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E-Minders July 2008

In This Issue:

E-minders is a monthly newsletter feature of TheCorporateCounsel.net dedicated to keeping the corporate and securities law community up to speed on developments.

We view TheCorporateCounsel.net as the gathering place for the community and encourage those who may not yet be members to take advantage of our special "Rest of 2008" no-risk trial to see what you are missing. Here are 10 Good Reasons to try us now.

Lynn & Romanek's "The Executive Compensation Disclosure Treatise & Reporting Guide"

Dave Lynn and Broc Romanek have been busy jamming on a comprehensive treatise of executive compensation disclosures - Lynn & Romanek's "The Executive Compensation Disclosure Treatise & Reporting Guide" - so that we can get it into your hands by Labor Day. This thing will be massive: over 1000 pages and is full of explanations, annotated sample disclosures, analysis of possible situations that you may find yourself in, etc.

After you order the Treatise, you will also receive quarterly Update newsletters - so that we can give you the latest practice tips at the crucial moments you need them. And once the Treatise is done, those that order the hard copy also get access to an online version of the Treatise (and newsletters). We haven't yet figured out the URL for the online version - suggestions are welcome. Here are FAQs about the Treatise.

Order your Treatise now so we can rush it to you right after Labor Day; there is a reduced rate if you are attending any of our Conferences. Order online (but you need to register for the Conferences before you order the Treatise to get the discount) - or here is an order form if you want to order by fax/mail. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.

Register Today! Our 3rd Annual Proxy Disclosure/5th Annual Executive Compensation Conferences

We're very excited to announce that Corp Fin Director John White will serve as the keynote speaker for our "3rd Annual Proxy Disclosure Conference." Come join us in New Orleans or via Nationwide Video Webcast for the "Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference" & "5th Annual Executive Compensation Conference" on October 21st-22nd.

Unlike prior years, these two popular conferences have been bundled since they are both so integrally related. Here is the agenda and here is registration information. And if you attend in New Orleans, you may want to stick around for the "16th Annual Naspp Conference," which has more than 40 panels and starts the day after the "3rd Annual Proxy Disclosure Conference. Here is the Naspp conference brochure.

Upcoming Webcast on TheCorporateCounsel.net:  Join us on July 16th for this webcast – "XBRL: Understanding the New Frontier" – to learn what about SEC proposals to mandate the use of XBRL, and what steps you should be taking to be prepared.

There is no cost for these webcast if you are a member of TheCorporateCounsel.net. However, if you are not a member, take advantage of our special "Rest of 2008" no-risk trial to access the program. You can sign up for this no-risk trial online, send us an email at info@thecorporatecounsel.net – or call us at 925.685.5111.

Upcoming Webcast on DealLawyers.com: Join us on July 15th for the webcast – "How to Handle Hedge Fund Activism" – to learn about the art of responding to a hedge fund attack from our panel of experts. This is a companion webcast to our popular May 7th webcast – "2008: The Year of the Hedge Fund Activist"

No registration for this webcast is necessary – and there is no cost – for DealLawyers.com members. Take advantage of our "Rest of 2008" no-risk trial for this critical webcast.

Hang On! SEC Certifies "Reimbursement of Third-Party Solicitation Expenses" Binding Bylaw to Delaware Supreme Court

On June 27th, the SEC Staff referred a shareholder proposal to the Delaware Supreme Court under a certification process we wrote about in the Nov-Dec 2007 issue of the The Corporate Counsel and discussed in this February podcast with a Delaware lawyer. The Delaware Constitution was amended last summer to create this process, allowing for greater cooperation between the SEC and Delaware Supreme Court on issues related to Delaware law. This is the first time that this new certification process is being used - the Delaware Supreme Court has the option to refuse the SEC's request, but is unlikely to do so.

Submitted to CA (formerly known as Computer Associates) by AFSCME, the shareholder proposal would require - yes, its a binding bylaw proposal - the company to pay for the expenses related to a successful election of a short slate of directors. Submitted to several companies in each of the past three years, this type of proposal is AFSCME's response to the stalled shareholder access debate; see this RiskMetric's blog where Professor Charles Elson calls it the "ultimate solution" - and here is a 2006 WSJ article that portrays VC Strine as supporting a similar type of proposal.

