Reliant Energy Sues to Exclude Shareholder Access Proposal

On Monday, Reliant Energy filed a lawsuit asking a federal court in Texas to declare that the company can exclude a shareholder proposal that deals with shareholder access. This is not surprising given the SEC's recent "no view" position regarding Hewlett-Packard's similar proposal. The case is Reliant Energy Inc. v. Seneca Capital LP, case number 07-376 in the U.S. District Court for the Southern District of Texas - and a copy of the complaint is in our "Shareholder Access" Practice Area. Here is a related article.

The other company with a shareholder access proposal - UnitedHealth Group - might not resort to the courts because it is reported that the company is arguing that the gist of the 2nd Circuit Court's decision in AFSCME v. AIG doesn’t apply because UnitedHealth is incorporated in Minnesota - and shareholders in Minnesota-incorporated companies must hold at least 3% of the company’s voting power to propose bylaw amendments.

Investors Speak Out about "Quickie" Executive Compensation Rule Change

The Council of Institutional Investors has filed this comment letter with the SEC regarding the "interim final rules" adopted by the SEC just before Christmas. The Washington Post recently ran this article on the CII letter.

Note that the letter begins by chastising the SEC for adopting rules without allowing for "real" comment, something that someone might very well argue violates the Adminstrative Procedures Act. I know I have blogged about this before, but I still keep asking myself: what were the Commissioners thinking by going about rulemaking this way? I note that the SEC is on an extended losing streak in the courts...

My Ten Cents: 8 Hours is Kidnapping

Off topic, but most of us travel a lot. I couldn't believe the tone of the American Airlines spokesperson in yesterday's NY Times article about how stranding passengers for 8 hours on the runway wasn't that big a deal because they had running water, even if they had run out of bottled water and food. I don't care if they have grilled shrimp and lollipops, eight hours is way too long to be sitting on a runway without being given the option of getting off a plane!

Support the Stranded Passengers Bill of Rights! Electronically sign the petition today...

Corp Fin Speaks on Problematic PIPEs

Following up to my blog last month on problematic PIPEs, Corp Fin Staffers have begun speaking about when resales of securities underlying convertible notes will encounter Staff scrutiny. Recently, the Staff has questioned the availability of Rule 415(a)(1)(i) for delayed or continuous secondary offerings of securities in PIPE transactions by issuers that are not primary S-3 eligible when the amount being registered is disproportionately large in relation to the issuer's capitalization. My guess is that the Staff is tired of folks trying to squeeze abusive convertible note transactions into the Staff's longstanding PIPEs analysis by calling them catchy things like "structured PIPEs" and doesn't want abusive, toxic convertible notes to hide behind the cloak of the traditional PIPE analysis.

Last week, Deputy Directors Marty Dunn and Shelley Parratt spoke about the issue at Northwestern’s Securities Regulation Institute in San Diego. David Mittelman of Reed Smith reports on what they said:

- the Staff has not changed its historical position, but has increased its focus on “extreme convertible” note secondary offerings that dilute the market

- expect Staff comments when a non-shelf eligible issuer seeks to register for resale more than 1/3 of the outstanding common stock held by non-affiliates prior to the convertible note transaction

- the comments will request an analysis of why the offering is a secondary resale, rather than a primary given its size

- whether the Staff objects to use of Form S-3 will depend upon the facts and circumstances, but non-fixed convertible notes and other "toxic" securities are less likely to pass muster

- Staff comments also may request information, with a view toward disclosure, of 10 to 12 items including (i) how the issuer determined the number of shares to sell and (ii) if known to the issuer, any short positions held by selling shareholders

- the Staff will not object to the issuer registering an additional 1/3 tranche of the securities underlying the convertible note offering provided the later of (a) 60 days has elapsed since sale of “substantially all” of the prior tranche, or (b) six months has elapsed since effectiveness of the prior tranche registration statement. In other words, additional tranches can be registered after the later of 6 months from the effective date and 60 days after sale of substantially all the shares registered for a selling shareholder. This is to be determined on a per selling shareholder (and its affiliates) basis.

- Corp Fin does not expect to issue written guidance in this area other than through the comment letter process

An M&A Conversation with Chief Justice Myron Steele

Tomorrow, catch this important DealLawyers.com webcast: "An M&A Conversation with Chief Justice Myron Steele."

The SEC in 2006

A while back, the SEC issued its 2006 Performance and Accountability Report, which includes financial statements from the GAO and SEC with these interesting tidbits:

- Internal control reportable conditions still existed at the end of the SEC's last fiscal year ending September 30th; there has been significant improvement from the prior year (page 60).

- A drop in the percentage of companies and investment companies having their disclosures reviewed (page 13).

- The SEC has a rising attrition rate, as noted on pages 24-25. In the past, the SEC disclosed the actual rate, but did not this year. However, from reviewing the SEC's annual reports, we can glean that the SEC had 3,865 staff as of September 30, 2005, compared to 3,590 a year later - that is a reduction of 275 people (thus, a reduction of 7.1%).

- A decline in the percentage of the budget spent on enforcement activities (page 38)

- A decline in overall spending, which declined form $917 million in 2005 to $888 million in 2006; this included a decline in enforcement spending from $364 million to $336 million (page 61 and pages 83 and 84)

Forecast for 2007 Proxy Season and Strategies to Consider

Tune in tomorrow to hear Pat McGurn of ISS provide us with the latest proxy season developments during the webcast: "Forecast for 2007 Proxy Season and Strategies to Consider."

Executive Pay Dominates Australia's Proxy Season

Just like the UK, Australia has a relatively new law that allows shareholders to cast an advisory vote on executive pay reports; you might recall, this is the regulatory format that Rep. Barney Frank is seeking. ISS's "Corporate Governance" Blog notes how that new law is faring, with a number of Australian companies receiving high levels of dissenting votes in its 2nd year under the new law.

SEC Chairman Cox on the Power of Blogs

A few weeks back, a CFO.com article entitled the "The Blogging Regulator" led me to a Reuters' article entitled "SEC's Cox Uses Blogs To Gauge Public Sentiment." According to the Reuters' article, SEC Chairman Cox told a summit on Monday: "'Blogs are a great way to infer passion and depth of feeling... They give you an early read on the ... response you might expect." However, Reuters noted, "Cox said he does not rely on blogs to find the way forward on tough issues - as he observed, "Blogs in many cases are so irreverent... They don't wait for facts."

It's funny how statements like this are deemed to be "news"; I think that most people feel the same way about blogs as the Chairman: useful but take with a grain of salt (just like I approach the mainstream media!).

Calculating Damages in Option Backdating Litigation

As the number of backdating lawsuits grow (we have links to numerous complaints in our "Timing of Stock Option Grants" Practice Area on CompensationStandards.com), the perspective of the economists grows more important as they will help dictate what the level of damages will be. In this podcast, Bruce Deal of Analysis Group, an economic consulting firm, provides some insight into the challenges of calculating damages in option backdating lawsuits, including:

- How is the economist's role different from the accountant's role in the pending option backdating cases?
- What types of valuation methods do you expect to be used in these cases?
- How might the use of these methods impact settlements and judgments of backdating cases?
- What other economic issues might arise in these cases other than the value of option grants?
- What types of damage do you expect to see plaintiffs' claim in litigation?

Section 409A Consequences Forces Some Option Backdaters Out of the Closet

As noted in this article, at least 28 companies disclosed that they are investigating for stock-options backdating during the past three weeks as these companies awarded repriced options by the end of last year to keep their senior managers from paying a 20% surtax on potential profits from the options. Per my earlier blog, I noted that the IRS had issued Notice 2006-100 to provide interim guidance to employers regarding their reporting and withholding obligations for calendar years 2005 and 2006 with respect to deferrals of compensation and amounts includible in gross income under Section 409A.

And some companies don't appear to care much about what shareholders think of their backdating practices, as this Saturday WSJ article reports that these companies have paid bonuses to employees in an amount equal to the value that the employees might lose due to backdating. Shareholders don't want to pay even more for the backdating practices of these companies (on top of all the money being paid to investigate them, etc.) - and in fact, at some companies, executives have paid back the amounts they reaped due to backdating back to the company.

