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Monthly Archives: December 2011

December 22, 2011

A Little Holiday Present: SEC Adopts Accredited Investor Net Worth and Mine Safety Disclosure Rules

Yesterday, without an open Commission meeting, the SEC adopted accredited investor net worth and mine safety disclosure rules.

Besides freaking out those that are now rushing to write memos about these new rules, many members asked if more adoptions are forthcoming before the end of the year given that the SEC’s Dodd-Frank implementation schedule was updated yesterday – and that still shows a lot of things planned for December.

Although anything can happen, I tend to doubt any new rulemakings will happen during the seven working days left for the year. The two that came out seriatim yesterday were non-controversial and I can’t imagine the SEC would adopt rulemakings that are more controversial – such as conflict minerals – without an open meeting. Although an open meeting is not required and like I said, anything can happen…

Oh Boy! The World’s Largest Holiday Disclaimer

It’s gonna be an annual thing. Reminding y’all of these funny disclaimers and holiday cards – see last year’s blog. And here’s a different excerpt from Intel Legal Department’s largest holiday disclaimer ever:

Please keep in mind that Some Quantum Physics Theories Suggest That When the Consumer Is Not Directly Observing This Product, It May Cease to Exist or Will Exist Only in a Vague and Undetermined State. Warning: Pregnant women, the elderly and children under 10 should avoid prolonged exposure to Happy Fun Ball. Caution: Happy Fun Ball may suddenly accelerate to dangerous speeds. Happy Fun Ball Contains a liquid core, which, if exposed due to rupture, should not be touched, inhaled, or looked at. Do not use Happy Fun Ball on concrete. Discontinue use of Happy Fun Ball if any of the following occurs: Itching Vertigo Dizziness Tingling in extremities Loss of balance or coordination Slurred speech Temporary blindness Profuse sweating Heart palpitations. If Happy Fun Ball begins to smoke, get away immediately. Seek shelter and cover head. Happy Fun Ball may stick to certain types of skin. When not in use, Happy Fun Ball should be returned to its special container and kept under refrigeration. Any resemblance to persons living or dead should be plainly apparent to them and those who know them, especially if the author has been kind enough to have provided their real names and, in some cases, their phone numbers. All events described herein actually happened, though on occasion the author has taken certain, very small, liberties with chronology, because that is his right as an American. Do not use near stairs.

The Best Holiday Video Ever…

Came across this very old classic “Hardrock, Coco, and Joe” embedded below. Can’t get enough of those “Oh-lee-o-lay-dee, o-lay-dee-I-ay’s”:

This old “Suzy Snowflake” video is a classic too…

Here’s a pretty funny “Wall Street On Trial” animated video from the Manhattan Institute. And Manatt’s holiday card this year is as funny as last year’s

- Broc Romanek

December 21, 2011

ISS Issues White Paper on “Pay-for-Performance” Test

Yesterday, ISS published its promised white paper that describes the pay-for-performance methodology under which it will implement its 2012 policy updates. ISS will begin to apply this new methodology on February 1st. Here’s an excerpt from a Wachtell Lipton memo by Michael Segal, Jeannemarie O’Brien, Jeremy Goldstein and Timothy Moore (that will be posted later today):

The test is one of the primary methods by which ISS determines whether to recommend for or against a company’s management say-on-pay vote, with companies failing the test being deemed to have a “pay for performance disconnect.” In determining whether there is a “pay for performance disconnect” this proxy season, ISS will measure the degree of alignment between CEO pay and total shareholder return within the subject company’s peer group for a one- and three-year period, as well as the absolute alignment between CEO pay and the company’s TSR over a five-year period.

The white paper specifies that ISS will select 14 to 24 peer companies against which the subject company’s TSR performance and CEO pay will be measured for the one- and three-year periods ending on the last day of the month closest to the subject company’s fiscal-year end. Peer companies will be limited to those in the same two-digit GICS category as the subject company, each with annual revenues (or assets for financial companies) between 0.45x and 2.1x the subject company’s revenues (or assets) and a market capitalization between 0.2x and 5x the subject company’s market capitalization. This list of companies will then be filtered to 14 to 24 companies in the subject company’s six-digit GICS category (or four- or two-digit category if fewer than 14 companies exist in the six-digit category), with companies “closest in size” (presumably based on market capitalization or assets) selected first and larger and smaller companies added to maintain the subject company at or near the median size of the list of peer companies.