In its no-action request to Corp Fin (among other exclusion bases), CA argued that, under Rule 14a-8(i)(1), the proposal is an improper subject under Delaware law and, under (i)(2), it would cause the company to violate Delaware law because reimbursement of solicitation costs is a decision for the company and its board. Both of these exclusion bases has a legal opinion requirement and Richards Layton was hired to provide one to support the company's arguments.

AFSCME responded that its proposal doesn't violate state law and Grant & Eisonhofer supported this argument with a legal opinion. Faced with dueling legal opinions, Corp Fin refused the exclusion request since the Division doesn't resolve disputed questions of Delaware law - but also sent a request for certification to the SEC Commissioners, who approved certifying this question of law to the Delaware Supreme Court.

If the Delaware Supreme Court doesn't weigh in timely, it appears Corp Fin won't allow CA to exclude the proposal when it files and delivers its proxy materials on July 17th. Given the topic of the proposal, this is a huge development and one that may be resolved within a few weeks.

Here are the documents relating to this development:

- Corp Fin No-Action Response to CA

- SEC's Certification of Question of Law to Delaware Supreme Court

- Attachment A - Company's Initial Exclusion Request (copy of proposal is on page 11)

- Attachment B - Proponent's Letter in Support of Proposal

- Attachment C - Company's Response to Proponent

Just after this development, Broc caught up with AFSCME's Rich Ferlauto and taped this interview with him.

Corp Fin Issues Updated Section 16 and Form 8-K Guidance

On June 26th, Corp Fin issued:

- Updated Form 8-K Compliance & Disclosure Interpretations

- Updated Section 16 Compliance & Disclosure Interpretations

- Section 16 No-Action Letter to Society of Corporate Secretaries

Alan Dye has already blogged on these on his "Section16.net Blog," with more complete analysis coming up in "Section 16 Updates" in a week or so.

SEC Approves One-Year Delay for Smaller Companies' Auditor Attestations

As proposed back in February, the SEC has approved another one-year extension of the compliance date for smaller companies to meet the Section 404(b) auditor attestation requirement of Sarbanes-Oxley. Smaller companies will now be required to provide the attestation reports in their annual reports for fiscal years ending on or after December 15, 2009.

In addition, the Office of Management and Budget is allowing the SEC to proceed with data collection for a study of the costs/benefits of Section 404, focusing on the consequences for smaller companies and the effects of the auditor attestation requirements.

Welcome to Dan Greenspan!

We're excited that Dan Greenspan has left the SEC to join our staff! Dan spent five years at the SEC, spending the bulk of his time in Corp Fin, including a lengthy stint in the Office of Rulemaking. Most recently, he served as a Senior Special Counsel in the Office of the General Counsel. Dan was one of the key players during the SEC's executive compensation disclosure rulemaking in '06. He worked for seven years in private practice before his time at the SEC.

You can congratulate him at dan @thecorporatecounsel.net (remove the space after "dan" before sending).

SEC Approves One-Year Delay for Smaller Companies' Auditor Attestations

As proposed back in February, the SEC has approved another one-year extension of the compliance date for smaller companies to meet the Section 404(b) auditor attestation requirement of Sarbanes-Oxley. Smaller companies will now be required to provide the attestation reports in their annual reports for fiscal years ending on or after December 15, 2009.

In addition, the Office of Management and Budget is allowing the SEC to proceed with data collection for a study of the costs/benefits of Section 404, focusing on the consequences for smaller companies and the effects of the auditor attestation requirements.

Corp Fin Guidance on the Filing Review Process

The Corp Fin Staff recently posted some helpful guidance detailing its process for reviewing filings, including information about the structure of the Operations offices and how to "appeal" a Staff determination.

You can refer to our SEC Staff Organization Chart for more information on the line-up of Corp Fin's Staff, as well as the telephone numbers for each of the Offices.

Corp Fin's Staff Legal Bulletin No. 3A on 3(a)(10) Exemption

In mid-June, Corp Fin posted a revised Staff Legal Bulletin No. 3A, providing updated guidance on the exemption provided by Securities Act Section 3(a)(10). The SEC had noted that a revised SLB would be issued upon effectiveness of last year's changes to Rule 145.