Is Backdating Criminal?

As noted in this article, the FBI is devoting significant resources to options backdating investigations as they have mushroomed to comprise one-eighth of the FBI's corporate fraud caseload.

Kevin LaCroix provides some thoughts on D&O Diary Blog Steve Jobs and criminal backdating, as well as links to others who have shared their thoughts on this hot topic.

Corp Fin Posts Executive Compensation FAQs

Yesterday, Corp Fin posted interpretive guidance on the new executive compensation rules. The guidance is divided into two sections - 28 questions & answers and 18 telephone interp-style responses. The second part replaces the S-K Item 402 interpretations in the July 1997 Telephone Interpretations and its March 1999 Supplement.

This new Corp Fin "Staff Compliance and Disclosure Guidance" page apparently means that the Staff has devised a new way to provide us with written guidance. The end of Telephone Interps perhaps?

Some Thoughts about Foreign Private Issuer Deregistration

With comments due to the SEC by mid-February, in this podcast, Andy Bernstein of Cleary Gottlieb provides some insight into the SEC’s re-proposal regarding foreign private issuers and deregistration, including:

- Why did the SEC re-propose its FPI deregistration scheme?
- How does the re-proposal differ from the SEC's original proposal?
- What types of comments do you expect to be made on the re-proposal?
- If the re-proposed rules are adopted, do you think that many foreign companies will take advantage of them and deregister?

Hewlett Packard Files Proxy Statement With "Access" Proposal

Yesterday, Hewlett Packard filed its proxy statement - and included AFSCME's shareholder proposal regarding shareholder access (note that their executive compensation disclosures were filed under the old rules). Probably a smart move given the risk of exclusion.

Interestingly, the company asserts that supermajority approval is necessary before it can amend its bylaws. I'm not sure that the proponents had supermajority approval requirements in mind when they submitted the proposal.

The Bloomberg-Schumer Report

Earlier this week, Mayor Bloomberg and Senator Charles Schumer - with the the assistance of McKinsey - issued this report about how New York City is losing its competitive edge and could give up its lead as the financial capital of the world in as little as 10 years. The D&O Diary provides some lengthy analysis on this new report. Not sure all these reports really have traction on the Hill and in the federal agencies...but we shall see...

More on Option Backdating and Restatements: Corp Fin Position on Minor Errors

In the wake of Corp Fin's recent sample letter guidance on option backdating, Brink Dickerson of Troutman Sanders recently has been working with the Corp Fin Staff to determine when option dating issues necessitate restatements. He reports that the Staff believes that in applying Question 3 of SAB 108, it is necessary to assess the materiality of the prior period errors under SAB 99 to determine if the errors can appropriately be included in the cumulative effect adjustment. SAB 99, in turn, contemplates assessing materiality on both quantitative and qualitative bases.

Since intent is a factor in assessing qualitative materiality, Brink reports that the Staff doubts that companies will be able to conclude that the errors are not material where the dating errors were intentional on the part of senior management. Certainly there are some errors - e.g., the occassional screw-up in documentation - that would not taint the assessment of qualitative materiality, but the Staff expects that many of the reporting problems that have been disclosed so far will require a restatement.

First Proxy Statements Filed Under New Exec Comp Rules

As Mark Borges has been dutifully blogging about on CompensationStandards.com, the first proxy statements complying with the new executive compensation disclosure rules have been filed, including:

- Kronos Inc.

- Whole Foods Market

- Wrigley Jr. Company

Alan Dye on the Latest Section 16 Developments

For Section16.net and NASPP members, don't forget to tune into the popular annual webcast tomorrow: "Alan Dye on the Latest Section 16 Developments."

SEC Posts E-Proxy Adopting Release

Yesterday, the SEC finally posted the 110-page adopting release regarding E-Proxy - or as it's also called: "Internet availability of proxy materials." These rules were adopted more than a month ago at a December 13 open meeting.

The new rules cannot be used before July 1, 2007 (which means a notice under the new rules cannot be sent to shareholders before then) - given that the notice period under the new rules is 40 days, this new notice and access model cannot be used for meetings scheduled before August 10th. As you may recall, these rules are optional and I bet it will take time for the proxy intermediaries to tweak their systems to allow for the new model. We will cover these new rules in a webcast - including what these tweaked systems look like - in a few months...

SEC Proposes Extension of E-Proxy to "Universal" Status

Yesterday, the SEC proposed amendments to E-Proxy that would require issuers and other soliciting persons to furnish proxy materials to shareholders by posting them on a web site and providing shareholders with notice of the Internet availability of the proxy materials. Comments are due 60 days after publication in the Federal Register.

Back in December at the open Commission meeting, this was referred to as "mandatory" e-Proxy, but that was a bit of a misnomer and I believe the proposing release doesn't even mention the term "mandatory," it's coined "universal" instead - because compliance with the proposal would be so simple: merely posting proxy materials and providing notice of the URL. This change in terminology is helpful to understand what the SEC is proposing; I butchered my interpretation of what "mandatory" meant in a blog last month when the SEC first mentioned it. I can be a space cadet sometimes...

Corp Fin Expresses "No View" in Hewlett-Packard Shareholder Access Response

Yesterday, Corp Fin made public its highly anticipated no-action response letter staff to Hewlett-Packard regarding the AFSCME shareholder proposal seeking a by-law amendment that would allow for a form of shareholder access. It has been reported that this was the only shareholder access proposal submitted to an issuer this proxy season (although this Washington Post article intimates that two other companies have received this proposal). We have posted a copy of Corp Fin's response in our "Majority Vote Movement" Practice Area.

Since the SEC is still grappling with how to respond to the Second Circuit's decision regarding a similar proposal that AFSCME submitted last year to a handful of companies, the Staff decided not to express a view as to whether Hewlett-Packard can exclude the proposal from its upcoming shareholders' meeting.

In deciding to pass on considering a proposal relating to this matter at a January 31st open Commission meeting as expected, SEC Chairman Cox said, "The SEC staff quite properly are following Commission precedent, expressing no view as to the eventual disposition of what is for the moment an unsettled legal question. Fortunately, during the current proxy season, the very small number of inquiries we have received have come solely from companies representing that they are not governed by the decision in the Second Circuit, so in the near term there is no risk of conflicting application of our rules. As a result, the Commission is taking advantage of this opportunity to consider more fully the questions raised by the court decision in their broader context, and to work on crafting a carefully considered proposal that will ensure there is one, clear rule to protect investors' interests in all jurisdictions during the next proxy season." So it looks like the SEC is still debating internally what it should do in this area...

What is a "No View" Response from the Staff?

It's not surprising that the Staff decided to go with a "no view" response here, as the Staff has refused to take a position over the years when a close call is involved if the governing law is unclear.

Although a "no view" response may provide some comfort to a company that the SEC will not bring an enforcement action if it excludes the proposal, it is probably more likely that a court would compel inclusion since there is no Staff decision for a court to defer to - or consider - in making its decision...albeit the courts haven't been following the SEC's lead anyways in recent decisions, like the AFSCME one. Hewlett-Packard is expected to file its proxy materials within a few days and it will be interesting to see what appetite for risk they have after the pre-texting scandal.

PCAOB Inspections: Failing Grades for E&Y, KPMG

A few weeks back, the PCAOB finally released its inspection reports for the two remaining auditors of the Big 4: E&Y and KPMG. As aptly covered in this CFO.com article, the reports reveal a number of issues at those firms.

Given that all four auditors did not receive rave reviews by the PCAOB during last year's round of inspection reports, I'm not sure why the SEC's Chief Accountant is supportive of giving auditors immunity for liability. Maybe setting the standard for negligence higher (or whatever the proper standard is for liability) is a better legislative/regulatory response?

By the way, Kevin LeCroix of the "D&O Diary" Blog provides us with the latest developments about auditor liability reform in Europe.

The SEC’s December Rule Changes: How They Impact You

We have posted the transcript from the popular CompensationStandards.com webcast: "The SEC’s December Rule Changes: How They Impact You." Over 1300 members have listened to that webcast (either live or by audio archive) - and over 1400 caught last Thursday's webcast: "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!" (for which there will be no transcript due to its length of over 3 hours, but the audio archive is available now).

