On pages 4-8 of the March/April issue of The Corporate Counsel, there is a discussion about how the SEC staff might interpret the crucial definition of “material definitive agreement” under the new 8-K regulations. Included in that analysis are notes about comments made by Alan Beller at the ABA meeting in Seattle, particularly in the area of compensation arrangements.
In noting Alan’s comments, we took pains to point out that Alan qualified his comments by stating they didn’t reflect the staff’s final positions. And from what I hear transpired at the ABA-JCEB meeting last week with the staff, we were wise to include that disclaimer. For example, it appears that the staff is now leaning towards requiring an 8-K for each grant to a NEO, even under previously filed plans (contrary to what Alan stated in Seattle).
Learn more about the staff’s latest thinking from our webcast next Wednesday – “Overcoming the Challenges of Real-Time Disclosure” – during which the panel will discuss grey areas and provide practical guidance in those areas that might not be grey, but still will be challenging.
California Dreaming
We have developed a Practice Area devoted to issues raised by California Corporations, including links to the corporate governance web pages of some of the more prominent companies incorporated in California.
The mainstream media continues to run articles containing rumors of where the SEC is heading with its shareholder access proposal. On Friday, the NY Times ran a controversial Floyd Norris column indicating, among other rumors, that the withheld vote trigger would be racheted up to 50% in exchange for not counting broker non-votes.
And yesterday, the WSJ ran an article indicating that the SEC was going to drop its 1% opt-in trigger in exchange for speeding up the ability for investors to force a contested election (but didn’t provide details as to what this latter trade-off really was). The article also noted that the SEC was considering the BRT’s suggestion to allow companies to implement a “cure” after a triggering event (i.e. remove one or more directors that received high withheld votes).
Despite these media musings, I would wager that the SEC is at least a few months from adopting their final rules in this area (hey, the World Series of Poker started last night, I gotta bet something…).
These articles come on the heels of the MBNA Corp. annual meeting last week at which a TIAA-CREF shareholder proposal received a majority vote regarding the appointment of additional directors without personal or financial ties to senior management/founders. Two MBNA directors received more than a 40% withheld vote due to their ties to management. Interestingly, both of those directors are lawyers – and MBNA just appointed two other lawyers to vacant seats on the board, Mary Boies and former SEC Commissioner Laura Unger (my old boss racking up her third board seat) – so that nearly half of MBNA’s directors are lawyers (4 out of 9)!
The SEC’s Shell Company Proposal
The SEC has been jawboning about perceived abuses of shell companies for some time. So last month’s proposal to prohibit the use of Form S-8 by shell companies should not be a surprise. Still, some of us represent clients that engage in these transactions and the question remains, what now? Learn more in my interview with David Kaufman on the SEC’s Shell Company Proposal.
Last Wednesday, I attended PLI’s 1st Annual “PCAOB Speaks” held in Washington DC. I was surprised that live attendees numbered over 200 (although a significant percentage of that were PCAOB and SEC staffers)- because the “SEC Speaks” audience always consists of a handsome number of SEC alumni and the PCAOB doesn’t yet have alumni.
One point brought home during the conference is that, under Auditing Standard No. 2 (which is awaiting final SEC approval), audit committees must pre-approve all services related to internal controls if these services are performed by the same firm that conducts the company’s audit. Audit committees cannot pre-approve these services by categorical standards. As a result, in this area, Auditing Standard No. 2 effectively trumps the SEC’s auditor independence rules adopted in January 2003 to implement Section 201 of Sarbanes-Oxley.
The rationale is that auditor independence is not viewed as a simple compliance matter; it is much more important than that. So audit committees are required to scrutinize each possible internal controls engagement to ensure that the auditor can be impartial and objective. By the way, the grandfathering of some non-audit services ended last Thursday.
We have posted more PCAOB Speaks notes on our home page and in Section F of our Sarbanes-Oxley Law Firm Memos portal.
