July 28, 2015

Once a Crowdfunder, Always a CrowdFunder

A lot of ink has been spilled about crowdfunding in the press, such as this Huffington Post piece that gives a plain vanilla take on crowdfunding (and here’s another piece). In addition, there are some misunderstandings in the press about the capital options that a company has – this infographic by Kiran Lingam and Anthony Zeoli can help sort that out.

Here’s some thoughts from members on crowdfunding (similar to this series of blogs a few years back): In response to a question about the effects of an initial crowdfunding investment on a possible later venture capital transaction, Patrick Reardon of The Reardon Firm had the following thoughts:

First, on your other point about representations and warranties in crowd-funding, please note that, while there may not be any reps or warranties in an initial crowdfunding round, there are the duties under SEC Rule 10b-5 and state securities laws to disclose all material information. So, one could view those as a form of statutorily-mandated representations and warranties.

Now to your point on later VC financings. Although my experience does not directly involving crowdfunding, my belief is that once a crowd-funder, always a crowd-funder. Well, if not “always,” at least to every conceivable statute of limitation expires.

The appeal of crowdfunding is that small (and often unsophisticated) investors make up the initial investors. Unfortunately, these people do not understand basic investment concepts like investment risks, dilution by subsequent investments, or corporate principles such as approval of related party transactions, dissenters’ rights, governance of the internal affairs of the entity by the state of formation, not the state where the investor resides, etc. For example, try explaining to a school teacher/investor why the company has to have a down-round venture capital financing for legitimate business reasons that don’t involve wrongdoing. Very likely, he or she will only see that his or her investment has decreased by X% in value.

Also, unsophisticated investors also often have unsophisticated attorneys. In Texas, I have seen cases where obvious corporate and securities law causes of action have been ignored, and other, what I consider off-the-wall causes of action, are pled. Our Texas courts have relatively lax pleading and procedural rules, and a significant portion of the trial bar will not bring cases in Federal courts. So you might get a securities law case brought under state law instead of Federal law, just to avoid the U.S. Dist. Cts. The effect of this is exacerbated by elected state judges who often have limited business litigation experience. Texas, unlike Delaware, does not have separate business courts.

Do not misunderstand. I am not singling out my home state. I think many states have a legal system similar to that I described above. The point is that foregoing all create far more than the usual uncertainty of possible claims. After years of representing professional investors, I feel that VC or other investors will see crowd-funded companies as fraught with unknown risks. This will scare off most professional investors from subsequent rounds.

That is why I say once a crowd-funder, always a crowd-funder. If your start-up company can limit itself to investments from accredited investors, I recommend a public solicitation under Reg. D, Rule 506(c), instead of crowdfunding.

Crowdfunding: Status of SEC vs. State Laws

Brad Hamilton of Jones & Keller (see his blog) had these thoughts about that issue:

In the US, it is currently a theoretical question – there is no federally allowed crowdfunding equity investment regime in the U.S. The SEC’s “crowd funding” rules mandated by the JOBs Act are proposed rules only, and have not been approved and adopted. “Crowdfunding” in the U.S. currently applies only to (1) donations, or pre-sale purchase of goods or services, through websites such as gofundme, KickStarter, indiegogo, etc., and does not involve sale of equity, or (2) state crowdfunding registration exemptions.

Recently, you may have seen that several states are proposing and implementing rules for intrastate equity investment through “crowdfunding.” Most of those rely on the intrastate offering exemption from federal registration requirements, allowing offers and sales only to residents of that state, though you may have seen that Maine’s recent rules allow investment from non-Maine residents, although Maine’s rule is brand new, so I would be surprised if there have been any offerings under it. Texas, Indiana, Wisconsin, Washington, and Michigan are some of the states that have pending proposed, or adopted, intrastate crowdfunding rules. I believe Florida proposed, but did not adopt its own crowdfunding scheme. Here is a list covering a rundown of state exemptions.

Many practitioners and commentators, include me, think that the crowdfunding rules proposed by the SEC are worthless and if adopted as proposed would never be utilized by our clients. Some of the state crowdfunding rules eliminate the costly SEC proposals, such as audited financial statements, and may be more useful. Some states virtually mirror the SEC proposals, and are unlikely to see much use. All of the state crowdfunding rules are recent, and I too would be interested if anyone has a client who funded through state crowdfunding exemptions, and then had a subsequent exit. As I am a pessimist on this issue, I would be pleasantly surprised if any enterprise that included a crowdfunding of less than $1 million as part of its financial history, eventually succeeded to the point that a potential real-money acquirer was looking at the crowdfunding investors’ reps and warranties.

