SEC Proposes that SROs Post Rule Proposals & Current Rules

Yesterday, the SEC proposed changes to its rules that would require that SROs submit their rule filings to the SEC electronically. The proposal also would require the SROs to post the rule filings - as well as maintain a current version of their rules - on their own websites.

This should fill many practitioners with joy, as it's often difficult to obtain SRO rule filings prior to their publication by the SEC (even though such rule changes are considered publicly available once filed with the SEC). Further, it's sometimes difficult to quickly obtain a copy of the revised rules once a SRO rule is approved.

By the way, the SEC revised its website so that when you access "SRO Rulemaking," there are separate webpages for each SRO - thereby making it easier to monitor each SRO's rule proposals as they are published for comment and approved by the SEC. Thanks to Suzanne Rothwell of Skadden Arps, who always has her finger on the pulse of the SROs!

Nominating Committee Functions and Shareholder Recommendations regarding Director Nominees

In one of my more practical interviews - and certainly the longest - there is a lot of sound guidance from Ken Kopelman and Abbe Dienstag on Nominating Committee Functions and Shareholder Recommendations regarding Director Nominees.

This interview includes a number of link to sample documents, policies and disclosures that Kramer Levin has put together. And we have posted even more of their useful samples in the Nominating/Governance Committee Portal and the Shareholder Access Portal. This includes:

- Sample Nominating Committee Procedures for Identifying and Evaluating Candidates for Director
- Sample Procedures for Security Holders Submitting Nominating Recommendations (Website Disclosure)
- Sample Nominating Committee Policy Regarding Qualifications of Directors
- Sample Website Disclosure regarding Security Holder Communication with Directors
- Sample Website Disclosure Regarding Director Attendance at Annual Meetings
- Sample Proxy Disclosure Regarding Much of the Above

Director Attendance at Board Meetings

Today, the NY Times has a story about how more companies are requiring their directors to attend shareholder meetings - and holding their meetings in more convenient locations (see above for sample website disclosure on director attendance). The article erroneously attributes the director attendance trend to SOX - rather, the SEC adopted disclosure regs on director attendance on its own volition. So don't always believe what you read (including this blog - let me know if you ever see an error!).

Got a chuckle about the anecdote of the former Dana Corp. practice of holding its shareholders' meeting at its outside counsel's law firm in Richmond, VA (the company is based in Ohio) - and management not even attending. And you wonder why shareholders are mad...

SEC Looking at Enforcement Action on Timing of Option Grants

Today, the Wall Street Journal has an interesting cover story about how the SEC is considering enforcement action regarding the timing of option grants - whether grants are made just before market-moving information is released. This arguably also would have the effect of understating the level of executive compensation, since the market-moving information would quickly put the options "in-the-money." The article doesn't identify any companies nor indicate whether SEC action is imminent.

As the article points out, coincidences may arise because a board might grant options at the same meeting as approving the release of quarterly earnings. This obviously is a practice to avoid going forward.

As has been reported earlier in The Corporate Counsel (see the Jan/Feb '04 and Sept/Oct '03 issues), the SEC's Enforcement Division has been requesting documents related to executive compensation arrangements from a number of companies over the past year - and this likely is just one of various possible enforcement theories they are considering to tackle perceived executive compensation abuses.

Last of the SEC Speaks Notes

From PLI's "SEC Speaks," notes from the enforcement panel and from the accounting workshop.

The Compensation Consultants Speak Out!

If you didn't catch the NASPP's webcast on March 18th, the transcript is now posted regarding "What The Top Compensation Consultants Are NOW Telling Compensation Committees."

Reliving the webcast through the transcript bore out how useful the program was in this time of transitioning beyond what is legally required in the exec comp area.

NYSE Updates - and Adds to - Governance Forms

Last week, the NYSE updated its corporate governance forms that were first made available last month. In addition, there are two new forms: one for affirming the audit committee's composition at the time a IPO company lists on the NYSE and another to report any change of the audit committee's composition.

The NYSE also has tweaked the instructions to Section 303A Annual & Interim Affirmations - and point out (in questions 6 and 7) that companies must submit the pdf version of the Section 303A Written Affirmations without modification, but that they can type the exhibits to the Affirmation on company letterhead.

Overcoming the Challenges of Real-Time Disclosure

On May 19th, we will hold a webcast - "Overcoming the Challenges of Real-Time Disclosure" - during which David Martin of Covington & Burlin, Ron Mueller of Gibson Dunn, Bill Tolbert of Jenner & Block, and Stacey Geer of BellSouth Corporation will discuss how to identify and overcome the challenges inherent in the SEC's new disclosure framework.

In B.26 of our "Sarbanes-Oxley Law Firm Memos," we now have more than 25 law firm memos on the topic!

Revision to OECD Principles of Corporate Governance Delayed

As pointed out to me by Mike Holliday, on Saturday, the NY Times reported on page C3 that a dispute has arisen that has delayed the announcement of a final version of the revised OECD Principles of Corporate Governance. The dispute is about France wanting to insert "encouraged" in place of "permitted" in the provision about employee participation in corporate governance, such as employee representation on boards.

This dispute illustrates how difficult it is to obtain agreement among numerous nations on any set of principles - it has been amazing that there has been so much global cooperation recently, particularly in the accounting arena.

Significance of eBay Case

I don't know if you've seen the Delaware Chancery Court's opinion in the eBay/ Goldman "spinning" case yet, but it may be worth a look. Chancellor Chandler is a thoughtful and balanced judge, but it seems to me that he went a lot farther than he had to in his decision. In only 15 pages, he manages to lower the bar for claims of demand futility in derivative actions, expand the business expectancy concept in corporate opportunity cases to include investments in equities, liberally construe the ability of plaintiffs to make aiding and abetting claims against third parties - and even imply that directors with stock options that haven't vested may not be "independent."