“Super-mega” non-financial companies (approximately 25 Russell 3000 companies each with greater than $50 billion in annual revenues and at least $30 billion in market capitalization) will collectively comprise a stand-alone peer group, and ISS will compare their respective one- and three-year TSR performance and CEO pay against the members of that group. In each case, annual revenues, assets and market capitalizations will be determined as of June 1 or December 1 (presumably the relevant year is the year prior to the year in which the proxy is definitively filed).

Now that the white paper has been released, companies can assess how their TSR performance and CEO pay will compare to that of their peers under ISS’ test. Companies should use the criteria set forth in the white paper to determine whether they are likely to have a “pay for performance disconnect” based on these criteria, and, if so, what actions, if any, are advisable to take in light of this analysis.

Yesterday, ISS also announced a new version of its Governance Risk Indicators (GRId 2.0), and issued information about the changes that will become effective in February. Tune in on January 24th for the always entertaining webcast – “Pat McGurn’s Forecast for 2012 Proxy Season: Wild and Woolly.”

If your New Year’s resolution is to consider something new, check out the “Lowell Milken Institute Law Teaching Fellowship” at UCLA School of Law…

Corp Fin Issues Disclosure Guidance for Real Estate Limited Partnerships

On Monday, Corp Fin issued the second installment of its new type of informal written guidance – “CF Disclosure Guidance: Topic No. 3 – Sales Material under Guide 5” – that explains the comments issued most frequently by the SEC Staff when they review sales material from real estate limited partnerships.

PCAOB Re-Proposes Standard on Communications with Audit Committees

Yesterday, as noted in this press release, the PCAOB re-proposed its standard on “Communications with Audit Committees.” Statements from the Board Members are posted (and the re-proposal will eventually be posted on that page too). Jim Hamilton has blogged notes from the Board meeting discussing the re-proposal.

- Broc Romanek

December 20, 2011

SEC Enforcement’s “Leveraging the Media” Strategy

As most of us in the securities law community know, the SEC tends to bring cases that target celebrities if they can because of their limited resources. The media boost by bringing these types of cases serve to help deter potential fraudsters – so it’s a good thing. Hence, this recent insider trading case against a former Red Sox baseball player – and this pump and dump case against “Rudy” Ruettinger, a former Notre Dame football walk-on and the subject of the movie “Rudy.” In his new “Cady Bar the Door Blog,” David Smyth of Brooks Pierce analyzes the latter in an entry entitled “Oh, Rudy….” And then today the SEC charged a former NFL player in a pumping scheme…

House Financial Services to Hold Hearing on SEC Settlement Practices

As noted in this press release, the Republican and Democratic leaders of the House Financial Services committee are planning a hearing on the SEC’s practice of settling cases without requiring defendants to admit or deny guilt. No date has been selected yet…

Mailed: November-December Issue of “The Corporate Executive”

We just mailed the November-December Issue of The Corporate Executive and it includes pieces on:

- Understanding the ISS Burn Rate Policy
- Tax Complexities in Diluted EPS Calculations
- Section 6039 Returns–Lessons Learned
- Rule 144 Gift Compliance Letters

Act Now: Get this issue for free when you try a 2012 No-Risk Trial today.

- Broc Romanek

December 19, 2011

SEC Reconsidering 17 Rules for Small Business Impact (Including Reg FD and Insider Trading Rules)

As Vanessa Schoenthaler blogged in her “100 F Street Blog,” the Regulatory Flexibility Act of 1980 requires federal agencies to review those rules that “have a significant economic impact upon a substantial number of small entities … to determine whether [they] should be continued without change, or should be amended or rescinded … [in order] to minimize any significant economic impact … [on] such small entities.” Reviews must be undertaken within ten years of a rule being adopted. Last week, the SEC published this list of 17 rules that will be reviewed over the next year.