The Brits Are Winning the Crowdfunding Battle…

This article from last year about how the United Kingdom regulates crowdfunding compared to the United States is an eye-opener…

– Broc Romanek

July 27, 2015

Transcript: “Clawbacks – What Now After the SEC’s Proposal”

We have posted the transcript for our popular webcast: “Clawbacks – What Now After the SEC’s Proposal.”

Proxy Access: Comments on the SEC’s Review of (i)(9)

Given the high level of interest in the topic, I was a little surprised to find that there hasn’t been more commentary – in the form of official comments submitted to the SEC – regarding the SEC’s review of Rule 14a-8(i)(9). So far there has been a dozen and a half comment letters sent in, about half from the corporate world and half from investors…

This Cooley blog describes the most recent meeting of the SEC’s investor advisory committee and includes some discussion of proxy access shareholder proposals from this proxy season…

Form 8-K: Taking It Too Seriously

Just saw this in my neighborhood. Honestly, it’s not mine…


– Broc Romanek

July 24, 2015

Section 13(d): More Court Guidance on “Group” Status

For those of you that have been tasked with determining whether a “group” is formed for purposes of Section 13(d), you know that it’s a fact-intensive analysis – and often very difficult to determine with any real certainty. In recent months, even more pressure has been put on this analysis because of the SEC’s Sections 13(d) & 16 enforcement initiatives that Broc has blogged about (also see this blog). Fortunately, the Southern District of New York’s recent opinion – in Greenberg v. Hudson Bay Master Fund – provides some additional guidance that may be helpful when grappling with group formation. This blog summarizes the guidance:

– While participation in private placements with other investors does not in and of itself create a Section 13(d) group, it is advisable to include language in the transaction documents expressly providing that the obligations of the parties are several and not joint and that no action taken by a buyer pursuant to such agreements shall be deemed to create a group or create a presumption that the buyers are in any way acting in concert;

– It is essential for blocker provisions to expressly apply the conversion cap with other parties that may be deemed to be a member of a Section 13(d) group with the applicable holder; and

– Hedge funds cannot evade Section 16 obligations and liabilities by claiming that they have divested themselves of voting and dispositive power over shares in favor of their registered general partners or investment advisors; the funds themselves will generally be deemed beneficial owners of the shares that they hold.

Also see Alan Dye’s blog for a discussion of the particulars & analysis of the case.

SOX After 13 Years: Evolving Compliance & Increasing Costs

As we recover from the 5th Anniversary of Dodd-Frank and head towards the 13th anniversary of the adoption of Sarbanes-Oxley – check out Protiviti’s 2015 Sarbanes-Oxley Compliance Survey. This survey takes a detailed look – including a number of charts & diagrams – at the most recent Sarbanes-Oxley compliance trends and the time & money being spent on Sarbanes-Oxley related compliance. Here’s an excerpt from the findings:

SOX compliance costs, together with external audit fees and scrutiny, are increasing – External auditors are enhancing their scrutiny of internal controls and their fees are increasing as a result. Nearly three out of four organizations reported that their external audit firm is placing more focus on evaluation of internal control over financial reporting, and external audit fees rose for more than half of companies in the most recent fiscal year. In terms of overall internal SOX compliance costs (excluding external audit fees), 58 percent of large company respondents spent more than $1 million in their most recent fiscal year, while 95 percent of small companies spent less than $500,000. Bottom line: The larger your company, the more you will need to invest in SOX compliance.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for 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:

– Sample: Proxy Statement Reg Summary Sheet
– Shareholder Proposals: Corp Fin Allows Exclusion of “Review of Company’s Voting Policies” Proposal
– More Debate: Harvard’s “Shareholder Rights Project”
– Trinity v. Wal-Mart: Serious Implications for the Ordinary Business Exclusion
– Shareholder Proposals: Playing Games With Submission Deadlines

– Jeff Werbitt

July 23, 2015

House Passes Five Securities Bills!