This SLB replaces the two prior Section 3(a)(10) bulletins – the one originally issued in 1997 and the revised version issued in 1999 (reflecting the enactment of SLUSA). In addition to the new guidance regarding the Rule 145 amendments, various tweaks and updates have been made throughout the SLB.

Parsing the SEC's XBRL Proposing Release: Two Liability Standards and More

In early June, the SEC posted a 143-page proposing release for its mandatory XBRL rulemaking. Based on a quick glance, here are some additional thoughts that Broc blogged to the ones he blogged a few weeks ago based on what was said at the open Commission meeting:

  1. The Proposed Liability Framework - During the open Commission meeting, it was unclear what liabilities might attach to filing in XBRL - giving the impression that this important issue had not been fully worked out yet. Now that we have the proposing release, we can see on page 60 that the SEC is proposing two very different standards - (i) that the interactive data be considered "furnished" as it is under the pilot program versus (ii) that it be considered "filed" as the "viewable interactive data as displayed through software available on the Commission's Web site. . . would be subject to the same liability under the federal securities laws as the corresponding portions of the traditional format filing." I guess this was a compromise to get the proposal out of the building.

    Some of you may be asking - what did Broc just say? We know that this is confusing. The SEC's proposal has different liability standards for the XBRL data itself and for the "viewable" data. The former is what the machines read; the latter is what humans read (yes, there is a difference - a big difference; more on this later). So, in other words, the raw XBRL data (the "non-viewable" XBRL data) would essentially carry forward the pilot program's liability regime (but note that no liability for Section 12 has been added - the voluntary filers program didn't have this immunity) - and the "viewable XBRL data" would have the same type of liability as the official HTML or ASCII filings have today (and so viewable data would be considered "filed").
     

  2. Late Filers and "Springback" of Current Status - Under the proposal, the financials in XBRL would be filed as an exhibit under Item 601 of Regulation S-K and be considered part of the company's "official" filing, rather than as a supplement as is the case in the pilot program. Even though a company would lose its Form S-3, etc. eligibility if it was late in filing its XBRL data, it could regain its current status once the XBRL information was filed. This is a new concept under the SEC's regulatory framework. (And there is a proposed pair of 30-day grace periods for the first two years.)
     

  3. Possible Alternative Regulatory Frameworks - As with most SEC proposing releases, the Staff does a great job of posing questions to help solicit comments. In the proposing release, I particularly like the list of questions beginning on page 26. Read them to help you better understand what XBRL is all about.
     

  4. Costs - As Dominic Jones notes in his "IR Web Report," costs are expected to go up significantly in Years 2 and 3 (when "deep-tagging" will be required) and then will decrease rapidly as each company develops its own customized templates that can be re-used.
     

  5. Foreign Private Issuers - As Dominic notes, the proposed rules would not require foreign private issuers that prepare their financial statements in accordance with a variation of IFRS as issued by the IASB to provide XBRL. Foreign private issuers that provide financial information on Form 6-K or any financial information prepared with non-US GAAP that must be reconciled to US GAAP in the foreign private issuer's '34 Act reports will not have to be provided in XBRL.

 We are excited that David Blaszkowsky, Chief of the SEC's Office of Interactive Disclosure, has joined the panel for our July 16th webcast: "XBRL: Understanding the New Frontier."

FASB Proposes an Expansion of FAS 5 Disclosures

In mid-June, the FASB issued an Exposure Draft of a proposed Statement, Disclosure of Certain Loss Contingencies — an amendment of FASB Statements No. 5 and 141(R). The FASB is seeking to significantly expand the disclosures required about loss contingencies (including loss contingencies assumed in a business combination), such as pending or threatened litigation.

In issuing the Exposure Draft, the FASB is responding to concerns expressed by investors and others about the inadequacy of information currently available regarding the likelihood, timing and amount of future cash flows associated with loss contingencies. These changes could significantly impact the audit response letter process, given the potential increase in disclosure obligations concerning sensitive matters such as ongoing litigation and the operation of the proposed "prejudicial" exemption.

The proposal seeks to enhance current disclosure requirements by:

- expanding the types of loss contingencies to be disclosed to include specified remote loss contingencies;

- requiring that certain quantitative and qualitative information be disclosed;

- requiring a tabular reconciliation of changes in amounts recognized for loss contingencies; and

- providing an exemption from disclosing certain required information, if disclosing the information would be prejudicial to a company's position in a dispute.

