January 31, 2012

Mine Safety Tweaks to Forms 10-K and 10-Q Effective

As noted in Gibson Dunn's new "Securities Regulation & Corporate Governance Monitor," the changes to Forms 10-K and 10-Q caused by the new mine safety rules took effect on Friday. The headings for Part I, Item 4 of Form 10-K and Part II, Item 4 of Form 10-Q now read "Mine Safety Disclosures" (previously those headings were the more distinguished "Removed and Reserved").

As noted in Gibson Dunn's blog, the SEC estimated that only approximately 100 companies would be subject to the new rules - but all other companies still should make this caption change and then can state that the item is "not applicable." Note that the blank Form 10-K and Form 10-Q posted on the SEC's site have not yet been updated...

ISS Issues 20 FAQs on Its '12 Compensation Policies

Last week, ISS issued this set of FAQs about its newly-minted compensation policies; 15 about pay-for-performance, 3 about management say-on-pay responsiveness and 2 about equity plans.

Transcript: "Pat McGurn's Forecast for 2012 Proxy Season: Wild and Woolly"

We have posted the transcript for our recent webcast: "Pat McGurn's Forecast for 2012 Proxy Season: Wild and Woolly."

- Broc Romanek

January 30, 2012

Off & Running: 1st Say-on-Pay Failure of the Year

As noted in its Form 8-K, Actuant is the first company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 46% voting in favor. A list of the Form 8-Ks filed by the "failed" companies is posted in CompensationStandards.com's "Say-on-Pay" Practice Area.

Thanks to Professor Previts, I have posted a nifty series of pie charts that illustrate the rise of the institutional investor over time in our "Institutional Investors" Practice Area. Interesting stuff...

More on "Federal Court Dismisses Umpqua Say-on-Pay Lawsuit"

Quite a few members emailed me in response to my recent blog in which I reported news from Wachtell Lipton that a federal court had dismissed one of the say-on-pay lawsuits. As noted in this Reuters article, it's simply a procedural skirmish at this point as the case was dismissed without prejudice. As noted in the article, the plaintiff's lawyers intend to continue the case.

Transcript: "The 'Former' Corp Fin Staff Speaks"

We have posted the transcript for our recent webcast: "The 'Former' Corp Fin Staff Speaks."

- Broc Romanek

January 27, 2012

The Furor over Income Inequality: Directors Need to Look In the Mirror

In the wake of President Obama's State of the Union address, the front-page headline in the Washington Post screamed "Obama: Nation Must Address Inequality." Some claim that the President is playing a class warfare card ahead of the November elections and maybe he is. But that is because he can. Not only is it abundantly clear that the vast majority of those in this country - and around the world for that matter, remember Britain's actions just this week - are angry about increasing pay disparity, but quite a few experts believe our country's ability to continue to be a high achiever is at risk because the rich are getting richer at the expense of the middle class. So even more than it was for the last Presidential election, excessive CEO pay will be a lightning rod once a GOP nominee is found and we head into the general election.

So what does this mean for advisors that help set CEO pay? It means a lot because the governance reforms of the past few years have changed only a few practices at the margins - but the bulk of the procedural deficiencies that led to an unsightly climb in pay over the past two decades remain. As I've said many times, boards need to get over their heavy reliance on peer group surveys since they are well known to be unreliable given that most boards sought to pay their CEOs in the top quartile for many years - thus tainting the database with a slippery slope upwards. How can boards continue to use these as a crutch when the plaintiff's bar can so easily prove that the data is unreliable - and thus directors arguably didn't fulfill a fiduciary duty because they knew they weren't fully informed by not considering alternatives?

There are still too many cases of underachieving CEOs earning a lifetime's worth of money in a single year. Sometimes they are fired before a year of service is even over - yet they walk off with a more than generous severance package. And this is not just a handful of outliers - this is the norm. It is far past time to do something about it.

An Alternative to Peer Group Benchmarking? Internal Pay Equity

Recently, a group of trade associations jointly sent this letter to the SEC regarding the need for further research before implementing Section 953(b) of Dodd-Frank, the pay ratio provision. The SEC Staff repeatedly has noted that Dodd-Frank grants the SEC fairly narrow latitude to veer from what Section 953(b) dictates, so I'm not sure how successful this letter will be. And I am well aware of the technical issues - and potential burdensome costs - of how the provision was written by Congress.

But how are boards (and their advisors and trade associations) embracing the spirit of this law? We've been touting internal pay equity as an untainted alternative to peer group benchmarking for the better part of a decade. We've told the story about how American capitalist J.P. Morgan is reputed to have had a rule that he would not invest in a company whose CEO was paid more than 50% above the executives at the next level. He reasoned that, if the CEO was paid more, he wouldn't have a team but only courtiers. Internal pay is a primary factor when a company determines how to pay its workforce - why shouldn't that principle apply to how CEOs get paid?

It's shocking to me how few companies employ internal pay equity today. It's use by DuPont, Whole Foods and a handful of others is no secret. And Dodd-Frank's mandate for disclosure is well known. Shouldn't boards demand to see what those ratios look like ahead of the mandated disclosure? And even more important, as noted above, shouldn't boards demand to see those ratios to protect themselves from liability given the known bad data in the peer group surveys they get year after year? Of course, advisors should be willingly recommending the use of this alternative since it's their job to protect the board. Sadly, most advisors blindly adhere to the status quo as too often happens.

I just can't see what is wrong with putting together internal pay numbers for a board to consider. Where is the evil here? I suppose the downside is it likely will reveal how badly the board has been doing its job setting CEO pay levels over the past 20 years when historical numbers are crunched. But it's better to make a fix now than perpetuate the problem. Note that I am not saying boards need to demand the ratios as called for by Section 952(b) as simpler ratios are easy to generate. We have sample spreadsheets posted in the "Internal Pay Equity" Practice Area on CompensationStandards.com.

By the way, I also don't see any problem with using peer group benchmarks either. It's just that the data in those surveys now are useless due to "pay in the top quartile" craze. There needs to be a reset before that type of data can be relied upon again. This reset will be hard to do, but it's necessary and certainly doable, particularly if CEO pay levels are brought down to Earth on a widespread basis. The longer boards wait, the harder the medicine will be to take. See Exhibit A: Congress trying to force it upon boards through a misguided formulation of Section 953(b) of Dodd-Frank. If boards hadn't waited so long to consider internal pay equity, Congress probably wouldn't have felt compelled to act...

Why It's Wrong to Compare CEO Compensation to Athlete's & Actor's Pay

With the periodic news of a sports star or big-name actor making $20 million per year, I am constantly called upon to remind someone that this is apples and oranges compared to setting CEO pay. For companies that choose to spend that kind of money on a sports star or actor, the decision typically is made via the processes used for any other large asset like a factory (the exception being sports owners who run their teams as a hobby). These processes include a comprehensive evaluation of what the return will be on that investment.

Compare that process to how a board makes the decision about how much to pay a CEO. On the surface, it may seem similar - but in substance, it is vastly different. For starters, the people making the decision are different. But even more important are the differences in the processes - and just as importantly, the end goals of those processes.