This Morrison & Foerster blog gives us the latest:

A flurry of activity was seen last week on the House floor as the Financial Services Committee reported on various bills, many of which JOBS Act related. These bills propose to change registration and reporting requirements for small reporting companies, Small Business Investment Companies (SBICs) and savings and loan companies, as well as affect the treatment of Emerging Growth Companies (EGCs). On July 14, the House passed the following bills, and on July 15, referred them to the Senate Committee on Banking, Housing and Urban Affairs:

– The SBIC Advisers Relief Act of 2015, H.R. 432, would amend the Investment Advisers Act of 1940 to exempt SBICs from certain SEC registration and reporting requirements;

– The Holding Company Registration Threshold Equalization Act of 2015, H.R. 1334, would amend Title VI of the JOBS Act and raise the threshold number of shareholders of record at which savings and loan companies must register with the SEC. H.R. 1334 also raises the threshold number of shareholders of record below which a savings and loan company may terminate its registration;

– The Small Company Simple Registration Act of 2015, H.R. 1723, proposes to have the SEC revise Form S-1 to allow smaller reporting companies to incorporate by reference any documents it files with the SEC after the effective date of a registration statement on Form S-1;

– The Swap Data Repository and Clearinghouse Indemnification Correction Act of 2015, H.R. 1847, proposes to amend the Securities Exchange Act of 1934 and the Commodity Exchange Act to repeal the indemnification requirements for regulatory authorities to obtain access to swap data;

– The Access to Capital for Emerging Growth Companies Act, H.R. 2064, proposes to make changes to the treatment of EGCs as defined by the JOBS Act. The bill would reduce the number of days that an EGC is required to have a confidential registration statement on file with the SEC before a “road show,” and would allow an issuer to retain EGC status through the date of its IPO if it was considered an EGC at the time of filing its confidential registration statement.

In contrast, plans to consider H.R. 1675 and H.R. 2354 were scrapped by House Republicans, according to CQ News. H.R. 1675 would have directed the SEC to revise regulations relating to compensatory benefit disclosures by issuers. H.R. 2354 planned to reduce the number excessive and costly regulations issued by the SEC by requiring a review of each significant regulation it had issued.

Alternative Fee Arrangements: Is the Tide Finally Turning?

In May, Broc blogged about how billable hours changed the legal profession. Now it looks like alternative fee arrangements are gaining momentum as the traditional law firm billing model is increasingly scrutinized. According to this Philadelphia Inquirer article, more law firms are embracing alternative fee arrangements. Big law firms are even beginning to employ a team of financial experts to price legal services. Here’s an interesting example from the article:

At Reed Smith – a 1,600-lawyer firm – a staff of 15 accountants, lawyers and MBAs helps partners pitch the law firm’s services. Alternative fee arrangements now account for about 30 percent of the firm’s revenue of $1.15 billion. If a client asks for a flat fee or charges based on case outcomes or some structure other than the billable hour, they project what the matter will cost and how it can be done profitably.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for 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:

– Nasdaq Proposes to Stop Automatic Delisting for Failure to Hold Annual Meeting
– Do I Need to Update My D&O Questionnaire for 2015?
– Vanguard’s CEO Speaks
– How the Fall Proxy Season Reveals ’15 Proxy Season Trends
– Relational Investors Plans to Wind Down

– Jeff Werbitt

July 22, 2015

Pay Ratio: Disclosure Example & Ramping Up

Get ready to ramp up by registering now for our upcoming “Proxy Disclosure Conference“! A few days ago, Mark Borges blogged over on about NorthWestern’s pay ratio disclosure that bears reviewing. In addition, check out this study entitled “Consumers Prefer Firms with Lower CEO-to-Worker Pay Ratios” – and this WSJ article entitled “CFOs Prep for Pay-Ratio Rules“:

Finance chiefs at public companies are looking for clarification from the Securities and Exchange Commission as they prepare to comply with coming regulations on how they must disclose the boss’s pay compared to a typical worker. The SEC earlier this month accepted public comments on a proposed rule that soon could force thousands of companies to disclose annually the ratio of CEO-to-typical worker pay. The agency first proposed the rule two years ago to comply with the Dodd-Frank Act of 2010 and SEC Chairman Mary Jo White has said she wants the SEC to issue a final rule by this fall.

Among the issues that companies are expecting to get further guidance is how they should define a “median employee”—and what types of pay to include as compensation. The clarifications also will impact the cost to companies of preparing for the ratio. The SEC is “going to have to provide some degree of guidance” to clarify which employees that companies will have to include when they crunch the numbers, said Joseph Grundfest, a Stanford law professor and former SEC commissioner.

Companies can use different sampling methods in their calculations, which gives them “a lot of latitude to choose what they want those estimates to be,” said Michael Ohlrogge, a Stanford University law and engineering doctoral student, who wrote to the SEC earlier this month.