We just announced Part III of our CompensationStandards.com Web Conference to be held February 15th: "The SEC’s 8-K Rule Changes: How They Impact You."

Executive Compensation Disclosure FAQs and More...

On CompensationStandards.com, we continue to post numerous resources daily, including these recent gems:

- Posted in our "The SEC's New Rules" Practice Area, Cleary Gottlieb has put together 52 FAQs regarding the new rules (helping us out until the SEC Staff's FAQs come out sometime during the next week or two).

- Posted in our "Backdated Options/Grant Policies" Practice Area, we have added a few more sample grant option policies - in Word! Also check out this upcoming NASPP webcast: "Implementing Scrutiny-Proof Grant Procedures."

- Posted in our "Tabular Disclosures" Practice Area, Alan Kailer has updated his popular outline on the executive compensation tables for the SEC's December rule changes.

[And as a Chicago native in my youth, a hearty "shout out" to da Bears!]

ISS' Watchlist of Proxy Season Activities

Last week, ISS posted its 2007 Proxy Season Watchlist. Highlights from the Watchlist so far include:

- There are 99 pending proposals on majority vote to elect directors versus 94 that came to a vote in 2006.

- There are 39 pending proposals on linking pay-to-performance versus 17 that came to a vote in 2006.

- There are 40 pending proposals to report on or disclose political contributions versus 28 that came to a vote in 2006.

Supreme Court to Review Pleading Standard in Private Securities Actions

From Wachtell Lipton: The US Supreme Court last week granted review in an important case that should resolve a split of authority concerning the pleading standard in private securities fraud actions. The standard was established by Congress in the Private Securities Litigation Reform Act of 1995 to combat abusive securities "strike suits," and it requires that a securities complaint for damages "state with particularity facts giving rise to a strong inference"t hat the defendant acted with "scienter," i.e., fraudulent intent. In virtually every securities fraud action, the defendants will likely move to discuss the complaint on the ground that the allegations doe not give rise to such an inference. If the court sustains the complaint, defendants must either settle or endure the massive expenses and risks of discovery and trial.

The case being reviewed by the Supreme Court is Makor Issues 7 Rights Ltd. V. Tellabs, 437 F.3d 588 (7th Cir. 2006), in which the United States Court of Appeals for the Seventh Circuit held that a securities fraud complaint should survive "if it alleges facts from which, if true, a reasonable person could infer that the defendant" acted with scienter. Id. at 602 (emphasis added). In making that determination, the court may not, according to Tellabs, evaluate inferences more consistent with innocence than with fraud. This approach is markedly more lenient for plaintiffs than the standards applied in other Circuits, which require the district court to consider all plausible inferences. The Seventh Circuit, however, reasoned that a district court could not consider competing inferences without potentially invading the constitutional role of the jury.

The Supreme Court decision promises to be a landmark in the federal securities laws. The "strong inference" standard is central to the congressional effort to eliminate abusive standards that prevailed prior to 1995. That effort has been frustrated by a multitude of approaches between and within the various circuits, and has led to forum-shopping, uncertainty, and inconsistent outcomes. From a defendant's standpoint, the Seventh Circuit's decision in Tellabs not only adds to this confusion, but takes a significant step backwards to the pre-PSLRA era. The Supreme Court has directed that briefing be completed by March 20, 2007, making it reasonably likely that a decision will be rendered this term.

We Live in a Complicated Society

The best part about working from home is that I don't have to shave years off my life driving in rush hour traffic. I can leave my machete at home. I loved this WSJ article which laid out a number of websites where those without machetes can instead embarrass our fellow humans into behaving better, including:

- BadDriving.com
- Caughtya.org
- LitterButt.com
- RudePeople.com

Senate Finance Committee Approves Limits on Executive Compensation

To pay for certain small business tax relief, the Senate Finance Committee yesterday approved legislation that would severely limit nonqualified deferred compensation for executives. Specifically, the "Small Business and Work Opportunity Tax Act of 2007" would:

- Amend Section 409A to limit the annual accrual of nonqualified deferred compensation to $1 million (or if less, the executive’s average annual compensation determined over five years ). Going over the cap would trigger ordinary income tax plus a 20% additional tax.

- Amend Section 162(m) to treat any former executives as continuing to be covered by the Section 162(m) limits with the effect that payments made after termination of employment would no longer be deductible by the company.

Learn more in this article and this article...

FASB Votes Not to Delay FIN 48; Considers Defining 'Ultimate Settlement'

FIN 48 is proving to be quite a challenge for many people, as discussed during our "Accounting Reform: How the Latest Developments Impact You" webcast last month. Remember that we have resources on this topic in our "Tax Uncertainties" Practice Area.

From the FEI "Section 404" Blog: At its board meeting yesterday, the FASB board voted unanimously (7-0) not to delay the effective date of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). However, FASB will consider potential implementation guidance to be drafted by its staff and presented for the board’s consideration at a future meeting, on one particular issue: the definition of “ultimate settlement.”

FASB received over 400 comment letters on FIN 48 in the past month. FASB staff said most of the letters were from preparers or organizations representing preparers, most were signed by tax executives, and many were form letters referencing an early letter sent by the Tax Executives Institute. FASB also received comment letters from users of financial statements who asked FASB not to delay FIN 48.

In reaching its decision not to delay the effective date of FIN 48 (effective fiscal years begininng after 12/15/06), FASB considered the 3 main calls for delay as summarized by the FASB staff:

- Implementation issues arising directly from provisions of FIN 48 (for which they decided to have staff draft guidance to be considered at future board meeting on the meaning of 'ultimate settlement')

- Other consequences not directly associated with FIN 48’s provisions (including documentation, internal control, timing constraints and available tools)

- Industry or other entity-specific concerns

As noted above, FASB decided the staff should draft implementation guidance for FASB to consider on the definition of 'ultimate settlement' but staff said other implementation issues raised in comment letters had been dealt with by staff or did not lend themselves to further general guidance because they were facts and circumstances based. Since FASB directed the staff to "burn the midnight oil" and work as quickly as possible on the "ultimate settlement" guidance, they did not believe a delay in the effective date of FIN 48 was required due to this particular implementation issue.

John White on FPI Deregistration and Other Global Issues

Earlier this week, Corp Fin Director John White delivered this speech at PLI's 6th Annual European Securities Law Institute. John covered a number of international topics, including foreign private issuer deregistration and global accounting convergence.

Corp Fin's Option Backdating Guidance

Yesterday, Corp Fin's Chief Accountant's office posted guidance - in the form of a sample letter (ignore the header about oil & gas companies; that is a SEC webmaster snafu) - regarding restatements and option backdating. A little nerve-wracking that the Staff gives a lot of helpful guidance - but then adds the qualifier that even if you follow it, it doesn't mean you can conclude you are current. So I imagine the Staff will continue to get a lot of calls from folks with backdating issues.

This Staff guidance was anticipated in the Nov-Dec 2006 issue of The Corporate Counsel, which was mailed last week - and will be dealt with more in the upcoming Jan-Feb issue which will be mailed by the end of the month. By the way, that Nov-Dec issue has a great - and lengthy - analysis of how to implement the SEC's new related person rules.

The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

Catch tomorrow's blockbuster 3-hour webcast - "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!" - to hear the SEC's Paula Dubberly, Mark Borges, Ron Mueller and Alan Dye discuss how companies are gearing up to provide their new executive compensation and related party transaction disclosures this proxy season.

Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com (Part I on the SEC's December rule changes was last week, audio archive now available), we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers has ended) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.

Senate Panel May Limit Tax-Deferred Pay to $1 Million

According to this Bloomberg article, the Senate Finance Committee may consider a proposal setting a $1 million limit on the amount of compensation highly paid workers such as corporate executives, professional athletes and entertainers can defer tax-free each year. The provision was included in a preliminary draft of legislation that was posted yesterday (but then removed because it had been posted "prematurely").

Rep. Barney Frank: CEO Pay Bill Vote By Mid-'07

Rep. Barney Frank, the new Chair of the House Financial Services Committee, continues to be outspoken on executive pay as he works towards resurrecting his Truth-in-Pay bill. On Thursday, Rep. Frank said he hopes to pass a bill by mid-2007 to give shareholders more say in setting corporate executive pay, according to this Reuters article.