Nell Minow makes this point well in this ABC News article from a few years back entitled "Are CEOs and Celebrities Worth the Big Bucks?." And here are more thoughts from Nell:

It's a very small group in the stratosphere of pay: rock stars, movie stars, athletes, investment bankers, and CEOs. Of that group, the first four are in the ultimate pay-for-performance category, with a tiny percentage at the very top making millions of dollars, and with deals that evaporate quickly if a movie, a CD, or a business deal tanks. Their pay is set through tough arms-length negotiations.

CEOs are the only ones who pick the people who set their pay, indeed they pay the people who set their pay. And no matter what "independence" standard we try to impose, the board room culture of congeniality and consensus is so powerful that it makes it very hard to object, especially when the compensation consultant helpfully provides an avalanche of numbers designed to justify pay increases. In the wonderful world of CEOs, like the children in Lake Wobegon, everyone is above average. Even Warren Buffett acknowledges his own failings as a director, particularly in approving excessive compensation: "Too often, collegiality trumped independence." If Warren Buffett, always a significant shareholder in any company on whose board he serves, does not feel able to oppose excessive pay, something is wrong.

- Broc Romanek

January 26, 2012

Broker Nonvotes: NYSE Deems Group of Governance Proposals to Be "Non-Routine"

Over the last few days, the NYSE has sent a notice to listed companies that brokers can no longer vote uninstructed shares on proposals that relate to a group of corporate governance matters - because the environment for the use of broker nonvotes has changed. The examples provided in the notice include: proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides (it seems likely that this new position applies to just these proposals - but the notice is unclear since it lists these as "examples"). The NYSE's new position is effective immediately.

Here are some thoughts culled from this O'Melveny & Myers memo:

One practical implication of the NYSE's new position is that companies may face increased difficulty in obtaining the necessary support for these governance proposals. This could especially impact companies seeking support for proposals requiring approval of a majority (or greater) of the shares outstanding, such as proposals seeking to amend the certificate of incorporation to implement a specified corporate governance change (for example, board declassification or the right of shareholders to act by written consent).

On these proposals, the resulting broker non-votes will have the effect of votes against the proposal. Companies seeking support for proposals that are subject to a typical default vote standard (such as the default Delaware standard of a majority of the shares represented and entitled to vote on the matter or a majority of the votes cast standard) may also feel an impact from this change because brokers who historically voted uninstructed shares in accordance with management's recommendation (whether on an absolute or proportional basis) will no longer be permitted to exercise discretion to vote uninstructed shares in favor of these proposals. The impact will be more severe for companies with governing documents (or subject to state laws) requiring supermajority approval for revisions of the specified governance provision in their certificate of incorporation or bylaws.

Another Variation on Proxy Access

As noted in the ISS Blog: "The Furlong Fund, which has launched a proxy fight at a micro-cap firm, plans to put a proxy access proposal on the ballot. The fund, which is managed by financial analyst Daniel Rudewicz, is calling for investors to own at least a 15 percent stake for one month to be eligible to nominate candidates for up to one third of the board.

The company is Microwave Filter Co., which has a $2.3 million market cap. The Furlong Fund announced its plans in a filing and press release on Friday. The fund is seeking two seats on the company's nine-member board.

The binding proposal is 17th access resolution that has been announced by investors for the 2012 proxy season, according to ISS data. The proposal, which has the highest ownership threshold but the shortest holding period of any resolutions so far, is the fifth "private ordering" variation on proxy access in 2012."

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:

- How to Conduct Board Self-Assessments
- Study: Superior Financial Performance If Promote From Within
- Disclosure Overload & Complexity: Hidden in Plain Sight
- The Future of the SEC's "Neither Admit Nor Deny" Enforcement Policy
- Delaware Supreme Court: H-P's Privileged Report Can Stay Private

- Broc Romanek

January 25, 2012

UK Looks to Dramatically Overhaul Executive Pay: Binding Say-on-Pay for Starters

As I've blogged before, the United Kingdom has been on a path to revise its executive compensation laws to rein in excessive pay. Yesterday, the UK announced a slew of proposals that would push the envelope in the executive pay area - here are the proposals (or the closest thing I could find to them), as well as British Business Secretary Vince Cable's oral statement, a summary of responses to the related discussion paper and a comparison with the High Pay Commission's report that came out a few months ago (note that the HPC is not an independent commission; it's a left wing charity). And here is a Towers Watson memo, ISS blog and NY Times article discussing these proposals.

The proposed major changes include:

- Say-on-pay votes would be binding
- Approval threshold increased to 75% from 50%
- At least two compensation committee members would have no prior board experience
- Clawbacks of bonuses if executives failed
- Enhanced disclosures

It's notable that Britain's opposition party is quoted in media reports as criticizing these proposals as not going far enough! Is this looking at tea leaves for the US? Remember Australia's new "two strikes" law...

New Shareholder Initiative Seeking Disclosure of Lobbying

Here's something that I blogged last week on our "Proxy Season Blog": As reflected in this press release issued yesterday, AFSCME has filed 40 shareholder proposals urging companies to report on lobbying expenditures, including indirect funding of lobbying through trade associations. This is an extension of the activist movement in the political contribution transparency area that is the hottest governance topic this proxy season - but instead of seeking information about how a company may be involved in influencing elections, these proposals seek transparency about how companies seek to influence regulation and laws.

The press release includes a sample of AFSCME's shareholder proposal and supporting sample at the end, as well as a list of the companies that have received the proposal so far.

Proposed Legislation: Disclosure of Corporate Political Contributions

As Pat McGurn noted during yesterday's proxy season webcast (audio archive available), political contributions is the hottest topic of this season. Not only shareholders are interested in this topic, but politicians as well (see Keith Bishop's blog about a new bill that would mandate corporate political disclosures). With so many members asking questions about how their companies need to rethink their political contribution policies and procedures so they don't violate pay-to-play or other laws or run afoul of what their major shareholders demand from them, I just scheduled a webcast - "The Exploding World of Political Contributions" - that will be held in two weeks.

Webcast: "Alan Dye on the Latest Section 16 Developments"

Tune in tomorrow for the Section16.net webcast - "Alan Dye on the Latest Section 16 Developments" - to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation. Try a no-risk trial to catch this program.

- Broc Romanek

January 24, 2012

Using QR Codes for Shareholder Communications

In this podcast, Joe Lindfeldt of DG3 Group discusses how QR codes can be leveraged for shareholder communications, including:

- What are QR codes?
- How hard are they to generate?
- How can companies use them for shareholder communications?
- Can you give examples of how they have been used so far?
- What do you see as a likely future for QR codes?

Nasdaq Proposes Updated Initial Listing Standard

Last week, the SEC published notice of a proposed rule change by Nasdaq. The exchange is seeking to adopt a $2 or $3 initial listing bid price as an alternative to the current $4 initial listing bid price on its Nasdaq Capital Market. The change would allow the Nasdaq Capital Market to compete for listings with NYSE Amex, the only other exchange that currently has a $2 or $3 initial listing bid price. Hat tip to Vanessa Schoenthaler for her blog on this...