Like most of what's going on in Delaware today, I don't think Chancellor Chandler is breaking new legal ground - but he seems to be applying existing doctrines in a much more plaintiff-friendly way than I think he would have before the recent governance reforms.

We have posted a couple of law firm memos about the case in Section E.27 "Corporate Opportunity" of our "Sarbanes-Oxley Law Firm Memos." Thanks to John Jenkins for jogging my memory on this one!

Gun-Jumping - Lessons in Dealing With the Media

Below is an interesting March 8th news article from Institutional Dealers' Digest about the film "Billy Dead" that recently conducted an online IPO that was halted by the SEC (if you ever are faced with gun-jumping, don't forget to see our sample "Risk Factors Regarding Gun-Jumping" in the "Disclosure Analysis & Samples" Practice Area):

"Less than two weeks after Civilian Capital raised the curtain on its initial public offering of Billy Dead Inc.-the first IPO for an individual movie ever attempted in the U.S.-the Securities and Exchange Commission has called "Cut." According to SEC filings, Civilian Capital was asked to halt its offering and clarify any risks to investors before it could proceed.

Civilian, a NASD-registered broker/dealer, wants to raise up to $7.8 million to finance the production of its first film-"Billy Dead," a murder mystery set to star Ethan Hawke that was originally slated to start production this spring. To fund the film, Civilian last Nov. 13 launched an online offering of 900,000 shares of Series A preferred stock in Billy Dead's holding company, at $8.75 each. But shortly thereafter, Civilian returned investors' initial funds, a move it credits to extensive news coverage of the offering that made it difficult for investors to adequately assess the offering's risk.

Billy Dead's latest prospectus details a number of inaccuracies and overly optimistic statements about the company that were presented by the media. (Full disclosure: IDD was first to report on the potential IPO, as far back as May 14, 2001, following up on news of registration of the shares in an Apr. 28 story and a Nov. 17 article about marketing the shares. But none of the IDD stories was cited among those containing the hype that caused the deal to be yanked.)

Civilian's pulled IPO shows how risky it can be for companies in the process of raising capital to talk to the media, especially at a time when the SEC has been trying to become a more vigilant watchdog for investors. A spokesman for the SEC says it does not track how often IPOs are pulled, nor would it give any guidance on its reasoning. Industry observers, however, were not surprised to learn that the offering had been tabled. They say that the SEC has become more exacting in its interpretation of securities laws. Calls to Civilian were not returned.

If Civilian has become mum, it could be because its prior efforts to cultivate the media backfired. In a new prospectus filed Feb. 13, 2004, the company states that it stopped the offering on Dec. 8 "in order to reduce the risk of investors' possible reliance on news reports and articles, or information which appeared on the underwriter's website in a manner which was insufficiently balanced." Underwriter Civilian Capital then returned investors' money.

The prospectus details several of the news stories and Internet reports published in November and December 2003. It appears that after one or two news organizations misreported information about the offering, the errors snowballed when other reporters writing follow-up stories pulled incorrect information from the earlier ones.

First off, the prospectus cites a Nov. 19, 2003, article from the Associated Press that incorrectly reported the Billy Dead offering as a Nasdaq IPO, when the shares were actually slated to trade on the Over the Counter Bulletin Board (OTCBB). "These statements, which were additionally stated in slightly altered forms in other articles and reports, are erroneous," says the new prospectus.

The prospectus also hints that some news stories carried overly optimistic comments from Civilian's management when it was supposed to be in the quiet period after filing for the IPO.

"In an article in The Economist dated Dec. 2, 2003, Barry Poltermann, President of Civilian Capital, is quoted as saying that the offering is on track to close.'"

The prospectus goes on to name a Bloomberg wire article first published on Nov. 13, 2003, that was reprinted in various publications, including the Chicago Tribune, that quoted Poltermann's views about the offering's success: "My confidence is off the charts,'" he told Bloomberg. "I've been working on this for four years. We wouldn't do it if we weren't extremely confident." Civilian's plans to launch another six film IPOs and raise up to $60 million by the end of 2004 were also reported in the articles.

To clarify the uncertainty of these statements, the latest prospectus goes to great lengths to point out there is no assurance that even the Billy Dead offering will be completed, or that Civilian's plans for other film IPOs will come to fruition. "When considering the merits of this investment, investors should not rely on any representations of confidence made by the underwriter in their ability to raise sufficient funds to close this offering, or plans of the underwriter to pursue similar film offerings in the future," it states.

A third problem hinted at in the prospectus was one journalist's own interpretations of the offering's risks and how they might be offset. Citing a Dec. 15, 2003, article from Business Week, the prospectus indicates that the journalist went too far by discussing hypothetical returns for the film and contingency plans Civilian might use to pay back investors if "Billy Dead" were to make an unsuccessful box office debut.

"This hypothetical scenario was not based on any information provided to the author by management or Civilian Capital," states the prospectus. "We believe the author analyzed information that appears in the Management's Plan of Operation' section of this prospectus and based the potential returns upon his estimates and assumptions that are inherently subject to significant uncertainties and contingencies, primarily concerning the timing and cost of the Film's distribution. Billy Dead, Inc. has never made, and does not intend to make, any public financial projections about the performance of the film Billy Dead, Inc. was formed to produce."

Why the SEC Acts

Bankers say there are a variety of reasons the SEC can halt an offering. "But it's usually because of the CEO or CFO mistakenly giving a quote when they shouldn't have," says the head of equity capital markets for one midsize firm. That's why most securities firms go out of their way to avoid the media once they have filed an offering, he explains.

"It's rare the SEC would penalize a company for hype if the company had nothing to do with it," adds the banker. Once an offering is tabled, however, the costs can be significant. The refiling charges and associated legal fees are one thing; then there's the risk that slowing up a deal could scare off investors, who have long been leery of Hollywood.