By the way, note that this is a required regular exercise for the SEC – for example, here is its 2010 list, 2009 list and 2000 list

Yesterday, the WSJ ran this piece entitled “Can Annual Reports Save Lives?” that is about the SEC’s conflict minerals rulemaking…

SEC Chair Discusses the Coming Beneficial Ownership Rules Overhaul

In this speech last week, SEC Chair Mary Schapiro gave us a few broad parameters of what the agency’s overhaul of the beneficial ownership reporting rules might look like (the speech also addresses proxy plumbing, proxy access, say-on-pay, etc.). Here is what she said on that topic:

Next year, we plan to begin a broad review of our beneficial ownership reporting rules. We think it’s important to modernize our rules, and we are considering whether they should be changed in light of modern investment strategies and innovative financial products.
Issues that we will consider include:

- Whether the 10-day initial filing requirement for Schedule 13D filings should be shortened;
- Whether beneficial ownership reporting should be changed with respect to the use of cash-settled equity swaps and other types of derivative instruments;
- How the presentation of information on Schedules 13D and 13G can be improved.

The Dodd-Frank Act has provided the Commission with new statutory authority to shorten the 10-day filing deadline for 13D, as well as to regulate beneficial ownership reporting based on the use of security-based swaps. And, earlier this year, the SEC received a petition for rulemaking recommending amendments to Regulation 13D-G.

The petition asks the SEC to broaden the definition of beneficial ownership to include interests held by persons who use derivative instruments. The petition also specifically requests that the time period within which initial beneficial ownership reports must be filed be shortened to one calendar day because technological advances have rendered the 10-day window obsolete.

Many feel that the 10-day window:

- Results in secret accumulation of securities;
- Results in material information being reported to the marketplace in an untimely fashion; and
- Allows 13D filers to trade ahead of market-moving information and maximize profit, perhaps at the expense of uninformed security holders and derivative counterparties.

In response, some argue that:

- Tightening the timeframe may reduce the rate of returns to large shareholders, and thereby result in decreased investments and monitoring of and engagement with management;
- There is no evidence that changes in trading technologies and practices have led to significant increases in pre-disclosure accumulations of large ownership stakes; and that
- State law developments, such as the validity of poison pills, staggered boards and control share statutes, have tilted the regulatory balance in issuers’ favor.

Our first step will likely be a concept release given the controversy surrounding some of the issues.

Shareholder Proposals: Corp Fin Supports Staff’s Exclusion of Auditor Rotation Proposal

As I blogged a few weeks back on our “Proxy Season Blog,” the Carpenters Union had asked for a reconsideration of the Corp Fin Staff’s decision to allow the exclusion of the labor fund’s auditor rotation proposal at Deere & Company. Last week, Corp Fin decided to side with its Staff and allow the exclusion and not kick it up to the Commissioners…

- Broc Romanek

December 16, 2011

A Retrospective: Ten Years as An Online Personality

Wow. Back in February of this year, I passed the decade mark since I launched my maiden site, RealCorporateLawyer.com (here’s how that site looked when I first launched). As the year ends and I wind down on blogging for the holidays, I am going to toot my own horn as a lot has happened since the beginning including these milestones:

1. Created a total of 14 sites – a few of which never saw the light of day.
2. Became one of the first lawyers to blog, starting in May 2002. Now I blog daily on five blogs.
3. One of the first lawyers to conduct webcasts, starting in 2002. 175 webcasts and counting.
4. One of the first to show a conference live via video webcast, starting in 2004.
5. One of the first to post podcasts, starting in 2005. For the three years before that, I posted text transcripts of interviews. Over 400 podcasts and counting.
6. Been actively fostering a vibrant Q&A Forum dialogue with members since 2003. Across all our sites, 20,000 questions and counting.
7. Been actively benchmarking practices online since 2003, either directly on our sites or in our blogs. 125 surveys and counting.
8. Through “The Blue Justice League,” became the first lawyer – as far as I am aware of – to create an online business casual game in 2008.

