E-Minders February 2016
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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It's Done! 2016 Executive Compensation Disclosure Treatise - With a "Pay Ratio" Chapter! We just wrapped up Lynn, Borges & Romanek's "2016 Executive Compensation Disclosure Treatise & Reporting Guide" — and it's done being printed! This edition has two new key chapters — one on the new SEC's pay ratio rules, with over 60 pages of practical analysis & model disclosures — and one with over 120 pages of sample proxy disclosures and detailed analysis from the 2015 proxy season!
How to Order a Hard-Copy: Remember that a hard copy of the 2016 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately. Act now as this will ensure delivery of this 1600-page comprehensive Treatise as soon as you can. Here's the Detailed Table of Contents listing the topics so you can get a sense of the Treatise's practical nature. Order Now.
Upcoming Webcasts on TheCorporateCounsel.net: Join us on February 4th for the webcast - "Conflict Minerals: Tackling Your Next Form SD" - to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray's Michael Littenberg, Elm Sustainability Partners' Lawrence Heim and Deloitte's Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2016.
And join us on March 2nd for the webcast - "Hot Issues for Your Annual Meeting" - to hear Allen Matkins' Keith Bishop, Independent Inspector Carl Hagberg, Potter Anderson's Roxanne Houtman and Broadridge's Jill Whitney discuss the latest developments - and how to handle tricky issues - related to annual shareholder meetings.
And join us on March 8th for the webcast - "FAST Act: Gearing Up" - to hear our own Dave Lynn of Morrison & Foerster, Latham & Watkins' Alex Cohen, Cohen & Gresser's Bonnie Roe and Davis Polk's Sophia Hudson discuss what you should now be considering as you prepare deals under the new FAST Act.
And join us on April 26th for the webcast - "Company Buybacks: Best Practices" - to hear Skadden's Kady Ashley, Hunton & Williams' Scott Kimpel, Simpson Thacher's Lee Meyerson and Foley & Lardner's Pat Quick discuss what you should now be considering as you conduct stock repurchase programs.
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 February 3rd for the webcast - "Activist Profiles and Playbooks" - to hear Bruce Goldfarb of Okapi Partners, Damien Park of Hedge Fund Solutions LLC and Renee Soto of Sard Verbinnen identify who the activists are - want what makes them tick.
And join us on March 14th for the webcast - "Rural/Metro: Aiding & Abetting Breach Claims Now" - to hear Potter Anderon's Brad Davey, Alston & Bird's Kevin Miller and Richard Layton's Blake Rohrbacher discuss what you should now be considering as you prepare deals after the latest Rural/Metro decision from the Delaware Supreme Court.
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 Webcasts on CompensationStandards.com: Join us on February 10th for the webcast - "How to Get Your Equity Plan Approved By Shareholders" - to hear Towers Watson's Jim Kroll and Brian Myers, Fenwick & West's Shawn Lampron and Alliance Advisors' Reid Pearson explain how to navigate the NYSE & Nasdaq rules - as well as the proxy advisor and institutional investor policies - to obtain shareholder approval for your equity compensation plans.
And join us on March 3rd for the webcast - "Key Steps to an Effective Compensation Committee" - to hear Pay Governance's Diane Lerner, Shearman & Sterling's Doreen Lilienfeld & Global Governance Consulting's Susan Wolf untangle the complex issues that compensation committees face in exercising their fiduciary duties against a backdrop of increased shareholder activism, potent proxy advisor policies, an active plaintiff's bar and heightened media scrutiny.
And join us on May 17th for the webcast - "The Top Compensation Consultants Speak" - to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance "tell it like it is. . . and like it should be."
No registration is necessary - and there is no cost - for these webcasts 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.
In mid-January, as noted in this press release, the SEC adopted two interim final rules as mandated by the FAST Act that revise Forms S-1 and F-1 for emerging growth companies to provide that as long as their registration statements include all required financial information at the time of the offering, the ECGs can omit certain historical period financial information prior to the offering.
The interim final rules also revise Form S-1 to allow smaller reporting companies to use incorporation by reference for future filings - along with a request for comment on whether the rules should be expanded to include other registrants or forms.
These interim final rules will become effective as soon as they are published in the Federal Register - so within the next week - and folks can comment for 30 days if they want to push the SEC to change these interim final rules before they become "final final"...