After failed efforts by the Street to fund limited partnerships for groups of films in the 1980s, bankers say investors have since shied away from anything exclusively film-related. Only investments in major entertainment conglomerates-such as The Walt Disney Co. and Time Warner Inc., whose returns are not solely tied to the performance of films-have been able to attract mainstream investors.

Nonetheless, the financial success of a few recent independent films has piqued investors' interest. But such success stories are still few and far between. Indeed, the profitability of independent films reported in conjunction with Civilian's offering showed up as another SEC concern, according to Billy Dead's prospectus.

"Both [a] CBS Marketwatch Internet article and the Associated Press article referred to [Civilian] officials as stating that in certain instances low-budget films have a greater chance at profitability than more costly projects," it states. "These statements attributed to Mr. Fuhrman [Billy Dead Inc.'s CEO] or to representatives of Billy Dead, Inc. have been repeated, sometimes in slightly altered forms, in several other press articles."

Another example cited is a quote from Poltermann that aired on NPR's "On the Media" program on Nov. 21, 2003. "I'm not saying that it's still not a very risky game," Poltermann is quoted as saying. "The movie business is hit-driven. But it doesn't have to be Blair Witch Project' or My Big, Fat Greek Wedding' to do very well. In fact, last year Y Tu Mama Tambien' was actually more profitable [on] a return-on-investment basis than My Big, Fat Greek Wedding.'"

The new prospectus says these statements are "not balanced representations of potential film profitability because they do not represent the fact that numerous films or groups of films released at the same time were less profitable than the cited films or groups of films."

Phone Number Crisis at the SEC?

Remember that Seinfeld episode where Kramer effectively killed Elaine's phone number (I think he gave out her number as a fax line). That's when Elaine had to get a new phone number because the "212" area code wasn't available to her - which thus rendered her undateable.

Well, the same type of thing is happening at the SEC's HQ. So many new staffers have been hired that the omnipresent "942-" prefix is no longer available. Instead, new staffers have phone numbers with a "824-" prefix. And for the trivia buffs, what is the difference between 942 and 824? Answer is that you subtract a one from the first digit and flip the order of the last two...

And Even More "SEC Speaks" Notes

These PLI "SEC Speaks" notes are from the panel with staffers from the Office of Chief Accountant.

PCAOB News

After a long search, the PCAOB has hired the head of its enforcement arm - Claudius Modesti formerly served as an assistant prosecutor in the U.S. Attorney General’s office for the Eastern District of Virginia.

By the way, the SEC has proposed the PCAOB's investigations and adjudication rulemaking as well as its conforming amendments to its interim standards from the attestation rulemaking for comment (note that the attestation standards themselves have not yet been proposed out by the SEC).

The General Electric Proxy Statement

In anticipation of the April 28th annual shareholders meeting, I just received my copy of the General Electric proxy statement in the mail. Below are some interesting tidbits:

1. Severance Pay - As publicized last week, GE will now allow shareholders to approve any severance packages for the Named Executive Officers if a severance package is worth more than 2.99 times an executive's salary and bonus. However, GE doesn't currently enter into employment agreements nor severance arrangements with its NEOs.

Interestingly, I can't find this development mentioned in the proxy statement - instead, it's a new #10 in GE's Management and Compensation Committee's Key Practices. These Key Practices were attached as an appendix to last year's proxy statement, but not this year.

This development is also noteworthy because the Teamsters Affiliates Pension Plan had a similar shareholder proposal on GE's ballot last year that was narrowly defeated. So GE probably took this action in response to that voting result.

2. Number of Shareholder Proposals - The GE proxy statement includes 15 shareholder proposals that collectively run 20 pages. Nearly a third of the entire proxy statement! Last year, GE had 13 shareholder proposals.

3. Voluntary Reporting of Quasi-Business Use of Aircraft - In footnote 2 of the Summary Compensation Table, GE discloses the incremental value of the personal use of aircraft by the chair and vice chair - even though that use is considered by GE to be a business expense (because GE's updated executive security program requires that those two officers use company aircraft for personal travel). So this detailed information is available in a footnote, but not included in the "Other Annual Compensation" column.

4. Format of Proxy Statement - It's printed on 5" by 8" tissue paper with one-eight margins. This baby is compact and light-weight. It's not easy to read - but the online version of the proxy statement is quite nice. Clearly the way to go to save trees!

Demystifying Delisting of Securities

I have always found the deregistration of a company's securities to be quite confusing (and when I was in Chief Counsel's office in Corp Fin, it was a common question from callers).

Learn how to better understand this process from my interview with M. Ridgway Barker and Randi-Jean G. Hedin on Guidelines for Delisting.

More on Private Company Research

Thanks to research wunderkinds Marissa Andrea and Cindy Alfieri of Agilent Technologies, below are more resources regarding private companies (it's a follow-up to my March 5th blog - all of which is now part of the our new "Private Company Research" Practice Area):

Subscription-Based Services

1. VentureSource and VentureExpert - These are Venture Capital databases that monitor private start-up activity. The focus is finally moving beyond US-centric and there are several deals involving Canadian, Israeli and European startups now.

2. ORBIS - This database searches private and public European company info. The information reported is coming from mandatory government filings (whether you're a private or not - it's a European requirement), rather than as information that companies voluntarily submit. There are about 5 million companies from Europe profiled, 110,000 from Japan, 1.4 million from the US. There is a product in ORBIS called Zephyr that you can use for M&A information.

3. DataStarWeb (Dialog, a Thomson company) - This database is heavy with European company information. It's very strong in pharma/biotech but contains industry information across the board.

4. Dun & Bradstreet - If a company report is not available on the D&B database, one can be requested for a fee. Although, since D&B obtains some of its information by phoning the company with a questionnaire - but the information is only as accurate or complete as what the private company is willing to disclose. Other D&B information is gathered from what is available in public records: Secretary of State Filings, UCC, liens, and so on.