I’ve also been one of the first lawyers to actively use LinkedIn (since ’06), Twitter (since ’07, using different account than my primary one now), Quora (since ’10), etc. Maybe one day I will grow up to be a “Legal Rebel“…

It looks like Congress has narrowly averted a government shutdown once again. In case final negotiations fall through, here are the SEC’s plans in the event of a shutdown. And here is the SEC’s Enforcement Director’s statement about the agency’s decision to appeal Judge Rakoff’s decision about the Citi settlement in the US Court of Appeals for the Second Circuit….

How to Get a Job

In this podcast, James Martin of DHR International explains how to tweak the board evaluation process to make them more effective, including:

- With the most pronounced legal hiring recession over the last few years in modern history, is there a trend in legal hiring?
- Are law firms hiring again and if so what are they looking for?
- Should I stay with my existing firm or is now the time to start to look for that perfect in-house position?
- Should I stay with my existing in-house position or is not the time to look for a better opportunity?
- Should I stay with my existing firm or is not the time to look for a law firm with a better platform for my practice?

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor 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:

- Watch Those Other Broker Charges
- Evidence: Effects of Prescribing Majority Voting as the Default Voting Standard
- Investors Back Majority Voting as Default Legal Standard
- Another Interview with Bob Monks
- #occupywallstreet: Live!

- Broc Romanek

December 15, 2011

US Chamber Looks to Reorganize the SEC (Again)

Yesterday, the US Chamber of Commerce released a 135-page report that proposes a reorganization of the SEC. This new set of recommendations follows up on a proposed overhaul by the Chamber back in early ’09. Authored by former SEC Secretary Jack Katz, the report does have some good ideas – the most important being more resources provided to the SEC and facilitating the ability of the SEC to hire the right people. Hat tip of the Society of Corporate Secretaries for spotting this new report.

Unfortunately, the report doesn’t tackle the most glaring problem of the SEC – that it’s forced to cater to a Congress bent on the SEC not fulfilling its mission to protect investors. Often due to business lobbyists like the Chamber influencing Congress. In my opinion, that needs to be the starting part of any reform (and came ‘oh, so close’ to happening when Dodd-Frank was being negotiated by the House and Senate)…

Even More Proxy Access Proposals: Up to 15

Here is a blog from ISS’s Ted Allen describing 2 more access proposals, one from Amalgamated Bank at HP and two from Jim McRitchie at Goldman Sachs. And then this blog from Ted describes a group of public pension funds that have filed an access proposal at Nabors Industries. Overall, investors have publicly announced 15 access resolutions for the upcoming proxy season.

D&O Insurance: “Disgorgement” Paid in SEC Settlement Not Covered

Check out this recent blog from Kevin LaCroix on his “D&O Diary Blog” where the “New York Supreme Court, Appellate Department, First Division, held that amounts Bear Stearns paid in settlement of SEC late trading and market timing allegations represented a disgorgement that is not covered under its insurance program. Because the appellate court’s decision reversed the lower court ruling that the settlement payment did not constitute a disgorgement, the case provides an interesting perspective of the question of what makes a particular payment a “disgorgement” for purposes of determining insurance policy coverage.”

- Broc Romanek

December 14, 2011

Glass Lewis Talks About Say-on-Pay and Updates to Voting Policies

In the “Davis Polk Governance Blog” recently, Ning Chiu gave us this recap: During its 2012 North American Proxy Season review, proxy advisory services firm Glass Lewis looked back to the 2011 proxy season and also gave insights as to what we can expect from them in 2012. Highlights included:

Say-on-Pay. Glass Lewis recommended against 17.5% of say-on-pay proposals in 2011. They use a proprietary model to evaluate companies and come up with “A” to “F” grades. 10% of companies that they reviewed received “F”s in 2011, with the average say-on-pay results at those companies at 73%. While, like ISS, they cite pay for performance issues as the primary reasons for causing negative recommendations, Glass Lewis also tends to cast an unusual focus on CD&A disclosure that sometimes surprises companies. According to Glass Lewis, they find it problematic when companies disclose performance measures but not the rationale for the selection or the weighting of the measures, or when they perceive inadequate discussion of a compensation committee’s exercise of discretion. Glass Lewis grades CD&A disclosure as “poor, fair and good,” and 5% of companies received “poor” citations in 2011. They mentioned Amazon as an example of a company that, in their view, both performs and has appropriate executive compensation, but has poor CD&A disclosure. In terms of evaluating company responses to prior year say-on-pay votes, Glass Lewis will examine those companies that received at least 75% negative votes for whether to recommend against either the chairman of the compensation committee or the entire committee, depending on companies’ engagement efforts with shareholders and then the level of responses.