Transcript: "The Latest Developments: Your Upcoming Proxy Disclosures-What You Need to Do Now!"

We have posted the transcript for the CompensationStandards.com webcast: "The Latest Developments: Your Upcoming Proxy Disclosures-What You Need to Do Now!"

- Broc Romanek

January 23, 2012

Corp Fin Updates Financial Reporting Manual (Again)

Last week, Corp Fin indicated that it has updated its Financial Reporting Manual for issues related to reporting requirements of an acquired business in a step acquisition, disclosures of subsidiary guarantee release provisions, auditor location issues, ICFR audit report modifications due to a scope limitation, revisions pursuant to effective dates of the Foreign Issuer Reporting Enhancements release, as well as other changes.

Corp Fin has posted a confusing "summary of changes" that comprise the current update because the opening few sentences make reference to the last update - but the chart on the "summary of changes" page is new. Last revised in October, Corp Fin has been updating the Manual much more frequently than in the past, deciding to do so a little bit at a time rather than major rewrites.

Last week, the NYSE reminded its staff in this memo that Super Bowl pools are strictly prohibited...

Carlyle Group Seeks to Prevent Shareholder Claims from Reaching a Courtroom

Those interested in preserving shareholder rights have been emailing me with complaints about the most recent amendment to Carlyle Group's Form S-1 (under which the company hopes to go public by selling limited partnership units). As Kevin LaCroix explains in his "D&O Diary Blog," the company specifies in its partnership agreement that all limited partners must submit any claims to binding arbitration. See Kevin's blog for a fuller analysis - as well as this Securities Law Prof Blog.

Webcast: "Pat McGurn's Forecast for 2012 Proxy Season: Wild and Woolly"

Tune in tomorrow for the always entertaining webcast - "Pat McGurn's Forecast for 2012 Proxy Season: Wild and Woolly." Pat McGurn, Executive Director of ISS and the proxy season expert, will recap what transpired during the 2011 proxy season and what to expect for 2012. Here is Pat's PowerPoint presentation that you should print off in advance of the program...

- Broc Romanek

January 20, 2012

Federal Court Dismisses Umpqua Say-on-Pay Lawsuit

Here's something that I recently blogged on CompensationStandards.com's "The Advisors' Blog": According to this memo from Wachtell Lipton:

In a decision reaffirming directors' authority to determine executive compensation, the United States District Court for the District of Oregon has ruled that a suit against bank directors arising out of a negative "say on pay" vote should be dismissed. The court determined that plaintiffs failed to raise a reasonable doubt that the challenged compensation was a reasonable exercise of the board's business judgment. This is the first federal court decision to dismiss such an action, a number of which have been filed in state and federal courts across the country in the wake of the Dodd-Frank Act. Plumbers Local No. 137 Pension Fund v. Davis, Civ. No. 03:11-633-AC (Jan. 11, 2012).

At issue in Davis was a decision by the compensation committee of Umpqua Holdings Corporation to pay increased compensation to certain executive officers for 2010 -- a year in which the bank's performance had improved and met predetermined compensation targets, but total shareholder return was allegedly negative. In a subsequent advisory "say on pay" vote, a majority of the shares voted disapproved of the 2010 compensation. Plaintiffs claimed that it was unreasonable for the Umpqua board of directors to increase compensation and that the shareholder vote rejecting the compensation package was prima facie evidence that the board's action was not in the corporation's or shareholders' best interest.

The court rejected both of plaintiffs' arguments. Applying Delaware and Oregon law, the court determined that plaintiffs' "essential position . . . that if a simple comparison reveals a level of compensation inconsistent with general corporate performance, the business judgment presumption is necessarily overcome, [is] a position that is unsupported by the applicable standards." The court also held that the Dodd-Frank Act did not alter directors' fiduciary duties and that a negative "say on pay" vote alone does not suffice to rebut the business judgment protection for directors' compensation decisions. In so holding, the court expressly declined to follow a prior federal court decision which had denied a motion to dismiss in a "say on pay" action in the Southern District of Ohio, NECA-IBEW Pension Fund v. Cox, No. 11-451 (S.D. Ohio, Sept. 20, 2011).

Davis is a powerful reminder that directors of both financial and non-financial companies may base compensation on long-term goals and choose the yardsticks by which to measure executive performance with confidence that courts will respect their good faith business judgment.

Developments in Private Ordering

Professor Larry Hamermesh gives us some food for thought in his recent blog about "two ostensibly unrelated events in the last two weeks implicate deep questions about the basic role of private ordering and regulation in relation to publicly traded equity securities."

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:

- STA Goes After Broadridge on Separately Managed Accounts
- Another Survey: What Companies are Doing in Wake of Whistleblower Rules
- Black Friday: Fraud Auctioning Style -
- Unlisted Companies: Watch Out for Rule 10b-17 Compliance
- Another Court Decision: Importance of Oral Safe Harbor Warnings Before Conference Calls

- Broc Romanek

January 19, 2012

SEC Approves the PCAOB's '12 Budget, a 11% Hike

As noted in this Bloomberg article, the SEC unanimously approved the PCAOB's '12 budget last week in the amount of $228 million, a 11% hike as the PCAOB takes on new duties overseeing broker-dealer audits. Unlike past years, this approval was not contentious - see Chair Schapiro's and Commissioner Aguilar's remarks - as it appears that new PCAOB Chair Jim Doty is handling his new duties nicely, such as better oversight of the IT development process at the agency.

Meanwhile, this Reuters article discusses rumors of two candidates vying for a PCAOB Board slot...

Political Spending Disclosure: CalPERS and CalSTRS Join the Bandwagon

Recently, CalPERS and CalSTRS amended their corporate governance guidelines to call on companies to disclose their policies regarding political contributions. Here's CalPERS' press release - and here's CalSTRS' press release.

January-February Issue: Deal Lawyers Print Newsletter

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

- M&A in 2012: Out with the Old, in with the New?
- Forward-Looking Statements: Deal Market Trends for 2012
- Joint Development Agreements: A Primer
- Tax Diligence and Tax-Related Provisions in Acquisition Agreements
- Delaware Court of Chancery Seeks To Narrow VeriFone With Potential Unintended Consequences

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

- Broc Romanek

January 18, 2012

Shareholder Proposals: Apache vs. Chevedden (Again)

We're now in Round 3 of Apache vs. John Chevedden. Here is Apache's exclusion notice sent to the SEC last week indicating that the company intends to exclude a Chevedden proposal based on eligibility grounds. Apache went the "exclusion notice" route because it's suing relying on newly minted SLB No. 14F rather than making the typical no-action request (Exhibit H is a separate attachment - and here's the lawsuit's complaint). It will be interesting to see if other companies follow this atypical route going forward.

Round 1 was Apache suing Chevedden in 2010 and won its case in the Federal District Court for the Southern District of Texas. As noted in this blog, Apache decided to forego a lawsuit last year in Round 2 and decided to exclude a proposal from Chevedden based on that court win, combined with the fact that KBR sued Chevedden (here's last year's exclusion notice filed with the SEC).