Some companies including Noble Energy Inc. are testing the waters. In March, the Houston-based oil and gas exploration and production company disclosed that former Chief Executive Charles Davidson made 82 times more than the median employee, who took home $103,500 in direct compensation in 2014. Mr. Davidson made $8.5 million in direct compensation, it said. Neither that figure nor its ratio calculation included the roughly $1 million increase in the value of his pension, employer retirement contributions and perquisites like club-membership dues the company provided. “If the SEC adopts rules on compensation ratio, we will conform the methodology by which we calculate that ratio to align with the SEC requirements,” a Noble spokeswoman said in a statement. “Until rules are adopted, we expect to continue with the current methodology in our future disclosures.”

In all, the SEC expects the 3,800 public companies affected to spend a combined $72.8 million to comply, according to its 2013 proposal. That comes to about $19,000 apiece. One “global technology company” the agency consulted estimated that the cost of crunching the numbers could amount to $350,000 plus $100,000 a year for compliance, it said. James Flaws, Corning Inc. ’s finance chief, said he expects the specialty glass and ceramics maker will lay out less than $250,000 to tally a ratio between the compensation of its CEO Wendell Weeks—$13 million in 2014—and its average worker. The Corning, N.Y. business employs 34,600 people full-time, with two-thirds of them working in more than 100 foreign countries.

At ingredients maker Ingredion Inc., based in Westchester, Ill., about 83% of the company’s full- and part-time workforce of 11,400 people is employed outside the U.S., which means that determining a pay ratio could be “resource intense,” said CFO Jack Fortnum. “There are many potential variables in the calculation of the compensation ratio, including how employees are paid around the world, and how to consider various pensions and other benefits,” he said.

A lobbyist for a S&P 500 technology company said that the company objects to including foreign employees in the calculation, because the average per capita income in places like the Philippines are a fraction of those in the U.S. and thus would skew the results.

As much as 95% of the cost and effort the company expects to face in calculating a pay ratio would arise from tallying the pay of overseas workers, he said. “If this was domestic employees only, it wouldn’t be worth my time” to fight against the rule in its current form, the lobbyist added.

The National Association of Manufacturers, a trade group, cited a member company that said it would face $18 million in costs related to implementing the rule. That unnamed company, it said, must scour 500 separate payroll systems around the world to hammer out compensation details for its 130,000 employees and build a centralized network to capture the information, according to its comment letter to the SEC. The SEC’s Division of Economic and Risk Analysis last month said the figures that companies use to calculate their pay ratios could vary between 3.4% and 15%, based on the percentage of workers the companies exclude from their sampling.

CEOs and CFOs must attest, under penalty of law, that the information is accurate, since the disclosures will be included in SEC filings, according to Timothy J. Bartl, president of the Center on Executive Compensation, a Washington, D.C., advocacy group of human-resources chiefs.

Some shareholders say they’re eager to see the new statistics. “I think the pay ratio is going to be a data point in the conversation,” said Jonas Kron, senior vice president and director of shareholder advocacy at Boston-based Trillium Asset Management LLC, with $2.2 billion in assets under management. Trillium generally votes against any executive compensation package exceeding $7 million. “We’re going to be able to have more sophisticated conversations with companies and internally when making investment determinations,” he added.

Proxy Disclosure Awards: Last Chance to Vote!

It’s time to vote! Please take a moment to vote for these 12 categories of awards. Voting is anonymous – and ends this Friday, July 24th. Here’s the FAQs

Poll: “What is a Perk?”

It’s been 9 years since we ran our popular “Quick Survey on “What is a Perk?” (here’s those old results) – so it’s time to do it again. Please take a moment to participate in our new “Quick Survey on “What is a Perk?”

– Broc Romanek

July 21, 2015

Happy Anniversary! Dodd-Frank Turns 5

If you’ve read this blog for a while, you know that we don’t need much of a reason to celebrate around here. So put down those pay-for-performance & clawback proposing releases – and help us celebrate the 5th anniversary of the Dodd-Frank Act!

To take stock of where we’ve been & where we’re going, here’s a rundown of what’s being said about Dodd-Frank on its anniversary:

SEC Chair White
House Financial Services Committee
Q & A with Dodd-Frank (WSJ)
Market Watch
The Hill

Also check out Davis Polk’s “5th Anniversary Dodd-Frank Progress Report” and cool “Dodd-Frank Infographic”.

