E-Minders July 2014
In This Issue:
E-Minders is our monthly e-mail newsletter containing the latest developments and practical guidance for corporate & securities law practitioners.
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Just Mailed: Popular "Romeo & Dye Section 16 Forms & Filings Handbook": Good news. Alan Dye just completed the 2014 edition of the popular "Section 16 Forms & Filings Handbook," with numerous new - and critical - samples included among the thousands of pages of samples. Remember that a new version of the Handbook comes along every 4 years or so - so those with the last edition have one that is dated. The last edition came out in 2009.
Act Now: If you don't try a '14 no-risk trial to the "Romeo & Dye Section 16 Annual Service," we will not be able to mail this invaluable resource to you now that it's done being printed. The Annual Service includes a copy of this new Handbook, as well as the annual Deskbook and Quarterly Updates.
Just Mailed: 1st Edition of Morrison & Romanek's "The Corporate Governance Treatise": Wrapping up a project that Randi Morrison & Broc Romanek feverishly commenced two years ago, we are happy to say the inaugural 2014 Edition of Morrison & Romanek's "The Corporate Governance Treatise" was just finished being printed. You will want to order now so that you can get your copy as soon as it's being mailed to those that ordered it. With over 900 pages—including 212 checklists—this tome is the definition of being practical. You can return it any time within the first year and get a full refund if you don't find it of value.
Our Pair of Popular Executive Pay Conferences: We are very excited to announce that Corp Fin Director Keith Higgins will be part of our "Annual Proxy Disclosure Conference" on September 29th-30th. Registrations for our popular pair of conferences (combined for one price) - in Las Vegas and via video webcast - are strong and for good reason. Act now for phased-in pricing - which expires July 11th - to get as much as 15% off!
The full agendas for the Conferences are posted—but the panels include:
- Keith Higgins Speaks: The Latest from the SEC
Upcoming Webcasts on TheCorporateCounsel.net: Join us on July 22nd for the webcast - "Career Advice: The In-House Perspective" - during which Oracle's Chris Ing, Governance Solutions Group's Denise Kuprionis, Northeast Utilities' Rich Morrison, former Northrup Grumman Kathie Salmas and Tennant's Heidi Wilson will impact career advice from decades of in-house experience.
And join us on September 16th for the webcast - "Cybersecurity: Working the Calm Before the Storm" - to hear Weil Gotshal's Paul Ferrillo, Hogan Lovells' Harriet Pearson and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster analyze a host of issues that you need to consider now - before you have a security breach.
And join us on October 15th for the webcast - "Private Company Trading Markets: The Latest" - to hear NASDAQ Private Market's Greg Brogger, SecondMarket's Annemarie Tierney, ACE Portal's Peter Williams and our own Dave Lynn of Morrison & Foerster discuss how the private company trading exchanges are evolving as the Nasdaq and NYSE have recently got into the game.
There is no cost for these webcasts if you are a member of TheCorporateCounsel.net. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up for this no-risk trial online, send us an email at firstname.lastname@example.org - or call us at 925.685.5111.
Upcoming Webcasts on DealLawyers.com: Join us on July 15th for the webcast - "Divestitures: Nuts & Bolts" - during which Doug Campbell, Jim Rice, Jennifer Arnolie and Scott Berry of E&Y will teach us all we need to know about diversitures.
And join us on October 7th for the webcast - "The Art of Negotiation" - during which Cooley's Jennifer Fonner DiNucci, Perkins Coie's Dave McShea and Sullivan & Cromwell's Krishna Veeraraghavan will teach you how to negotiate with the best of them in a chock-full of practical guidance program.
No registration is necessary - and there is no cost - for these webcasts for DealLawyers.com members. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up online, send us an email at email@example.com - or call us at 925.685.5111.
Upcoming Webcast on CompensationStandards.com: Join us on July 16th for the webcast - "Executive Pay Basics: The In-House Perspective" - during which Winston & Strawn's Erik Lundgren, Motorola Solutions' Kristin Kruska and KAR Auction Services' Becca Polak provide analysis of how a struggling in-house practitioner might best keep up with executive pay practices & disclosures, including an overview of fundamental securities law issues, stock exchange requirements, proxy advisor policies.
No registration is necessary - and there is no cost - for this webcast for CompensationStandards.com members. If you are not a member, take advantage of our no-risk trial to access the programs. You can sign up online, send us an email at firstname.lastname@example.org - or call us at 925.685.5111.
