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Monthly Archives: October 2012

October 16, 2012

Webcast: “Secrets of the Corporate Secretary Department”

Tune in tomorrow for the webcast – “Secrets of the Corporate Secretary Department” – to hear the current Chair of the Society of Corporate Secretaries – and three former Chairs – as they debunk myths on how to run the corporate secretary department as well as provide oodles of practice pointers. The panel includes Lydia Beebe of Chevron; Ken Wagner of Peabody Energy; Carol Ward of Mondelez International (formerly Kraft Foods); and Susan Wolf, formerly of Schering-Plough.

Among the topics of this program are:

– How to leverage outside resources & technology
– Best ways to feed and care for the board
– How to best manage a budget
– Ways to streamline the board materials process
– Ways to optimize director orientation & education
– How best to involve directors in shareholder engagement
– Being a governance subject matter expert and resource
– Logistics, contingency plans and last minute changes for board meetings

Nuggets in Responses to Corp Fin Comment Letters: Iran & Syria Travel Plans

Recently, Michelle Leder of footnoted.com (who recently bought back her site from Morningstar) tweeted about the interesting stats on travel to Iran and Syria booked via Expedia in this response to a Corp Fin comment letter. The comments came from Corp Fin’s Office of Global Security Risk. You never know what you’ll find in responses to comment letters…

Catch-Up Now: “Say-on-Pay Workshop Conference”

The video archive of last weeks’ pair of Conferences – the “7th Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” – are posted. Hopefully, you’ve talked to some of the many that attended this event and heard how much practical guidance was imparted (people come from all over the world; I sat at lunch one day with someone that came all the way from Israel). Our panels really delivered this year – and it’s not too late to watch them as you can still register and watch the panels now or when you are gearing up to draft your proxy materials.

Our Week of Conferences: Sights

It was New Orleans, so there were numerous thrills outside the Conference, starting with a Sunday NFL night game next door in the beautifully lit Super Dome – those Saints fans sure know how to get dressed up. The next day, the city temporarily lost it’s drinking water:

conf water.jpg

The Conference wouldn’t feel right without the annual race of pigs from AON Hewitt/Radford (see this video from a few years back):

conf pigs.jpg

As a button maker myself, I was excited to see these magnets from Kenexa that had hilarious statements on them:

conf buttons.jpg

– Broc Romanek

October 15, 2012

Our New “D&O Questionnaire Handbook”

Spanking brand new. Posted in our “D&O Questionnaires” Practice Area, this comprehensive “D&O Questionnaire Handbook” provides a heap of practical guidance about how to navigate this tricky task. This one is a real gem – 76 pages of practical guidance…

I have started posting ’13 proxy season checklists in our “Proxy Season” Practice Area.

CII’s New Campaign Against Multi-Class Companies

In the wake of the Facebook debacle, the chorus to challenge multi-class voting structures – seen as a poor governance practice – continues as CII has announced a campaign to urge the NYSE and Nasdaq to make new companies that have two or more classes of common stock with unequal voting rights ineligible for listing. This press release contains links to the letters sent to the NYSE and Nasdaq by CII…

Webcast: “Evolution of M&A Executive Pay Arrangements”

Tune in tomorrow for the DealLawyers.com webcast – “Evolution of M&A Executive Pay Arrangements” – to hear Sullivan & Cromwell’s Matt Friestedt, Wachtell Lipton’s Jeremy Goldstein and Simpson Thacher’s Andrea Wahlquist cover the latest in executive compensation arrangements in deals.

– Broc Romanek

October 12, 2012

Industry Groups Sue to Kill Dodd-Frank – Or At Least Redo Resource Extraction Rules

As I return from our week of executive pay conferences, Scott Kimpel of Hunton & Williams gives us this news:

A collection of industry groups has sued the SEC in federal district court to block implementation of the resource extraction disclosure rules promulgated in late August under Section 1504 of Dodd-Frank. The plaintiff trade groups raise a number of claims, including a faulty cost-benefit analysis and deficiencies under the Administrative Procedures Act, the Securities Exchange Act and the 1st Amendment. The act of filing suit does not immediately stay the rules. In recent challenges to SEC rules, the Commission has generally stayed the controversial rules on a voluntary basis after negotiation with plaintiffs’ counsel. Should the Commission refuse to do so here, the plaintiffs could then petition the court for that relief.