A significant aspect of the FASB's proposal is the expansion of contingencies that are potentially reportable. Today, a company does not typically have to disclose loss contingencies for which the likelihood of a loss is remote. Under the proposed Statement, a company would be required to disclose remote loss contingencies if:

- the contingency (or contingencies) is expected to be resolved in the near term (within one year from the date of the financial statements); and

- the contingency (or contingencies) "could have a severe impact on the entity's financial position, cash flows, or results of operations."

Under the proposal, disclosure would also be required for all loss contingencies that stem from asserted claims or assessments (or those for which it is probable a claim will be asserted) and for which the likelihood of loss is deemed more than remote.

The FASB wants to "field-test" this proposal with preparers, and it also hopes to hold at least one roundtable on the topic. If adopted, the proposed Statement would be effective for fiscal years ending after December 15, 2008, and interim and annual periods in subsequent fiscal years. Comments are due by August 8, 2008.

The CSX Opinion is In!

In mid-June, in CSX Corp. v. The Children's Investment Fund Management, Judge Lewis Kaplan of US District Court (SDNY) delivered his anxiously awaited opinion finding that the two plaintiff activist funds violated the securities laws by not disclosing their positions and intentions many months before they did.

However, Judge Kaplan also ruled that there was nothing effective that he could do and he didn't bar the funds from voting their shares at CSX's upcoming annual meeting. And in his fine analysis, Professor Steven Davidoff notes that it is unlikely the SEC will pursue an enforcement action given the letter submitted to the court from Corp Fin. Here is a NY Times article - and here is a WSJ article.

Here are some amicus curiae filings related to the case, including a letter from Corp Fin Deputy Director Brian Breheny (as transmitted by the SEC's General Counsel; this is not a Commission amicus brief). We have posted them in the "M&A Litigation Portal" on DealLawyers.com, as follows:

Survey Results: Earnings Guidance

Broc and Dave were at the National Investor Relations Institute Annual Conference in San Diego in early June, and among the perennial topics for that group are the issues of how often companies should provide earnings guidance and whether companies should provide guidance at all. Here are the results of our recent survey on these topics:

1. Does your company:

- Provide monthly earnings guidance – 0.0%
- Provide quarterly earnings guidance – 18.3%
- Provide annual earnings guidance – 28.2%
- Provide quarterly and annual earnings guidance – 19.7%
- Provide earnings guidance selectively – 5.6%
- Not provide earnings guidance at all – 28.2%

2. If your company provides earnings guidance, have you considered (within the last 2 years):

- Reducing the frequency with which guidance is provided – 54.3%
- Increasing the frequency with which guidance is provided – 5.7%
- Discontinuing the practice of providing earnings guidance – 40.0%

3. If your company provides earnings guidance, have you considered (within the last 2 years):

- Increasing the detail of the guidance provided – 15.2%
- Decreasing the detail of the guidance provided – 37.0%
- Making no change to the detail of the guidance provided – 47.8%

4. If your company has discontinued earnings guidance, were the results:

- No changes can be attributed to discontinuing guidance – 43.7%
- Increased stock price volatility – 6.3%
- Reduction in analyst coverage – 6.3%
- Shift away from a short-term, quarter-to-quarter focus – 18.7%
- It is difficult to judge the impact of discontinuing guidance - 25.0%

  We last conducted a survey on audit committees and earnings releases in August 2005 (here are those results). Practices appear to have changed since then; to determine the extent of change, we have repeated many of that survey's questions in our new quick survey on "Audit Committees and Earnings Releases." Please take a moment to answer the five survey questions.

Completed the Set: The SEC Staff's Executive Compensation Comment Letters

As the Corp Fin Staff has nearly finished uploading the 350 comment letters from its executive compensation review project last Fall, we have put the finishing touches on providing links to all the comment letters and responses in the CompensationStandards.com "SEC Comments" Practice Area. Thanks to Dave for the heavy lifting on this one. Note that it might be missing one or two.