For those that can remember, as noted in this Davis Polk blog, it was the NYC Comptroller's office who really took the proxy access movement to the next level last year. Now, the Comptroller has issued a new list of 72 companies that have received proxy access shareholder proposals - 36 of them repeats from last year's list of the 75 that received shareholder proposals...
In mid-January, Broc blogged about a recent study that shows disclosure-only settlements dropping dramatically in the last quarter of 2015 as the Delaware judiciary delivered some hard-hitting decisions in that area. A week later, we have In re Trulia, CA 10020-CB (Del. Ch.; 1/22/16), in which Chancellor Bouchard refused to approve a disclosure-only settlement with a decision that possibly delivers a coup de grace to these types of settlements absent a showing that the additional disclosures are clearly material.
Chancellor Bouchard's decision makes it clear that the Delaware Chancery Court will no longer approve settlements involving the release of broad claims in exchange for additional disclosures of dubious quality. These settlements have involved an exchange of near-meaningless changes to the "Background," "Interests of Certain Persons in the Merger" and "Opinion of Financial Advisor" sections of a merger proxy or Schedule 14D-9 - and/or merely cosmetic changes to the buyer's deal protections in a merger agreement - in return for a defendant's agreement to support the plaintiff's fee application.
So In re Trulia is a potential game-changer - as it comes on the heels Aeroflex, Riverbed, TW Telecom, etc. - as it may further diminish the leverage that strike suit firms have been able to wield for years. It appears to be the most potent condemnation of marginally-pled claims - and it should refocus deal litigation on those relatively rare circumstances where there is demonstrable evidence of disloyalty, bad faith and disqualifying conflicts of interest.
Notably, Chancellor Bouchard recommends the adoption - on a clear day - of exclusive forum bylaws to the extent the decision fuels an increase in deal litigation outside of Delaware. And he calls on the courts of "sister states" to appreciate the judicial waste inherent in litigation designed only to line the pockets of plaintiff firms while providing no real value to shareholders. Thanks to Greenberg Traurig's Cliff Neimeth for his insights!
In late January, ISS added three more to its Executive Compensation Policies FAQs - they are:
- FAQ #15: Problematic Pay Practices & Equity Plans - Will consider
three-year average concentration ratios above 30% for the CEO - or above 60% for
the NEOs in the aggregate - as a signal that an equity plan is not broad-based
In this podcast, Jim Patterson discusses the life of his former wife, Evelyn Y. Davis, including:
- Can you tell us about Evelyn's childhood? For example, how did Evelyn's
childhood arrest with her mother and brother by the Nazis in Amsterdam in the
final months of WWII affect her life?
Broc is starting to collect anecdotes about Evelyn - please send him your stories (as always, he won't share them with attribution unless you give me permission). Here's the first batch:
- You are aware of her prostitution arrest at the United Nations (sexpionage is what the press called it) and her "business services" at a Lexington Avenue hotel in New York. Brief accounts in editions of New York Post and New York Daily News. This one comes from Jim Patterson.
- Bob Lamm of Gunster notes: When my father was 94 last year and found out that Evelyn was still around and kicking, he was shocked - "that woman was old when I was young!" He was CFO of a company 40 or so years ago and had to deal with her. Mostly, he had to stop her from attacking his outside lawyer, who was a very good looking guy.
- I remember her and Donald Trump going at it at the Alexander's meeting many moons ago.
As noted in our "Annual Report & 10-K Wrap Handbook," glossy annual reports are one of the few documents that companies furnish to the SEC in paper rather than being filed electronically in Edgar. Companies are permitted to furnish them electronically - but most choose to mail them in because it's hard to format them so that Edgar accepts them.
For some time now, Corp Fin has been scanning in the paper copies of glossy annual reports and posting them on Edgar. However, as noted in Edgar Filer Support newsletter, Corp Fin recently decided to forego this practice "in an effort to reduce costs and simplify administrative processes, and in light of the availability of these annual reports on other web sites."
The Edgar Filer Support newsletter notes that a Registration Fee Estimator - a tool designed to assist filers in estimating required fees for EDGAR filing submissions - should be available within the next 6 months...
Here's a memo by Wachtell Lipton's William Savitt: The Delaware Court of Chancery recently held that a corporation without a classified board or cumulative voting may not restrict stockholders' ability to remove directors without cause. In re Vaalco Energy S'holder Litig., C.A. No. 11775-VCL (Dec. 21, 2015). The ruling gives rise to questions for the many companies with similar charter or bylaw provisions.