Shareholder Proposals, Including Proxy Access. Glass Lewis data shows that there were 443 shareholder proposals in 2011, a decrease from 591 in 2012, mainly attributable to the absence of compensation proposals in light of mandatory say-on-pay. This year’s most popular proposal, given the election year, will likely be on political contributions and related topics. As for proxy access shareholder proposals, similar to ISS, Glass Lewis will review those on a case-by-case basis before making recommendations, including the percentage ownership requested and holding period requirement. Their list of factors that they will consider is much longer than the ISS policy, including an analysis of the company’s shareholder base in both percentage of ownership and type of shareholders, responsiveness of board and management to shareholders as evidenced by “progressive shareholder rights policies” such as annual elections and majority voting, and company performance and steps taken to improve bad performance.

Exclusive Forum Provisions. Glass Lewis discussed the selection of Delaware as an exclusive forum for shareholder derivative suits by 80 companies as of November, adopted either after seeking shareholder approval or by board action alone. We recently blogged about ISS policies on this matter. Like ISS, Glass Lewis generally recommends against an exclusive forum provision and a company will need to demonstrate that it has a long history of suffering from frivolous lawsuits to justify the proposal. But Glass Lewis also takes it a step further and will recommend against the chairman of the governance committee if the company adopts exclusive forum provisions either without shareholder approval or pursuant to a bundled bylaw or charter amendment (where exclusive forum is coupled with other changes). If a company adopts an exclusive forum provision before a company’s IPO, Glass Lewis will recommend against the chairman of the governance committee or the board chairman if there is not a governance committee chairman.

Talk to Us Now. Glass Lewis reiterated that they do not engage with companies during the proxy season, long a frustrating policy for companies after they receive negative Glass Lewis reports, but they are available for discussions during the off-season. At times during the proxy season, they will sponsor “proxy talks” involving a specific company and invited clients.

Next-Generation LTIPs

In this CompensationStandards.com podcast, Larry Cagney of Debevoise & Plimpton explains a new idea for an executive compensation program – Debevoise & Plimpton Retention Incentive Bonus (the “DEEP RIB”) – that takes a slice of an executive’s future short-term incentive compensation and converts it into a long-term investment in the company’s stock (essentially, it is a mandatory executive stock purchase program that pre-funds an executive’s purchase out of future bonuses, but in a way that does not implicate the personal loan provisions of SOX), including:

- What is the “DEEP RIB”?
- How does it stack up to long-term incentives in place today?
- What types of companies should consider this?
- What are the reactions from clients so far?

Take Our Survey on Pay Ratios

Yesterday, I posted this survey about pay ratios ahead of the SEC’s required rulemaking about this topic under Dodd-Frank. Please take a moment to participate – all responses are anonymous.

I have also posted this new survey on blackout periods. Please participate in that too…

- Broc Romanek

December 13, 2011

D&O Insurance for Executive Compensation Clawbacks?

In an interesting response to some recent FDIC rules, Mike Melbinger blogged recently that a major insurance broker plans had begun offering “policies that would cover financial firms against both their legal costs in the event that they underwent investigation by the FDIC and any compensation that their executives had to hand back as a result of action by the agency.” I’m not sure that the FDIC, SEC or other regulatory agency would let this fly (nor should they). Anyone else out there hear of any developments in this area? Or have thoughts on the topic? Ping me. I will maintain confidentiality as always…

New Insurance for FCPA Investigation Costs?

