The Practical Corporate & Securities Law Blog

By Broc Romanek

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SEC Adopts Nominating Committee/Shareholder Communication Rules

Today, at an open Commission meeting, the SEC adopted the proposed rules on disclosures regarding nominating committee functions and communications between security holders and boards of directors. During the meeting, Commissioner Goldschmid pushed Corp Fin Director Alan Beller pretty hard about finalizing the rules on shareholder access as soon as possible (for which the comment period does not end until late December). Goldschmid asked about possibly getting it out in February and Beller did not commit.

On the new rules, the SEC has issued a press release - but not an adopting release yet. Below are notes from Mike Holliday on today's meeting (note how the SEC was responsive to a number of the points made in the comments):

1. A required disclosure was added to provide the company's policy, if it has one, on director attendance at annual meetings, and a statement of the number of directors attending the prior year's annual meeting.

2. A requirement was added to require disclosure of changes in nominating committee procedures in periodic reports.

3. Instead of describing the material terms of a nominating committee charter, the registrant is required to make the charter available by posting on its website and disclosing in the proxy statement where the charter is located, or the charter can be attached to the proxy statement every three years.

4. While disclosure of qualifications for board membership is required, disclosure of specific standards for the overall structure and composition of the board will not be required.

5. The name of the source of each nominee (other than nominees who are executive officers or directors standing for re-election) will not have to be disclosed. Instead, the registant will disclose the source by category of source (security holder, non-management director, CEO, other executive officer, third party search firm, or other specified source).

6. The 3% beneficial ownership trigger to require additional information where the committee does not nominate a candidate recommend by a security holder is increased to more than 5%.

7. The requirement to disclose the specific reasons for the nominating committee's determination not to nominate a recommended candidate in certain circumstances is eliminated.

8. The name of the recommended nominee will be required to be disclosed in addition to the name of the nominating shareholder(s) where the committee determines not to nominate a candidate recommended by a more than 5% shareholder(s), but written consent to the disclosure must be given by the recommended nominee and the nominating shareholder(s).

9. The requirement to disclose material actions taken as a result of shareholder communications is eliminated.

Effective Date of New Rules - September 30th Companies Beware!

Mike Holliday points out that these new rules may be particularly burdensome to companies with September 30th fiscal year ends. The SEC's press release states that the rules will apply to proxy statements first sent or given to security holders on or after the date that is 30 days after publication in the federal register. This could pick up September 30 companies who may be preparing and printing their proxy statements soon for their upcoming annual meetings. The effective date does not allow much lead time to plan and take timely corporate action (not to mention draft, review, print, stuff in envelopes, etc.). The following is the SEC's paragraph on effectiveness:

"The rules adopted today are expected to be available on the Commission's website within the next few days and will apply to proxy and information statements first sent or given to security holders on or after the date that is 30 days after their publication in the Federal Register."

posted by broc at 10:53 PM

 
What to Disclose under the New SRO Standards

When John Newell of Goodwin Procter sent me his excellent checklist of what disclosures are now required under the SRO standards (this checklist is in our "Proxy Season Resource Center" with other law firm checklists) - he provided the following interesting observations:

"The NYSE has advised listed companies that the new disclosures will not be required in documents before the date on which the company must comply with the amended NYSE listing standards -- for calendar year companies, their first annual meeting after January 15, 2004.

Nasdaq has informally advised that companies should include the Nasdaq proxy statement disclosure in proxy statements sent to stockholders for annual meetings held on or after January 15th. It is possible that there will be further clarification on these positions in coming weeks. However, companies may want to consider including these disclosures, whether or not the SROs require them to do so, for the following reasons:

1. Many companies have significant institutional holders who may be looking for information about companies' compliance with the new corporate governance requirements. Being proactive about corporate governance is a good investor relations strategy. Many companies have been early-adopters on corporate governance matters during the past 15 months, and they may take the same view on the new SRO disclosure requirements.

2. We do not know what the various proxy advice services (i.e. ISS and Glass Lewis - as well as the governance rating services) will do with proxy disclosure that doesn't clearly indicate that the company will be in compliance with SRO requirements if management's nominees are elected. Will they down-rate the company? This seems very plausible...I do not see them giving everyone a pass for this spring just because of a quirk in the effective dates. That's just a guess.

3. The NYSE and Nasdaq will likely be reviewing this spring's proxy statements to determine whether companies were in compliance as of their annual meeting dates. If the proxy statement indicates that the company will be in compliance on the date of its annual meeting, it may be better to include at least the required disclosure about directors and committees and avoid inquiries by SRO staff later.

4. Including the disclosure that would be required about directors, and to a lesser extent other corporate governance matters involving directors, may avoid later questions about whether the proxy materials omitted material information.

For example, in the case of a Nasdaq company that knows that it is likely that a non-independent director will be appointed to one of the three key committees under the "exceptional and limited circumstances" exception, it may be better to disclose that fact and avoid potential claims that stockholders would not have voted for this director if the company had disclosed that it knew that the board intended to appoint him/her to the audit committee but omitted disclosing this in the proxy statement.