In 2009, Vaalco's stockholders approved an amendment to the company's certificate of incorporation to declassify the board, but the amendment left intact clauses in the bylaws and charter providing that directors could be removed only for cause. When an activist investor launched a consent solicitation to remove four members of the board in late 2015, Vaalco responded that any such written consent would be "null and void" because its directors could "only be removed from office for cause." Stockholder plaintiffs sued, arguing that under § 141(k) of the Delaware General Corporation Law, stockholders have the right to remove directors without cause unless the company has a staggered board or cumulative voting.
In a transcript ruling, the Court of Chancery agreed and invalidated the terms of Vaalco's charter and bylaws providing that directors may be removed only for cause. Shortly thereafter, Vaalco reached a resolution with the activist investor.
The practical significance of the ruling for the scores of other companies with unclassified boards whose charters allow director removal only "for cause" remains to be determined. Even if the Delaware Supreme Court confirms the Vaalco rule — and the Supreme Court has not had the opportunity to pass on the issue — a without-cause removal right may be of limited importance, especially for companies whose charter and bylaws do not provide low thresholds for stockholder-called special meetings. More fundamentally, a board vulnerable to a without-cause removal campaign is likely equally vulnerable to a proxy fight at an ensuing annual meeting. In many cases, therefore, the Vaalco rule is unlikely to have real-world impact in a contested election scenario.
But stockholder plaintiffs may seek to capitalize on the ruling nonetheless, by bringing suit or demanding that boards comply with the Vaalco rule and then claiming a fee if a conforming change is made. Confronted with such a claim, companies will have the option to settle or litigate the matter in the Court of Chancery and the Supreme Court. Given the tactical complexity of these governance and litigation choices, companies affected by the Vaalco ruling should consider carefully whether a response is in order.
Here's the intro for this blog by Kevin LaCroix: It will not come as news to anyone that corporate directors face the possibility of direct personal liability for their actions or omissions in the capacities as directors. However, the scope of these individuals' potential liability exposures can and does change. As a result of recent legal developments, at least two new areas of potential liability exposure for corporate directors have emerged. As discussed below, a recent federal district court decision suggests that directors can be held personally liable under both the Sarbanes-Oxley Act and the Dodd-Frank Act for whistleblower retaliation, and a recent California legislative enactment provides that corporate directors can be held personally liable for violations of the state's wage and hour laws.
Broc has blogged before about whether you should update your D&O questionnaire for the PCAOB's new AS #18 - and we had a webcast recently that addressed this topic (& much more regarding audit committees). But the good news is that Dave Lynn and his Morrison & Foerster colleagues have provided this updated model annotated D&O questionnaire. Check it out, along with our "D&O Questionnaire Handbook" that was just updated - and the other resources in our "D&O Questionnaire" Practice Area...
A lot of responses to my blog about the newly posted model annotated D&O questionnaire. Goodwin Procter's John Newell gave me a nice add for the "D&O Questionnaire Handbook" and my section on page 24 about "Whether to Obtain Competition-Related Information." In that section, I noted that it's possible that some companies include a question about the Clayton Act depending on their questionnaire philosophy - but that we hadn't seen one. John sent me one:
Do you, or have you at any time on or after the beginning of the company's most recent completed fiscal year, served as either a director or an officer of any business other than the Company, including non-public businesses, that had (a) total liabilities and stockholders equity (i.e., net worth as shown on its balance sheet) in excess of $29,945,000 as of the end of that business's most recently completed fiscal year and (b) revenues of $2,994,500 or more attributable to business operations that could be viewed as competing with the Company because of the nature of the other business's business operations and the geographical markets in which the other business operates? If so, please provide the name of the business in the space below.
And John notes that the trick is that the FTC updates the dollar thresholds annually - but not until the second or third week of January, so anyone who uses this question before that date gets the prior year's dollar amount.
And then another member sent me this example that doesn't need to be updated every year:
Do any of the companies for which you serve as an officer or director (whether publicly-traded or privately-held) compete, directly or indirectly, with any of the company's businesses?
If YES, please identify below the company and provide an estimate of its total annual sales for its last completed fiscal year and an estimate of its annual sales which are competitive with the company.