As this Willkie Farr memo notes: “the insurance industry has begun to develop insurance products intended to protect companies against the costs of FCPA investigations. These products serve a different purpose from that of existing D&O insurance policies. Some D&O policies do not provide any coverage for FCPA investigation costs. Even if a D&O policy does cover FCPA investigation costs, such D&O coverage is limited to costs incurred by individual company officers and directors and does not cover the company’s costs. The new FCPA insurance products, on the other hand, provide coverage for the company itself. To the extent that there is overlap between a D&O policy and an FCPA policy, the FCPA policy would provide primary coverage in the event of an FCPA investigation, preserving the D&O policy for other suits.”

The memo goes on to describe a new product from Marsh USA that “provides coverage for legal, accounting, auditing, and consulting expenses incurred as a result of an FCPA investigation, but does not cover any fines or penalties that might be imposed. Entities and individuals covered by FCPA Corporate Response include the insured company, all subsidiaries, and all persons employed by or otherwise affiliated with or acting at the direction of the company, including independent contractors and consultants. Significantly, FCPA Corporate Response also provides coverage for costs incurred as a result of investigations conducted by foreign regulators pursuant to foreign laws and regulations, such as the U.K. Bribery Act, to the extent that such laws and regulations are compatible with the anti-bribery provisions of the FCPA.”

Survey: How Prepared Are Companies for a Crisis?

This set of survey results prepared by Pillsbury and Levick Strategic Communications provides interesting insights into how prepared companies think they are for a crisis (here’s the related press release). The findings include:

- Only 60% have a formal crisis response plan
- Only 21% have a reputation management plan for social media
- 64% don’t conduct annual training drills
- The following types of crises were thought to most negatively impact the company: security failure (62%); natural disaster (51%); and blackout (40%)

- Broc Romanek

December 12, 2011

One Way to Increase Voting Levels? Pay Shareholders?

Ever since e-proxy’s implementation has dramatically reduced voter participation rates, practitioners have been trying to figure out new ways to encourage shareholders to vote. Although I don’t think the SEC would like kindly on companies paying shareholders to vote – not necessarily to vote with management, just to vote period to ensure quorum is reached – I’m sure that conversation has been had more than once.

But what might this look like if it was tried? A member emailed in this: I just happened to come across pages 3-4 of this proxy statement for an incorporated village in Alaska that is somehow subject to the securities laws and involved in a contested solicitation. The solicitation offers a chance to win cash prizes for those that send in their proxy including an “Early Bird Special.” Pretty wild.

Green Bay Packers: More Stock Sold

In tune with all my recent blogs about crowdfunding and novel stock offerings comes this article noting that the Green Bay Packers conducted their fifth offering in their 92-year history last week. This offering had to be approved by NFL and it’s good timing considering that the Packers may well go undefeated this year. 28,000 shares were sold in first 2.5 hours at $250 per pop (plus a $25 handling charge). This article notes how this stock has no resale value and thus is bordering on shady…

Alan Singer of Morgan Lewis notes: In connection with its last offering of common stock, the Packers submitted a no-action request, asking the staff to confirm that it would not recommend enforcement action if the Packers sold the stock without registration under the Securities Act or the Exchange Act. (Green Bay Packers, Inc.,11/13/97). The SEC Staff granted the no-action request.

I have not read the most recent offering document, although I noted the following legend on the cover:

COMMON STOCK DOES NOT CONSTITUTE AN INVESTMENT IN “STOCK” IN THE COMMON SENSE OF THE TERM. PURCHASERS SHOULD NOT PURCHASE COMMON STOCK WITH THE PURPOSE OF MAKING A PROFIT.

Two pages back, another legend adds the following:

PARTICULARITY (sic) IN LIGHT OF THE TRANSFER RESTRICTIONS AND REDEMPTION RIGHTS OF THE CORPORATION DESCRIBED IN THIS OFFERING DOCUMENT, IT IS VIRTUALLY IMPOSSIBLE FOR ANYONE TO REALIZE A PROFIT ON A PURCHASE OF COMMON STOCK OR EVEN TO RECOUP THE AMOUNT INITIALLY PAID TO ACQUIRE SUCH COMMON STOCK.

I read the prior offering document when it came out, and my impression at that time was that a loyal fan who read the document would understand that while a purchaser would receive a stock certificate that was suitable for framing, he or she could not expect to get much else out of his or her purchase.