SEC Inspector General to Leave His Job

Wow. The original title of this blog was "SEC Inspector General Buys NFL Tickets from Radio Show Host: Does It Matter?" - then came the news yesterday that SEC Inspector General David Kotz was leaving the Commission. So maybe his departure answers the question posed in my former title? That's not clear. Anyways, here's what I wrote for this blog entry before the news:

A few weeks ago, I blogged about how SEC Inspector General David Kotz was being investigated by the SEC's General Counsel for providing a 75-minute interview on a semi-infomercial website. Now, the mass media is reporting how Kotz purchased NFL tickets from a radio show host after appearing on his program. I don't know enough about the ethics rules to opine on whether this is truly newsworthy. But I am fascinated that the mass media is ready and willing to report on such things. I harken back to a decade ago when things that were SEC-related rarely got coverage. Now, anything related seems to be newsworthy...

Board Effectiveness

In this podcast, Catherine Bromilow of PwC's Center for Board Governance discusses a new book by PwC and the Institute of Internal Auditors entitled "Board Effectiveness: What Works Best" - which includes anecdotes from active directors about their personal experiences, including insights on their interactions with investors, media, and regulators - including:

- Why did you write the new book?
- What are some of the practical nuggets in it?
- Any surprises when writing it?
- Where can people get a copy of the book?

- Broc Romanek

January 17, 2012

Survey Results: Stock Repurchase Practices

We have posted the survey results regarding the latest stock buyback trends, repeated below:

1. Does your company use a Rule 10b5-1 plan for corporate buybacks:
- Yes - 58.1%
- No - 41.9%

2. If your company uses a Rule 10b5-1 plan for corporate buybacks, does the company publicly disclose the adoption of the plan:
- Yes - 31.6%
- No - 68.4%

3. If your company uses a Rule 10b5-1 plan for corporate buybacks, is there a waiting period between execution of the Rule 10b5-1 plan and the first repurchase:
- No - 57.9%
- Yes, and it is the same waiting period that our insiders use in connection with their Rule 10b5-1 plans - 31.6%
- Yes, we have a waiting period - but it's not the same as the waiting period for insiders - 10.5%

4. If your company uses a Rule 10b5-1 plan for corporate buybacks, what is the typical duration of the plan:
- Approximately equal to the blackout period - 42.1%
- 2 months to less than 6 months - 21.1%
- 6 months to less than 12 months - 31.6%
- 12 months or greater - 5.3%

5. If your company uses a Rule 10b5-1 plan for corporate buybacks, are purchases made only during the company's blackout periods:
- Yes, plan purchases are made only during the blackout periods - 36.8%
- No, sometimes we make plan purchases outside the blackout periods too - 63.2%

6. If your company uses a Rule 10b5-1 plan for corporate buybacks, does it enter into a plan:
- Once per year that covers all of the blackout periods for the year - 5.3%
- More than once per year, one for each blackout period - 15.8%
- On an ad hoc basis - 78.9%

7. If your company uses a Rule 10b5-1 plan for corporate buybacks, has it implemented more than one plan at a time for repurchases:
- Yes - 5.3%
- No - 94.7%

8. Has your company used accelerated share repurchase (ASR) programs for corporate buybacks:
- Yes - 38.7%
- No - 61.3%

9. If your company has used ASRs, has your company announced the ASR programs separately from any general announcement of a buyback authorization:
- Always - 35.7%
- Never - 35.7%
- Depends on size of the ASR - 28.6%

10. If your company has used ASRs, has there been a waiting period between execution of the ASR and the start of its valuation period:
- Yes, and it is the same period we use for 10b5-1 buyback plans - 7.7%
- Yes, but it is not the same period we use for 10b5-1 buyback plans - 15.4%
- No - 76.9%

11. Has your company used other derivatives (e.g. call options, capped calls, "Sub-VWAP forward" or other forward purchases) for corporate buybacks:
- Yes -10.0%
- No - 90.0%

Please take a moment to participate in this "Quick Survey on Blackout Periods" - and this "Quick Survey on Pay Ratios."

Chinese Hackers Breached US Chamber of Commerce Computers for Possibly a Year

As noted in this Reuters article, Chinese hackers breached the Chamber's computers and gained access to everything stored on its systems, including information about its three million members. According to the article, the complex operation involved at least 300 Internet addresses and was discovered and shut down in May 2010. It is possible the hackers had access to the network for more than a year before the breach was uncovered. Security failures continues to be one of the primary challenges for companies today...

Webcast: "Activist Profiles and Playbooks"

Tune in tomorrow for the DealLawyers.com webcast - "Activist Profiles and Playbooks" - to hear Bruce Goldfarb of Okapi Partners, Dan Katcher of Joele Frank Wilkinson Brimmer Katcher, Damien Park of Hedge Fund Solutions LLC and Darren Wallis of Alara Capital identify who the activists are - want what makes them tick. Over 20 activists will be dissected!

- Broc Romanek

January 13, 2012

SEC Announces Record Number of Enforcement Actions for Fiscal Year 2011

With significant publicity, as noted in this Sidley Austin alert, the SEC announced several weeks ago that it had filed the most enforcement actions in a single year in SEC history. For the fiscal year ending September 30th, the SEC stated it filed a record 735 enforcement actions - a 9% increase from 2010 - with more than $2.8 billion in penalties and disgorgement ordered. As noted in the Pepper Hamilton alert, Enforcement Director Khuzami recently gave remarks which indicate that this number will go even higher this year...

Hands down. The best video featuring a dog (he's hip, man!) ever...

Unconstitutional! Canada's Highest Court Strikes Down Proposed Federal Securities Regulator

This D&O Diary Blog entry from Kevin LaCroix says it all. Pretty wild...

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:

- Distortions In Baffling Financial Statements
- 2011 Spencer Stuart Board Index: Board Composition, Organization & Process and Director Comp
- ABA Declines to Embrace Majority Voting as Default Standard
- The Second Circuit Curbs ERISA "Stock Drop" Class Actions
- How to Conduct a Board & Director Evaluation

- Broc Romanek

January 12, 2012

The Financial Printer Diaries: Tales of an Era Gone By - Part 2

Below is Part 2 of a collection of memories from anonymous members about working at the printers (here's Part 1). Please keep them coming and I will only blog them if you give me permission:

- Worst time at the printer? Being in-house at the same time as Joe Flom. Our deal sat totally ignored until Joe's was done and out the door!! Imagine that!!??

- Been at Bowne around the clock for a week on a very difficult public offering. Needless, I was on a first-name basis with everyone employed at Bowne at that time. About night 5, our group is by far the largest group in-house. When I emerge from a meeting in smaller conference room about 3:00 AM, the night receptionist goes absolutely pale. She says, "Harry, I'm so sorry, I did not realize you were still here." I say, "Thanks, but why?" She hesitates, and then says, "Well, your wife called about 30 minutes ago and I told her not only that you were not here now, but also that you had not been here tonight." I calmly replied, "Now guess who you are going to call and wake up to correct that small gaff??!!" She did, and my long-suffering lawyer bride thought it was hysterical . . . . Now many years later still one of her favorite war stories.