Our New "Job Board": Free for All
We have launched a new "Job Board" that can help you land a job - or find candidates for a job opening (the first job opening is already posted!). You don't need to be a member to participate - nor does it cost anything to post a job opportunity or search for a new job. Every aspect of it is entirely free. Tell your recruiter friends so they can post jobs. If you're not a member, you do need to "register" for the job board (we require that so the folks on the other end of a job transaction can reach you). Check it out!
Accredited Investor Verification: SIFMA Guidance
In late June, SIFMA issued guidance about a broker's duty to verify accredited investors (backed by 20 law firms which are listed at the back). The guidance includes a form of a Rule 506(c) accredited investor questionnaire as well as a form of written confirmation. It could wind up being important if new Rule 506(c) offerings take off...
Insider Trading: SEC Sues Congress to Compel Subpoenas!
As noted in this WSJ article and NY Times article, the DOJ and SEC have sent subpoenas to Rep. David Camp, Chair of the House Ways & Means Committee, and Congressional Staffer Brian Sutter, regarding whether they tipped traders about a change in health care policy in the wake of a long-running investigation. And, as noted in this WSJ article, the SEC filed a lawsuit in the Southern District of New York seeking to compel the subpoenas. Possible grand jury to follow.
Here's an excerpt from David Smyth's blog about the case:
This is fascinating to me for so many reasons, among them: (1) the potential Constitutional cluster we're about to witness; (2) the real test this poses for the recently passed STOCK Act's effectiveness; and (3) another example of Mary Jo White's severe distaste for those who defy Commission subpoenas.
And here's an excerpt from the latest WSJ article:
"It's not unheard of for an agency to serve a subpoena to Congress, but for an agency to sue is—if not unprecedented—at least very rare," said Michael Stern, who was senior counsel to the U.S. House from 1996 to 2004. "It shows that there is a serious conflict; the SEC really wants the information and the House really wants it protected," he said.
SCOTUS: Halliburton Doesn't Overturn Basic (But Defendants Can Rebut Reliance Presumption)
In late June, the Supreme Court delivered the long-awaited opinion in Halliburton v. Erica P. John Fund. We're posting hordes of memos in our "Securities Litigation" Practice Area, but here's analysis from Skadden:
The Supreme Court of the United States in Halliburton Co. v. Erica P. John Fund upheld the fraud-on-the-market presumption of reliance first recognized by the Court in Basic v. Levinson, but gave defendants a new tool for challenging class certification in fraud-on-the-market cases. The Court held that defendants may introduce evidence of lack of price impact at the class certification stage in order to rebut the presumption of market efficiency. Justice Roberts delivered the opinion of the Court, joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan. Justice Thomas filed an opinion concurring in the judgment, in which Justices Scalia and Alito joined.
Basic opened the door to securities class action litigation by holding that plaintiffs are entitled to a class-wide presumption of reliance if the securities at issue were traded in an efficient market, and thus the alleged misrepresentations were analyzed by the market and reflected by the market price. In the absence of the presumption of reliance, plaintiffs would be required to demonstrate "eyeball reliance" on each alleged misrepresentation on an investor-by-investor basis, effectively precluding class treatment.
The Court upheld the fraud-on-the-market presumption of reliance, but held that defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock. Defendants may seek to defeat the Basic presumption through direct, as well as indirect, price impact evidence. Thus, the Court vacated the Fifth Circuit's decision that evidence of price impact could not be introduced at the class certification stage and remanded for further proceedings. The decision today gives defendants a potentially powerful new tool for challenging the use of Basic's presumption of reliance at the class certification stage.
The SEC's First Whistleblower Retaliation Case
Here's news from Nick Morgan of DLA Piper:
The SEC's biggest problem in bringing its first whistleblower retaliation case - a settled administrative action against Paradigm Capital Management - may be the lack of statutory authority to do so under Dodd-Frank. The SEC's track record in this area is already blemished.
Dodd-Frank unambiguously defined "whistleblower" to mean people who provide information to the SEC. However, the SEC promulgated regulations that purported to expand the definition of "whistleblower" to include any individual who has reported information which could lead to prosecution by the SEC for violations of US securities laws, even if the individual does not report that information directly to the SEC. Under this expansive SEC regulation, a "whistleblower" would include an individual who only made an internal complaint to his or her company, but did not report the alleged conduct to the SEC.
A recent opinion by the federal Fifth Circuit Court of Appeals rejected the SEC's "expansive interpretation of the term ‘whistleblower' for purposes of the whistleblower protection," denying retaliation protection to an employee who did not report alleged misconduct to the SEC and was demoted, then fired, for complaining to managers and a corporate ombudsman that the company was engaged in questionable lobbying efforts with an official in the Iraqi government.