The action concerning Section 1504 begs the question as to what may happen to its companion statute, Section 1502, concerning conflict minerals. The two rulemakings employed similar arguments concerning Congressional intent and the scope of Congress’s mandate; a putative plaintiff may choose to raise some of the criticisms leveled in the 1504 complaint against the Section 1502 release as well. It remains to be seen if any groups will in fact come forward with a challenge.

To be clear, the apparent objective of this challenge is not necessarily to make the prospect of rulemaking go away forever. Unless the plaintiffs are successful in setting aside the entire statute as violative of the Constitution – or absent an amendment of Dodd-Frank – the Commission will have to go back to the drawing board if the rules are eventually struck down (which is far from certain) after all appeals are exhausted. This suit presents a different scenario than the SEC’s rules on mutual fund governance, equity-indexed annuities and proxy access–each of which was struck down, but none of which was compelled by statute, which gave the Commission discretion not to re-propose.

Here is the complaint posted in our “Resource Extraction” Practice Area – and here’s the Chamber’s press release about the lawsuit…

Starting Monday: Draft Registration Statements Required to Be Submitted Using EDGAR

Yesterday, Corp Fin announced that draft registration statements are required to be filed via Edgar starting this Monday, October 15th. This applies to both emerging growth companies under the JOBS Act and foreign private issuers. Here are related blogs leading up to this development…

President’s “Iran Sanctions” Executive Order Impact Foreign Subsidiaries and Require SEC Disclosure

On Tuesday, President Obama issued an Executive Order implementing certain sanctions set forth in the “Iran Threat Reduction and Syria Human Rights Act of 2012”, which was signed into law in August. The Act expands the reach of the U.S. sanctions law against Iran by expanding the types of activities subject to sanctions and extending the prohibitions to foreign entities owned or controlled by U.S. persons. The Act also creates a new obligation for SEC reporting companies to disclose in their filings whether they or their affiliates knowingly engaged in Iran-related activities as noted in these memos posted in our “National Security” Practice Area.

– Broc Romanek

October 11, 2012

Study: CFOs Concede Earnings are ‘Managed’

As noted in this article, this study made the rounds a few months back and caused a stir. Here is the abstract from the study:

We provide new insights into earnings quality from a survey of 169 CFOs of public companies and in-depth interviews of 12 CFOs and two standard setters. Our key findings include (i) high-quality earnings are sustainable and are backed by actual cash flows; they also reflect consistent reporting choices over time and avoid long-term estimates; (ii) about 50% of earnings quality is driven by innate factors; (iii) about 20% of firms manage earnings to misrepresent economic performance, and for such firms 10% of EPS is typically managed; (iv) CFOs believe that earnings manipulation is hard to unravel from the outside but suggest a number of red flags to identify managed earnings; and (v) CFOs disagree with the direction the FASB is headed on a number of issues including the sheer number of promulgated rules, the top-down approach to rule making, the curtailed reporting discretion, the de-emphasis of the matching principle, and the over-emphasis on fair value accounting.

Talk About Overboarded!?!

I don’t know much about hedge funds and their boards, but this NY Times article was stunning as it revealed that quite a few directors serve on as many as 25 boards – and one dude sits on 262 hedge fund boards, per this chart.

Law Firms: Your Deal Data is Being Hacked!

This Bloomberg article entitled “China-Based Hackers Target Law Firms to Get Secret Deal Data” scared the daylights out of me. Check it out!