Late Breaking 703 Developments
In case you missed this blog that I posted Friday afternoon: I understand that the SEC staff has reached an agreement on the treatment of restricted stock that is forfeited for purposes of the 703 stock repurchase table. The key determinant here is whether the company pays any consideration when the stock is returned – even a de minimis amount is sufficient consideration so that the returned stock must be included in the table. If there is no consideration given for the forfeited stock at all – it need not be included in the table.
By the way, at the ABA-JCEB meeting this week, the SEC staff apparently stated that stock repurchases by a 401(k) plan or other employee benefit plan may be required to be reported when the plan is an “affiliated purchaser” within the meaning of Rule 10b-18(a)(3). This could be a real problem in cases where a benefit plan is administered in-house, instead of being handled by a brokerage firm, transfer agent or other outside party. I would wait until the staff has a position in writing on this one before taking any drastic actions, such as hiring a third-party administrator.
Under Rule 10b-18, an “affiliated purchaser” is:
(i) A person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities; or
(ii) An affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer; Provided, however, that “affiliated purchaser “shall not include a broker, dealer, or other person solely by reason of such broker, dealer, or other person effecting Rule 10b-18 purchases on behalf of the issuer or for its account, and shall not include an officer or director of the issuer solely by reason of that officer or director’s participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the issuer.
I understand that the SEC staff has reached an agreement on the treatment of restricted stock that is forfeited for purposes of the 703 stock repurchase table. The key determinant here is whether the company pays any consideration when the stock is returned – even a de minimis amount is sufficient consideration so that the returned stock must be included in the table. If there is no consideration given for the forfeited stock at all – it need not be included in the table.
By the way, at the ABA-JCEB meeting this week, the SEC staff apparently stated that stock repurchases by a 401(k) plan or other employee benefit plan may be required to be reported when the plan is an “affiliated purchaser” within the meaning of Rule 10b-18(a)(3). This could be a real problem in cases where a benefit plan is administered in-house, instead of being handled by a brokerage firm, transfer agent or other outside party. I would wait until the staff has a position in writing on this one before taking any drastic actions, such as hiring a third-party administrator.
Under Rule 10b-18, an “affiliated purchaser” is:
(i) A person acting, directly or indirectly, in concert with the issuer for the purpose of acquiring the issuer’s securities; or
(ii) An affiliate who, directly or indirectly, controls the issuer’s purchases of such securities, whose purchases are controlled by the issuer, or whose purchases are under common control with those of the issuer; Provided, however, that “affiliated purchaser “shall not include a broker, dealer, or other person solely by reason of such broker, dealer, or other person effecting Rule 10b-18 purchases on behalf of the issuer or for its account, and shall not include an officer or director of the issuer solely by reason of that officer or director’s participation in the decision to authorize Rule 10b-18 purchases by or on behalf of the issuer.
“Please Disregard The Attached Document”
After attending 3 conferences in 3 days (more on that next week), I need a light moment – and what better than repeating this great 4/29 blog from Bruce Carton of the SecuritiesLitigationWatch Blog:
“What would you do if a secretary in your publicly-traded company accidentally e-mailed a sensitive internal document showing weaker-than-expected profits to 50 of your investors? Would you immediately post the internal document on the front page of your company website with a request that “no reliance whatever should be placed on the estimates, forecasts or opinions expressed therein” and that the company “would be grateful if you disregard this information”?
That’s what Amvescap did on Tuesday on the front page of its website, after a secretary in London inadvertently e-mailed this “Presentation to the Executive Management Committee” to a group of investors. Amvescap added on its website that the presentation was sent out “in error,” was “in the course of preparation” and was “incomplete in a number of important respects.”
Under the SEC’s Regulation FD, Amvescap probably had no other real choice. Reg FD requires an issuer that inadvertently discloses material nonpublic information regarding itself to promptly make a public disclosure of that information, as well. This can be done either by filing a Form 8-K with the SEC or through some other method that is “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” Amvescap’s posting of the document on its website was presumably done to provide the “broad, non-exclusionary distribution” of the information required under Reg FD (as long as it was combined with a press release).