Free Information

1. BRB Publications - BRB Publications is well known in the public records retrieval industry and has gathered links to state and county sites containing public records data. Often, when you are unable to find anything at all on a private company, at the very least you should be able to uncover a Secretary of State or other public filing that can confirm basic information about the company (for example, when and where the company incorporated).

2. US Patent & Trademark Office - If intellectual property is your main concern, checking the USPTO's free databases will reveal a private company's patents/trademarks, if any.

3. Wayback Machine - What if the private company no longer exists, but you still need information? Try the Wayback machine! If the company had a website and if the Wayback Machine captured it, you might be able to get some basic information about the company.

4. Regional Newspapers - You can find out a lot of information about a private company by looking at regional newspapers where the company is either headquartered or residing as a subsidiary.

5. Free Lists from Top Business Magazines - Top company lists are a good source of private company data. These lists are usually revised each autumn and list by rank and in alpha order. See Forbes - The 500 Top Private Companies; INC. 500 - The Fastest Growing (Private) Companies in America; RobMagazine - Top 300 Private Canadian Companies; and Red Herring Magazine - Red Herring Top 100 Private Companies Reshaping Business.

Don't Forget to Ask Yourself - Is It Really a Private Company? Some companies masquerade as privates but are really subsidiaries of a public company, so you should check the Directory of Corporate Affiliations. If it is a subsidiary of a public company, check the parent's annual report for additional references to the subsidiary.

Marsh & McLennan Nomination Renders "Opt-In" Proposal Moot

In the face of the first potential "opt-in" proposal - one that might have triggered the SEC's shareholder access framework, Marsh & McLennan nominated a director candidate put forth by four pension plans (who combine to own 1.3% of the company's equity). As a result, the shareholder proposal was withdrawn by the pension plans.

The investor nominee is a former US Attorney in New York, who now works at Dorsey & Whitney. This is an interesting development and might be a harbinger of what will typically happen when companies receive "opt-in" proposals. Historically, it has been rare that a company would acknowledge investor involvement in the selection of a nominee.

Another Exchange Heard From

A little late to be addressing this question, but someone asked in our Q&A Forum whether AMEX follows the NYSE or Nasdaq as to when the new governance standards take effect (i.e. do the new disclosures have to be included in this year's proxy statement)? I have confirmation from the AMEX staff that they follow the Nasdaq approach - so AMEX-listed companies must include the new disclosures in this year's proxy statements.

Evolving Compensation Practices

On the heels of yesterday's popular NASPP webcast - "What The Top Compensation Consultants Are NOW Telling Compensation Committees" - the NASPP has launched a Q&A Discussion Forum devoted to evolving compensation practices.

A number of well-known compensation consultants and compensation critics have signed on to help monitor the forum and answer questions. Within its first hour, there were nearly a dozen - many of them provocative - questions posted!

The Hewlett-Packard Annual Meeting

Yesterday, at Hewlett-Packard's annual meeting, a majority of shareholders cast votes in favor of a shareholder proposal that requested that the company expense options. Management had vigorously opposed the proposal.

According to TheStreet.com, shareholders cast 1.2 billion votes in favor of the measure and 921 million against. In 2003, the company's net income of $2.5 billion would have been reduced $762 million to $1.8 billion if the company had expensed options using the fair-value method. Annual earnings would have been cut from 83 cents to 59 cents.

In addition, all but one of H-P's directors received the support of over 90% of the votes cast, including its audit committee members - despite the urging of CalPERS for shareholders to vote against these five audit committee members because they approved Ernst & Young as both the H-P's auditor and tax adviser. CalPERS has taken this position universally this year - and as a result, it has voted against the audit committee members at a number of companies.

CalPERS had more success with the director that works for Dewey Ballantine, while the law firm provided legal services to H-P. Last week, CalPERS publicly criticized the director for having a "poor attendance record and a business relationship with the company that CalPERS believes could impair his objectivity." The preliminary voting results show that this director received withhold votes from over 30% of the votes cast.

Ethics Programs - The Role of the Board: A Global Study

In our "Code of Ethics" and "Compliance Training" Portals, we have posted an executive summary of a 2003 report from The Conference Board on the role of the Board in the design, implementation, and monitoring of corporate ethics programs. The full report can be purchased for $140 ($35 for Conference Board members) at the Conference Board website.

What the Top Compensation Consultants Are NOW Telling Compensation Committees

Don't forget tomorrow's exciting NASPP webcast - "What The Top Compensation Consultants Are NOW Telling Compensation Committees." Try a no-risk trial membership to the NASPP and hear the top consultants "tell it like it is."

Besides NASPP Chair Jesse Brill, who will moderate, the panelists are:

- Peter T. Chingos, National Director Executive Compensation for Mercer. Peter has been a leading light in the field of executive compensation for over 25 years and consults with numerous boards, CEOs and managements. Peter is also a member of the NASPP's Advisory Board.

- George B. Paulin, President and CEO of Frederic W. Cook and Co., Inc George is one of only three people in the past 15 years to receive our Best Compensation Idea Award. His just published piece Best Compensation Ideas Features and Practices should be on everyone's "must" reading list.

- Tim Sparks, President, Compensia, a newly formed consulting firm specializing in providing counsel to boards, compensation committees and senior management. Many of us know Tim as a nationally recognized compensation lawyer and former senior partner and member of the Executive Committee at Wilson Sonsini Goodrich & Rosati. Tim has written and spoken extensively on executive compensation issues and serves on the NASPP Advisory Board.

Real-Time Disclosure Adopting Release Posted

The SEC has posted the adopting release with the new Form 8-K amendments - this is a PDF 133-page document double spaced. I am cooking up a May webcast on the topic...