– Broc Romanek

October 10, 2012

Survey Results: Use of Proxy Solicitors

Much discussion here at our Conferences about the role of proxy solicitors during the say-on-pay process (here is the video archive from yesterday’s “The Say-on-Pay Workshop: 9th Annual Executive Compensation Conference”). Here are survey results on the use of proxy solicitors:

1. Does your company use a proxy solicitor for the proxy season:
– Yes, every year – 64.9%
– Only in years of special need – 24.3%
– No, we don’t use proxy solicitors – 10.8%

2. If a proxy advisor (ie. ISS/Glass Lewis) recommended a vote ‘against’ your company’s say-on-pay proposal, your proxy solicitor’s SOP projection (at record date vs. final voting results) was:
– Less than 3% (small margin between what estimated and what occurred) – 4.2%
– Within ± 3% – 5% – 16.7%
– Within ± 5% – 10% – 8.3%
– Within ± 10% – 15% – 12.5%
– More than 15% (large margin) – 0%
– Other/Don’t know – 58.3%

3. If your proxy solicitor’s say-on-pay projection substantially missed the mark during your latest proxy season, do you feel it was:
– Likely due to a good reason (eg. unforeseen circumstances) – 18.2%
– Not likely due to a good reason (ie. they just blew it) – 9.1%
– Don’t know – 72.7%

Please take a moment to participate in this “Quick Survey on Conflict Minerals” and this “Quick Survey on Delegation of Authority.”

Day Trading During Proxy Contests

In this DealLawyers.com podcast, Chuck Nathan of RLM Finsbury discusses an interesting – and potentially novel – situation in a proxy contest in which The Clinton Group (led by Greg Taxin, formerly a Glass Lewis founder) is seeking to remove 6 out of 7 directors through a written consent campaign and replace them with five new directors of Clinton’s choosing. Clinton seems to be day trading Wet Seal stock, which may be the first instance in which an activist investor day traded the stock of a company during a proxy contest it was sponsoring.

An Update for Internal Audit Standards

Recently, the Institute of Internal Auditors (IIA) announced changes to the International Standards for the Professional Practice of Internal Auditing Standards effective January 1st. In total, 18 revisions were made.

– Broc Romanek

October 9, 2012

Today: “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference”

Today is the “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference”; yesterday was the “7th Annual Proxy Disclosure Conference” – and the video archive of that Conference is already posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (a prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Central.

How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.

M&A Lawyers and New Careers

In this DealLawyers.com podcast, Chuck Nathan of RLM Finsbury discusses his big life change, including:

– Why did you make the move?
– What will you be doing?
– How has the practice of law in M&A evolved over the years?

US Supreme Court to Decide Potential Landmark Case on Application of Statute of Limitations to SEC Civil Penalties

As noted in this Akin Gump alert, in Gabelli v. SEC, No. 11-1274, the U.S. Supreme Court has agreed to determine whether the “discovery rule,” the concept that a statute of limitations is tolled until the underlying harm is discovered, applies to SEC enforcement actions seeking civil penalties.

– Broc Romanek

October 8, 2012

Today: “Tackling Your 2013 Compensation Disclosures: 7th Annual Proxy Disclosure Conference”

Today is the “Tackling Your 2013 Compensation Disclosures: 7th Annual Proxy Disclosure Conference”; tomorrow is the “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference.” Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our staff. Both Conferences are paired together; two Conferences for the price of one.

How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive (note that it will take about a day to post the video archives after it’s shown live). A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference (and on the top of that Conference page, you will select a link matching the video player on your computer: Windows Media or Adobe Flash Player).

Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here is today’s Conference Agenda; times are Central.

How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few – but hours for each state vary; see the CLE list for each Conference in the FAQs.

ISS’ 2013 Voting Policy Survey Results Now Available

Last week, ISS posted the results from its policy survey – 370 responses were received. Not surprising, executive compensation is the top area of focus across the globe. A summary of ISS’s summary is in this Davis Polk blog

Study: 20% of Companies Smooth Earnings

As noted in this WSJ article – which dissects this study – around 20% of CFOs interviewed believe that companies smooth earnings. Here is an excerpt from the piece:

Taken in isolation, this finding isn’t that surprising. It is an open secret that companies play around with “cookie-jar” reserves, accruals, and other accounting instruments to flatter, or even depress, earnings.

The tricks are well-known: A difficult quarter can be made easier by releasing reserves set aside for a rainy day or recognizing revenues before sales are made, while a good quarter is often the time to hide a big “restructuring charge” that would otherwise stand out like a sore thumb.