SEC Chair White: “The Response”

As Broc blogged about last month, Senator Elizabeth Warren sent a letter to SEC Chair White expressing disappointment with her leadership. In response to Senator Warren’s letter, Chair White wrote this letter addressing each of Senator Warren’s four primary issues: implementation of Dodd-Frank rules on pay ratio disclosure, admission of wrongdoing in SEC enforcement cases, disqualifications & waivers and recusals. Chair White’s letter specifically highlights the SEC’s enforcement & rulemaking accomplishments during her tenure – and defends the accuracy of her projected timing of the pay ratio rulemaking. Here’s an excerpt from this WSJ article (also see this blog):

In a letter to Ms. Warren released [on July 10], Ms. White denied the agency had been soft in punishing wrongdoers, saying the commission brought a record number of enforcement cases—as well as a record amount of fines—in the most recently completed fiscal year.

She also defended the agency’s work completing new rules developed in response to the financial crisis, such as tighter restrictions on money-market mutual funds that had stymied the agency for years.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for 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:

– Usability Study: Investors Frustrated With Disclosure
– Independent Board Chairs: An Interview with ISS’ Carol Bowie
– Shareholder Proposals: Statements in Support Permitted
– Whether & How to Supplement or Amend Your Proxy Materials
– Member Musings on the SEC’s Proxy Season Punt

– Jeff Werbitt

July 20, 2015

Study: Disclosing Internal Control Weaknesses May Backfire

Here’s news from Baker & McKenzie’s Dan Goelzer: As noted in prior Updates, SEC officials have expressed concern that companies are not properly identifying and disclosing material weaknesses in internal controls, and that such weaknesses are too frequently disclosed only in conjunction with a restatement – after the damage is, in effect, done (e.g., January 2014 Update). However, an academic study in the May/June 2015 issue of The Accounting Review, published by the American Accounting Association, suggests that companies may have good reasons to be reticent about disclosing their control weaknesses: Companies that disclose material weaknesses in advance of a restatement are more likely to be penalized than those that do not. As summarized in an AAA press release, the study finds that there is:

“[N]o evidence that penalties following a restatement are more likely for firms that fail to detect and disclose their control weakness as required. Instead, firms that do report their control weaknesses in a timely manner are generally more likely to face [varied] penalties in the event of a later restatement. These results are consistent with the disclosure of control weaknesses making it difficult for management to plausibly claim later that they had been unaware of the underlying conditions in the control environment that led to their restatements.”

The study, entitled “Does SOX 404 Have Teeth? Consequences of the Failure to Report Existing Internal-Control Weaknesses,” was authored by Sarah C. Rice of Texas A&M University and David P. Weber and Biyu Wu of the University of Connecticut. According to the press release, the findings are based on analysis of the disclosures made by 659 companies that filed restatements between November 14, 2004 (when the internal control reporting requirements of SOX Section 404 became effective) and the end of 2010. During that period, 134 of the restating companies reported material weaknesses in their internal controls prior to announcing the restatement, while 525 did not report control weaknesses. Of those that did not disclose a material weakness prior to the restatement, 314 made after-the-fact disclosure of the existence of an internal control weaknesses at the time of the restatement.

The SEC enforcement risk associated with disclosing a material weakness is fairly small. The press release states that pre-restatement disclosure of a material weakness increases the likelihood of SEC enforcement action by about 6 percent, “probably because it aids the agency ‘in identifying cases where potential enforcement actions are likely to succeed and make it difficult for management to claim they were unaware of the problems that led to the restatement.’” Companies that make pre-restatement disclosures may also suffer other consequences:

– Class action lawsuits are “5 to 10% more likely when firms report internal control weaknesses prior to restatements”
– “Top management turnover is 15 to 26% more likely”
– “Auditor turnover is 6 to 9% more likely”

Professor Weber summarizes the study in these terms:

“For as long as anyone can recall, investors have complained about being blindsided by companies, where one day everything is fine and the next day it all falls apart. SOX 404 is supposed reduce the incidence of that sort of thing, but to do its job there has to be an incentive for top execs and auditors to divulge control problems in the company annual report, as mandated by the provision. I must admit that my colleagues and I were only mildly surprised that firms which fail to do so aren’t penalized. What surprised us a lot more is that companies which evidently take SOX 404 to heart are penalized.”

Comment: The study’s findings may provide interesting insight into SEC enforcement policy. The study should not, however, be used as a guide to corporate disclosure policy. If the Commission were to uncover evidence that a company intentionally withheld disclosure of a known material weakness, it is quite likely that it would bring enforcement action against the individuals – including, if applicable, audit committee members who made that decision or were aware of it.

Podcast: Fraud Enforcement Compliance

In this podcast, Michael Peregrine of McDermott Will & Emery discusses corporate governance & compliance matters relating to increased government fraud enforcement, including:

– What areas of corporate governance & compliance should directors & counsel be evaluating as a result of increased government fraud enforcement matters?
– How much of this is as a result of financial fraud enforcement and how much of this is as a result of health care fraud enforcement?
– What steps should be taken now to strengthen governance, compliance & oversight?
– What initial steps should be taken by a company that is the subject of a fraud enforcement matter?