Rep. Barney Frank: Speaking Frankly

Below is an excerpt from comments made by Rep. Frank at the National Press Club on January 3rd:

MODERATOR: You've said that you would support giving shareholders more power to constrain executive pay.

Will you provide some details, please, on how you would do this?

FRANK: We're still working out the details. But, yes -- I have to say, boards of directors, I didn't know much about them before I got to be the senior member of our committee.

You read about boards -- they're supposed to be -- I read about boards of directors in Enron and MCI and elsewhere, and they reminded me, I guess this is an appropriate journalistic forum to use this metaphor, the role of the boards of directors in all these crises remind me of something Murray Kempton once said, the great journalist from the New York Post, talking about editorial writers. He said the function of editorial writers is to come down from the hills after the battle is over and shoot the wounded.

(LAUGHTER)

And it seemed to me that's what the boards of directors used to do.

Now, some of them have gotten more energetic, and I think Sarbanes-Oxley has helped them do that.

But there's one area where the boards of directors do not appear to be much of a check, and it's easy to understand why, because they don't stand up to the CEO. They may stand up to the workers. People said, "Well, do you want to cut the bargaining agreements or the wages to go to shareholders?" You can count on the board of directors to want to depress what they pay the workers.

FRANK: But with regard to the CEO, in the first place, the CEO picked the board of directors; they picked the CEO. It's a very collusive relationship.

And it's clear that boards of directors do not provide any real check on CEOs. And it's true, I guess, the board of directors of Home Depot finally decided that Mr. Nardelli had to go. And they put their foot down and gave him $210 million and asked him to please leave, at which point he apparently succeeded, for the first time, in raising the stock price, by leaving. But $210 million is an expensive thing for that.

So I plan to have some legislation by which we increase the ability of shareholders to vote. And we're going to try to work out the details, including what happens if they were to vote no.

They have that in Britain, by the way. And Britain has become, recently, an example. And a lot of American corporate leaders have said, well, we like what they have in Britain. We think the Financial Services Authority is more flexible than the Securities and Exchange Commission, that Britain does it better.

But in Britain, shareholders have much more say. And particularly here, I do not think you can count on boards of directors to be adequate checks.

By the way, this compensation for CEOs -- it's not just a matter of envy. It has reached a point where it has some macroeconomic significance.

People at Harvard, Lucian Bebchuk and others, have shown the percentage of the profit of these top 1,500 corporations that goes to compensation for the top three officials has reached almost 10 percent. We're talking, now, about significant numbers. When Lee Raymond gets $400 million when he leaves ExxonMobil, and the pension is shorted, the pension fund, we're not just talking about envy.

So yes, we are going to be working on this, and when it gets to committee, we'll be dealing with it. The SEC -- I have one small difference with what they did, but the SEC has made some real gains in requiring corporations to be more open about what kind of compensations there are. And that's all compensation. It's stock options, and it's retirement, and what happens if there's a change in the corporation.

And by the way, one of the things that we don't do enough of in this business of ours and yours is to talk about the predictions of doom that didn't happen. We're often beating our breast because something bad happened, and we didn't predict it. What about all the bad things that we predicted that didn't happen?

Two that come to mind, to me, are same-sex marriage in Massachusetts and expensing stock options. In both cases, enormous negative consequences were predicted and, of course, none have materialized.

I do think it's time to have a hearing. When we voted on preventing the accounting officials from requiring that stock options be expensed, we heard terrible predictions about the negative effects this would have on the valuation, particularly, of technology companies. It has not happened.

FRANK: And I got to say -- and I voted against that bill. So yes, I am saying I told you so.

One of the most common lies in human existence is when people say, "Oh, I don't like to say 'I told you so.'"

I do not know anyone who doesn't like to say "I told you so."

(LAUGHTER)

And I have personally found that as one of the few pleasures that improves with age.

(LAUGHTER)

I can say I told you so and enjoy it without taking a pill before, during or after the operation.

And we told them so about this. So I think that -- again, there's a lot less fragility in this economy than people think.

But, yes, we have got to find some way to give shareholders -- maybe it's automatic or maybe it's whatever shareholders want to -- but shareholders have to be the check.

By the way, the shareholders we're talking about now -- we're not talking about this or that individual somewhere off in the country. You're talking about a very sophisticated set of institutional investors. You're talking about CalPERS. You're talking about other pension funds run by public officials or by unions.

There are entities out there representing groups of shareholders who are sophisticated and thoughtful, and I believe corporations would benefit greatly by their increased participation.

Our New M&A Print Newsletter: Deal Lawyers

In response to so many requests for a practical M&A print newsletter about deal practices, we have created a new newsletter: Deal Lawyers. Just like its sister publication, The Corporate Counsel, Deal Lawyers is tailored for the busy dealmaker, bi-monthly issues that do not overload you with useless information – rather, this newsletter will provide precisely the type of information that you desire: practical and right-to-the-point. As in all our publications, this newsletter will include analysis of timeless “bread and butter” issues that you confront time and again.

To illustrate how Deal Lawyers will provide the same rewarding experience as reading The Corporate Counsel, we have posted the Jan-Feb issue of Deal Lawyers for you to check out at no charge. Feel free to share it with your deal-minded brethren. This issue includes pieces on:

- What the New “Best Price” Rule Means for You

- The New “Best Price” Rule: Financing Issues and Answers

- The New – and Tricky - SEC “Change-in-Control” Disclosures

- What Private Equity Firms Want in a Lender

- The “Sample Language” Corner: Acquiring the California Corporation

Try a no-risk trial today; we have special introductory rates and a further discount for those of you that already subscribe to The Corporate Counsel.

The Evolving 'Best Price' Rule

We have posted the transcript of our DealLawyers.com webcast: "The Evolving 'Best Price' Rule."

NYSE and NASD Propose Changes to Research Analyst Rules

On Thursday, the SEC posted a proposing release that would amend NASD and NYSE rules regarding research analysts' conflicts of interest. The proposed amendments would implement certain recommendations from a Joint Report issued a year ago by the NYSE and NASD.

Among other things, the proposals would change rules regarding disclosure of conflicts; quiet periods; restrictions on review of research reports by non-research personnel; and restrictions on personal trading by research analysts. The proposing release identifies those instances where the NYSE and NASD proposals are different.

Directors: The Retirement Age Dilemma

Poor Home Depot. After its botched annual meeting last year and lavish executive pay - not to mention poor stock performance - it looks like it's now easy game for the mass media on lesser issues. On Wednesday, the NY Times ran this article skewering the company's board for waiving age limits for three of its directors. Given the apparent roles of these three directors in setting former CEO Nardelli's lavish pay, there appears to be a basis for the attack.

But generally, I don't believe in age limits for directors in all cases - some of the most productive directors can be those with the most age (and experience). In our "Board Composition" Practice Area, I have had a number of FAQs on age limits posted for some time including this one:

Should boards have age limits for their directors?

Most experts believe yes - unless the company truly believes it has a sound director evaluation process. If a board develops an effective process for evaluating individual directors, it may not need mandatory retirement guidelines - but if a board does not have a sound evaluation process, a mandatory retirement age should be considered.

Retirement ages vary between 70 and 75. Some companies allow the board to waive the retirement age for certain directors. Although a waiver may allow a company to keep a director who is quite valuable (and even become more valuable as more experience is garnered), this might be difficult to administer as some directors might wonder why they were not granted a waiver. Or even worse, a board may become divided over whether to grant a waiver to a particular director.

A possible solution is to grant limited waivers so that directors serve for just one more year. But this still could cause the problems noted above, without providing much in the way of a real benefit if the affected director is a true asset.

Proponents of mandatory retirement ages and term limits argue that they serve to bring fresh outlooks and perspectives to boards by periodically forcing a board to replace directors. Proponents also contend that directors who serve on a board for many years may be less independent from management and, as a result, less of an advocate for shareholders. In addition, retirement ages for directors can provide boards with a way of getting non-performing directors off the board without having to ask for a director's resignation.

