: SEC v. Goldman
Here are the results from the poll that I conducted a few days ago regarding the SEC’s Goldman case:
- It will drag on in courts for years – 20/7%
- It will be settled within a few months – 28.9%
- Some mid-level Goldman staffer thrown under bus – 29.6%
- Some big Goldman honchos suffer badly – 10.4%
- Goldman will lose big – 13.3%
- SEC will lose big – 20.7%
- Both parties come out even – 10.4%
- What me worry? – 5.2%
If there were awards given for entertainment value of disclaimers, I imagine this forward-looking information disclaimer for Mattel’s new interactive 2009 Annual Report (you’ll need to click on “Start”) would win hands-down this year (last year’s winner would be Southwest’s “rap” disclaimer). It’s innovative as two children read the disclaimer at the beginning of the video. After reading – and writing – so many staid disclaimers over the years, it’s cute as buttons.
On the one hand, due to its high entertainment value, I bet a court would give this disclaimer more weight than written disclaimers because shareholders are much more likely to pay attention to it. But on the other, it’s also possible that a court may be turned off by children reading the disclaimer for fear that investors wouldn’t take it seriously.
As noted in the memos posted in our “Forward-Looking Information” Practice Area, courts seem to prefer that the cautionary language be tailored to the forward-looking language in the document. But that just applies when the forward-looking information is in a written document.
In this case, it’s a video and arguably it’s considered an “oral” statement – in which case, the requisite disclaimer is much more bare-bones and need not be tailored (just like Mattel has it). I’m not sure if a court would consider a video “oral.” Note that under Reg G, a webcast is considered “oral” – but other provisions of the securities laws could lead one to conclude that all multimedia are “writings” (see these FAQs I drafted long ago). All interesting stuff to ponder.
I should note my general thoughts that video annual reports that come off solely as infomercials are a waste of time (read how to create effective video annual reports in my piece entitled “The Birth of “Video Annual Reports:” A Substitute for the Written Word?” from the Winter ’09 issue of InvestorRelationships.com, a free publication).
Dominic Jones agrees, and adds: “I’d much prefer a cheaply made video featuring a one-on-one between an analyst and the CEO, or even just the CEO being asked a bunch of questions sourced from shareholders via the company’s website. Keep it real and authentic.”
Social Media and Investor Relations
A while back, Brian Lane and I taped a 45-minute podcast for Eric Schwartzman’s “On the Record” regarding the impact of social media on investor relations, which a heavy dose of the legal implications – which obviously means a bit of discussion about Regulation FD.
The podcast is designed for the general public, so the remarks fall at a fairly high level. I If you scroll down this page, Eric does a good job of sifting through the audio and creating a detailed table of contents of the program’s agenda by summarizing certain remarks in bullet-format, indicating the “minute mark” during which they were made.
This “Fortune 500 Business Blogging Wiki” shows that 15.6% of the Fortune 500 are blogging – the Wiki has links to the 78 business blogs. In his “IR Web Report” yesterday, Dominic Jones blogged about how investor relations officers can no longer ignore social media compliance risks.
FINRA Provides Guidance on Use of Social Media
A while back, FINRA provided guidance – in Notice 10-06 – regarding how the rules governing communications with the public apply to social media that are sponsored by members or their registered representatives.
In this podcast, Jeff Kaplan of Kaplan & Walker explains how the US Sentencing Guidelines have recently been modified to add provisions that set forth the attributes of an effective compliance and ethics program (here is Jeff’s recent memo on the topic), including:
- What are the Corporate Sentencing Guidelines and why to they matter to companies?
- How – and how often – are they amended?
- What are the recent amendments and why are they significant?
- Should a board of directors be aware of this new development?
- Have there been any other important legal developments relating to compliance programs since we last spoke?
Seller’s Key Issues in 2010: Still a Tough Seller’s Market
We have posted the transcript from the recent DealLawyers.com webcast: “Seller’s Key Issues in 2010: Still a Tough Seller’s Market.”
US Supreme Court Bar: I’m a Member!
Often, I am called upon to explain the benefits of blogging. One clear example of a benefit is the ability to network without stepping outside of the office. Simply by blogging about my experiences of visiting the US Supreme Court a few months ago, two readers of this blog emailed me and offered to sponsor my admission to the US Supreme Court Bar.
Although ceremonial in nature for most SCOTUS bar members (as they never plan to argue a case there), it is a limited bar in that two existing members must “sponsor” you, none of whom can be related to you. Obtaining the two sponsors can be hard to accomplish. Being sworn in before all nine Justices is quite a thrill, as I was admitted yesterday morning, right before oral arguments in a case.
Here are a few new take-aways from yesterday’s event (here are ten from my prior visit):
1. Attorneys to be admitted are permitted to bring one guest, so my wife accompanied me – and my dad waited in line to attend like a regular guest. They were as thrilled as me. The lawyers arguing a case are permitted to bring six guests.
2. Etiquette is taken seriously, and customs are observed far more than any other court I have been in (eg. everyone is “Mr.” or “Ms.” – no first names). The Clerk of the Court (a former Judge Advocate General of JAG) and the Court Marshall wore morning coats with tails (ie tailcoat). So did the Assistant Solicitor General who argued the case (although Elena Kagan, the newly appointed Solicitor General has broken from that tradition, as noted in this blog).
3. Even though yesterday was Justice Steven’s 90th birthday, it was not acknowledged in the courtroom. Having seen Justice Steven’s argue twice during the past few months, I can report that he is as sharp as ever.