Electronic Application for Form IDs

In a welcome development, the SEC has proposed amendments mandating the electronic filing of applications on Form ID for access codes to file on EDGAR. The SEC is taking comments until April 5th - and expects to launch the new system in late April, possibly after little further notice.

By that time, a related new online filing system accessed through an EDGAR Filer Management website is scheduled to be completed.

[My final four: Duke (champion), Gonzaga, UConn and Wake Forest. Go Terps!]

The Mad 10-K Rush is Over!

As many of us know, yesterday was the deadline for calendar-year, accelerated filer companies to file their 10-Ks. This year's deadline is 75 days after the company's fiscal year end. So far it doesn't look like the tightened deadline has been problematic for most companies as only about 50 companies have filed a Form 12b-25 (although the deadline for filing those is not until the end of today) and quite a few companies filed their 10-Ks well before yesterday's drop-dead date.

Those of us that have been around for more than a decade might fondly recall the days before EDGAR when lines of Federal Express trucks stretched a few blocks in front of the SEC's HQ - as many companies waited until the last day to ship their 10-Ks to the SEC's Filing Desk. Dem were da days...

Impact of Forensic Accounting on Fraud Investigations

We have posted Part II of my interview with Howard Silverstone and Mike Sheetz on the Impact of Forensic Accounting on Fraud Investigations.

Updated International Corp Fin Guidance

For the first time in several years, the SEC staff has updated its "International Reporting and Disclosure Issues In the Division of Corporation Finance" on the SEC website. We will be updating our "SEC Staff Guidance" Portal accordingly.

MD&A Panel at PLI's "SEC Speaks"

Thanks to Kimberley Drexler, we have posted our notes from the MD&A workshop panel at SEC Speaks.

SAB 105 and Treatment of Derivatives

Last week, the SEC issued Staff Accounting Bulletin No. 105 - SAB 105 - which summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments.

Regarding when to implement SAB 105, the SAB states that the staff will not object if companies that have not already been applying SAB 105 accounting continue to account for loan commitments as derivatives as they have in the past for those commitments entered into on - or before - March 31, 2004. However, for any loan commitments entered into subsequent to that date, the staff expects all companies to apply SAB 105 to them.

SEC Proposes International Accounting Standards for Foreign Private Issuers

On Thursday, the SEC proposed amendments to Form 20-F that would allow foreign private issuers to change their basis of accounting to international accounting standards. These standards are known as International Financial Reporting Standards or "IFRS". The SEC already has posted the proposing release.

With its proposal, the SEC seeks to ease the burdens that foreign private issuers may face when they adopt IFRS for the first time, while still improving the quality of financial disclosure they provide to investors. It is noteworthy that companies located in the European Union are required to adopt IFRS in 2005.

Today, Form 20-F requires foreign private issuers to include 3 years of audited financial statements. The proposal would allow these companies- for their first year of reporting under IFRS - to include only 2 years of audited financial statements in their SEC filings and require any company that adopts IFRS for the first time to provide disclosure related to exceptions from IFRS on which it relied, including a reconciliation from its prior methods of accounting. The new regulations would apply to companies that publish IFRS financial statements for the first time for any fiscal year beginning no later than January 1, 2007. There is a 30-day comment period.

"Conduct of the Annual Meeting" Transcript is Up

We have posted a transcript from last week's popular webcast regarding Conduct of the Annual Meeting.

Real-Time Disclosure is Here!

Yesterday, the SEC adopted new 8-K requirements that represent a fundamental change in the disclosure framework, moving toward the real-time reporting framework that Harvey Pitt first envisioned way back before Enron and SOX. There are quite a few changes in the final rules compared to the proposal, including 4 - rather than 2 - day filing deadlines (with no provision for an extension of the deadline).

There are 8 new items in 8-K, 2 existing items are expanded and 2 items are transferred from the periodic reports. There is a safe harbor from Rule 10b-5 for 7 of the new items - and the safe harbor extends only until the due date of the next periodic report for the relevant period in which the 8-K event occurred. Non-binding merger letters of intent are not required to be disclosed.

As the press release from the SEC bears out, this really could be a dramatic change in philosophy - one Commissioner said that bad information is worse than delayed information. However, early analysis of the new rules indicates that companies may still decide to hold off on making disclosure until they are ready to make complete disclosure - so they might miss the 4 day deadline by a few days and take a risk (rather than giving incomplete information to the market and taking a bigger risk).

For all companies, the effective date of the new rules is August 23, 2004 - so it takes effect after the 2nd quarter 10-Q deadline for calendar year companies. Five law firms already have put out memos on this SEC action - see B.26 of our "Sarbanes-Oxley Law Firm Memos."

Securities Settlements and Myth of Opting-In

2003 was a historic year for securities settlements - and there is a trend for some institutional investors to "opt out" of class actions lawsuits. This effectively means that companies are faced with simultaneous class actions. Learn more from fellow blogger, Bruce Carton on 2003 Securities Settlements and Opting Out of Class Actions.

More "SEC Speaks" Notes

We have posted our own notes from PLI's "SEC Speaks" from the Corp Fin panels.

The SEC's Roundtable on Shareholder Access

Yesterday's roundtable at the SEC was filled with star-studded panelists and was quite a program. The SEC did a great job of bringing in the best and brightest from all corners of the debate and it really brought those 13,000 comment letters to life. (About 150 attended live - I was surprised there were empty seats.)

To me, the most persuasive arguments were presented by Ira Millstein and Joe Grundfest on why the SEC should hold off on its proposed framework - and instead use a simpler model based on holding "true" elections of directors. They argue that the current plurality system is fundamentally flawed and that the SEC's proposal doesn't fix that problem (David Ruder called the proposal a Rube Goldberg solution and Carter Beese said it was prone to the law of unintended consequences).