The bottom line is that most experts believe a bright line test can save boards from serious interpersonal issues that inevitably will cost a lot of invaluable time and energy and could cause permanent divisiveness on the board.

ISS generally recommends that investors oppose management and shareholder proposals to impose mandatory age limits or term limits on directors. ISS notes in its U.S. Voting Manual: "[A] mandatory retirement age sends the message that older directors cannot contribute to the oversight of the company. Although establishing a retirement age or limiting the number of times a director may be elected to the board provides a mechanical or 'bloodless' means for addressing a real or potential performance issue with a director, it does not take into consideration the fact that a board member's effectiveness does not necessarily correlate with the length of his board service or his age. Time served is not a substitute for a thoughtful and rigorous board and director evaluation process, which is a better determinant of a director's fitness for service."

Carl's Corner: Back in Business!

Finally got my act together and have started adding more wisdom from Carl Schenider of Wolf Block in "Carl's Corner". In this month's installment, Carl tackles preferred stock features.

SEC's Chief Accountant Backs Shielding Auditors From Lawsuits

Vineeta Anand of Bloomberg continues to do some great investigative reporting, including this story based on an interview with SEC Chief Accountant Conrad Hewitt:

"The U.S. Securities and Exchange Commission's top accountant said he supports a proposal to shield public-company auditors from liability if they fail to detect fraud because shareholders won't be protected should lawsuits force more accounting firms out of business. 'We would like to see the remaining `Big Four' firms remain as auditors for companies,'' SEC Chief Accountant Conrad Hewitt said in an interview. 'It helps investors. We would also like to see the second-tier and third-tier firms remain financially solvent.''

Most of the largest U.S. companies are audited by either PricewaterhouseCoopers LLP, Deloitte & Touche LLP, Ernst & Young LLP or KPMG International. Arthur Andersen LLP, formerly the world's fifth-biggest accounting firm, shut down in 2002 after being convicted of obstruction of justice in the federal government's investigation of fraud at Enron Corp.

Glenn Hubbard, a former White House economic adviser who's dean of Columbia University's business school, and former Goldman Sachs Group Inc. President John Thornton in November called for limits on auditor liability as part of a campaign to make U.S. financial markets more competitive. The group they lead, the Committee on Capital Markets Regulation, wants to ease provisions in the 2002 Sarbanes-Oxley Act that put more of an onus on auditors to detect accounting mistakes and fraud, making them more vulnerable to shareholder lawsuits in future Enron-like scandals. 'We certainly don't want to have another Arthur Andersen failure,'' Hewitt said.

Mark Olson, chairman of the Public Company Accounting Oversight Board, said in a separate interview that Congress should set policy on protections for auditing firms. 'Liability exposure is a significant management issue for firms,'' he said. The six biggest accounting firms, which also include Grant Thornton LLP and BDO International, said in a Nov. 7 report that regulators should penalize individuals, rather than entire organizations, for faulty audits or misconduct.

SEC Deputy Chief Accountant Zoe-Vonna Palmrose, before joining the agency, wrote in a 2005 academic paper that lawsuits by public-company shareholders ``undermine the stability of even the largest audit firms.'' She suggested establishing a new government office to review whether accountants should be culpable for securities violations.

Hubbard and Thornton's committee, which is backed by U.S. Treasury Secretary Henry Paulson, said Nov. 30 that Congress can prevent 'damage awards against audit firms and their employees at a level that could destroy a firm.' The SEC in December proposed changing the provisions for business-practice audits under Sarbanes-Oxley to reduce costs for public companies."

Analysis: The Updated "Current Accounting & Disclosures Issues" Outline

As I blogged about a few weeks ago, Corp Fin's Office of Chief Accountant has updated its "Current Accounting and Disclosure Issues" Outline. Below is some excellent analysis from Davis Polk as to what Corp Fin changed in its Outline. I just love this piece; it surely is an early contender for memo of the year:

Part I of the Corp Fin's Outline provides a summary of recent SEC rulemaking and written guidance (both proposed and adopted). Part II of the Outline discusses the SEC staff’s views on other accounting and disclosure issues. Although posted by the SEC in December 2006, the updated Outline has a date of November 30, 2006. As a result, the Outline does not reflect the significant rulemaking by the SEC in December 2006.

The new or updated disclosure items contained in the Outline include the following:

- Statement of Cash Flows - The SEC has added two new subcategories to Section II.C of the outline regarding the Statement of Cash Flows. One of the new subcategories addresses the treatment of Discontinued Operations and the other new subcategory addresses the treatment of Insurance Proceeds.

- Discontinued Operations - In the outline subcategory related to discontinued operations, II.C.1., the SEC staff notes that registrants who have discontinued operations should carefully consider how to present disclosures about the cash flows of the discontinued operations within the Liquidity and Capital Resources section of MD&A. According to the SEC staff, management should pay particular attention to describing how cash flows from discontinued operations are reflected in their cash flow statements, and, if material, they should quantify those cash flows if they are not separately identified in those statements. In addition, management should describe how it expects the absence of cash flows, or absence of negative cash flows, related to the discontinued operations to impact the company’s future liquidity and capital resources. Management should also discuss any significant past, present or upcoming cash uses as a result of discontinuing the operation.

- Insurance Proceeds - In the new outline subcategory related to insurance proceeds, II.C.2., the SEC staff notes that material cash insurance settlements should be discussed in MD&A. The discussion should inform investors of cash received and why it was received, what the company plans to do with the proceeds, how it is presented in the cash flow statement and the impact, if any, on reported earnings.

- Contingencies, Loss Reserves and Uncertain Tax Positions - The SEC has also updated Section II.I of the outline regarding Contingencies, Loss Reserves and Uncertain Tax Positions. As part of the update of this section, the SEC staff has added a new subsection entitled “Discussion in MD&A.” In this new outline subsection, the SEC staff notes that the requirement to discuss uncertainties in MD&A encompasses both financial and non-financial factors that may influence the business, either directly or indirectly. According to the SEC staff, the need to discuss such matters in MD&A will often precede any accounting recognition when the registrant becomes aware of information that creates a reasonable likelihood of a material effect on its financial condition or results of operations, or when such information is otherwise subject to disclosure in the financial statements, as occurs when the effect of a material loss contingency becomes reasonably possible. The outline provides that if a registrant is unable to estimate the reasonably likely impact, but a range of amounts are determinable based on the facts and circumstances surrounding the contingency, it should disclose those amounts.

The SEC staff also notes that MD&A should include a quantification of the related accruals and adjustments, costs of legal defense and reasonably likely exposure to additional loss, as well as the assumptions management has made concerning those amounts. According to the SEC staff, a company should articulate the reasons the assumptions it used best reflect its exposure and the extent to which the resulting estimates of loss are sensitive to changes in those assumptions. The SEC staff also indicates that it believes that the need to address the underlying assumptions is especially important when there is a material difference between the range of reasonably possible loss and the amount accrued.

- Segment Disclosure - The SEC staff has updated Section II.L.2. of the outline which discusses the aggregation of operating segments as permitted by FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). The SEC staff has also added a new subsection, II.L.5, to discuss operating segments and goodwill impairment.

- Aggregation of Operating Segments - In Section II.L.2 of the outline, the SEC staff notes that it has seen improper aggregation of operating segments in situations involving a quantitatively immaterial segment. For example, the SEC staff has seen instances where a quantitatively immaterial segment is aggregated with a reportable segment because it does not meet the quantitative thresholds requiring separate presentation under SFAS 131. According to the SEC staff, if the quantitatively immaterial segment does not share a majority of the aggregation criteria with the reporting segment, aggregation is inappropriate. The outline provides that in this situation, the quantitatively immaterial operating segment would best be placed into the “other” category.

- Operating Segments and Goodwill Impairment - The SEC staff has added a new subsection, II.L.5, that discusses ramifications of FASB Statement No. 142, Goodwill and Other Intangible Assets, (“SFAS 142”) on segment reporting. Paragraph 18 of SFAS 142 requires that goodwill be tested for impairment at the reporting level. As part of this discussion, the SEC staff notes that given the impact the identification of reporting units can have on the determination of a goodwill impairment charge, registrants should consider providing disclosure in the critical accounting estimates section of MD&A. The SEC staff believes that this disclosure may be particularly important when the amount of goodwill is material. According to the SEC staff, the disclosure should address how the reporting units were identified, how goodwill is allocated to the reporting units and whether there have been any changes to the number of reporting units, or the manner in which goodwill was allocated. If such changes have taken place, they should be explained.