The inadvertent disclosure had several other ripple effects. First, many analysts media speculated that a $300 million “exceptional item” mentioned in the document was its estimate of costs to resolve an SEC investigation into alleged improper mutual fund trading, which was reportedly three times analysts’ estimates. Amvescap, however, denies that it made any such estimate in that document.
In addition, the investors’ receipt of the report presented compliance and insider trading landmines at those investors’ companies. According to this article, for example, some compliance officers prohibited investment bankers receiving the document from talking to investors or the trading desk after it became clear that they were in possession of confidential documents. One investment banker stated that “we effectively had inside information for two hours, so we took legal counsel and I had to stay incommunicado.”
According to the Financial Times, however, not all the proscriptions against insider dealing were effective. On Tuesday of this week, over $40 million shares changed hands – nearly four times the daily average – and Amvescap ADRs fell 3.5% to $14.08.” Thanks Bruce!
It doesn’t appear that any more certainty on the finer points of the 703 table can be derived from the staff’s Tuesday meeting with the ABA’s JCEB – as many of the open issues are rather complicated and the staff likely wants to ensure its interps are appropriate before they are issued in “final.” My guess is that the staff will put out written guidance on these open issues, but will not be able to do so before Monday’s 10-Q deadline for accelerated filers.
The issues that appear to be soundly resolved are the ones noted in my Tuesday blog, such as net withholding/exercises of options don’t need to be included in the table – but stock-for-stock exchanges should be included.
Beyond that, bear in mind that the staff’s general view is that the table is supposed to provide a broad and comprehensive picture of the repurchase activity going on within a company (i.e. more inclusive than what Rule 10b-18 covers). So it might be better to err on the conservative side until written guidance is available.
Once firm guidance is available, the question then is whether you need to amend this 10-Q if the numbers in the table would have been different under the guidance (note that it’s only a 3-month table, so there would be no natural opportunity to correct what you included in the last 10-Q). My bet is that, in most cases, there will be an argument that the changes are not material – but that argument likely would be bolstered if you provide too much disclosure now, rather than too little.
Our Spring Cleaning
I often get asked why there is no search engine on TheCorporateCounsel.net. The reason is that I was never satisfied with the quality of results from the engines we have tried.
However, to facilitate your ability to find useful information on the site, I have significantly increased the number of “Practice Areas” on the site – with over 100 of them now! I believe this indexing approach is the best search solution for the site. Our Practice Areas can be accessed by hitting the button with that name at the top of every page on the site.
Scrushy’s Attempt to Render SOX Unconstitutional
As I blogged a while back, HealthSouth’s former CEO, Richard Scrushy argues that Sarbanes-Oxley – particularly Section 906 – is unconstitutional in this recent motion to dismiss criminal charges. It is hard to tell what the Judge’s response is, due to many of the Judge’s orders being sealed (see the N.D. Alabama web page for notable cases).
You should read my revised blog from yesterday below – the SEC staff still is mulling over some open issues on the new Item 703 stock repurchase table. I will revise this blog later today if I hear any developments.
One open issue is whether you need to include the 703 table if you did not make any repurchases during the quarter, but you have a publicly announced repurchase plan under which future repurchases can be made? Some companies apparently think the answer is “yes” – Qualcomm’s 10-Q has a table with zeroes under the columns for repurchases during the quarter, along with the column for future possible repurchases that includes the number of shares available for repurchase and a footnote about the terms of the ongoing repurchase program.
And some companies appear to think the answer is “sort of” – Raytheon’s 10-Q has narrative disclosure about its ongoing repurchase program. I think either approach makes sense and is a much better idea than dropping the table completely – but we await word from the staff as to what is acceptable.
Weaknesses in the Proxy Process
John Wilcox, Vice Chair of Georgeson has been the voice of reason during the shareholder access debate by pointing out how our proxy system might be too broken to accommodate the SEC’s proposed framework. Learn more in my interview with John on Weaknesses in the Proxy Process.