Based on the way that Commissioner Harvey Goldschmid debated some of the corporate advocates, I doubt he is going to change his mind. Commissioner Campos read a statement early on and otherwise was silent. Chairman Donaldson asked a few questions but did not reveal if his leanings were changing at all. So I would hazard to guess that the Commission will bless its proposal sometime in a month or so, perhaps with some changes at the edges (although you never know and I could be wrong).

If the SEC does adopt its proposal, the head of the US Chamber of Commerce threatened to sue. A panel packed with academics provided a variety of arguments supporting the SEC's authority to adopt its proposal. So the ultimate showdown might be a few years away in a court somewhere.

The Evelyn Y. Davis Show

In mid-afternoon, Evelyn Davis' panel took the stage and Evelyn kicked it off with a 15-minute monologue. If I was Mark Burnett - the "vision" behind all those reality TV shows - I would grab Evelyn for her own show as soon as possible.

Evelyn was quick to mention how she had spoken to the CEO of Bank of America last week and advised him not to pay the SEC's fine in the mutual fund scandal (and reported that the CEO was thinking about it!). She claimed that she had also spoken to SEC Enforcement Director Cutler a few days ago regarding the same. Not sure how this is relevant to the shareholder access proposal, but it made for a solid entertainment break from the weighty issues of the day. She is one of a kind. (By the way, Evelyn opposes the SEC's proposal - because it discriminates against retail investors.)

The PCAOB's Open Meeting Regarding Internal Controls

As a frequent attendee of open SEC Commission meetings over the years, I was curious how the PCAOB's first open meeting to deal with a substantive rulemaking would be run yesterday. Overall, the meeting was very well run and I was pleased to be handed copies of the releases that were approved during the meeting on the way out (and the releases were soon posted on the PCAOB website thereafter - in comparison, it takes the SEC a few days).

Another distinction was the meeting location - it was held at a hotel since the PCAOB HQ can't accommodate large crowds (about 200 attended live - it was also webcast). Otherwise, the meeting was run much like a SEC meeting (e.g. plenty of lovin' for the staffers who wrote the rules), with minor differences such as each Board Member reading a statement regarding the internal control adopting release - and only one Board Member, Dan Goelzer, who is a former SEC GC, asking questions.

Note that the SEC Chief Accountant is quoted in today's paper as saying it would take the SEC around 6-7 weeks to vote on the PCAOB's final rule.

Copyright Squabble Continues Between PCAOB and AICPA

During the part of the open meeting when the PCAOB proposed changes to its interim standards (which was necessary to accommodate the internal controls rulemaking), Board Member Kayla Gillan noted that the proposing release would only have excerpts from the applicable standards - and thus a lack of transparency - due to an ongoing dispute with the AICPA regarding copyright protection of the standards that the AICPA issued in the past. Dan Goelzer weighed in on this topic as well.

As I blogged about last year, I agree that the AICPA really has to get off the dime here and allow its standards to be transparent. This issue is emblematic of all that was wrong with the AICPA when it was the nominal watchdog of the profession.

SEC Proposes National Market System Changes

Here is a link to a Federal Register copy of the proposing release on proposed Regulation NMS applicable to the National Market System. This is a more manageable 91 page document - compared to the 346 page document on the SEC website. One proposal in particular would establish a uniform trade-through rule for all market centers, with certain exceptions. Comments are due by May 24.

PCAOB Already Posts Final Internal Controls Release

I went to the PCAOB open meeting this morn - remarkably, the PCAOB already has posted its final internal controls release (with still is subject to SEC approval). For the most part, the final release incorporates changes recommended by the corporate community, with some notable exceptions.

One of these exceptions is that the final release retains the standard that requires the independent auditor to evaluate the audit committee's performance as part of its internal control evaluation (however, the release makes clear that the full board of directors still is primarily responsible for conducting such an evaluation - and added a new element where the auditor must report to the full board if it believes the audit committee ineffectively oversees the company's external financial reporting and internal controls). More about the PCAOB's meeting tomorrow.

PLI's "2004 SEC Speaks"

Thanks to Bryan Cave, we have posted some brief notes from remarks that Alan Beller and other senior SEC staffers made on Friday at PLI's "2004 SEC Speaks." We will be posting our own more extensive notes from the conference shortly.

Even More on Disney

A few more items of interest on last week's historic meeting. Roy Disney and Stanley Gold did indeed engage in some solicitation efforts other than the media and the Web. They retained McKenzie Partners to assist in a solicitation campaign that included mailing letters to all Disney stockholders. They also hired a PR firm.

These solicitation efforts appear to have fallen within the scope of Rule 14a-2(b)(1), the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6. As for discretionary authority, this "no-vote" campaign didn't push the election into a non-routine category - so the NYSE allowed discretionary broker voting on the election of Disney directors.

How Many Directors Get a 35% Withhold Vote?

Yes, I'm gearing up for tomorrow's shareholder access roundtable hosted by the SEC - here is the final agenda and related materials posted by the SEC yesterday. I had to look twice - Evelyn Davis is on a panel! It should be quite a show!

According to a statement from Rich Daly, head of ADP's brokerage group, during last year 99 panelists have submitted statements for the roundtable), there were 69 shareholder meetings of the Russell 2000 companies that resulted in at least one director getting a 35% withhold vote (and actually there were 137 directors that triggered that threshold at those 69 meetings). There is other interesting information in Rich's statement regarding the changes to ADP's system that would be required if the SEC adopting its proposed framework.

Thanks to Dave Felman of Hill, Ward & Henderson, we have posted these selected interesting excerpts from comments submitted on the SEC's proposal in our "Shareholder Access Portal."

A New Winner!

In the "Shortest 8-K Contest," Adam Savett of Cohen, Milstein, Hausfeld & Toll informs me that a recent 8-K filed by Charter Communications is only 22 words. I am confident that someone out there can even beat that...keep 'em coming.