- Disclosure of Off-Balance Sheet Arrangements - The outline includes a new section, II.N., entitled “Disclosure of Off-Balance Sheet Arrangements.” In this section, the SEC staff discusses the Item 303 of Regulation S-K requirement to provide, within MD&A, a separately captioned section that discusses off-balance sheet arrangements that have or are reasonably likely to have, a material current or future effect. The SEC staff notes that they have found many registrants’ compliance with this requirement to be deficient. In particular, the SEC staff notes that registrants often provide the disclosure required by Item 303 throughout MD&A and in the footnotes to the financial statements rather than in a separate section as required. In addition, the SEC staff feels that the disclosure provided is often boiler-plate.

The SEC staff urges registrants to review whether any of their business activities may have off-balance sheet implications and present descriptions of these arrangements in their MD&A in one section that is clearly labeled. The nature and business purpose (i.e., why the transaction was structured as off-balance sheet) of off-balance sheet arrangements, as well as the exposure to risk that results from the arrangements, should be discussed. The SEC staff requests that, in order to increase transparency for investors, registrants should also consider disclosing that they have no material off-balance sheet arrangements, if that is the case.

More on Mark Cuban's Investment Strategies

Cleaning out old emails and came across this gem from Bruce Dravis of Downey Brand, who waxes on my blogs about entrepreneur Mark Cuban's investment strategies:

"I think the interesting question about Mark Cuban’s shorting/reporting business model is not the short positions that he establishes, but what will happen when he changes those positions. This is not Foster Winans taking a position ahead of the news without disclosing that fact, or the “scalping” case in SEC v. Capital Gains Research of the investment adviser taking positions without letting his newsletter recipients know.

Cuban advertises the fact he took a position ahead of the news. That is more honest than the hedge fund manager who shorts a stock and then leaks his negative investment thesis to CNBC or the Wall Street Journal—readers have a chance to consider the interested nature of the source of the news. However, what happens when Cuban unwinds the position? Once he takes this public position—and explicitly or implicitly invites other investors to follow him—I could envision circumstances in which his own investment plans could turn into material non-public information.

Even in that case, if he announced publicly before he changed his investment position, so that investors who followed him into the short position had a chance to get out first, it would be hard to claim that he manipulated other investors into generating trades that advantaged his investment. There is plenty that could go wrong with the business model: What if one of his own reporters misappropriates the information to establish a position ahead of Cuban? What if someone in his organization tips an outsider ahead of Cuban publishing his position?

Still, Cuban seems like an intelligent, careful businessman with a sense of business ethics. He bankrolled the excellent Enron documentary “The Smartest Guys in the Room.” If he had been advocating shorting Enron on the basis of Bethany McLean’s original Enron reporting, who knows what the alternative history of Enron—and consequently of the Sarbanes Oxley Act—might have been."

More about "Why" the SEC's December Rule Changes

According to this Reuters' article, Chairman Cox talked about "why" the rules changes were made and the Chairman illustrated how the December rule changes to the SEC's new executive compensation rules were not intended to hide pay levels at a Reuters summit on Monday. It's unclear if the Chairman addressed "why now and not back in July" at the summit, but earlier media reports stated that the Chairman had believed at the time the original rules were adopted that a vesting approach for reporting option grants in the Summary Compensation Table was included as part of the new rule package.

Not quite sure I bite on that explanation. Below is something I received from a member following up on what the NY Times' Floyd Norris wrote in his own blog last week:

"For what it's worth, after digging around in the July 26th Open Meeting webcast archive, I found out that (i) Chairman Cox described the FAS 123R full grant value treatment in his opening remarks at the Open Meeting (ii) the SEC Staff described this as well in its opening remarks and (iii) the first Q&A exchange between Cox and Corp Fin Director John White (listen to the webcast archive at the 30:52 mark of the meeting) explicitly covered this issue. White, in response to Cox's question about the treatment of options under the new rules, laid this out quite plainly, including the difference between FAS 123R for financial reporting purposes and for compensation disclosure purposes in the SCT (see 31:04 mark of the webcast archive)."

This fact finding seems to cut across the grain that the Commission really didn't know what standard it originally adopted and hopefully will put an end to such musings, such as done in yesterday's WSJ op-ed. The op-ed states: "The SEC's mistake is regrettable, but the agency might be forgiven for overlooking what was a relatively minor point in its gigantic 450-page July rule." I think anyone closely following the rulemaking during the proposal stage would argue that this was not a "relatively minor point"; this was a hotly debated issue as reflected in the comment letters submitted last summer by many major organizations.

What to Do Now: How to Implement the December Rule Changes

Regardless of the "why," what's done is done and we turn to what we practitioners care about most: the "how to implement" aspect of the December rule changes. Don't forget to tune into tomorrow's CompensationStandards.com webcast: "The SEC’s December Rule Changes: How They Impact You."

That webcast will be followed by another (and much longer) one next Thursday: "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!." Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com, we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers ended last week) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.

Whining about Semantics

I can't help but whine about last week's WSJ opinion column that did some whining of its own about Home Depot's former CEO 'severance' package. The WSJ claimed that most of Nardelli's $210 million payout wasn't really severance at all because the terms for much of that package were set when he was hired years ago.

I got news for whomever wrote that piece: just because severance arrangements are negotiated well in advance of a termination doesn't change the fact that they are indeed severance arrangements. In other words, don't bother writing that others are not properly using terminology until you master it yourself!

And One More Wake-Up Call

This statement in the WSJ opinion column">op-ed should serve as one more wake-up call to boards and advisors: "That contract can't be abrogated now simply because the board has concluded it made a mistake." The statement might be true for Nardelli because he is gone - but it certainly isn't true for every other CEO who still holds their job today.

As we have written about numerous times, boards get an opportunity each year to revisit their past mistakes when they are set pay levels for the following year. Remember that's one of the primary purposes of going through the exercise of creating a tally sheet - it enables boards to find out if excesses have been created and then the board has an action item to try to rectify them.

One of the first steps a board can take is to ensure properly worded clawback provisions are added to outstanding contracts - see more in our "Clawback Provisions" Practice Area on CompensationStandards.com.

Boards really need to take action here. It seems hardly a day goes by without another example of a senior manager getting fired and still taking millions of dollars home with them despite poor performance. Who wouldn't want $10 million in severance for six months on the job? That's what the just-fired COO of JC Penney walked away with; seems like managers are incentivized to perform badly with some of these poorly negotiated employment arrangements...

Lawyers' Role in Governance

The New York City Bar Association has put together a pretty fascinating report - through a task force - on what role lawyers should play in corporate governance. The 298-page report – "Lawyer's Role in Corporate Governance" - was just released a few weeks ago.

In this podcast, Tom Moreland of Kramer Levin - and the Chair of the NYC Bar's Task Force that prepared the report - tells us more, including:

- Why did the NYC Bar Association decide to prepare this Report?
- What were you able to determine about the involvement of lawyers in those scandals?
- Did this conclusion lead the Task Force to make any recommendations for the future?
- What other recommendations in this Report would you like to highlight?
- What should lawyers do in light of this Report?

Mad as Heck and Not Going to Take It Anymore

Shutterfly Chairman Jim Clark, founder of Netscape, resigned from the company's board (even though he is a 30% shareholder) complaining that Sarbanes-Oxley overly restricts the ability of large shareholders to participate in board functions, as noted in this resignation letter filed as an exhibit to a Form 8-K filed yesterday.

FIN 48: Slouching Toward Implementation

Here's some great stuff from Jack Ciesielski's AAO Weblog: "Last June, the FASB released an interpretation of Statement No. 109, which deals with income tax accounting. It was called Interpretation No. 48 (catchy, eh?), “Accounting for Uncertainty in Income Taxes” and quickly picked up the moniker “FIN 48.” Or, if you work in the tax department of a publicly-traded company, it became known by other, more colorful nicknames. I won’t go into those here; family publication and all that.