The Fifth Circuit dismissed the employee's arguments that the more expansive SEC regulation provided protection, stating that "there is only one category of whistleblowers: individuals who provide information relating to a securities law violation to the SEC."
The SEC's self-granted authority to bring its own anti-retaliation action suffers from the same impermissibly "expansive interpretation" of Dodd-Frank.
The relevant portion of Dodd-Frank authorizes "[a]n individual who alleges discharge or other discrimination" to file an anti-retaliation lawsuit. The statute does not authorize the SEC to file such a lawsuit. However, the same regulation promulgated by the SEC that the 5th Circuit found exceeded the SEC's statutory authority to define "whistleblower" also purports to make the anti-retaliation provisions "enforceable in an action or proceeding brought by the Commission."
As with the SEC's attempt to redefine "whistleblower," the SEC's first attempts to exercise its self-granted authority to pursue an anti-retaliation claim will eventually be challenged in courts.
Here's more on this case from David Smyth's blog...
PCAOB Adopts "Related Parties & Unusual Transactions" Auditing Standard
As noted in this blog by Gibson Dunn's Michael Scanlon, the PCAOB recently adopted Auditing Standard #18 that expand audit procedures required to be performed with respect to three important areas: (1) related party transactions; (2) significant unusual transactions; and (3) a company's financial relationships and transactions with its executive officers. The standards also expand the required communications that an auditor must make to the audit committee related to these three areas. They also amend the standard governing representations that the auditor is required to periodically obtain from management. Here are memos about this new standard.
FASB's New Revenue Recognition Standard: Pre-Adoption Planning Required
U.S. companies will need to comply with a new converged revenue recognition standard that the FASB and the International Accounting Standards Board (IASB) issued on May 28. The converged standard—which applies to fiscal years beginning after December 15, 2016—eliminates many existing industry and other accounting guidance related to revenue recognition for U.S. companies and provides the first comprehensive requirements in International Financial Reporting Standards.
The new standard may not affect all U.S. companies equally, but it will require all to evaluate their contracts to determine whether:
- the new standard will affect the timing and amount of revenue recognized;
The amount and timing of revenue may be affected for the following reasons:
1. The new revenue recognition standard requires companies to determine whether goods or services promised in a contract are separate performance obligations that must be accounted for separately if they are distinct, which means that (1) "[t]he customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer" and (2) "[t]he promise to transfer the good or service is separately identifiable from other promises in the contract."
2. The amount of revenue that is recognized (i.e., the transaction price) must
take into account various factors, including the following:
3. The timing of revenue recognition will be affected by the following:
A significant requirement in the new revenue recognition standard is the principles-based disclosure requirement, which is intended to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from such contracts. This will likely result in robust, qualitative, and quantitative information about contracts on a disaggregated basis for appropriate categories of customers, such as the categories that companies use in their investor presentations, about related revenues, the allocation of the transaction price to performance obligations and significant judgments, and changes in judgments made in applying the new standard to contracts.
Survey Results: Pay Ratios
1. At our company, the board:
- Does not consider internal pay equity when setting the CEO's compensation -
2. Ahead of the SEC's mandated pay disparity disclosure rulemaking under
Dodd-Frank, our company:
3. As one of the companies that have assessed the impact of the SEC's mandated
pay disparity disclosure rulemaking, our company:
4. In your own opinion, do you think that statistical sampling would have too
high a potential for manipulation or material error:
Facebook Sued Over Director Compensation
Mark Zuckerberg and other members of Facebook Inc's board have been sued by a shareholder who claimed a policy letting them annually award directors more than $150 million of stock each if they choose is unreasonably generous. In a complaint filed on Friday night in Delaware Chancery Court, Ernesto Espinoza said the board was "essentially free to grant itself whatever amount of compensation it chooses" under the social media company's 2012 equity incentive plan, which also covers employees, officers and consultants.
He said the plan annually caps total awards at 25 million shares and individual awards at 2.5 million, and in theory lets the board annually award directors $156 million in stock each, based on Friday's closing price of $62.50. The lawsuit does not contend that such large sums will be awarded. Espinoza also said last year's average $461,000 payout to non-employee directors was too high, being 43 percent larger than typical payouts at "peer" companies such as Amazon.com Inc and Walt Disney Co that on average generated twice as much revenue and three times more profit.