Tomorrow’s Webcast: “Selling the Public Company – Methods, Structures, Process, Negotiating, Terms & Director Duties”

Tune in tomorrow for the webcast – “Selling the Public Company: Methods, Structures, Process, Negotiating, Terms & Director Duties” – to hear Greenberg Traurig’s Cliff Neimeth, Richards Layton’s Ray DiCamillo and Richards Layton’s Mark Gentile analyze the legal and commercial parameters of what you can – and can’t do (or should & shouldn’t do) – when shopping and agreeing to sell control of a public company are evolving due to judicial decisions, legislative developments and market conditions.

– Jeff Werbitt

July 17, 2015

Deal Cubes: Making a Comeback?

As the proud founder of the “Deal Cube Museum,” I’ve been digging this blog devoted to deal cubes so much that I sat down to conduct this podcast with the blogger, David Parry of “The Corporate Presence.” The podcast addresses:

– What is your role for “The Corporate Presence” (including this blog)?
– Who typically makes the buying & design decisions for deal cubes these days?
– What are the latest trends in deal cube designs?
– What are the coolest deal cubes you have seen?

And hat tip to Lois Yurow for alerting me to this article from the “Financial Times” entitled “Mementos of triumphs make a return to bankers’ desks”:

When Lehman Brothers collapsed, Jessica Lindroos watched from her Canary Wharf office as redundant bankers left their building carrying boxes loaded with personal detritus. “It was a difficult time,” she says. For “The Corporate Presence,” where Ms Lindroos works, the bank’s bankruptcy was particularly gloomy. TCP makes deal toys, also known as Lucites and tombstones, commissioned by banks to mark the closure of a corporate deal and sit on a desk or an office shelf. The design will include relevant corporate logos and may reflect the nature of the deal. A TCP Lucite for the Twitter deal featured the blue bird logo in a birdcage.

When the financial crisis hit, headcount was cut at TCP, mirroring the sector overall. Smaller Lucite makers went bust. Kim Russo, founder and chief executive of New York deal toy agency Global Design Network, felt “scared” enough to reduce headcount, move offices, pitch to new clients and diversify into awards. Today, as mergers and acquisitions have bounced back, so have the deal toy makers. Ms Lindroos says last year “there were more deals, the phones were ringing and it was getting busier. Then, in 2014, even more so.” Nonetheless, the business landscape is very different from the 1980s and 1990s, says Ms Russo, a former stockbroker: “Deal toys were elaborate and budgets were not so constrained.” That said, the design process then was a lot slower, when she had to liaise with clients by fax and post.

Typically a deal toy ranges between £30 and £200 apiece, with the average about £60, says Ms Lindroos. A set of 20 or so is usually distributed among bankers from different institutions who have worked on a deal. It tends to be an analyst – the most junior banker on the team – who is charged with working with the deal toy maker. The task can be stressful for anxious bankers hoping to impress their higher-ups. Ms Russo says many fret, for instance about deadlines for the dinner to commemorate the deal and hand out the Lucites. They worry that “the managing director will get [angry]”. So part of her role is to hold their hand and say: “I need you to trust me.” She adds: “I’ll do anything I can to make the analyst look like a hero.” The worst jobs are those with tight deadlines. “What you are asking me to do is get pregnant and produce a baby in a few days,” says Ms Russo. Also difficult are bankers with grandiose ideas: “You can’t have a Mercedes for the price of a Volkswagen.”

Ms Lindroos recalls one project that spiralled out of control: the client wanted a rollercoaster, a zoo and lots of different animals. “It ended up looking really cluttered, but the client was adamant and it was something we could produce.” She says some of the Arabic banks want the largest pieces, mostly when marking energy deals. “[Those deal toys] are pretty extravagant and weigh a lot.” A substantial amount of time is spent ensuring one bank’s logo does not dwarf another’s.

While outsiders may view deal toys as frivolous and trinkets, they are important in providing meaning to work, says Daniel Beunza, a specialist in the sociology of financial markets at the London School of Economics. A merger, he says, can seem abstract to the bankers working on the deal, in contrast to, say, the factory workers in the companies being merged. “Deal toys are helpful in that regard. They can be shown around, exhibited in the office, and are understandable by many people, inside and outside the bank – kids, partners, friends.” Moreover, he says, they can provide a distraction from the vexed issue of bonuses. “By providing meaning and attributing credit to the overworked bankers involved in a deal, the hope is that less of their personal self-esteem will ride on the bonus.”