As noted in this blog by Duane Morris' David Feldman, the OTCQX has increased their listing and governance requirements effective January 1st. The QX is the highest tier of trading among the OTC options. There will now be a higher initial bid price of $0.25 to trade on the OTCQX U.S. tier. US companies on the QX will have to keep a price above $0.10. International companies will be required to meet new initial and ongoing minimum bid prices of $0.25 and $0.10 to trade on the OTCQX International tier. Both US and international companies will have higher initial and ongoing market capitalizations of $10 million and $5 million, respectively. All companies now will be required to have at least two market makers.
In addition, there are new minimum corporate governance requirements for American companies on the QX. These are: a minimum of two independent directors on the board of directors; an audit committee composed of a majority of independent directors; and they must conduct annual shareholders' meetings and submit annual financial reports to shareholders at least 15 calendar days prior to such meetings. They also added even more stringent new requirements for the higher level "premier" tier on the QX.
Broc has no idea if this new service aimed at journalists is taking off - most new services don't - but he found it interesting. It's called "Sqoop"- and here's their description of how it works:
Simply execute a search for a company, executive or interest, and Sqoop will deliver search results that click through to detail pages that are far more useful that those from Edgar. For the Form 4, Sqoop translates the codes and does the math so you don't need to. On all other forms, we provide filing along with any exhibits in expandable view, all within one page. Not only does this help you more quickly assess the news value, but it's also a better reader experience than linking to dumb Edgar pages where exhibits are inaccessible.
Broc has no idea why Sqoop is targeting journalists specifically with this service. It seems like it could be useful to others who consume SEC filings. And of course, for those that draft SEC filings, it's good to keep track of how your end-product may be consumed...
This blog by Pam Styles illustrates how sustainability has become a more frequent topic on quarterly earnings calls...
Here's an excerpt from this blog by Steve Quinlivan: "The United States District Court for the District of Columbia has dismissed a two-count complaint asking the Court to mandate the SEC be required to adopt rules regarding disclosure of political contributions. The plaintiff had submitted a request for rulemaking to the SEC, and the SEC never took action on the request."
Here's an excerpt from this blog by "Accounting Today": The Financial Accounting Standards Board issued Tuesday a long-awaited accounting standards update (2016-01) for the recognition and measurement of financial instruments that it has been developing for over a decade with the International Accounting Standards Board.
The standard affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. FASB also plans to issue this year a separate standard on the impairment of financial instruments that will differ markedly from the IASB's. The IASB issued its own financial instruments standard, IFRS 9, in 2014. The "recognition and measurement" standard was formerly referred to as "classification and measurement" but was changed to better reflect what FASB was trying to address.
Here's something from the "DealLawyers.com Blog" that Broc recently posted: Occasionally, you hear that people have received advice to be especially careful about emails so "don't put it in an email, give him/her a call." Often the advice is couched in terms of "avoid putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal. Make a call instead." That advice is insufficient given what often happens in litigation. According to a recent WSJ article regarding pending M&A litigation, it's alleged that: "[employee of buyer] later testified that [employee of target's financial advisor] called him and said "we should not email on this."
And then consider this quote from a recent Delaware Chancery Court opinion:
"On the evening of March 24, [employee of buyer] summarized the situation in an email [to other employees of the buyer]: I have spoken to a number of bankers on our side (for advice) and theirs (for back-channel feedback). There are definitely two other offers as we suspected, both say they need another week of work but the company's bankers think it is more like 2-3 weeks. Sounds like both are higher but again not a knock-out, I haven't been able to get more specific info than that."
Things to bear in mind include:
1. Any advice, if given by one transaction participant to another participant or their representatives, is discoverable. Even if you don't disclose it, the other person may - and you should assume likely will.
2. While not necessarily wrongful, there can be lots of innocent and/or perfectly valid reasons for making the suggestion to talk rather than exchange email (e.g., to avoid ambiguity or misinterpretation or because time is of the essence) - plaintiffs will likely allege that the person making the suggestion was trying to hide something damaging.
3. Just because you speak with someone and don't put it in an email doesn't ensure that the substance of the conversation will not be memorialized in writing - and be discoverable. Even if you don't put it in an email, the person you talk to may.
The bottom line is: while it is not always possible to avoid saying, doing or writing things that are potentially vague, ambiguous or subject to misinterpretation, and sometimes back-channel communications are authorized for purposes of seeking a bump in price from the buyer, you should not assume that it's okay to say something so long as you don't put it in an email. The better advice is to try to "avoid saying, doing or putting anything in an email that you would be embarrassed to read about on the front page of the Wall Street Journal."