Facebook spokeswoman Genevieve Grdina said in an email: "The lawsuit is without merit and we will defend ourselves vigorously." A spokeswoman for Robbins Arroyo, a law firm representing the plaintiff, had no immediate comment.
The lawsuit alleges breach of fiduciary duty, waste of corporate assets and unjust enrichment. It seeks to force directors to repay Facebook for alleged damages sustained by the Menlo Park, California-based company, and to impose "meaningful limits" subject to shareholder approval about how much stock the board can award itself.
Among the other defendants is Facebook Chief Operating Officer Sheryl Sandberg, a director whose compensation was $16.15 million in 2013, according to a regulatory filing. She is worth $999 million, Forbes magazine said on Monday. Zuckerberg made $653,165 last year, a regulatory filing shows, and Forbes said his net worth is $27.7 billion. Espinoza was also a plaintiff in a 2010 shareholder case in Delaware against Hewlett-Packard Co concerning its handling of the resignation of Chief Executive Mark Hurd over his relationship with a former contractor. The case is Espinoza v. Zuckerberg et al, Delaware Chancery Court, No. 9745.
Delaware: Fee-Shifting Legislation Punted to 2015
Last month, Broc blogged about how the Delaware legislature was barreling towards passing legislation to reverse the impact of the ATP Tour v. Deutscher Tennis Bund decision. In the wake of this Delaware Senate resolution, here's comes news from this WSJ blog:
Score this round for the U.S. Chamber of Commerce. The group representing business interests has won, at least for now, a fight in the Delaware legislature over whether companies can foist their legal bills onto shareholders who sue them and lose.
The Delaware legislature has postponed until early 2015 discussion of a proposed bill that had drawn heat from the Chamber, among others, the bill's sponsor confirmed Wednesday. The bill would have banned companies from shifting the costs of losing cases onto the stockholders who bring them. "I certainly believe that we should not permit companies carte blanche to adopt these kinds of bylaws," Sen. Bryan Townsend, who sponsored the bill, said in an interview. "But we have heard from a broad group of stakeholders and thought it best to take the coming months to continue our examination of the issue."
The fight bubbled up after Delaware Supreme Court ruling last month that upheld a fee-shifting bylaw adopted by a private company, ATP Tour Inc. Some corporate lawyers said the ruling might open the door to public companies adopting similar "loser pays" provisions in an effort to deter shareholder litigation, which has skyrocketed in recent years. Such cases are now nearly automatic after the announcement of a merger, and rarely result in substantial gains for shareholders.
A section of the state bar quickly crafted legislation to ban companies from adopting such bylaws, and presented the measure to the legislature, which had been set to vote last week. But the Chamber opposed the bill, which it said "takes away a new tool ... [that] businesses could use to reduce the amount of unnecessary litigation that accompanies corporate mergers," according to a letter sent to Mr. Townsend June 5 and reviewed by The Wall Street Journal.
Others joined the fray. Dole Foods Co. also sent a letter to Mr. Townsend, the News Journal has reported. And more quietly, E. I. du Pont Nemours & Co., one of Delaware's biggest and most influential companies, has quietly lobbied against the legislation, according to people familiar with its efforts. A DuPont spokesman confirmed that the company opposes the bill, but declined to comment further. DuPont's intervention likely carried considerable weight in Delaware, where it was founded in 1802 as a gunpowder maker along the banks of the Brandywine Creek. It is the only Fortune 250 company based in the state, despite the dozens that claim it as their legal home, and its name is plastered around Wilmington, where its headquarters take up an entire city block.
XBRL Filings: 8-12% Contain Errors!
Here's an excerpt from this piece by Compliance Week:
Calcbench, a technology firm promoting XBRL, says 8 to 12 percent of all filings provide the wrong scale for a number - such as reporting a number as 15 when the correct figure is 15,000. That mistake was most common in the fourth quarter of 2012, when one in eight filings contained a scaling problem, the firm says. Scaling most often occurs in tags associated with shares, but "a non-trivial number of errors" also occur in areas that are watched closely by analysts and investors, like revenue, net income, and assets. "Errors in these accounts may cause potentially wrong investment recommendations and decisions which may lead to increased liability by filing firms," the report says. That makes them a high priority for correction, according to Calcbench.
Even more common, says the report, are sign switches, a problem in 40 to 60 percent of filings over the period analyzed by the firm. Sign switches are not as right or wrong as scaling errors, the firm says, but they can be confusing. As an example, cost of goods sold might be presented as a negative number that is added to revenue, or as a positive number that is subtracted from revenue. The analysis also finds a correlation between the presence of sign switches and the average number of tags in a filing. "The more tags you use, the more likely you are to have a sign switch," the report says.
