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- by Broc Romanek
In the recent "Directors & Boards" e-briefing, Hoffer Kaback of Gloucester Capital Corp. included this humorous survey on governance. Take a gander and give it a try. It's a variation of what the late William Safire, a speechwriter for President Nixon and Vice President Agnew, wrote in his NY Times columns consisting of multiple-choice questions about policy, politics, prognostication and personalities.
- by Broc Romanek
To be honest, I have not been following the Rule 163 proposal announced last December for which the comment deadline just ended. But a member did forward the comment letter from the New York City Bar, because he noticed that they apparently have some concerns about certain elements of the proposal. There are only about a dozen comment letters submitted on this one - and here are a bunch of law firm memos on the proposal.
- by Matt Adler, DLA Piper
As noted in our recent memo, the Multijurisdictional Disclosure System, adopted in July 1991 by the SEC and Canadian securities regulatory authorities, provides cost-effective and expedient access to the US capital markets. The MJDS allows eligible Canadian issuers to register public offerings and meet US continuous reporting obligations using Canadian disclosure documents that are effective immediately, without substantive review by the SEC.
The second half of 2009 saw a sharp increase in US IPO activity, with 52 IPOs closing in the third and fourth quarters, compared to only 14 during the same period of 2008. Many analysts anticipate that this momentum will continue and accelerate through 2010. As US capital markets rebound from recent dislocation, Canadian issuers are increasingly turning to the US capital markets for both capital-raising and strategic reasons.
A US public offering provides Canadian companies with access to a broader and deeper range of institutional and retail investors than is available in the Canadian capital markets. Additionally, listing on a US stock exchange such as the NYSE or Nasdaq enhances the likelihood of coverage by the large and sophisticated community of research analysts in the US, which can result in increased liquidity and higher valuations. Finally, having publicly traded US securities can serve as valuable currency for merger and acquisition transactions and can facilitate equity compensation plans for US-based employees.
- by Broc Romanek
Recently, Dave Lynn answered this query in our "Q&A Forum" about how to handle analysts that are too optimistic about your company:
Q: After company's earnings call and earnings release where company provides guidance, company observes that analysts' forecasts are materially more optimistic. Do you agree that it would be very difficult for the company to reach out to analysts to "walk them down" even if the information that the company would provide would be fully consistent and not new from what the company previously disclosed? In these circumstances, have you seen companies issue a press release confirming the recently issued guidance and perhaps providing some additional color underlying the guidance or would you advise the company to do nothing?
A: I just gave a Regulation FD talk the other day, and one of the points that I made is that at the root of a number of the handful of Regulation FD cases that the SEC has brought over the years has been the good-hearted notion of trying to "correct" some misguided notion of the Street, or in other words, walking the analysts down (or up as the case may be). I agree that it is difficult to do this in a way that doesn't risk a potential Regulation FD violation.
The first thing I would do when presented with this situation is to conduct an internal inqury to see if there is some specific reason that the analysts' outlook is so rosy. Was it something that someone from the company said in a call, in one-on-one meetings or even an unauthorized communication? If someting turns up on this front, then you need look no further than the SEC's recent action In the matter of Christopher Black on guidance on how to effectively deal with the situation from the company's perspective.
Assuming nothing turns up in this inquiry, then I would say that there is nothing that would prevent the company from reaffirming guidance and providing additional color in a Regulation FD and antifraud compliant manner. There is no guarantee that this approach will convince the analysts to change their views, however, and the market may perceive this out of cycle guidance (and additional color) as potentially negative news if it is happening shortly after the earnings release/call. The company might also consider providing some additional information in the upcoming 10-Q/K to try to explain better the outlook and trends that are impacting results, which might not look as out-of-the-ordinary as some random reaffirmation of guidance.
- by Professor J. Robert Brown
Here is a recent entry from my "Race to the Bottom" blog:
In the debate on corporate governance, its nice to know the facts. Thus, when someone claims that the preferred system of regulation is one that involves private ordering, its nice to dispel the approach by noting that in practice it doesn't seem to work.Davis Polk has produced some intriguing empirical work with respect to the governance practice of companies that undertake IPOs. The data is for companies with controlling shareholders and without. The study of all companies (including the controlling ones) looked at 50 IPOs in 2007 and 2008, with the amounts ranging from $136.5 million to $17.86 billion.