- I remember slugging proof on a Merrill Lynch deal and being astonished at how fast their people could say "Merrill no com Lynch com Pierce com Fenner ampersand Smith no com Incorporated six up."

- 3:00 a.m., eight months pregnant and recalculating a Beneficial Ownership Table for the 400th time because the bank kept changing the offering size. And then falling asleep on the couch only to wake up to the nauseating (to a pregnant woman) smell of eggs and lukewarm pancakes and some banker telling me we needed to change the table again. All while listening to the slam-whirr, slam-whirr of the ball on the Golden Tee machine. Good times.

- I graduated from law school in 2001, so I was pretty much at the end of "The Printer Era." While you could submit changes to documents via e-mail in 2001, in order to proof what I refer to as the "Blueline" (ready to print) "book version" of the document, you had to actually go to Donnelley's or Bowne's offices (Bluelines could not be transmitted over PDF back then).

I am from New Orleans, so large quantities of alcohol assembled in one location do not shock me. There was one 6:00 a.m. morning at The Printer (I forget which one) where I may have confused a refrigerator full of beer with a vision of Heaven. We had just cleared to print, and The Printer Rep invited us into their darkened kitchen while opening their refrigerator. Perhaps it was the warm glow of light shining through a refrigerator stocked with beer, but I nearly dropped to my knees. I ended up (very quickly) downing a beer, running back to my apartment, showering/dressing and zooming back to the office for an 8:00 a.m. meeting with the client.

My former employer shall remain unnamed. The beer, I recall, was delicious.

Speaking of "printers," I love this hilarious picture of one...

Latham & Watkins "Weekly Words of Wisdom" Blog

I've certainly been remiss in not highlighting Latham & Watkins "Weekly Words of Wisdom" Blog that has been around for nearly two years. The group at Latham responsible has been doing great work in their weekly writings. It's informative, particularly for attorneys not deeply involved in securities law (which is true for the bulk of in-house lawyers since they often wear many hats) - and written in a style that is easy to understand. One of the things I like about the blog is that the topics tackled are not ripped from the headlines. Rather, they cover bread and butter stuff that is more likely to get them attention from potential clients. Check it out!

Sara Hanks' "Capitol Capitalist" Blog

I'm also excited to note that Sara Hanks - former Corp Fin Chief of the Office of International Corporate Finance - has launched the "Capitol Capitalist" Blog. Check that out as well!

- Broc Romanek

January 11, 2012

One for the '11 Road: The 44th Say-on-Pay Failure of the Year

We certainly ended the year with a bang, as the 44th company to fail to receive a majority vote for say-on-pay only obtained 6.4% of the votes cast in favor. 6.4%! As noted in its Form 8-K, American Defense Systems had many more votes voted in opposition (51%) or abstention (43%). The only director up for election had even more "withheld" votes than were cast against the company's say-on-pay. Note that this company is a smaller reporting company (whose annual meeting was held on December 30th but the 8-K states the date of event was August 3rd)...

A list of the Form 8-Ks filed by the "failed" companies is posted in CompensationStandards.com's "Say-on-Pay" Practice Area.

Webcast: "The Latest Developments: Your Upcoming Proxy Disclosures - What You Need to Do Now!"

Tune in tomorrow for the CompensationStandards.com webcast - "Your Upcoming Proxy Disclosures - What You Need to Do Now!" - to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Robbi Fox of Exequity, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to say-on-pay--including the latest SEC positions--and the other compensation components of Dodd-Frank, as well as how to handle the most difficult ongoing issues that many of us face.

As the grace period has ended - and all memberships expired on December 31st - if you haven't yet renewed your membership for CompensationStandards.com for '12, you will not be able to access this program. Renew now.

OECD's Report on Board Practices in Setting Executive Pay

Here is something that I blogged on CompensationStandards.com's "The Advisors' Blog": I haven't seen anything on this - so I guess we all missed this OECD report on board practices in setting executive compensation that was published back in August. Among the many interesting parts of this report is the UK section, particularly Section 7.1.6 regarding shareholder engagement. The UK has had say-on-pay for a decade - so the US can look to the Brits to see what might lie ahead here perhaps. Observations about the undue influence by a couple of groups and feelings of distrust and hostility do not bode well. Of course, maybe we can do better here. Hope springs eternal.

- Broc Romanek

January 10, 2012

Posted: List of Proxy Access Shareholder Proposals

For those keeping track, ISS is maintaining this list of access shareholder proposals. 16 so far, including a fourth variation. Meanwhile, the first companies have commenced sending in no-action exclusion requests to Corp Fin on access proposals as noted in this blog...

Posted: Winter Issue of Compensation Standards Newsletter

We've heard such tremendous feedback from our week of executive pay conferences that was held back in November that we have decided to share this lengthy transcript from our plenary session entitled "Say-on-Pay Shareholder Engagement: The Investors Speak" in the form of this lengthy Winter 2012 issue of our Compensation Standards newsletter, which was just posted on CompensationStandards.com. The practical guidance provided during this panel from those that vote proxies at thousands of companies is timely as we gear up for another interesting proxy season.

Renew Now: As all CompensationStandards.com memberships expired on December 31st, if you haven't yet renewed for '12, you will not be able to access this issue, nor catch this Thursday's webcast on that site: "The Latest Developments: Your Upcoming Proxy Disclosures-- What You Need to Do Now!"

Federal Court Sides with SEC, Orders Hearing on SEC's Subpoena to Deloitte

Here's news pulled from this White & Case memo: On January 4th, a magistrate judge granted the SEC's request for a hearing to decide whether to order the Shanghai office of Deloitte Touche Tohmatsu CPA Ltd. ("Deloitte Shanghai") to produce documents related to its work as the outside auditor of Longtop Financial Technologies, Ltd. This proceeding will decide important issues bearing on the SEC's ongoing enforcement action against Longtop, a publicly traded Chinese company. The magistrate judge's decision closely follows the SEC's deregistration of Longtop on December 14th for failing to file required annual reports and audited financial statements with the SEC. Longtop's securities are now substantially worthless.

The hearing will also highlight tensions between the SEC and Chinese issuer and auditor regulators who have failed to reach a written agreement on mutual assistance in securities investigations and supervision of audit firms despite talks during the summer of 2011. This sets the stage for either resolution of those tensions through negotiation or increased conflict between the two regulatory systems with unknown consequences for issuers and auditors in both capital markets.

- Broc Romanek

January 9, 2012

Corp Fin Issues MD&A Guidance on European Sovereign Debt Exposures

On Friday, Corp Fin issued the latest in its "CF Disclosure Guidance Topic" series with Topic No. 4: European Sovereign Debt Exposures due to concerns that banks aren't consistently disclosing their direct - and indirect - exposure to the sovereign debt crisis in Europe. This guidance provides a long laundry list of what the Staff is seeking from financial institutions in this area, including noting that recent comments sought enhanced disclosure - on a country-by-country basis on:

- Gross sovereign, financial institutions, and non-financial corporations' exposure, separately by country;
- Quantified disclosure explaining how gross exposures are hedged; and
- Discussion of the circumstances under which losses may not be covered by purchased credit protection.