SEC to Bring More Insider Trading Cases in Administrative Proceedings?
As noted in this Reuters article, the SEC is looking to bring more insider trading cases "as administrative proceedings in appropriate cases," Andrew Ceresney, head of the SEC enforcement division, told the District of Columbia Bar. "We have in the past. It has been pretty rare. I think there will be more going forward."
Shareholder Meetings: The Challenges of Vote Counting
There is nothing more stressful - with perhaps the exception of a major disruption - at an annual shareholder meeting than having to postpone and adjourn the meeting. As reported in Mike Melbinger's blog, Cheniere Energy recently filed these supplemental proxy materials to postpone a special shareholder's meeting as a result of a lawsuit alleging improper compensation disclosures and some fishy counting of votes (see also Jill Radloff's blog and this WSJ article).
This came on the heels of Cortland Bancorp having to postpone its annual meeting because its transfer agent's tallies couldn't be trusted in the wake of an enforcement action filed by the SEC. In our "Annual Shareholder's Meetings" Practice Area, we have posted sample supplemental proxy materials and Form 8-Ks dealing with meeting postponements and adjournments - and here's a blog from Keith Bishop about abstentions in the news...
Back to the fishy counting of votes, for those that have watched Broc's videos about "usable" proxies, you will see that he has highlighted companies that used a chart to clearly describe how abstentions and broker non-votes are counted for each agenda item. The Cheniere Energy lawsuit highlights the need to have good disclosure in this area - and it will be interesting to see if the plaintiffs firms will be scouring 8-Ks for proposals that reportedly passed, but should not have passed had abstentions and broker non-votes been counted properly (and vice versa), as well as Section 14(a) claims for incorrect descriptions of the vote required...
(Re)considering a Board Risk Committee
Ever since the recent, highly publicized cyber breach incidents - whether warranted or not (see Broc's recent blog) - it seems like hardly a day goes by without media coverage & third-party commentary about the board's risk oversight role. This new Deloitte report- which addresses Deloitte's findings of a global study addressing the prevalence and drivers of board-level risk committees - is very timely.
A primary theme is that board risk committees are just one tool that boards should at least consider to help effect their risk oversight responsibilities. That said, as the study shows, board risk committees (stand-alone or hybrid) for large companies outside the highly regulated financial services industry (FSI) are still relatively uncommon globally - and virtually non-existent in the US. This is the kind of benchmarking information most boards like to be aware of.
Most commonly, US boards effect their risk oversight by allocating responsibilities among multiple board committees; the balance typically retain responsibility at the full-board level. However, like all other governance practices, re-evaluating the approach to risk oversight periodically in the context of evolving macro & company-specific circumstances is important - even if it appears that the status quo is working. Sometimes this means reviewing particular governance practices outside of the board's slated review time frame (e.g., proxy season). This report assists that review process by teeing up for the board's consideration these potential benefits of a risk committee:
Depending on the organization and its industry, risks, and regulatory and risk governance needs, a board-level risk committee can enable the board to:
Importantly, the report emphasizes that - outside of the FSI - risk committees aren't normally required, and may not be desirable for every company. Each board needs to determine for itself how best to effect its risk oversight responsibilities; a dedicated risk committee is just one of several potential approaches. As noted in my previous blog about board technology committees, some boards function most effectively at the full board level with minimal work conducted in standing committees - whereas others function primarily through their standing committees. Both approaches can be equally effective. Along those lines, the board can certainly achieve the risk oversight benefits identified in the report without establishing a dedicated risk committee.
More on our "Proxy Season Blog"
We continue to post new items regularly on our "Proxy Season Blog" for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
- Annual Meeting Midpoint: Closer Look at Governance Shareholder Proposals
People: Who's Doing What and Where
At the SEC, although the actual celebration was tamped down this year - an ice cream social - the SEC has built a "80th Anniversary" spotlight page that is pretty cool. Some old-time videos including one with the 1st SEC Chair, Joe Kennedy. In Enforcement, Adam Storch is leaving as COO and Managing Executive - and Geoff Aronow is leaving as Chief Counsel of the Office of International Affairs.
In Corp Fin, accountant Cicely LaMothe has been promoted to serve as an Associate Director.
Former Justice Jack Jacobs of the Delaware Supreme Court will join Sidley as Senior Counsel, effective October 1st.
What's New on Our Websites
Among other new additions, during the last month we have:
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