These companies, like most large public companies, have staggered boards and combine the positions of CEO/Chairman. Here are some of the stats:
- 28 (56%) companies on NYSE; 21 (42%) on NASDAQ; and one (2%) on AMEX
- 32 companies (64%) had classified boards
- 20 companies (40%) had a separate chairman and CEO (Of those 20 companies with a separate chairman, 4 (20%) had an independent chairman)
- 44 (88%) required a plurality standard for board elections, with only 6 (12%) requiring a majority standard for board elections
- 3 (6%) companies had shareholders rights plans. Of the remaining 47 (94%) of the companies, - 43 (91%) had the authority to issue blank check preferred stockAdd in that a high percentage (80% in one study) of most IPOs are companies incorporated (or, more acurately, reincorporated) in Delaware.
- by Russ Ryan, King & Spalding
Recently, Judge Middlebrooks of the U.S. District Court for the Southern District of Florida - in SEC v. Jamie L. Solow - found someone in contempt of court for failing to pay disgorgement and prejudgment interest of over $3.4 million ordered to be paid in a securities fraud case brought against him by the SEC. The sanction for this contempt is that he must report to the U.S. Marshal's Office to be taken into custody and incarcerated until he complies with the court's order to pay. The NY Times' Floyd Norris covered this action in his column last week.
It is somewhat rare for the SEC to seek a contempt citation against a defendant for failure to pay a disgorgement judgment, but not unprecedented. Most SEC-related contempt proceedings involve failure to obey an injunction or a TRO. Usually when someone doesn't pay disgorgement it's because they simply don't have the means to do so, and the SEC generally tries to collect those judgments through the IRS process rather than seeking a contempt citation.
Here, the SEC apparently was convinced that the defendants had the money - but dissipated and transferred it. So I doubt it signals a new trend toward throwing people in jail who genuinely don't have the money to pay their disgorgement obligations. If it is, that would be very significant and chilling.
- by Tom Bayliss, Abrams & Bayliss LLP
Recently, Chancellor William B. Chandler III issued the a letter opinion in Xu Hong Bin v. Heckmann Corporation, No. 4802-CC. In the opinion, the Court addresses a common situation that arises when a director's advancement and indemnification rights flow from multiple sources. In this instance, the Court found that a provision in Heckmann's bylaws entitling the corporation to impose conditions on a director's right to advancement limited a provision providing for mandatory advancement in Heckmann's certificate of incorporation. This holding may come as a surprise to practitioners and clients, both because it can be read to conflict with the commonly held view that certificate provisions necessarily trump inconsistent bylaw provisions, and because it implicitly rejects the view that advancement and indemnification provisions in certificates should be read to provide rights that are entirely separate and independent of rights provided by bylaw or by contract.
In his suit seeking advancement and indemnification, Xu sought summary judgment on his request for advancement based on Heckmann's certificate of incorporation, which provided for mandatory indemnification "to the fullest extent authorized or permitted by law" and advancement of "expenses incurred in defending or otherwise participating in any [covered] proceeding in advance of its final disposition."
Heckmann disputed Xu's advancement claim based on Heckmann's bylaws which also included mandatory advancement language but expressly empowered the corporation to impose "such terms and conditions, if any, as the Corporation deems appropriate." Based on the bylaws, Heckmann refused to advance legal fees to Xu unless, among other things, he provided (i) a bonded and collateralized undertaking for the entire amount of his reimbursement demand and (ii) provided Heckmann with financial statements of his net worth and a list of assets indicating that he had the requisite resources to protect Heckmann's legitimate financial interests.
Xu argued that Heckmann's conditions were impermissible because the bylaw authorizing them conflicted with Heckmann's certificate of incorporation and was therefore invalid. Xu further argued that a Delaware corporation may only condition a right to advancement provided in a certificate of incorporation by imposing that condition in the certificate itself.
Chancellor Chandler rejected both of Xu's arguments and held that Heckmann could impose "reasonable terms and conditions on Xu's right to advancement." First, the Court noted that Heckmann's certificate and bylaws were executed at the same time and that "[u]nder Delaware law, every effort should be made to reconcile provisions of simultaneously enacted founding documents." The Court reasoned that "the drafters of the Heckmann articles and bylaws did not intend for these two documents to conflict."