What is more surprising though is CFOs’ belief that these practices leave a significant mark on companies’ reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study’s respondents said it was around 10% of earnings per share.

Probably a good time for this series of “skepticism” webcasts hosted by a group of organizations that cater to CFOs…

– Broc Romanek

October 5, 2012

Dismissed: Three More Cases Related to Failed Say-on-Pay

Here is something I blogged yesterday in CompensationStandards.com’s “The Advisors’ Blog“:

Mark Poerio of Paul Hastings reports: Last week, the application of Delaware law principles has led courts in Colorado (Janus Capital), North Carolina (Dex One), and California (Hewlett-Packard) to dismiss shareholder challenges based on alleged disconnects between pay and performance, failed say-on-pay votes, and alleged waste through payment of $53 million of severance. In each case, the underlying complaints failed to excuse a pre-suit demand because none of the allegations created a reasonable doubt that the questioned transaction was entitled to protection under the business judgment rule.

These lawsuits will be discussed next week during our Conferences – “7th Annual Proxy Disclosure Conference” & “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” – for which it’s not too late to register. If you do intend to register in person in New Orleans, please bring a check as indicated in this note. You can still register online at any time if you intend to watch by video.

Corp Fin Updates Financial Reporting Manual (Again)

Yesterday, Corp Fin indicated that it has updated its Financial Reporting Manual for a JOBS Act note and clarification of guidance related to proxy statement requirements for the disposal of a business, auditor association with amounts from inception, the application of PCAOB auditor requirements in a reverse merger, reporting requirements in a reverse acquisition with a non-shell company, and other changes.

Can the SEC Eliminate the Prohibition on General Solicitation Retroactively?

Keith Bishop continues to blog provocatively – the latest being this gem about whether the SEC can give its upcoming rulemaking on general solicitation retroactive effect…

Meanwhile, state regulators are not too happy about the SEC’s proposal, as noted in this article

– Broc Romanek

October 4, 2012

Apple in the Crosshairs: Reg FD, Privacy, Etc.

Part of being the highest profile company in the land means that more attention is paid to what you do. From a compliance standpoint, Apple hasn’t always embraced that attention. For example, the fact that their announcements might move markets (eg. Steve Jobs health) – or even perhaps what they say about their financial performance during product announcements – as illustrated by this recent blog by Gus Schmidt of Gunster entitled “Did Apple violate Regulation FD at its iPhone 5 release conference?“.

In addition, as this blog notes, Apple recently received a shareholder proposal asking the company to publish a report explaining how its board is overseeing privacy and data security risks. Note that one thrust of this proposal is about personal information privacy. That can encompass issues such as what personal information is collected by apps, where it is stored, how it is used and shared, and how user consent is obtained.

The SEC’s cybersecurity disclosure guidance from last year did not mention the word privacy, although federal and state privacy laws can be implicated in the context of a data breach involving personal information (what the SEC described as a cyber incident). In light of the recent legislative focus on privacy and data security topics, and increased media focus on Big Data and companies’ privacy practices, the SEC might conclude that shareholder proposals related to information privacy risks or cyber security risks raise significant policy issues and therefore are not excludable under Rule 14a-8(i)(7) for the reasons discussed in Staff Legal Bulletin No. 14E. In the coming proxy season, more companies may see shareholder proposals focused on cyber security and privacy risks. So, now is a good time for their management and boards to focus on their risk management in those areas. Thanks to Jim Brashear of Zix Corp. for his insight!

Now Effective: Higher Filing Fees at the SEC

Don’t forget that fees to register securities at the SEC went up effective October 1st. Here is my blog about the rate increase from last month…

I’m bummed the baseball team here – the Washington Nationals – let the Teddy mascot win the daily race against his fellow Presidential mascots during yesterday’s game. Having him consistently lose was starting to become a national “thing” – and that’s great branding. No more. But I have “Natitude” for the coming playoffs…

How to Transition Existing Draft Registration Statements to Edgar

Yesterday, Corp Fin posted this sample letter that it has sent to companies whose draft registration statements are under review so they can transition them to the new Edgar process – using Form DRS – explained in this blog.