Here are the latest survey results about annual meeting conduct:
1. To attend our annual meeting, our company:
2. During our annual meeting, our company:
3. For our annual meeting, our company:
4. At our annual meeting, our company:
Please take a moment to anonymously participate in our "Quick Survey on Drafting Proxy Statements, Glossy Annual Reports & Form 10-Ks" and "Quick Survey on 'What is a Perk'."
Here's news from this Wachtell Lipton memo: In an insider-trading case that will be closely watched until it is decided before the end of June, the U.S. Supreme Court granted certiorari to decide critical open questions about what is required to establish insider trading by a remote "tippee"—specifically, what kind of personal benefit must a "tipper" receive, and what knowledge of that benefit must the "tippee" have, for a conviction or sanction to stand.
The case is Salman v. United States, No. 15-628, and it involves a criminal defendant who traded on the basis of stock recommendations given to him by the brother of a Citigroup investment banker. The banker had given material nonpublic information about pending M&A deals as a gift to benefit his brother, who in turn gave the information to the defendant, Salman. Salman was convicted, and on appeal, he urged the Ninth Circuit to follow the requirements adopted by the Second Circuit in 2014 in United States v. Newman: that the government must prove that a remote tippee like Salman knew of the "personal benefit" that the original tipper received in exchange for the tip; and that the benefit must be "objective, consequential, and represent at least a potential gain of a pecuniary or similarly valuable nature." Affirming Salman's conviction, the Ninth Circuit refused to follow Newman, and held that it was sufficient for the government to establish that the tipper had made "a gift of confidential information to a trading relative or friend." In so holding, the Ninth Circuit created a significant circuit split over the proper scope of remote tippee liability for insider trading.
To resolve this conflict, the Supreme Court must revisit its 1983 decision in Dirks v. SEC. Dirks held that, to establish tippee liability, the government must show, first, that the tipper of inside information "personally will benefit, directly or indirectly, from his disclosure," for "[a]bsent some personal gain, there has been no breach of duty"; and, second, that the "tippee knows or should know that there has been a breach." The Ninth Circuit in Salman and the Second Circuit in Newman each grounded their decisions in Dirks, but drew divergent lessons from it.
The Court's eventual answer will define the outer boundaries of insider trading liability in future cases. But as we advised in our memo on Newman, whatever the Court's answer turns out to be, corporations and financial institutions that have established compliance policies and systems to prevent the misuse of confidential information by their employees should continue to maintain, and vigilantly enforce, such controls. Although Salman may well reshape the outer boundaries of the law in this area, the core proscriptions against disseminating material nonpublic information will remain firmly in place, and as the recent In the Matter of Marwood Group Research proceeding illustrates, companies can face significant liability for failing to maintain robust systems and procedures to prevent the misuse of confidential information.
The two FASB proposals for determining materiality continues to stir controversy. For example, these proposals have raised the ire of investors, including the SEC's Investor Advisory Committee (see this comment letter from CII and this NY Times column). In its proposals, the FASB has said materiality is a legal concept - and in essence, isn't an accounting concept. The latter is debatable as many courts have cited to the FASB's concept of materiality in their decisions - and materiality has been discussed in both legal cases and in the accounting literature (eg. SAB 99). Here's the comments on the FASB's proposal so far - check out this one from Jack Ciesielski.
Spanking brand new. By popular demand, this comprehensive "Materiality Handbook" covers a wide range of scenarios, from how 8-K, press releases and Reg FD to 10-Ks and 10-Qs and securities offerings. This one is a real gem - 31 pages of practical guidance - and its posted in our "Materiality" Practice Area.
Spanking brand new. By popular demand, this comprehensive "Audit Response Letters Handbook" covers all you need to know about dealing with audit response letters (it's now posted on our "Audit Response Letters" Practice Area). This one is a real gem - 48 pages of practical guidance.
In this 40-second video, Cap'n Cashbags gets a surprising call from the IRS.
In the Winter 2016 issue of the Compensation Standards Newsletter, here are 17 pieces of news & analysis from the last month culled from the three blogs on CompensationStandards.com:
- ISS Updates Burn Rate Tables for 2016
You can sign up to get any blog pushed out to you via email whenever there is a new entry by simply inputting your email address on the left side of that blog.
In Corp Fin, former Staffer Jonathan Gottsegen is taking another run at a GC role, joining BrightView (portfolio company of KKR and MSD Capital) following seven years as United Rentals' general counsel.
Among other new additions, during the last month we have:
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