4. The SCOTUS staff is incredibly competent and courteous. They were very helpful all throughout the process. Most of the Staff appeared to be quite young – although that is perhaps because I am getting old.
5. Those being sworn in are seated right in front of the Justices, just to the left of the counsel arguing the case. It was great to have Chief Justice Roberts look me in the eye and confirm my admission. I think he smiled because my legal first name is “Barak,” similar to the President’s.
6. Yesterday, only one case was argued – a rarity. Typically, two cases are argued. Occasionally, three will be. Arguments for a case last precisely one hour. Chief Justice Roberts ensures a prompt ending (although he is not as strict as Chief Justice Rehnquist who would cut off someone in mid-sentence).
7. The Supreme Court only sits in session 35-38 days per year (as only 90 cases are granted certiorari annually out of 10,000 requests). Given that there is available space for 20-30 lawyers to be admitted during an open session with live argument, most lawyers admitted to the SCOTUS bar are confirmed via postal mail or in a session without argument. To be admitted in an open session, it takes a lot of pre-planning. If you would like to learn more, please contact me.
Speaking of the Supreme Court, the government has filed its brief in opposition to the writ of certiorari in the work product case, U.S. v. Textron. See this blog for the background on this important decision.
Visiting Live SCOTUS Arguments: Get In Line Early
Below is a picture of the line outside SCOTUS yesterday to get in and observe the proceedings, several hours before the court opened. I heard folks were lined up for three days for the chance to hear Monday’s arguments (as it was a popular case):
For years, I’ve been on the “verge” of creating an online photo gallery for Corp Fin alumni. Now I’m finally doing it via this “Photo Gallery.” Send yours along to me if you find some in your attic – and even new photos are welcome. If you don’t have the ability to scan photos, you can mail them to me – and I’ll scan them and mail them back.
As an example, this old picture is courtesy of Marty Dunn and features the Corp Fin “Poison Pills” softball team (names are listed above the pic). Given that the picture is over 15 years old, some names may have changed. Most of the other pics so far were contributed by our Staff; hence the overabundance of pics including us…
Nasdaq Revises Its Global Select Market Listing Standards
Last week, the SEC issued this order approving amendments to Nasdaq’s Global Select Market Listing standards that allow a company to list if it has at least a $160 million market capitalization, $80 million in total assets and $55 million in stockholders’ equity. Companies meeting these standards would also be required to meet the round-lot holder and market value of publicly held shares requirements.
In addition, Nasdaq lowered the market value of publicly-held shares requirement for IPOs and affiliated companies from $70 million to $45 million. Also, Nasdaq amended its rules to clarify that a SPAC is not permitted to list on the Global Select Market since the new listing standard may otherwise be relied upon by such a company.
Although the amendments are immediately effective upon filing with the SEC, the Nasdaq website indicates that the changes to its rules will “become operative” as of May 6th.
A number of members wanted me to gauge how our community felt about the SEC’s lawsuit against Goldman Sachs (see yesterday’s blog). In the following anonymous poll, you can select more than one answer:
With the SEC likely to be gearing up to hold true to its promise to consider adopting final proxy access rules sometime this spring – and the Dodd bill containing a proxy access provision – the activities of the US House of Representatives bear watching.
This Wednesday, Rep. Paul Kanjorski, the Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, will be holding a hearing to examine legislative proposals aimed at giving investors a greater say in corporate affairs. As noted in a press release, this hearing will focus on several other corporate governance reform proposals now pending in Congress, especially the bills advanced by three active members of the House Financial Services Committee – Gary Peters, Keith Ellison and Mary Jo Kilroy.
Placement Agent Regulation Makes Headline News
On “The Mentor Blog,” I’ve recently posted a few items from Keith Bishop of Allen Matkins about placement agent regulation. Here are two new items from Keith:
Last week, the SEC announced an action against a private equity firm – Quadrangle Group LLC – for kickbacks involving a New York Pension Fund, making headline news due to the political connections of the firm’s chief.
What struck me as interesting about this case, was that it was a Securities Act case but it doesn’t involve a registration statement or a public offering. I wondered why the SEC proceeded under the ’33 Act – and not the ’34 Act?
I did a little digging into why the SEC may have brought the action under Section 17(a) of the Securities Act. The Supreme Court has held that standard of proof must be met by the Commission when it seeks to enjoin violations of § 17(a) and § 10(b) and Rule 10b-5. In Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), the Court held that scienter is a necessary element of a violation of § 17(a)(1) and § 10(b) and of Rule 10b-5. Scienter was held not to be a necessary element of a violation of § 17(a)(2) or § 17(a)(3). More importantly, the Court held that “when scienter is an element of the substantive violation sought to be enjoined, it must be proved before an injunction may issue.” 446 U.S. at 701, 100 S.Ct. at 1958. By consenting to an action under Section 17(a)(2), Quadrangle is presumably able to continue to deny scienter and this may help, among other things, with insurers.
In unrelated news, CalPERS has published for comment its proposed placement agent regulations. Last Fall, emergency legislation was enacted requiring CalPERS to adopt disclosure regulations for placement agents by June 30th of this year. Because CalPERS is the country’s largest pension fund, these regulations will impact money managers and those trying to market investment products across the country.
A Huge News Event: The SEC Sues Goldman Over a CDO
On Friday, the SEC sued Goldman Sachs over the sale of a “synthetic” collateralized debt obligation, under facts that are not quite as may be otherwise expected as noted by Erik Gerding in “The Conglomerate Blog.” Goldman is strongly disputing the SEC’s allegations.
There’s been an onslaught of news about this action, including: