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Here are the survey results regarding auditor inspection reports and engagement letters:

1. Have you requested information from your independent auditor about the non-public portions of the PCAOB’s inspection report (ie. Part II of the report) that could impact your company’s audit?

– Yes, our auditor agreed in the auditor engagement letter to provide a copy of the inspection report – 3.3%
– Yes, our auditor agreed informally to provide a summary or a copy of the inspection report – 40.0%
– Yes, but auditor refused our request to receive information regarding the non-public portions of the inspection report – 13.3%
– No, we have not made such a request from our auditor – 43.3%

2. Does your most recent engagement letter with your independent auditor include a provision that imposes a cap on the auditor’s liability (ie. no liability except for willful misconduct and gross negligence)?

– Yes – 63.3%
– No – 36.7%

3. Does your most recent engagement letter with your independent auditor include a provision that waives a jury trial?

– Yes – 70.0%
– No – 30.0%

New Survey: Trading Policies for Outside Directors

Please take our new survey on trading policies for outside directors.

SEC Files Amicus Brief in At Home Corp. v. Cox Communications

A few weeks back, the SEC filed its amicus curie brief with the Second Circuit in At Home Corp. v. Cox Communications, Inc., a case discussed in the November 2004 issue of Section 16 Updates. Below is some commentary from Alan Dye snipped from his Section16.net Blog:

Interestingly, 12 of the 24 pages of legal argument are devoted to the level of deference courts should pay to the views of the SEC as expressed in amicus briefs. On that issue, the SEC argues that the Commission’s interpretations of its own regulations are “binding, unless they are plainly erroneous or inconsistent with the regulations,” and that its interpretations of federal securities statutes should be considered “controlling,” or entitled to “Chevron deference,” if the statute is ambiguous and the SEC’s interpretation is reasonable.

The facts of the At Home case are discussed in an August 17, 2004 posting in the Litigation Corner. Briefly, Cox, Comcast and AT&T at one time shared control of At Home, and on March 28, 2000, AT&T agreed to purchase shares of At Home stock from both Cox and Comcast based on a hybrid pricing structure. In Cox’s case, AT&T agreed to purchase shares for a purchase price of $1.4 billion. If the price of At Home’s stock on the date of exercise were $48 per share or less, the number deliverable would be determined by dividing $1.4 billion by $48. If the price of At Home’s stock exceeded $48 per share (based on the market price during the 30 trading days beginning 15 days before Cox’s exercise of the right), then the number of shares deliverable would be a number having a value of $1.4 billion. Cox exercised the right on January 11, 2001, when the market price of At Home’s stock was $7.72 per share, and therefore Cox was entitled to the fixed price of $48 per share. (Because AT&T would have incurred significant tax liability had it purchased the shares, the parties worked out an agreement in on May 18, 2001 whereby AT&T satisfied its liability to Cox by allowing Cox to keep the shares and also to receive shares of AT&T stock.) Comcast entered into substantially identical transactions with AT&T.

At Home ended up in bankruptcy, and the bankruptcy trustee brought an action against Cox and Comcast, alleging that their put rights were not derivative securities because they did not have a fixed price. As a result, the trustee alleged, the exercise of the rights resulted in non-exempt purchases, matchable with the “purchase” of the shares back from AT&T within less than six months. As an alternative theory of liability, the plaintiff alleged that Comcast’s establishment of the put was a sale, matchable with Comcast’s purchases within six months of three cable companies which also owned At Home securities in their portfolios. Judge Buchwald dismissed the complaint, holding that the put rights were hybrid securities, having both a fixed exercise price and a floating exercise price, and that the rights therefore were derivative securities from the time they were created in March 2000. The exercise of the rights at the fixed price, in turn, was exempt from Section 16(b) by virtue of Rule 16b-6(b). Comcast’s purchase of the three cable companies was held to be outside Section 16 under the unorthodox transaction doctrine.

The SEC’s brief reaches some interesting conclusions. The opening section states that the SEC “agrees with the district court that defendants are not liable under Section 16(b).” The Commission then goes on to argue that (i) the puts were hybrid securities, and therefore were derivative securities to the extent of their fixed price component, (ii) the establishment of the puts on March 28, 2000 constituted “sales” of the stock that could sold at the fixed price, (iii) the puts were never effectively exercised on January 11, 2001, because the underlying stock was never delivered, and (iii) the options were “cancelled for value” on May 18, 2001, resulting in a “purchase” of the underlying shares on that date (more than six months after the March 28, 2000 sales).

The SEC disagreed with the district court’s conclusion that the unorthodox transaction doctrine applies to Comcast’s purchases of the three cable companies, arguing that the doctrine applies only to “forced” transactions that present no potential for speculative abuse because the insider has no access to inside information. The SEC asserted instead that Comcast’s purchases of the cable companies were not “purchases” of At Home stock as the term “purchase” is defined in Section 3(a)(13) of the Exchange Act. While that definition is broad enough to pick up Comcast’s purchases of the cable companies, the SEC argues that the lead-in to the definition says “unless the context otherwise requires.” The Commission argues that a change-of-control transaction typically is not motivated by a desire to purchase the acquiree’s portfolio securities and therefore should be presumed not to be a purchase for purposes of Section 16(b) (because the “context otherwise requires”). The Commission argues that the plaintiff would have the burden of rebutting the presumption, such as by proving that the acquisition of another company was a subterfuge for purchasing the underlying securities.

It likely will be several months before the Second Circuit issues its decision.