Future of the Accounting Profession

AccountingWeb.com made me aware of this November report on the future of the accounting profession. This report was the result of a meeting between leaders from the worlds of accounting, finance, law, academia, investment banking, and journalism. Among other topics, the report covers:

- The Value of the Audit
- Regulation and Oversight in Flux
- What Went Wrong?
- Structural Challenges Facing the Accounting Profession
- What Should Financial Reporting Look Like in the Future?
- Improving Auditing and Financial Reporting Standards
- Licensing Issues: More Firms, More Depth

Nell Minow on Disney

After Disney's meeting last Wednesday, the Chicago Tribune ran this op-ed by Nell Minow:

"When you wish upon a star, it may make no difference who you are, but these days when you are trying to get the support of your shareholders, who you are is of increasing importance. The latest chief executive officer to learn that lesson is Walt Disney Co.'s Michael Eisner. A stunning 43 percent of his shareholders refused to vote "yes" on his re-election to the board. This vote of no confidence led Disney directors Wednesday to replace Eisner as chairman, even though they had refused to do so before.

This comes at a time of great skepticism and concern about the independence and ability of corporate boards. Shareholders are painfully aware that distinguished directors like Henry Kissinger and Richard Perle were unable to prevent the CEO of Hollinger International from moving millions of dollars out of the company and into his own bank account because of a booby-trapped governance structure that gave CEO Conrad Black control of the voting shares. The charges against former executives of Enron Corp., WorldCom Inc., Adelphia Communications Corp., and Tyco International have highlighted the failure of the boards to provide effective oversight.

J.P. Morgan Chase & Co. and Bank One Corp. look very compatible in their pending merger as far as lines of business go, but they are far apart in corporate governance. Our firm gave Bank One's board the highest grade in its industry, while J.P. Morgan's was second to last. Shareholders may balk--or sell--unless the combined firm makes a commitment to best-in-class in terms of corporate governance.

The new chairman of Smith & Wesson's parent company recently resigned because of press reports of his jail term for armed robbery in the 1960s. Even though his record since then has been impeccable, the increased scrutiny of corporate boards made it impossible for him to continue.

In the corporate raider days back in the 1980s, shareholders were quick to grab almost any offer that was higher than that day's stock price. But today's shareholders are sadder and wiser. They have seen their value siphoned off to raiders who paid only a fraction of what the companies were worth or to corporate executives granted hundreds of millions of dollars in golden parachutes and stock-option grants while doing little for their stockholders.

Shareholders want more than a couple of dollars a share. They want leadership they can believe in. Shareholders have to be able to rely on the board to represent their interest in building long-term shareholder value and not short-term CEO ego. Since mega-mergers often fail, the ability of the board to provide rigorous and objective analysis to a proposed deal, whether as acquirer or target, is essential.

Disney has been criticized for many years for a board that was overly cozy. In 1997, Disney directors were named Business Week's "Worst board of the year" for overpaying Eisner and approving a huge guaranteed payment of more than $100 million to Michael Ovitz for his brief tenure as an executive. Many of the directors had direct ties to Eisner, including his lawyer, his architect and his son's schoolteacher. As a result of shareholder pressure, Disney dramatically improved its corporate governance, adding outstanding new independent directors and adopting state-of-the-art policies to ensure that they provide more active and objective oversight.

The Disney board's decision to select an independent director as chairman is, ironically, proof that it is stronger than its shareholders think. If Disney had not made a great deal of progress in strengthening its corporate governance over the past year, the board would not have been in a position to act so quickly and decisively. This decision will give shareholders a little more confidence in the board in the short term. But Eisner and the board will need to continue to prove themselves by communicating more effectively with investors on CEO succession and compensation and overall strategy and by continuing to add strong, experienced directors to add additional depth and independence.

Indeed, shareholders will insist on more from all corporate boards. A record number of shareholder proposals on issues like executive compensation and splitting the chairman and CEO positions will get record levels of support this year, and director candidates will get a record level of scrutiny. And that will lead to stronger, more effective and more responsive boards, essential for the credibility of public companies.

The vote at Disney reflects a new understanding in the investor community that corporate governance is an element of risk assessment of any investment and that vigilance in pursuit of improved governance is not just the price of shareholder democracy--it is a very good investment."

How to Conduct Research on Private Companies

I frequently get asked where are the best resources on private companies. I like Skyminder.com because it provides ratios and financials on private companies worldwide. Hoovers.com is probably a more reliable source, but does not have the same range of information as Skyminder. Both of these are subscription services. Forbes.com/private500 is a free list of the largest private companies - but there is no in-depth information available.

Foreign Corrupt Practices Act

Due to popular demand, I have created a "Foreign Corrupt Practices Act" Practice Area for members.

A 43% Withhold Vote!

Wow! The preliminary withhold vote on Michael Eisner, based on voting prior to the meeting (of course subject to final count and confirmation of inspector of election, and all the other disclaimers announced by Disney) was 43% yesterday. This is an extremely high number considering the highest withhold vote on a Fortune 100 director last year was in the mid-20s (for an "Enron" director who still sits on Lockheed Martin's board).

Considering that roughly a quarter of the votes cast were broker non-votes - who routinely support management - more votes were actively cast against Eisner than for him. And this is all due to a media/Internet campaign against Eisner - with no proxy solicitator involved, a remarkable achievement. Also noteworthy is that three other "targeted" directors of Disney also received withheld votes in the low-20% range.

It will be interesting to see how these historic results are used to make arguments at next week's SEC roundtable on shareholder access (eg. an argument that the proposed trigger thresholds can be easily reached and thus don't need to be lowered versus an argument how investors would bother to actively vote if they knew their votes had consequences).

Carl's Corner on Cumulative Voting

The March installment of Carl's Corner acts as a Primer on Cumulative Voting.