Coming Soon: Morrison & Romanek’s “The Corporate Governance Treatise”

We are happy to say the 2015 Edition of Morrison & Romanek’s “The Corporate Governance Treatise” has been sent to the printers! Here’s the “Table of Contents” listing the topics so you can get a sense of the Treatise’s practical nature.

You will want to order now so you can receive your copy as soon as it’s done being printed. With over 1100 pages — including 239 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.

Pay Ratio: Petition Hits 165k – & A New Timing Poll!

As noted in this press release, a group consisting of AFL-CIO, CREDO Action,, Americans for Financial Reform and Public Citizen delivered a petition to the SEC yesterday that numbered 165k signatures. Not sure whether that will influence the SEC to act any sooner since other petitions have not resulted in any action – although the rumor is that these rules will be adopted on August 5th.

There have been false starts before – this poll of the community as to when the pay ratio rules would be adopted fared well as the “winners” were those that guessed that the pay ratio rules would be adopted later than any of the offered poll choices. Here’s a new poll for you to make a prediction:

online surveys

– Broc Romanek

July 16, 2015

What’s the SEC Chair’s Role? Authority for the SEC’s Commissioners to Act?

Recently, a member asked: “I did a little looking at the statutory or other authority of the SEC’s Chair. I didn’t find very much that describes the role and authority of the chairman. As a practical matter, does the staff treat the Chair as the CEO (boss) and generally do what the Chair says? I always tell my clients that individual directors who are not officers have no authority to direct management to do anything. A board must act collectively or not at all. Interestingly, I could find a rule governing quorums of the Commission, but no rule that defining what vote is required for Commission action (i.e., a majority of the authorized number of Commissioners or a majority of a quorum). Perhaps these are matters that you could address in your blog.”

I forwarded this question to my go-to expert on this type of thing – Scott Kimpel of Hunton & Williams – who responded:

In Free Enterprise Fund v. PCAOB (2010), the Supreme Court held (just a few weeks before passage of Dodd-Frank) that the five Commissioners are, jointly, the head of the SEC. Also, Section 989B of the Dodd-Frank Act amended the Inspector General to provide that the “head of the designated Federal entity” with a board or commission (such as the SEC) means “the board or commission of the designated Federal entity.” Dodd-Frank changed prior law under which the inspector general only reported to the SEC chair. But the Court in Free Enterprise otherwise left intact Reorganization Plan Number 10 of 1950 (15 Fed. Reg. 3175).

Reorg Plan 10 formally transferred from the full Commission to the SEC Chair responsibility for all executive and administrative functions, including “(1) the appointment and supervision of personnel employed under the Commission, (2) the distribution of business among such personnel and among administrative units of the Commission, and (3) the use and expenditure of funds.” Item (3) is notable because it vests responsibility for the SEC budget solely with the Chair. I’ve found over the years that many people are surprised that the other commissioners have little to no input in the budget process, and the full Commission never takes a vote on the budget, which is unlike other agencies, such as the CFTC, where I understand there is no comparable provision and all of the Commissioners weigh in.

Reorg Plan 10 also vests the Chair with authority to appoint “the heads of major administrative units . . . subject to the approval of the Commission.” This provision gives the Chair a great deal of authority to hire and fire the general counsel and other division/office heads. Historically, these senior positions were held by career members of the civil service who ascended to director status after many years on the Staff, and director-level officers held these positions for many years across the tenures of multiple chairs. More recently, SEC Chair have generally brought in their own folks (often from the private sector) to serve as general counsel and as division/office directors, then these folks quickly leave when a new Chair joins. Unlike many cabinet-level executive departments that require Senate confirmation for the general counsel and various undersecretaries, there is no such requirement at the SEC, so appointing new directors is comparatively easy.

In terms of the interaction of the Chair, Commissioners and Staff, I believe the CEO-board analogy is a rough one at best. While it is true that the SEC Chair generally holds a position akin to a COO or CEO, the other Commissioners have no say in appointing the Chair (Reorg Plan 10 vested that power in the President), nor do they set the Chair’s compensation—all hallmarks of private-sector board oversight of the chief executive. And unlike traditional directors at a private-sector company, SEC Commissioners are employees of the agency, maintain offices and personal staffs at SEC headquarters, and regularly interact with members of the Staff, particularly on rule-makings and enforcement matters.