’33 Act Filing Fees Going Down Again for Fiscal ’05
Effective October 1st – or 5 days after the date on which the SEC receives its fiscal year 2005 regular appropriation – whichever date comes later (and the appropriation always comes later), the Section 6(b) fee rate applicable to the registration of securities, the Section 13(e) fee rate applicable to the repurchase of securities, and the Section 14(g) fee rates applicable to proxy solicitations and statements in corporate control transactions will decrease to $117.70 per million from the current rate of $126.70 per million.
As usual, the adjusted fee rates will not affect the amount of funding available to the Commission. A copy of the SEC’s order, including the calculation methodology, is available.
We have been inundated with interp questions on the new Item 703 repurchase table that will debut in the 10-Qs (that are required to be filed by COB Monday), as I’m sure the SEC staff has been. Below are several issues that have been informally addressed recently by the SEC staff – most of these are drawn from our Q&A Forum:
Restricted Stock: Executives purchase stock on day 1 for $.01 per share, which is par value. The shares are restricted and cannot be sold until the restrictions lapse. The restrictions lapse 20% per year for 5 years. Each time restrictions lapse, the executives have a tax withholding obligation to the Company which they may satisfy by delivering back to the Company some of the shares on which the restrictions have lapsed. Also, when an executive leaves the employ of the Company, the shares must be sold back to the Company for $.01 per share.
Answer: I have heard that some staffers have told practitioners that both types of repurchases have to be reported under 703 – any consideration given by the company means that the stock must be included in the table (if no consideration is given, it need not be included). I have also heard that you don’t need to include restricted stock units (because they are not registered under Section 12) – but this could be an area where the staff changes its view. One area that is clear is that you don’t need to include forfeitures of restricted stock upon failure to satisfy vesting requirements or vesting conditions (so long as no consideration is given).
Options: As noted in my interview with Jonathan Wolfman, the staff has said that you don’t need to include net option exercises to pay the exercise price of an option – nor the net option exercise to pay tax withholding of an option. But the staff has now decided that a stock-for-stock exchange does get included (so i am adding a note about the reversed position into Jonathan’s interview).
Rabbi Trusts: An issuer has a non-qualified deferred compensation plan for executives which allows participants to invest in the issuer’s stock. A rabbi trust purchases stock, subject to formulaic parameters, according to the investment choices of the participants. The issuer does not direct the purchase or sale.
Answer: These repurchases should be included in the table (because they are the company’s assets).
By the way, the March/April issue of The Corporate Counsel asks some interesting questions about some still unanswered issues regarding affiliated purchasers and employee benefit plan repurchases (the March/April issue is just hitting the streets as I type).
More from Oxley on SOX
Aparently, at the Security Traders Association conference last week, Representative Oxley said one – or more hearings – will be held this summer to evaluate how the legislation that bears his name is impacting businesses and whether or not it is working as intended. The hearings would include testimony from corporate executives, the SEC and the PCAOB.
In addition, Oxley told reporters that the House committee he chairs will soon review the FASB’s controversial stock option exposure draft.
We have posted the May issue of our popular email newsletter.
SEC’s Letter Explaining E&Y Suspension
The SEC has posted a letter from its Chief Accountant to E&Y’s CEO explaining the terms of the 6-month suspension on E&Y’s ability to obtain new clients. It makes clear that the SEC’s action is intended to focus on E&Y – and not hurt any of E&Y’s clients.
Good News in California regarding Shareholder Access!
I had reported a few months ago (see this March Eminders archive ) that California had introduced its own shareholder access legislation – introduced by Assemblymember Judy Chu – that would have gone a few steps further than the SEC’s proposal. It appears sanity has prevailed as the California bill has been substantially amended so that it’s no longer the threat it once was to the SEC’s proposal. Here is the latest marked-up version of the bill (i.e. note changes like “nominate” to “recommend,” etc.).