I remember how some of the banks were criticized back during the financial crisis in '08 and '09 for a lack of transparency - so this guidance is timely ahead of what may be a challenging year for banks...

SEC Changes "Neither Admit Nor Deny" Settlement Policy (When There is a Parallel Criminal Case)

As noted in this NY Times article, the SEC has modified its newly controversial "neither admit nor deny" settlement language policy in the wake of pressure from Judge Jed Rakoff (see this blog) and Congress (see this blog about an upcoming hearing).

On Friday, SEC Enforcement Director Rob Khuzami issued the following statement about the Staff's recent policy change:

Following a review by senior enforcement staff that began this spring and separate discussions with the Commissioners over the last several months, last week we modified our settlement language for cases involving criminal convictions where a defendant has admitted violations of the criminal law. As explained below, the new policy does not require admissions or adjudications of fact beyond those already made in criminal cases, but eliminates language that may be construed as inconsistent with admissions or findings that have already been made in the criminal cases.

Under our traditional "neither admit nor deny" approach, a defendant could be found guilty of criminal conduct and, at the same time, settle parallel SEC charges while neither admitting nor denying civil liability. This approach has reflected that the goals, objectives and other factors in the civil settlements that we and other federal and state agencies enter into often are distinguishable from those at issue in criminal proceedings. It nevertheless seemed unnecessary for there to be a "neither admit" provision in those cases where a defendant had been criminally convicted of conduct that formed the basis of a parallel civil enforcement proceeding.

The change applies to cases involving parallel (i) criminal convictions or (ii) NPAs or DPAs that include admissions or acknowledgments of criminal conduct. Under the new approach, for those settlements we will:

- Delete the "neither admit nor deny" language from the settlement documents.
- Recite the fact and nature of the criminal conviction or criminal NPA/DPA in the settlement documents.
- Give the staff discretion to incorporate into the settlement documents any relevant facts admitted during the plea allocution or set out in a jury verdict form or in the criminal NPA/DPA.
- Retain the current prohibition on denying the allegations of the Complaint/OIP or making statements suggesting the Commission's allegations are without factual basis.

‪The revision applies in the minority of our cases where there is a parallel criminal conviction (by plea or verdict) or criminal NPA/DPA involving factual or legal claims that overlap to some degree with the factual or legal claims set out in the Commission's complaint or OIP.

This policy change does not affect our traditional "neither admit nor deny" approach in settlements that do not involve criminal convictions or admissions of criminal law violations. In particular, it is separate from and unrelated to the recent ruling in the Citigroup case, which does not involve a criminal conviction or admissions of criminal law violations. We have appealed that ruling and the reasons for that appeal are described in the public statement I issued at that time.

As many former Staffers have emailed me, this settlement language saga is small potatoes since once a defendant has admitted criminal culpability in a DOJ case (or has been convicted), it won't care much about admitting in the SEC's civil case. One member shared this view: "The reason the SEC shouldn't care much about the loss of injunctions under the Rakoff approach (and he actually opposes only injunctions, not settlements more broadly) is that they have developed the far more effective tool of the non-prosecution agreements."

Here's some good analysis from David Smyth about this latest development in his "Cady Bar the Door" blog. And here's other commentary that I blogged a few weeks back on "The Mentor Blog"...

Webcast: "The 'Former' Corp Fin Staff Speaks"

Tune in tomorrow for the webcast - "The 'Former' Corp Fin Staff Speaks" - to hear former Senior Staffers from the SEC's Division of Corporation Finance Brian Breheny of Skadden Arps, Marty Dunn of O'Melveny & Myers, Linda Griggs of Morgan Lewis and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster weigh in on what you need to be doing for the upcoming proxy season, and provide a "bring-down" of what's happening now in Corp Fin.

As the grace period has ended - and all memberships expired on December 31st - if you haven't yet renewed your membership for TheCorporateCounsel.net for '12, you will need to able to access this program. Renew now.

- Broc Romanek

January 6, 2012

More Pay Disclosure for You? Verizon to Disclose More Details After Corp Fin Comments

With the official pushing of the SEC's expected rulemaking timetable into the first half of this year from late '11, many were resting easy that there would not be any new SEC executive pay positions to worry about this proxy season. Think again as this article from yesterday's WSJ was an eye-opener, noting that Verizon has agreed to make additional pay disclosures in the Summary Compensation Table of its next proxy statement after a total of 11 Corp Fin comment letters and responses - dated between June and November - were recently posted on the SEC's site (you can see these by looking at the "Upload" and "Corresp" documents in this Verizon filing stream, or look at these SEC comments and Verizon responses).

Here's how Cleary Gottlieb characterized the news of this WSJ article:

An article on page B1 of today's Wall Street Journal, entitled "Verizon Details $20 Million More in Pay," discusses an interpretive position taken by the staff at the SEC, in correspondence with Verizon Communications Inc, regarding the reporting of performance-based equity awards under plans that reserve significant discretion for the compensation committee to adjust payouts based on non-objective criteria, in the Summary Compensation Table of a proxy statement. The position relates to a current issue that may affect the staff's view of proper reporting of 2011 compensation in some of your 2012 proxies. The specific position taken by the staff does not appear to have been previously publicly reported. We are sending this quick note to alert you to the interpretive issue. Applying the staff's position to a particular plan may require judgment of the specific plan terms, as well as accounting expertise.

Here is the WSJ article repeated below:

Verizon Communications Inc. has agreed to increase by $20 million the total disclosed pay for former Chief Executive Ivan Seidenberg, but the recently retired executive won't be getting any more money. Verizon will recalculate Mr. Seidenberg's compensation for 2009 and 2010 after the Securities and Exchange Commission said the company hadn't properly disclosed discretionary grants of restricted stock given to Mr. Seidenberg in 2007 and 2008.

Verizon maintains its disclosures were proper, but agreed to make the changes in its forthcoming proxy statement to resolve the SEC's concerns. "The SEC did not suggest that anything was improper in past disclosures, but they wanted a new method of disclosure going forward," said Verizon spokesman Peter Thonis in a statement. "We have simply complied with a reasonable request, given that all of the information we provided was accurate and transparent." The dispute relates only to Verizon's disclosure of Mr. Seidenberg's pay, and won't change his actual compensation.

Mr. Seidenberg, who stepped down after 11 years as Verizon's CEO on July 31 and as chairman on Dec. 31, was long one of the nation's best-paid CEOs. He earned more than $130 million total from 2006 through 2010, according to Standard & Poor's Capital IQ unit. The total includes salary, bonuses, and the value of restricted stock and stock options at the time they vested, including the $20 million at issue with the SEC. His pay was also a flashpoint for unions and Verizon critics. In 2006, the nation's largest labor-union group, AFL-CIO, sought to oust directors on Verizon's compensation committee, calling Verizon "the poster child for pay for pulse." Last summer, amid a labor dispute, union representatives organized a candlelit "funeral for the middle class" outside Mr. Seidenberg's home.