It is true that the Chair has the most frequent contact with the senior staff, but rank and file staff have little daily interaction with the Chair or the other Commissioners and generally take direction from their immediate staff supervisors. Many Staff members can work at the SEC for years without ever meeting a Commissioner other than a chance encounter with one in an elevator or at the coffee shop. That said, there is certainly no rule or protocol that otherwise limits who the other Commissioners can speak to on the Staff. Because adoption of rules and authorizing enforcement action are both activities that require a vote of the Commission, individual Commissioners can have a great deal of influence over how these matters develop, and there is regularly a good deal of horse trading among the Commissioners and Staff working on a project to achieve a majority on a given vote.

As to the voting question more specifically, the quorum requirement appears at 17 CFR §200.41. It provides: “A quorum of the Commission shall consist of three members; provided, however, that if the number of Commissioners in office is less than three, a quorum shall consist of the number of members in office; and provided further that on any matter of business as to which the number of members in office, minus the number of members who either have disqualified themselves from consideration of such matter pursuant to §200.60 or are otherwise disqualified from such consideration, is two, two members shall constitute a quorum for purposes of such matter.”

A majority vote of those SEC Commissioners participating in a meeting where quorum is present is required for a matter to pass. There is no particular SEC rule on this issue, but it is instead based on the holding in cases like FTC v. Flotill Products, which the Supreme Court decided in 1967. In that case, the Court considered whether an official action of the FTC required the vote of a majority of the full Commission, or only of a majority of the quorum that participated in the decision. The Court noted what it referred to an “almost universally accepted common-law rule . . . in the absence of a contrary statutory provision, a majority of a quorum constituted of a simple majority of a collective body is empowered to act for the body.” I believe the SEC’s Office of General Counsel and Office of Secretary have developed various rules of thumb to administer this holding in practice. And a great deal of the Commission’s business is discharged through written consents in lieu of a meeting (each known colloquially as a “seriatim” from the legal Latin for a document signed in series) in which all five of the Commissioners must sign before the action is effective.

Also see Keith Bishop’s blog on this topic…

Mailed: July-August Issue of “The Corporate Executive”

We recently mailed the July-August Issue of The Corporate Executive, and it includes pieces on:

– FASB Issues Exposure Draft Proposing ASC 718 Amendments
– Delaware Courts Approve Another Lawsuit Over Director Stock Awards (and More Lawsuits Are Filed)
– A Trap for Corporate Executives
– IRS Issues Final Section 162(m) Regs
– Grant Date When Performance Awards Are Granted After the Start of the Performance Period
– SEC Proposes Clawback Rules

Act Now: Get this issue rushed to when you try a “1/2 Price for Rest of 2015″ No-Risk Trial to The Corporate Executive.

Wearable Computers: What Next?

Apparently, wearable computers were all the rage during this year’s SXSW despite the demise of Google Glasses. How might wearable technology impact investors? This article from a few years back gives some clues…

– Broc Romanek

July 15, 2015

More Fake News: Twitter’s “Unreal” Tender Offer

As Jeff Werbitt blogged last month, the SEC uncovered the dude who perpetuated the fake takeover rumors regarding Avon. The con artist was Bulgarian and used techniques to make it look like the “story” appeared on Bloomberg’s website. Yesterday, as noted in this article, the same techniques were used to perpetuate fake rumors about a takeover of Twitter (except that no SEC filing was involved) – apparently this time the hoax originated in Panama. Hat tip to Simpson Thacher’s Yafit Cohn for pointing it out!

Check out my blog over on entitled “Whoa! Dell Shareholders Lose Appraisal Rights Due to Custodial’s Back-Office Procedures“…

NYSE Trading Suspension: Implications for Issuer Equity Derivatives

This Skadden memo does a good job of explaining how the NYSE’s tech snafu last week might have done some real harm in the derivatives market by triggering a “market disruption event” …

Webcast: “Cybersecurity – Governance Steps You Need to Take Now”

Tune in tomorrow for the webcast – “Cybersecurity: Governance Steps You Need to Take Now” – to hear Weil Gotshal’s Paul Ferrillo and Randi Singer, as well as PhishMe’s Aaron Higbee, get into the nitty gritty of how cybersecurity is now a huge governance concern and what you should be doing (including how to best train employees). Please print these “Course Materials” in advance…

Don’t forget to tune into today’s webcast – “Clawbacks: What Now After the SEC’s Proposal” – to hear Compensia’s Mark Borges, Semler Brossy’s Blair Jones and Morrison & Foerster’s Dave Lynn discuss the SEC’s latest proposal…

– Broc Romanek