NASD Sends Member Notice on Underwriting Rule

The NASD has sent out its Notice to Members 04-13 announcing the adoption of major amendments to the NASD's Corporate Financing Rule--Rule 2710. The amendments were approved by the SEC on December 23, 2003 and the SEC approval order was published in the Federal Register on December 31, 2003.

As more fully explained in my interview with Suzanne Rothwell, these rule changes effect a new approach to underwriting arrangements. The Notice to Members summarizes the amendments and provides clarification regarding the application of Rule 2710 to straight debt and derivative securities. The Notice also includes the text of the amendments.

Super Wednesday

Today is our webcast - Conduct of the Annual Meeting!

Number of Shareholder Proposals Up

At last week's Institutional Shareholder Services conference, Corp Fin Deputy Director Marty Dunn noted that the staff is on pace to receive about the same number of exclusion requests as last year (and last year was a record). However, it was also noted that more proposals were either being negotiated out of the proxy statement or placed on the ballot without opposition (in fact, over 30 proposals were withdrawn while the SEC staff was processing an exclusion request just during the past month).

So, it appears that this year likely will see a new record number of proposals. In fact, Carol Bowie of IRRC states in today's NY Times that the number of proposals dealing with corporate governance topics will be over 900 this year, up from 500 last year. That 900 corporate governance proposals nearly equals the record-setting number of overall proposals set last year of just over 1000. So I wouldn't be surprised if this year's number of overall proposals falls at well over 1300.

Marty did confirm that the sole "opt-in" trigger proposal so far is the Marsh & McLennan one. The staff did allow the exclusion of a proposal - Verizon Communications (2004 Lexis 200 Jan. 18, 2004 - and rejection on reconsideration, 2004 Lexis 271, Feb. 10, 2004) - that was similar to an opt-in proposal - but the proposal changed the definition of "qualifed shareholder" from what the SEC proposed in its shareholder access framework. So, the staff allowed exclusion under Rule 14a-8(i)(8) regarding election of directors.

By the way, hats off to Marty for always making his panels as entertaining as possible. He never disappoints.

SEC to Consider Adopting 8-K Proposal

Next Thursday, the SEC is holding an open Commission meeting to adopt the 8-K proposals that have been outstanding for nearly two years (see this bunch of law firm memos on the outstanding proposal). The SEC will also propose changes to 20-F to lighten the financial reporting load for certain non-US issuers.

Demise of Poison Pills?

Yesterday, the Wall Street Journal ran an article illustrating how shareholder activism has caused an increasing number of companies to dismantling poison pills - and preventing companies from installing new pills. For a number of years now, shareholder proposals asking companies to either dismantle a pill or adopt a policy to not adopt pills have received majority votes. The article notes that 12 companies have dismantled pills so far this year - compared with 29 in all of '03 and 18 in all of '02.

Controlled Company Proxy Statements

In response to a number of requests regarding what controlled companies are disclosing in the wake of the new SRO standards - from which controlled companies can "opt out" of certain provisions - I have created a new "Controlled Companies" Practice Area which links to a dozen proxy statements filed recently by controlled companies.

"Shortest 8-K Ever" Contest

Just to have a little fun in our mundane legal lives, I have commenced a contest to find the shortest 8-K ever filed - or furnished - with the SEC. The first entrant is this recent 8-K furnished by Global Crossing that announces the hiring of an advisor to explore alternatives regarding one of its business units - it consists of one sentence with about 35 words. I know there are shorter ones out there, so please forward your entrants!

SEC Proposes Changes to Regulation of Stock Exchanges

Last week, the SEC proposed Regulation NMS applicable to the National Market System. One proposal in particular would establish a uniform trade-through rule for all market centers, with certain exceptions. There is a 75-day comment period. The SEC has now posted the proposing release - but it's a monster of a PDF at 346 pages.

The Eisner Letters

To get you in the mood for our Wednesday webcast - "Conduct of the Annual Meeting" - which will include two panelists reporting from the Disney annual meeting (including one who is Disney's Delaware lawyer), here is the recently unsealed 1996 letter from Michael Eisner to Michael Ovitz as well as the recent letter from Comcast's CEO to Eisner regarding Comcast's proposed acquisition.

Corp Fin's Advice to Oil & Gas Industries

Last week, Corp Fin advised they had sent out an accounting advice letter - sort of a "global comment letter" - to all companies that they have identified as being in the oil and gas production business. In posting this letter on the SEC's website, the staff noted that companies that did not receive the letter - but which have subsidiaries or operations in oil and gas production - should nevertheless consult the letter in preparing their filings.

FAS 69 requires specific, unique disclosures about oil and gas production; some uncertainty was thrown in, however, by the recent adoption of FAS 143 (re: asset retirement obligations) and how that affects the FAS 69 disclosures. (FAS 143 did not amend FAS 69.) This new letter gives the staff's views on how the recognition of a liability for an asset retirement obligation and the related depreciation of the asset and accretion of the liability under FAS 143 interplay with four specific disclosure areas mandated by FAS 69: Capitalized Costs; Results of Operations; Costs Incurred; and Standardized Measures. I wonder if this is the start of the staff periodically posting global comments applicable to specific industries - a concept that has been kicked around in Corp Fin for over 5 years.

Understanding the Impact of Forensic Accounting on Fraud Investigations

From my days as the enforcement liaison from Corp Fin (on an interim basis when the guru in this area, Mary Kosterlitz, was out on maternity leave - Mary now leads a team of staffers in Corp Fin in this function), I have always known that forensic accounting is necessary to parse accounting fraud - and that these investigations are very complex.

However, I never really knew what went on at ground level...well, now I do through my interview with Howard Silverstone and Mike Sheetz on the Impact of Forensic Accounting on Fraud Investigations. This is Part I of a two-part interview.