The clash highlights tougher SEC scrutiny of regulatory filings by big companies, as well as the challenge of valuing different flavors of executive pay. "It is becoming increasingly common" for the SEC to question details in quarterly and annual reports about executive compensation, corporate taxes and non-standard accounting measures, says John Olson, a partner at Gibson, Dunn & Crutcher in Washington, D.C. Still, pay consultants say it's unusual for a company to change an already-reported compensation total.

The dispute between Verizon and the SEC has been brewing since June, though it only recently became public, when the 11 letters exchanged between the company and the agency were posted on the SEC's website. SEC rules call for such letters to be posted 45 days after an issue is resolved, which occurred in early November in Verizon's case.

At issue was how the company should disclose grants of restricted stock given to Mr. Seidenberg in 2007 and 2008. The grants were tied to the performance of Verizon's stock over three-year periods, as well as the board's assessment of Mr. Seidenberg's performance on several strategic initiatives, such as revenue growth and subscriptions to Verizon's fiber-optic video service.

Verizon reported the grants in its proxy statements for 2007 and 2008, as SEC rules require. At the time, it valued the grants based on the performance "target," though it specified that Mr. Seidenberg could receive more shares if his, and Verizon's performance, exceeded the targets. In 2008, the company said that the grant if Verizon were to meet its targets through the next three years would be 355,210 shares of Verizon stock, then valued at $13.1 million. After the three-year period ended in 2010, Verizon directors awarded Mr. Seidenberg 838,457 shares, then valued at $30 million.

Verizon's stock performance accounted for some of the increase, but SEC staffers said Verizon should have included the discretionary portion of the award, roughly $13.8 million, in the "summary compensation table" of the proxy statement filed last March. That's the convenient headline number often cited in media reports and by some investors. The summary compensation table reported Mr. Seidenberg's 2010 compensation as $18.2 million. Including the discretionary grant would have increased the total 76%, to $32 million. For 2009, the SEC wanted Verizon to boost Mr. Seidenberg's reported total compensation by $6.5 million, to $24 million. Verizon's calculation method "has had and, may in the future, have the effect of under reporting compensation" in the summary table, the SEC said in an Aug. 5 letter. An SEC spokesman didn't respond to requests for comment.

Mark Borges, a principal at Compensia, a management consulting firm, says there's room for interpretation in the SEC's rules for reporting performance-based awards, because company plans differ. But he says the SEC increasingly has been pushing companies for more disclosure. "The staff really wants companies, particularly when it comes to CEO compensation, to be as forthcoming as possible," he says. Verizon's Mr. Thonis says the company had disclosed the range of values for the grant in 2008, the amount ultimately awarded, and highlighted the figures in its proxy statement and in letters sent to some big shareholders.

One Cincinnati Bell Say-on-Pay Case Settled, Second in Limbo

As noted by Steve Quinlivan in his Dodd-Frank.com Blog:

Cincinnati Bell has agreed to settle one of the say-on-pay law suits which is pending against it in the Hamilton County Court of Common Pleas. The lawsuit arises out of the shareholder's "say on pay" vote taken at Cincinnati Bell's May 2011 annual meeting. The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in July, 2010, requires that all public companies solicit an advisory shareholder vote on executive compensation. We previously reported on a related case here and here which survived a motion to dismiss.

According to Phillip R. Cox, Chairman of Cincinnati Bell's Board of Directors, "The proposed settlement includes features which will clarify the Company's executive compensation policies and which will more clearly communicate these policies to our shareholders. Importantly, the changes represented by this agreement should better assist our shareholders' understanding of how these policies are applied to covered employees."

One of Plaintiffs' Counsel, Ed Korsinsky, adds that: "The longer-term and perhaps most important aspect of the settlement is that it provides a binding agreement that executive compensation decisions remain consistent with the Company's pay for performance philosophy and that the Board of Directors will continue to clearly articulate the Company's philosophy to its shareholders." As part of this settlement, Cincinnati Bell will, among other things, reaffirm its pay for performance practice and provide for an annual discussion of its philosophy related to executive compensation.

Many may conclude the failed say-on-pay law suit which is settled for disclosure relief will become a shake down for an attorney fee award, much like numerous cases filed to block an acquisition. It will be interesting to see what kind of fee award the court grants for this type of "success." That may drive how many of these litigations are filed in the future.

But the case settled is a different one than the case which survived a motion to dismiss. The effect of the settlement on that case, pending in the United States District Court for the Southern District of the Western Ohio Division, is unclear. However, that case has taken some unusual twists and turns.

After the court denied the defendants' motion to dismiss, the defendants learned that diversity jurisdiction did not exist. Plaintiffs failed to identify itself as a citizen of Georgia and one of Cincinnati Bell's defendant directors was a citizen of Georgia. Plaintiffs attempted to correct the subject matter jurisdiction by amending the complaint to drop the director which resides in Georgia and voluntary dismissal of the director. The court granted defendants motion to strike the amended complaint and voluntary dismissal as procedurally improper. Apparently the plaintiffs can still a motion to amend the complaint following the proper procedures.

But there is another twist to the case that can only make the defense bar smile. The court sua sponte issued an order to the plaintiffs attorney to show cause why the attorneys should not be sanctioned under Rule 11 for failure to conduct a reasonable inquiry into the factual contentions as to the alleged diversity. The court ultimately concluded it was an honest mistake but found the attorneys "incomplete answer to the Court's direct question of him at oral hearing represented misbehavior of an officer of the Court in his official transactions." As a result, the court revoked the attorneys pro hac vice admission in the case.

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:

- Views of Former SEC Chairs on Auditor Rotation
- Survey: Boards Vulnerable to Hacking and Information Theft
- Bob Monks: What Occupy Wall Street Means for Corporate Governance
- Survey: Boards & Risk Management
- A Corporate Governance Framework for Emerging Markets

- Broc Romanek

January 5, 2012

AICPA Conference: Notes and Corp Fin Presentations

As it typically does, the SEC has posted these speeches and PowerPoint presentations used by its Staffers during last month's annual AICPA Conference:

- Chief Accountant James Kroeker on IFRS convergence, audit quality and auditor oversight

- Deputy Chief Accountant Paul Beswick on IFRS and valuation profession

- Deputy Chief Accountant Brian Croteau on global audit considerations, root causes of audit deficiencies and importance of inspection feedback

- Professional Accounting Fellow Jason Plourde on pricing service information in informing fair value measurements and disclosure

- Professional Accounting Fellow Christian Peo on COSO's internal controls project and improving audit quality

- Corp Fin's Current Developments

- Corp Fin's Gerry Laporte and Kevin Woody: Smaller Issuer Disclosure & Financial Reporting Issues

- Corp Fin's Craig Olinger and Jill Davis: International Reporting Issues

- Enforcement's Chief Accountant Howard Scheck Remarks

A few weeks ago, the PCAOB issued Staff Audit Practice Alert No. 9: "Assessing and Responding to Risk in the Current Economic Environment," which updates Staff Audit Practice Alert No. 3 in light of current global economic conditions and recent enhancements to PCAOB standards.