RiskMetrics' "Explorations in Executive Compensation"

Recently, RiskMetrics has put out a draft - and lengthy - set of white papers entitled "Explorations in Executive Compensation." The project is intended to spark constructive dialogue about executive pay issues and I really encourage you to read their papers and provide comments.

The first white paper - "Considerations" - defines and puts into context the basic elements of U.S. executives' pay packages, with special attention paid to emerging key considerations for investors in evaluating pay and equity plans in particular. The second one - "Innovations" - offers a pair of new methods of looking at critical issues in executive pay: peer group benchmarking and the degree of alignment between the risks borne by investors and by shareholders.

More on Healthcare Shareholder Proposals

Back in March, Broc blogged about Corp Fin's new position on health care proposals. Now, the NY Times has caught up with this development in this recent article. The article is pretty good and discusses the Staff's willingness to allow these types of proposals in the proxies this year, but it neglects to mention the instances where the staff granted no-action relief and allowed their exclusion.

The AFL-CIO has been one of the primary proponents in the health care area. In this podcast, Rob McGarrah of the AFL-CIO's Office of Investment explains the evolution of shareholder proposals related to health care, including:

- Why did the AFL-CIO choose this topic for its proposals?
- What was the SEC Staff's historical position for this type of proposal?
- What happened this proxy season regarding these proposals?

On The Way: Romeo & Dye Section 16 Deskbook

For those of you that subscribe to the popular Romeo & Dye Section 16 Annual Service, you will be happy to hear that Peter and Alan have finished the 2008 edition of the Section 16 Deskbook - and it will be dropped in the mail shortly. If you are not yet a subscriber, try a no-risk trial now (or if you haven't renewed, it's time to do so).

May-June Issue of The Corporate Executive

We have just mailed the May-June issue of The Corporate Executive, which includes a bunch of follow-up pieces regarding net exercises and analysis of the SEC Staff's ongoing commenting on executive compensation disclosures. Specifically, the issue includes articles on:

- Your Questions on Net Exercises Answered
- Follow-Up on Net Exercises: Voluntary or Mandatory?
- Cash Flow Issues from Net Exercises
- Technical Questions Related to Exercise Transactions
- ISOs and Net Exercises
- Modifying Stock Options After Termination
- What to Expect from the SEC After the 2008 Proxy Season
- More Comments on the Way: Key Executive Compensation Disclosure Issues

Take advantage of a "Half Price for Rest of '08" no-risk trial to have this issue sent to you immediately.

People: Who's Doing What and Where

At the SEC, Scott Friestad and George Curtis were promoted to Deputy Director in the Division of Enforcement (and Chief Counsel Joan McKown gained additional responsibilities). Scott and George replace Peter Bresnan, who left last year, and Walter Ricciardi who "retires" at the end of this month (we put retires in quotes because Walter only served on the Staff for four years and starts at Paul Weiss when he leaves the Commission).

In Corp Fin, former staffer Grace Lee has joined The First American Corporation in Santa Ana, California as Associate General Counsel and Assistant Secretary. 

At the PCAOB, the SEC appointed Steven Harris to the PCAOB's board. Steven was a former long-time Senate Banking Committee official, who more recently served as Senior Vice President and Special Counsel of APCO Worldwide.

Steven is the first Hill person to be named to the Board. However, that is not a foreign concept for SEC Commissioners. Current SEC Commissioner Kathy Casey was Staff Director and Counsel for the Senate Banking Committee when she was appointed last year. And the Commissioner Broc worked for a decade ago - Laura Unger - also came directly from the Senate Banking Committee.

Going back further, Rick Roberts was a former Hill staffer (although technically he left Senator Shelby's office and went to a law firm for a short while before becoming a Commissioner in the early '90s). In the '80s, Lindy Marinaccio was an aide to Senator Proxmire when he was appointed by Reagan. In the '70s and early '80s, John Evans served two terms after coming from the Senate.

Then there are the Commissioners who were White House aides when appointed: Joe Grundfest, Richard Breeden and Paul Carey. Given Congress' intense interest in the markets lately, any of this is not a bad background to have, as navigating Capitol Hill can be tricky. Thanks to Jack Katz for his endless knowledge of SEC history!

Conference Calendar

What's New on Our Websites

Among other new additions, during the last month we have:

Your Input, Please

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