My advice is, to the extent the company can determine the facts, to comply with the NYSE or Nasdaq disclosure requirements (in proxy statements and 10-Ks) to the greatest extent possible - and to make sure that website disclosure is up at least by the annual meeting for NYSE companies."

SEC's New Office of Risk Assessment

Yesterday, SEC Chair Donaldson announced that the SEC is on the verge of establishing a new Risk Assessment Office, which reportedly is "a cornerstone of efforts to counter criticism that it is not acting quickly enough to protect investors."

The office will have a director and five staff and gather data on trends and risks to identify new areas of concern. Separately, each SEC Division will have its own risk assessment staff. The SEC's Division directors and heads will sit on a Risk Management Committee. I just fail to see how this office would do much more than add another layer of red tape (unless they got Barnaby Jones to head it up).

Chairman Donaldson faced tough questions yesterday while testifying before the Senate Committee on Banking, Housing and Urban Affairs regarding mutual funds and this office appears to be one of his ways to correct the perception that Eliot Spitzer is running circles around him.

Legislative Update Webinar

On December 3rd, Akin Gump is offering a free webinar - "The Continuing Political Debate Over Corporate Governance — Where Will It Lead?" - during which Hank Terhune, Dave Carlin, and Charlie Johnson will review corporate governance issues that surfaced during the first session of the 108th Congress and a forecast of future activities, including an assessment of how governance will play a role in next year's elections.

posted by broc at 8:46 AM

 
Download "Internal Controls" Powerpoint for Today's Webcast

For today's "Internal Controls" webcast at 4 pm eastern time, download the Powerpoint from John Huber and Teri Iannaconi now. Download it as a PDF, if you don't have the Powerpoint "viewer" that enables web downloads of powerpoint presentations.

Growing Interest in Director Education

Probably bolstered by the new NYSE standard on corporate governance guidelines (that requires director education to be addressed), I have been getting numerous questions on director education. As a result, we have commenced a Quick Survey on Director Education and Orientation on TheCorporateCounsel.net - please take a moment to share your experiences.

Here's a coupla thoughts on directors colleges - we have a list of links to all of them on GreatGovernance.com by the way - many directors believe internal programs can be more useful since discussion among similarly situated directors can occur, management can participate and topics can be tailored to the company's circumstances (and it can save travel time and expenses).

Some companies also are exploring the use of reading material, multiple shorter programs at various times during the year by in-house or outside speakers, a long session or retreat devoted to a topic, or some combination of all.

Sharing Privileged Information with Buyers Without Waiving Privilege

In an interview with Brette Simon of Sheppard, Mullin, this dilemma is explored.

As Brette explains on one hand, it is incumbent on you - as the seller - to disclose to the buyer all material information relating to the business it is purchasing. On the other hand, should you share this confidential information with the potential buyer, you jeopardize waiving the attorney-client privilege with respect to the particular information, and, potentially, any other privileged information relating to the same subject matter.

This means that if litigation is pending - or is later filed against you - by a third party claimant (other than the buyer) regarding the problem, and the opposing party requests this confidential information, you will be unable to assert that it is privileged, and you will have to provide potentially damaging information to the claimant.


posted by broc at 7:03 AM

 
Ending the Year with a Bang!

We have three important webcasts coming up to end the year - first is the one tommorrow with John Huber of Latham & Watkins and Teri Iannaconi of KPMG on the practical implications of internal controls and all the other procedures that companies must put in place now (you can download the PowerPoint for this program now if you wish).

The other two webcasts are "back-to-back" in early December - Ron Mueller of Gibson Dunn, Karl Groskaufmanis of Fried Frank and Stacey Geer of BellSouth dissect new due diligence and drafting practices behind "The New MD&A" on December 10th.

Last - but not least - on December 11, we have a very practical examination of how companies are actually responding to the new SRO governance requirements. This will not be a recital of what are the new rules (the reason why I did not ask NYSE/Nasdaq reps to join the panel).

Rather, this will be inhouse lawyers explaining what their companies have actually done and why. This program - "The New Governance Listing Standards" - includes inhouse experts from both NYSE and Nasdaq companies. This webcast will ooze with practice pointers.

If you are not a subscriber, you can gain access to all three of these webcasts for free if you enter into a "no-risk" trial for 2004 ("no-risk" meaning you can obtain a refund at any time during '04 - no questions asked). For those of you in law firms, check out the advantages of our new "firmwide" license.

Q&A with Alan Beller

Arguably the best part of the PLI Securities Law Institute is when the Director of the Division of Corporation Finance answers questions during a brown bag lunch on the second day of the conference.

During this session this year, Director Alan Beller answered 17 questions - members of TheCorporateCounsel can read notes with those questions and answers in our notes from "Lunch with Alan Beller."

The IT Industry Gets to Work on Internal Controls

CFO.com just posted an interesting article on how the IT industry is looking to help companies reach compliance with the new internal controls requirements.


posted by broc at 7:57 AM