Bummer: SEC Approves Bundling of IR Services for Nasdaq and NYSE

As noted in this article, the SEC has granted this order so that the Nasdaq can offer complimentary IR services worth up to $169,000 a year to newly listed companies and to those switching their listing from the NYSE. The ruling follows approval several months ago of a rule change at the NYSE allowing up to $100,000 worth of services for all Big Board-listed companies, not just new listings like the Nasdaq.

Both of these SEC rulings should prove to be formidable hurdles for "independent" providers of services, thereby diminishing innovation - and ultimately will probably result in higher prices for companies once the Nasdaq and NYSE kill off any third-party competition.

But the bigger tragedy in my opinion is the probable loss in shareholder communication quality. US companies continue to provide a limited IR web page experience for investors, mainly due to the type of woeful IR services that major providers are providing companies. Yet, the main blame lays at the feet of the many companies that simply don't care what their IR web page looks like - or that their online SEC filings are not all that "usable." So much for shareholder engagement.

Despite our profession being all about "disclosure," there remains a shocking lack of knowledge about how humans "read" online in the profession - and thus few really know how documents are best written and presented online. To my knowledge, this Insights article that I wrote over a decade ago is the only one securities law piece that even uses the term "usability" despite it long being a mainstream term for those that design web sites. The SEC should be writing rules requiring a minimum experience on IR web sites and a minimum standard of usability for online proxy statements and annual reports, if not all SEC filings. Instead, the agency is approving listing standards that stifle any progress in this direction.

Mailed: November-December Issue of "The Corporate Counsel"

A few weeks ago, we mailed the November-December Issue of The Corporate Counsel and it includes pieces on:

- 2012 Proxy Season Items
- SLAB 14F--And the Shareholder Proposal Process Gets Much Simpler
- Crafting Issuer-Specific Shareholder Voting Outcome Requirements
- Late 8-K Reporting of Board's Say-on-Pay Frequency Determination
- The Staff's Opinions on Opinions
- The End of an Era--Confidential IPO Filings for Foreign Private Issuers
- Section 12(g) No-Action Relief for RSUs--The Windy Road from Facebook to Zynga/Twitter
- The Staff Clarifies the Rule 3-10 Consequences of Customary Subsidiary Guarantee Release Provisions

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

- Broc Romanek

January 4, 2012

"Funds Legally Available" for Redemption of Preferred Stock

Below are some interesting thoughts from Vince Pisano of Troutman Sanders:

It is normal in a certificate of designation for preferred stock to provide that dividends and redemptions will be made out of funds legally available therefore. Interestingly, there is not a legal definition of "funds legally available," despite the Delaware Chancery Court's decision last year in SV Investment Partners v. ThoughtWorks, in part because of new confusion caused by the opinion of the Supreme Court affirming that decision on November 15, 2011.

The facts are fairly simple. The plaintiffs had purchased preferred stock of ThoughtWorks which entitled them to have their shares redeemed at their request five years from issuance, out of funds legally available therefore. Plaintiff's position was that "legally available therefore" meant that ThoughtWorks needed to have sufficient surplus (net assets minus net liabilities and the par value of stock), with net assets to be determined, pursuant to the terms of the preferred, at the highest legally permitted value, to make the payments.

ThoughtWorks and Chancellor Laster disagreed and each concluded that funds legally available meant that you actually need to have available funds and that there be no legal restriction on their use. Legal restrictions include the surplus requirement in the Delaware GCL but also include other well known restrictions, including that payments not impair the payors' ability to continue as a going concern and pay its debts as they become due. Whatever ThoughtWork's statutory surplus may have been, Laster deferred to the Board's conclusion that funds were not available to the company to pay the redemption price in any case since it neither had nor could it borrow the necessary funds and each quarter determined what funds were available and would, after payment, permit the company to pay its debts.

Chancellor Laster's opinion is crystal clear and may even be correct. The Supreme Court, though affirming, just confused the question. They held that since Laster found that payment need not be compelled even if the plaintiff's position were correct - that funds legally available meant surplus - it did not have to decide whether f plaintiffs were correct. The only problem is that Laster never made that ruling. He simply ruled that plaintiffs' position was incorrect and looked instead to the "plain meaning" of the words.

If Laster or the Supreme Court had ruled that funds legally available for redemption was equivalent to surplus, judgment would have had to be entered for the plaintiffs since no one disagreed that the company had adequate statutory surplus. If you think I confuse easily, here is one of the concluding lines from the Supreme Court's opinion: "We find that the record in this case supports the Court of Chancery's conclusion that SVIP failed to prove that ThoughtWorks had 'funds legally available' (i.e.,surplus) to satisfy SVIP's redemption demand." This is the same court that on page one of its decision said: "We need not address SVIP's argument that the court below erred by not equating "funds legally available" with the definition of statutory surplus under the Delaware General Corporation Law."

One thing I do understand - when drafting terms of preferred stock - we need to stop using a term we only think we know the meaning of, be precise and consider adequate remedies.


"60 Minutes" Tackles Internal Controls

From a member: A few weeks ago, CBS' "60 Minutes" ran a segment on the prosecution of Wall Street (or lack thereof) as well as the lack of internal controls at firms such as Countrywide and Citi, which raises questions about how auditors could have been giving "clean" unqualified opinions on the internal controls at such institutions and whether investors can rely on such reports as being credible.

Transcript: "iPads in the Boardroom: 20 Issues to Consider"

We have posted the transcript from the recent webcast: "iPads in the Boardroom: 20 Issues to Consider."

- Broc Romanek

January 3, 2012

Dave & Marty on Cybersecurity, SLB 14F and Bruce Springsteen

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

- The SEC's cybersecurity disclosure guidance
- Staff Legal Bulletin No. 14F
- Dave's and Marty's views on Springsteen

This blog by Mark Suster - of "Both Sides of the Table" fame - is a great read on how to start the new year. It doesn't even mention the term "resolution" - but it does provide some insight into how one might live their life.

Judge Rakoff Getting Testy Over SEC-Citigroup Case

As noted in this NY Times article on Friday, "Judge Jed Rakoff of the Federal District Court in Manhattan issued a supplemental order saying that the SEC appeared to file a "materially misleading" request with the Court of Appeals for the Second Circuit earlier this week, when the commission sought an emergency halt to further proceedings in the case."

Before then, as noted in this blog by David Smyth, the US Court of Appeals in Manhattan had agreed to the SEC's request to delay the Citigroup settlement case until at least January 17th. This is the latest SEC settlement that Judge Rakoff has objected to - and he had set on a path of an accelerated timeline. As noted in this Bloomberg BusinessWeek article, Rakoff has now ordered the SEC and Citigroup to file with everything they file with the Second Circuit also with him. This case is getting quite nasty.

Even before all this, in this article from the Atlantic, Rakoff gave this lengthy interview to Howard Fineman in the Huffington Post. The Atlantic article does a good job of analyzing some of Judge Rakoff's critical comments about the SEC.

Meanwhile, a Wisconsin judge has questioned whether the SEC has sufficiently clawed back money for the relevant period under a different set of circumstances, as noted in this Bloomberg article.

Our January Eminders is Posted!

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

- Broc Romanek