And I won’t go into details about the nuances of FIN 48, either; suffice it to say, it provides a framework for evaluating “uncertain tax positions” that companies take from time to time, that might either create/increase a tax asset or reduce a tax burden. Sometimes those tax positions are solidly defensible, and there’s little question that any tax assets recognized in the financial statements are going to be realized; sometimes the positions taken on tax returns are done so with fingers crossed in the hope that the taxing authorities are going to miss them. Any effect that “fingers crossed” positions may have on the financial statements - creation/increase in assets or reduction in liabilities - might be different from what shareholders (after it’s been asserted in the financial statements that these things are so.)

In studying balance sheets, investors want to see what is - not what managers wish for. And that’s what the effect of applying FIN 48 does: it forces managers to look at the odds of open tax positions being sustained under review by tax authorities. The standard might wring some water out of assets on balance sheets … IF it’s actually implemented. It’s supposed to be effective in years beginning after December 15, 2006. For calendar year companies, that’s right now.

Recently, the FASB has started receiving unsolicited letters about the interpretation, insisting that the standard-setter push back the implementation date - for example, this one from Tax Executives International. This is a standard that has gestated for over two years, has been exposed for comment, and issued in final form six months before implementation - and now firms decide that it’s too soon to implement it? Even more ironic, the IRS had even offered expedited reviews of issues with FIN 48 importance in order to enable them to meet the implementation deadline.

I’ve written a letter of my own to the FASB, urging them to stand pat on the implementation date. Feel free to send one of your own to FASB chairman Robert Herz, using this link. Tell him that you support their standard as it stands."

Just Added! Key SEC Staffers to Our Exec Comp Rules Web Conference

David Lynn, Chief Counsel of the SEC's Division of Corporation Finance, has just joined the panel of this Thursday's webcast: "The SEC’s December Rule Changes: How They Impact You."

And Paula Dubberly, Associate Director of the SEC's Division of Corporation Finance, has joined the panel for the Thursday, January 18th webcast: "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!." Both Paula and David played key roles in writing the new executive compensation rules and will continue to do so in interpreting them.

Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com, we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers ended on Friday) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.

NYSE Proposes Automatic Suspension of Significantly Delinquent Filers

A few weeks back, the NYSE proposed a rule change to eliminate the NYSE’s discretion to allow a company to continue to be listed on the NYSE if it is over 12 months delinquent in filing an annual report. The NYSe proposed that its revised rules would become effective December 31, 2007. Comments are due by January 18th and the proposal is subject to SEC approval.

Under the NYSE’s proposal, if a company has not filed its annual report within 12 months of the required date, the NYSE will begin suspension and delisting procedures. Under current rules, the NYSE has the discretion to not commence such procedures in specified circumstances (egs. if delisting would result in investor harm or be significantly contrary to the national interest).

Recently, the NYSE has been criticized for using this discretion to allow Fannie Mae to continue to be listed for a long period of time without being current in its reporting. Last month, the NYSE gave Fannie Mae a deadline of the end of 2007 to file its 2005 reports.

Accounting Reform: How the Latest Developments Impact You

We have posted the transcript from our webcast: "Accounting Reform: How the Latest Developments Impact You." Among other topics, the webcast covered FIN 48, which continues to be an issue for lawyers - read more about that in our "Tax Uncertainties" Practice Area.

The New Crop of Compensation Committee Charters

In the "Compensation Committee" Practice Areas on both CompensationStandards.com and TheCorporateCounsel.net, we have posted a number of recently amended compensation committee charters, tweaked by companies to adapt to the SEC's new rules as well as other considerations.

Look at First Disclosures under the SEC's New Executive Compensation Rules

Yesterday, the SEC posted the federal register version of its December amendments (comments are due January 29th for these "interim final" rules). In addition, we posted the January supplement of Mark Borges' latest blogs on executive compensation disclosures, which include several analyses of the SEC's December rulemaking as well as a look at the first disclosures made under the new rules.

Survey Results: Compensation Committee Meetings/Disclosure Committee Meetings

We have wrapped up our latest survey; this one on compensation and disclosure committee meetings - and the results are repeated below (and don't forget to take our latest survey on related party transaction policies):

1. In the wake of the SEC’s new compensation disclosure rules, our compensation committee has the following people attend their meetings:

- General counsel - 57.6%
- Securities law counsel - 33.7%
- Employee benefits law counsel - 8.5%
- Head of Human Resources department - 59.4%
- Other member of Human Resources department - 24.5%
- Corporate secretary or assistant corporate secretary - 50.0%

2. Does someone from your independent auditor attend your disclosure committee meetings:

- No; no one from the independent auditor attends any disclosure committee meetings - 66.3%
- Some; someone from the independent auditor attends some of the disclosure committee meetings (e.g. just selected meetings such as those relating to financial reports or earnings releases) - 18.4%
- All of them; someone from the independent auditor attends all of the disclosure committee meetings - 15.3%

3. If someone from your independent auditor attends some or all of your disclosure committee meetings, the:

- Independent auditor requested the right to attend - 29.0%
- Company requested that someone from the independent auditor attend - 71.0%

4. If someone from your independent auditor attends some or all of your disclosure committee meetings, what is the purpose for attendance:

- To function as an active participant in the deliberations of the disclosure committee - 32.4%
- To serve in an advisory capacity and answer questions if asked - 35.3%
- To monitor and record the activities of the disclosure committee - 20.6%
- Other - 11.8%

Disclosure about Compensation Consultants

As I blogged about a few months back, a group of institutional investors sent letters to major companies seeking to elicit more disclosure about how those companies utilize compensaiton consultants. The disclosure sought exceeds the requirements adopted by the SEC last August.

Specifically, the investors sought disclosure about whether the companies hire compensation consultants that provide services to the company beyond advising on CEO pay and whether the companies have a policy prohibiting such perceived conflicts. So far, 18 of the 25 companies that received the request have responded - and most of them said they have taken steps to ensure the independence of consultants who advise their boards on executive pay. Here are the response letters from the 18 companies - and a January 2nd press release from the investor group.

On pages 49-50 of its proxy statement last year, Pfizer was the first company to provide such disclosure by naming their compensation consultant, discussing what they are engaged for, noting other work done for the company and the dollar amount of the fees, pointing out that it is the compensation committee that has engaged the consultant, and describing the consultant's involvement with compensation committee meetings.

Now, Vineeta Anand of Bloomberg reports in this article that General Electric will provide similar disclosure to Pfizer's in this year's proxy statement. I imagine that many - if not all - of the 18 other companies that responded to the institutional investors will do the same...

January Eminders is Up!

The January issue of our monthly email newsletter is now available.

SEC Releases Two Economic Studies on Mutual Fund Governance

As part of the re-proposal of the SEC's mutual fund governance rulemaking, the SEC's Chief Economist has issued two reports - here and here - that outline the difficulties in evaluating the benefits of a rule requiring 75% of mutual-fund directors to be independent. The 60-day comment period commenced from the release of these reports on December 29th. Here is an article from today's WSJ describing the two reports.

Compensation Standards – The New Quarterly Newsletter for Directors

As we know that executive compensation is foremost on director’s minds these days, we have posted the Winter 2007 issue of our new practical print newsletter for you to read and share with your directors about executive compensation practices - at no charge!

The new newsletter – Compensation Standards – will help keep directors abreast of the latest executive compensation practices and to help them glean practical pointers that can assist them in performing their challenging duties. Try a no-risk trial to Compensation Standards today. You have our permission to forward as many copies of the Winter 2007 issue as you like to directors and CEOs and others that might benefit from it.

The SEC's December Executive Compensation Rule Changes: Help is on the Way!

To help all those trying to sort out the SEC's surprise December amendments to its executive compensation rules, we just announced a new Part 1 of our January Web Conference to address how you should implement the amendments in a webcast to be held next Thursday, January 11th: "The SEC’s December Rule Changes: How They Impact You." [And if you can't wait til next Thursday for guidance, Mark Borges already has blogged four different times providing analysis on the amendments in his "Proxy Disclosure" Blog.]