Transcript: “Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies”

We have posted the transcript for our recent webcast: “Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies.”

- Broc Romanek

December 9, 2011

A Big Deal: Corp Fin Limits Confidential Submissions by Foreign Private Issuers

Historically, Corp Fin has allowed foreign private issuers (FPIs) to submit initial drafts of registration statements – for their IPO or other first-time filings – on a “draft” confidential basis. Yesterday, Corp Fin released this new policy that notes its position is being changed, effective immediately. Yes, immediately – there is language in the new policy that addresses those FPIs that have already filed and what it means for their amendments.

Here’s analysis from Alex Cohen of Latham & Watkins:

Under the new policy, FPIs that are only listing securities in the United States – as opposed to FPIs that are listed or concurrently listing outside the United States – will in most cases no longer be able to submit confidentially. So, to take an example, a Chinese company doing an IPO on Nasdaq only will from now on likely have to file its F-1 registration statement publicly on EDGAR, and will not be able to submit initial rounds of the F-1 on a confidential basis.

According to the new policy, confidential submission is still allowed under the following circumstances:

- Foreign government that is registering its debt securities;
- FPI that is listed or is concurrently listing its securities on a non-U.S. securities exchange;
- FPI that is being privatized by a foreign government; or
- FPI that can “demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.”

Under certain circumstances, Corp Fin may request a non-US issuer to publicly file its registration statement even though it would otherwise fall within the new policy. Also note that shell companies, blank check companies and “issuers with no or substantially no business operations” will also not be permitted to use confidential submission.

How does this affect ongoing deals? Let’s say you are currently in the middle of the confidential submission process but don’t meet the new policy — e.g., you are working on a Form F-1 for an FPI listing only in the United States. In that case, the SEC Staff will require the next draft of the F-1 to be filed publicly on EDGAR.

As for my thoughts, I suspect this new policy operating in conjunction with the new reverse merger limitations will limit the number of ‘not ready for prime time’ companies seeking to access the U.S. markets (and may disproportionately affect companies from certain countries). I imagine some foreign companies typically have more substantial comments and revisions in response to SEC comments than a comparable US company. Multiple rounds of F-1/As with heavy revisions to the financials will probably not instill potential IPO investors with a lot of confidence and, also, comment letters would eventually become public – whereas, I am not sure they did before with a confidential review. Extensive comments probably don’t look good in the eyes of creditors even if a FPI decided to withdraw its registration statement which I think quite a few of the foreign confidential filers eventually do.

So this change in Staff’s prior policy, which allowed FPIs to get ready for an IPO without publicly revealing their plans until they were ready to solicit, may affect whether non-US issuers decide to list their shares in the United States…

A Delicate Situation: Stock Buybacks and Meeting Executive Pay Targets

With a down market and companies sitting on boatloads of cash, many are already think stock repurchases as noted in this recent NY Times article entitled “As Layoffs Rise, Stock Buybacks Consume Cash.” As intimated by the title of this article, buyback programs likely will be subject to more scrutiny than in the past. In particular, the purpose the buyback may be called into question – is there a relationship to achievement of an executive compensation target? The optics of a buyback are important these days.

Here’s an excerpt from the NY Times article to consider:

The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company’s underlying growth is lackluster. In many cases, like that of the medical device maker Zimmer Holdings, executives are able to meet goals for profit growth and earn bigger bonuses despite poor stock performance.

“It’s clear there’s a conflict of interest,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Unless earnings per share are adjusted to reflect the buyback, then to base a bonus on raw earnings per share is problematic. It doesn’t purely reflect performance.” In addition, executives, who are often large shareholders, stand to benefit from even a small, short-term jump in stock prices.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor 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:

- Post-Proxy Access Decision: Which Way Forward? Part II
- Delaware: Settlement of Multi-Forum Litigation & Fee Negotiations
- Avoid Monoculture. Travel. Read Widely. Let Experience be Your Compass.
- Oil & Gas: SEC Doubts Ability to Book PUDs Beyond 5 Years
- Post-Proxy Access Decision: Which Way Forward?

- Broc Romanek