The Practical Corporate & Securities Law Blog

By Broc Romanek

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Corp Fin Issues New Staff Legal Bulletin on Shareholder Proposals

Yesterday, Corp Fin issued its third Staff Legal Bulletin on shareholder proposals - SLB 14B. The big news is that Corp Fin has followed-up on its warnings and "clarified" its views on Rule 14a-8(i)(3) - which is the exclusion basis for false and misleading statements - by creating a more objective and higher standard for companies that seek to modify proposals and supporting statements.

Noting that nearly half of no-action requests now argue for modification under (i)(3) - which is a huge resource drain for Corp Fin - the Staff has narrowed (i)(3) so that it will only entertain modification of proposals and supporting statements if a company argues that they are materially false and misleading under the following 4 categories (the labels are mine):

1. Reputation Killer - statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation

2. Objectively False Fact - the company demonstrates objectively that a factual statement is materially false or misleading

3. Crazy - the resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires — this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result

4. Unrelated Supporting Statement - substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote

The SLB also contains a list of circumstances under which it won't entertain (i)(3)
arguments anymore, such as unsupported or disputed facts, opinions, or facts that companies don't like. The bottom line is that companies now face a much greater burden of proof to convince the Staff that something is false and misleading - so warn your CEO and IR officers now that next year's proxy statement may contain language that they don't like.

The SLB also contains a reminder about how to draft defect notices, such as pulling directly from Rule 14a-8(b). It addresses when supporting legal opinions should be submitted - and how it might entertain requests that don't meet the 80-day deadline in Rule 14a-8(j) for "good cause."

How the Staff Processes No-Action Requests

The final part of Staff Legal Bulletin 14B sheds light on how Corp Fin processes no-action requests - and this includes some interesting items, such as:

- Since all materials are eventually placed in the public domain, the Staff seeks all arguments in writing and states that it won't discuss substantive matters over the phone.

- The Staff might fax a response - rather than mail it, which often means that commercial databases find it first - if you include all your contact info as well as all the contact info of the proponent. In other words, if you want it faxed - which you do so that you find out first what the response is - obtain the proponent's fax number and provide that to the Staff.

Stock Ownership Guidelines With "Hold 'Til Retirement" Provisions

On CompensationStandards.com, we have posted two new practice pointers from Robbi Fox regarding "hold 'til retirement" stock ownership guidelines - one that is a survey and one that lists companies that presently have such provisions in their guidelines. To see all the practice pointers we have posted, see this chronological list that you can check under the "Practice Pointers" button on the home page.

To access these pointers today, register for the October 20th Major Compensation Conference now!

posted by broc at 7:15 AM

 
FASB Discusses Employee Stock Purchase Plans

Way back when, the FASB proposed a Exposure Draft that would provide that ESPPs be deemed noncompensatory only if: (1) its terms are no more favorable than those available to all holders of the same class of shares; and (2) substantially all eligible employees that meet limited employment qualifications may participate on an equitable basis.

At its August 25 meeting, the FASB Board tentatively decided to modify that guidance, and at its September 8th meeting made further modifications. FASB cautions that these conclusions are tentative and may be changed - and become final only after a final Statement is issued.

Thanks to Mike Holliday for providing the current tentative conclusion on accounting for ESPPs after these meetings: An ESPP is not compensatory and does not involve recognizable compensation cost if all three of the following conditions are met:

1. (a) The terms of the ESPP are no more favorable than those available to all holders of the same class of shares OR (b) any discount under the plan results in proceeds not less than proceeds that would be received in an offering of shares issued to third parties by other means, e.g., through an underwriter. A discount of 5% or less from market price complies with this criterion without further justification. [The addition of (b) is a change from the Exposure Draft.]

2. Substantially all eligible employees that meet limited employment qualifications may participate on an equitable basis.

3. The ESPP does not incorporate option features. An example is given for a plan where the purchase price is based on the share price at date of grant and permits an employee to cancel participation before the purchase date and get a refund, which is considered a compensatory plan. [This condition is not in the Exposure Draft.]