And then, following up where our September two-day executive compensation disclosure conference left off, catch the rest of our critical 2-Part Web Conference on Thursday, January 18th - "The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!"- which will provide you with all the latest guidance about how to overhaul your upcoming disclosures in response to the SEC's most recent positions on the new executive compensation rules as well as the latest thinking on how to face the most difficult issues, such as how to deal with airplane and other perks and what to include in the CD&A.

Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com, we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers ends this Friday) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.

Floyd Norris: A Little More on the SEC’s Forgetful Chairman

The NY Times columnist, Floyd Norris, has really been going after the SEC for adopting changes to its executive compensation rules so soon before the proxy season and without asking for public comment. In addition to a couple of scathing columns, Floyd has posted additional thoughts on his blog, including this one (he has others, including this one):

"My column today points out that the staff of the Securities and Exchange Commission knew — and told the public — things that Christopher Cox, the commission chairman, now says were unknown to him. It also points out that those things were discussed in January by him at the S.E.C. public meeting when the rules were proposed. The column has links to documents, but may make readers work too hard to find them. The explanatory documents, which the S.E.C. put out in August, a month after the commission voted, can be reached here. The relevant part is on pages 56 to 58.

The January conversation can be linked to here. A reader then has to go to the Jan. 17 meeting, and watch a video. The important part starts at about 24 minutes and 50 seconds into the video, when Mr. Cox engages in a conversation with Alan Beller, who was then the director of the commission’s division of corporation finance.

'If I might turn next to stock options,' Mr. Cox stated, 'the proposal today would require the disclosure of the fair value of stock option awards as of the date that the option is granted to an executive officer. That distinguishes it in some respects from the reporting otherwise for financial reporting purposes.' This point is the one that Mr. Cox now says he did not know was in the rule when the commission approved it in July. The commision changed the rule just before Christmas.

Mr. Cox told me tonight that he had remembered the January conversation, and that I misunderstood him if I thought he had not. But he repeated that he wrongly believed that section had been changed by July, and blamed the error on miscommunication amid staff changes at the commission. In January, Mr. Beller said the S.E.C. had tried timing conformity in the past, only to reject it because it was viewed as less informative and 'excessively confusing.' That is not a bad description of the rule the commission came up with in December."

Backdated Options: Consent a Tender Offer? Need to Consider the SEC Staff

As we recently wrote about in the November-December issue of The Corporate Executive, increasing the strike price - or even fixing the exercise date - ordinarily cannot be effected without the consent/agreement of option holders (except, possibly, where there is a strong plan provision allowing the board/administering committee to unilaterally amend outstanding options), even to increase the exercise price, as deemed necessary or advisable to comply with applicable (e.g., tax) laws.

In an apparent effort to offset the foregone compensation, some companies are offering additional new options, restricted stock, or even cash bonuses in exchange for the consent. Under these circumstances, companies, in effect, are offering to buy existing stock options in exchange for materially amended options, etc. and/or cash. The Staff generally takes the position that option holders are presented with an economic investment decision, and not “merely a compensation decision,” if they are asked to consent to an increase in the exercise price of options - or even just adjust the exercise date.

The company’s presentation of the investment decision to the option holder implicates the SEC’s issuer tender offer Rule 13e-4 and requires the company to file a Schedule TO in advance of the offer being presented to the option holders. (Companies contemplating financial restatement may face another problem as tender offers for employee stock options filed on Schedule TO generally must be accompanied by current financial statements.)

It appears some companies might liberally interpret Corp Fin’s limited class 2001 exemptive order on repriced options as authorizing them to “fix” backdated options for (1) previous employees and (2) defer any cash consideration and/or substitute non-cash consideration into a subsequent year in order to avoid the ill tax consequences presented by §409A. These companies should think again because the exemptive order doesn’t say a thing about extending the offer to former employees or relief from “prompt payment.” Nor should these companies necessarily rely on the Clorox's issuer tender offer that was recently conducted.

Availability of the SEC’s 2001 Exemptive Order

Back in 2001, the SEC adopted a limited class exemptive order to address issues implicated by exchange offers for repriced options. Reliance on the SEC’s exemptive order was conditioned on, among other things:

- the issuer being eligible to use Form S-8;
- the options subject to the exchange offer being issued under an employee benefit plan as defined in Rule 405 under the Securities Act; and
- any substitute securities offered in exchange for existing options being issued under such an employee benefit plan.

The availability of Form S-8 when issuing an option to a former employee of the issuer is based on that employee receiving the option while employed by the issuer and then exercising the option on S-8 after leaving. If the Form S-8 is not available (e.g. because the person is no longer an employee when a replacement option is issued), issuers will need to rely on another exception from the ’33 Act or register the issuance of the new options.

An issue also exists in construing the Rule 405 definition of employee benefit plan, which “means any written purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan or written compensation contract solely for employees, directors, general partners, trustees (where the registrant is a business trust), officers, or consultants […]” If former employees are being issued new options but do not fall into one of the other enumerated categories, new options issued to former employees will not be options issued under an employee benefit plan. Note that when Microsoft employees transferred their options to JP Morgan in late 2003, Microsoft amended its plan to remove the transferred options so that Microsoft would not rupture the 405 definition based on the “solely” requirement.

Prompt Payment Issues

When the exemptive order was issued in 2001, the scope of the order’s relief was limited to Rule 13e-4(f)(8)(i) and (ii), the all-holders and best-price provisions. The repricing offers that gave rise to this exemptive order, however, were generally structured to award substitute options on a deferred 6-month and one day payment schedule if certain conditions were met. This payment schedule was driven by the accounting policies in existence at that time. This payment schedule was also technically in conflict with the prompt payment rules. Based on the accounting requirements, however, the Corp Fin Staff generally did not raise objections to the payment schedule.

§Section 409A appears to require that any cash amounts paid in connection with an option repricing be paid in the year after the option repricing (i.e. offers completed in 2007 would require payment in 2008). If true, this payment schedule could contravene the SEC’s prompt payment rules. In the absence of any Staff relief, therefore, issuer tender offers conducted in accordance with IRS §409A are required to comply with the SEC’s prompt payment rules. Although issuers may have legitimate compensation concerns as to why they may wish to defer payment of tender offer consideration for an extended period, issuers should first consult with the Staff before tender offer payments are deferred.

Today is a National Holiday: SEC is Closed

Remember that today's national day of mourning for former President Gerald Ford means that the SEC is closed and that any filings otherwise required to be made today will be due instead on January 3rd - as the SEC will treat today just like yesterday (ie. New Year's Day) for 8-K purposes (ie. not a business day). EDGAR is closed too. And remember this old blog regarding counting days for tender offer purposes...

The "League Tables": Battle for the Top

I always love this stuff. On Saturday, the WSJ ran this article about the battle to obtain top ranking for Thomson Financial's all-important league tables regarding deal advisors (and here's an article from today's WSJ about the top deals of '06):

"Citigroup lost a bid Tuesday to win credit for arranging a $30 billion deal in Norway that might have vaulted it to the top of one closely watched list of busiest advisers on European merger-and-acquisition deals. After days of wrangling, Thomson Financial declined to give the banking titan "league table" credit for writing a fairness opinion - a relatively minor role in the merger process - that endorsed Norsk Hydro's planned $30 billion sale of energy assets to Statoil.

Citigroup was appointed by Norsk Hydro on Dec. 18, the same day the deal was announced. Thomson, whose league tables are cited by investment banks to validate their deal prowess, requires banks to prove they were hired before deals are announced to be granted credit. A Citigroup spokeswoman declined to comment.

Dealogic, a rival to Thomson Financial, on Thursday gave Citigroup credit for the Norsk Hydro assignment. It and Thomson rank the banking titan second behind Goldman Sachs Group Inc. as the top global adviser on mergers.

Citigroup lobbied hard for the Norsk Hydro credit, people close to the company said, because it would have given it dominance in the European league tables. According to Dealogic, the deal vaults Citigroup one notch up in the European rankings to third place. But in Thomson's rankings, the Norwegian deal would have let Citigroup leapfrog Morgan Stanley to first place as adviser on European deals. Morgan Stanley is credited in the Thomson table with $482 billion of deals, a hair's breadth ahead of Citigroup's $473 billion."