– Broc Romanek

October 3, 2012

Clarification of the NYSE’s Preferred Stock Voting Requirements

A member recently sent me the following: Recently, there has been a marked increase in the number of public offerings of preferred stocks and many of those securities are listed. We understand that NYSE Staff has applied a heightened level of scrutiny to the provisions of these preferred issuances, in particular those relating to voting rights of the preferred stockholders. Consequently, it seems timely to share some perspectives gleaned from recent transactions reviewed by the NYSE Staff.

It may be worth noting as an initial matter that the requirements discussed below are not applicable to trust preferred securities, which are not listed under the preferred stock listing requirements set forth in Section 703.05 of the Listed Company Manual. Trust preferred securities are listed under Section 703.19 (“Other Securities”) and are analyzed by the Exchange as structured products rather than as preferred stocks.

The applicable rules are found in Section 313(C) of the Listed Company Manual. The provisions that have generated comments from the NYSE Staff typically relate to the voting rights of preferred stockholders when the issuer proposes to amend the terms of the preferred stock in a manner that would “materially affect” the rights of the holders of the preferred stock.

The threshold question is what constitutes an amendment that ” materially affect[s]” the rights of the preferred stockholders? The NYSE Staff has made it clear that this voting requirement is triggered only in the event of a material adverse effect on the rights of the preferred stockholders and that, generally, these would be changes that relate to the economic rights pertaining to the preferred stock (such as its dividend rate, its liquidation preference, or the creation of a senior issue) or the voting rights of the preferred stock. However, this is not necessarily an exclusive list and you should consult with NYSE Staff if there is any question as to whether a proposed amendment requires a vote.

The area which has generated most confusion, and has led to the NYSE Staff requesting changes to transaction documents, relates to who gets to vote in the event of a material change. Section 313(C) provides as follows:

– Approval by the holders of at least two-thirds of the outstanding shares of a preferred stock should be required for adoption of any charter or by-law amendment that would materially affect existing terms of the preferred stock.

– If all series of a class of preferred stock are not equally affected by the proposed changes, there should be a two-thirds approval of the class and a two-thirds approval of the series that will have a diminished status.

The NYSE Staff has indicated that the above provisions should be understood as follows:

– For matters which affect multiple classes or series of preferred stock, the first bullet above requires that at a minimum the terms of the listed preferred must provide that the listed preferred has the right to vote along with all other outstanding classes or series of preferred stock (either listed or unlisted) that have voting rights and are similarly affected by the proposed action. The proposal must be approved by the votes of two-thirds of all such classes or series considered in the aggregate.

– The second bullet requires that the listed preferred must have the right to vote separately on any proposal which affects the listed preferred in some respect that is more negative than its effect on other classes or series, with a required vote for approval of two-thirds of the listed preferred. If the negative effect is on the listed preferred alone, then the holders of the listed preferred must have the right to vote as a separate class; if it affects multiple classes or series (either listed or unlisted) in the same way, then it is appropriate for all of the affected classes or series to vote together. While it is not explicitly stated in the rule text, the voting requirements of the first bullet can also always be met by providing for a separate vote of the listed preferred, as this is more protective of the holders than a vote in which they share the right to approve the proposal with other classes or series of preferred.

More Fallout in ISS-Proxy Solicitor Leak Case

Back in April, the New York Post revealed the persons involved in a scandal involving the leaking of confidential shareholder votes for money. Now, Reuters reports that ISS has received a Wells notice from the SEC related to a whistleblower complaint made against an employee. Here is MSCI’s related Form 8-K.

Baldness Is Powerful: Yeah, Baby!

In honor of this WSJ article about how baldness can be an advantage in the business world, below is the second pic in my series of bald men in the corporate world (here is the first pic), featuring Pfizer’s Bob Lamm and Alliance Advisor’s Reid Pearson with me at the recent Southeastern Chapter meeting of the Society of Corporate Secretaries:

bald guys.jpg

– Broc Romanek