Everything You Wanted to Know About SOX

Now that Sarbanes-Oxley is more than two years old - and some younger lawyers might need a primer in the new law - we have created a Sarbanes-Oxley Practice Area, complete with a list of comprehensive memos (some more than 200-pages long!).

How to Get Your Name on the SEC's Website - Submit a Rule-Making Petition?

Here is proof that the Web now makes it easier to get your name in lights, even on government websites. Recently, an enterprising pair submitted a rule-making petition to the SEC that seeks a new listing standard forcing companies to have an "Earnings Rating." "Earnings Rating" is a trade-marked term (hmmm, I wonder by whom?), which is an assessment of the quality of a company's reported earnings. Like a credit rating, Earnings Ratings would be a secondary look at auditors' work and be publicly available. The issuance of these ratings would be made by a private enterprise (hmmm, I wonder who would run this enterprise?).
posted by broc at 7:40 AM

 
More on the Disney Trial

On Friday, Delaware Chancellor Chandler granted portions of Michael Ovitz' motion for summary judgment - and denied the rest. Ovitz won regarding his culpability for entering into his employment contract (because he was not yet an employee) - but will have to defend the part of a shareholder suit over his $140 million severance package (because he was an employee when he entered into that arrangement). The trial starts October 18th.

Meanwhile, expect more fireworks at next year's Disney annual meeting as Roy Disney and Stanley Gold have called on Disney's board to reject CEO Eisner's offer to retire in 2006 as well as Eisner's choice of President Robert Iger as his successor. The two former board members said they would propose an alternate slate of directors if Disney's board does not launch an immediate search for a new chief executive and announce that Eisner will step down from the board at the end of the search. The two former board members said a new CEO should be in place before Disney's next shareholder meeting in early 2005. Eisner has not indicated yet whether he would seek to remain on Disney's board or remain as a consultant.

Pension Plans to Disclose Votes?

Last week, Senator Ted Kennedy said he would press US pension plans to disclose proxy votes on the stocks they hold - as mutual funds began to do a few weeks ago - in response to a GAO report urging Congress to pass legislation to make their proxy votes public, in an effort to ensure that pension managers act in the best interests of the workers whose nest eggs they are overseeing. Not surprisingly, the GAO report found that pension plans face the same potential conflicts of interest that mutual funds face when they vote.

Enforcement Action Regarding Disclosure Controls

Several weeks ago, I blogged about the importance of the recent SEC Enforcement action against Siebel because it involves disclosure controls - learn more about this important action from my interview with David Brown and Oni Holley on the SEC's First Enforcement Action Involving Disclosure Controls.
posted by broc at 6:30 AM

 
Putting the Heat on the Activists

CalPERS has been widely recognized as a leader in the shareholder activist movement for some time - yet, now both CalPERS and CalSTRS are being pushed by the California State Controller's office to do even more. The Controller wants these two pension giants to look at executive compensation as a comprehensive program - not just a set of guidelines to use when voting proxies - with a program foundation based on these 4 concepts:

1. Executive compensation policies should link a substantive portion of compensation to achieving key performance targets;

2. Executive compensation policies should be fully transparent to shareholders and should be regularly submitted for shareholder approval;

3. Executive compensation should be evaluated over an appropriate time period (e.g., three to five years), not at just a single point; and

4. Executive contracts should be disclosed in easy-to-understand language in the proxy statement to allow shareholders to evaluate the link between pay and company performance.

We have just added California Deputy Controller Toni Symonds to the panel - "The Institutional Investors’ New Focus on Executive Compensation: What It Means For You" - for our October 20th Major Compensation Conference. Register now!

Where is the Love?

Wilson Chu does it again on the Deal Guys Blog with a nice blog containing some insightful analysis into the advisability of adversarial negotiation tactics that I guess can be best characterized as profane. Wilson's blog links to the actual voicemail left by an associate that has created quite an Internet buzz. Feel free to provide Wilson with feedback as some already have done...

Section 404 Guidance Manual

We have added a pretty nice 43-page Section 404 guidance manual from Deloitte & Touche to our "Internal Controls" Practice Area.


posted by broc at 5:22 AM