The Practical Corporate & Securities Law Blog

By Broc Romanek

Go to TheCorporateCounsel.net

 
The Occupational Safety and Health Administration has posted a compliance directive updating its Whistleblower Investigation Manual to cover two more statutes. The directive, DIS-0-0.9, adds two chapters and updates others to provide guidance on investigating whistleblower complaints under the Corporate and Criminal Fraud Accountability Act of 2002 (Title VIII of the Sarbanes-Oxley Act of 2002) and the Pipeline Safety Improvement Act of
2002. The manual is the primary vehicle for disseminating policy, procedures and information to whistleblower investigation staff.

For TheCorporateCounsel.net subscribers, we have posted a memo by Marty Lipton railing against the Breeden report as detailed in a blog yesterday by Mike O'Sullivan.
posted by broc at 9:22 AM

 
The battle over the executive compensation practices at Siebel Systems looks like its coming to an end with the settlement of a lawsuit brought by the Louisiana Teachers' Retirement System - yet another sign of how far institutional investors will now go to rein in excessive compensation, particularly in Silicon Valley. Siebel in particular has been targeted for quite some time by a variety of investors, including the AFSCME.

One of the more curious governance reforms in the Siebel settlement is the committment to provide better disclosure about how the compensation committee makes its executive compensation determinations. Its not clear if this means that the committee will provide more details in its report than required under Item 402(k) of Regulation S-K - but a cursory review of Siebel's 2003 Comp Committee Report shows that its current disclosure practices are not too far off the norm. So investors - and perhaps the SEC staff - may well be paying closer attention to these reports next proxy season.
posted by broc at 11:49 AM

 
With the SRO corporate governance proposals likely to be adopted in the near future, we have started posting sample board committee evaluations on TheCorporateCounsel.net, starting with audit committee evaluations.

We have posted the 156-page Breeden MCI report, which I am labeling the "Grand Corporate Governance Experiment" as it recommends a number of mechanisms that have been debated but not tried. A prime example is the concept of the "town hall" website where shareholders can organize to present proposals to management. Here is Breeden's recommended format:

"The Governance Committee should establish a website that will offer shareholders a “town meeting” forum for discussion of issues of concern. One or more shareholders representing at least 1% of the voting power of the Company should be entitled to place resolutions on the website for consideration of all shareholders, irrespective of whether such resolutions would be deemed appropriate for the Company’s proxy statement (based on considerations of whether such resolutions involve matters of ordinary business or otherwise). The Governance Committee should establish criteria for the times of submission of such resolutions, and the time and manner of recording votes of shareholders regarding any such proposals. Any such proposal that receives a minimum vote to be set by the Governance Committee (such as 20%) should be placed by the Company on its next proxy statement. It should be the general policy of the Company to solicit the views of shareholders on issues of concern to them on an active basis."

As I recalled with Bill Morley yesterday, this concept is nothing new. The staff had debated over this concept back during the 1998 amendments to Rule 14a-8 and the staff's July 15th report asks whether "solicitation should be facilitated by electronic means on one or more websites." George Kobler floated this concept also in "Shareholder Voting over the Internet: A Proposal for Increasing Shareholder Participation in Corporate Governance," 49 Ala. L.Rev. 673 (Winter 1998) - albeit without any real legal analysis.

As usual, the potential problems with this approach will be more evident once MCI flushes out - if they follow this recommendation - the details left unspoken by Breeden's recommendation. This framework is potentially quite costly, both in terms of dollars and management's time. First, there is the technology cost of setting up the website that contains mechanisms to allow voting, etc.

In fact, I believe only the largest companies could operate such a website as it will take quite a bit of time to qualify shareholders and keep tabs on what is being posted and prepare reports for senior management. This easily could lead to the corporate secretary's department hiring an additional staffer and would burden inhouse securities lawyers with a heavier load.

Management then would need to determine whether to run their own solicitation campaign against these proposals - and how to deal with false and misleading information posted on the website. Without the SEC staff to act as referees, its probably inevitable that proponents would make more false and misleading statements than they already do (and its unclear whether Rule 14a-9 would apply until more details are known). If the company's website ends up hosting a "spitting match" between a group of proponents and management, this is sure to draw the media's attention. More to come...


posted by broc at 10:17 AM

 
Whoa, the 78 suggestions filed by Richard Breeden, the court-appointed Corporate Monitor for MCI, with The United States District Court for the Southern District of New York to improve MCI's corporate governance includes some real "doozys." They surely will be fodder for much commentary in this blog and elsewhere for some time to come. Among them:

- placement of most of the board's corporate governance guidelines within the company's Articles of Incorporation, so that only shareholders can amend them

- establishment of a website "town hall" for shareholders to vote upon resolutions at any time of the year - and without the restrictions imposed by Rule 14a-8; with a mechanism to have certain of these resolutions then placed in the company's proxy statement for a vote (i.e. so Rule 14a-8 restrictions can effectively be avoided)

- ban on stock options for 5 years; to be replaced by the use of restricted stock (see Microsoft)

- at least one new director elected each year, with a mechanism for shareholders to nominate and hold a contested election potentially each year

- mandatory rotation of independent auditors every 10 years

- 10 year term limits on directors

- maximum limits on executive compensation (any amounts in excess must be approved by shareholders) and elimination of most retention grants

For TheCorporateCounsel.net subscribers, we have posted an interview with Seth Aronson on Recent Developments under the Securities Litigation Uniform Standards Act .




posted by broc at 10:28 AM

 
Last week, Bloomberg ran an article about SEC proceedings involving Chancellor Corporation and its former officers, directors and auditors in which one director was sued in an injunctive proceeding and another director consented to an administrative settlement.

The interesting aspect of these proceedings is that they were based on alleged anti-fraud and reporting violations under the Securities Exchange Act of 1934 - even though there were no allegations that these directors participated in the fraud. Instead, the directors appear to have been targeted because they neglected to make proper inquiries when there were indications that management was engaged in fraudulent conduct.

As John Olson noted in an email to the ABA Corporate Governance subcommittee, the directors were alleged to have been "reckless" in their lack of due care when they signed SEC annual report filings - and that this is one of the few situations where the SEC has sought a federal scienter-based anti-fraud remedy for what amounts to an abdication of state law duties of care, attention and, possibly, good faith.

Marty Lipton came out with a client alert indicating that the business judgment rule is alive and well and is not affected by these SEC proceedings, even as explicated by SEC Director of Enforcement Stephen Cutler, due to the extreme circumstances of the facts in these proceedings.

For TheCorporateCounsel.net subscribers, we have created a new "Convertible Debt Offerings" practice area, with a September webcast on this topic to be announced soon.
posted by broc at 8:00 AM