The Court further noted that "there is nothing inherently contradictory in recognizing that directors have advancement rights while at the same time recognizing the corporation's ability to set reasonable terms and conditions for the payment of expenses pursuant to those rights." Chancellor Chandler acknowledged that "the articles would have been better drafted if they included some language ... that pointed the reader to the bylaws for further information," but he declined to "adopt a rule that requires a corporation, when simultaneously executing its articles and bylaws, to cross-reference every provision in the articles that may be further explained or qualified in the bylaws or risk a holding that the articles and bylaws conflict at the outset." According to the Court, "[w]here related provisions in simultaneously enacted articles and bylaws can be reconciled, there is no need to adopt a stringent rule that renders bylaw provisions void because they qualify the basic rights provided in the articles."
Second, the Court noted that "both the articles and the bylaws were in effect when Xu began his directorship. Thus, Xu had every opportunity to read the articles and bylaws and become fully informed regarding the scope of his indemnification and advancement rights before agreeing to serve as a director." Chancellor Chandler found that he "must proceed on the assumption that directors of Delaware corporations read the articles and bylaws before joining the board, particularly those provisions that relate to indemnification and advancement rights." Notably, the Court expressly declined to hold that the conditions Heckmann had imposed were "reasonable." Accordingly, the parties' dispute over that issue remains live.
There are several valuable take-aways for practitioners who advise directors, officers and entities regarding advancement and indemnification rights. First, practitioners need to be cautious about relying upon the age-old hierarchy of corporate instruments, especially when the documents at issue are drafted together. At least in this instance, the Court of Chancery rejected a formalistic approach, went out of its way to harmonize potentially conflicting provisions and drew inferences about the likely intent of the drafters based upon the simultaneous adoption of the certificate and the bylaws.
Second, the implicit suggestion that Heckmann's bylaws merely imposed a permissible procedural burden upon a substantive right granted by Heckmann's certificate raises an interesting question about the dividing line between substantive conditions on rights provided by certificate that may not be limited by bylaw, and procedural/ministerial conditions on rights provided by certificate that may be limited by bylaw.
Third, the widespread practice of granting indemnification and advancement in multiple corporate documents may in some instances be counterproductive. Directors and officers may be better protected if their advancement and indemnification rights flow from a single, carefully crafted source. The decision in Xu Hong Bin confirms that broad rights to advancement and indemnification in a certificate may be limited by bylaws and contracts, even though those instruments sit lower in the corporate hierarchy and could be read to provide separate indemnification and advancement rights. At the same time, broad rights to advancement and indemnification in bylaws and contracts may be limited by advancement and indemnification provisions in certificates if those certificates can be read to limit a corporation's authority to grant broader rights.
These two interpretative threads could potentially subject directors and officers to a "lowest common denominator rule" whenever they are entitled to invoke multiple sources of advancement and indemnification rights of varying scope. This result appears to be at odds with Section 145(f) of the DGCL, which expressly provides that the indemnification and advancement granted pursuant to it "shall not be deemed exclusive of any other rights" to indemnification or advancement under any bylaw, agreement or otherwise.
The Xu Hong Bin opinion indicates that drafters should be careful to harmonize advancement and indemnification rights that flow from multiple sources. Drafters should also consider inserting language clarifying whether they intend to create advancement and indemnification provisions that (i) limit each other or (ii) create entirely independent rights. Practitioners advising directors about the intent and effect of proposed certificate and bylaw amendments should also address this issue.
The Xu Hong Bin opinion is at least the second instance when the Court of Chancery has rejected the contention that advancement and indemnification rights in separate instruments should be read to constitute entirely independent sources of advancement or indemnification. See Levy v. Hayes Lemmerz Int'l, Inc., C.A. No. 1395-VCL, 2006 WL 985361, at *7 n. 24 (Del. Ch. Apr. 5, 2006) (rejecting contention that the bylaws and indemnification agreements at issue provided two entirely independent sources of indemnification).
- by Broc Romanek
On Friday, the SEC posted the appeals brief it has filed in SEC v. Cuban. As I've blogged before, this is the appeal challenging the grant of a motion to dismiss the SEC's complaint against the famous Dallas Mavericks owner Mark Cuban.
In the brief, the SEC argues that agreeing to maintain material, nonpublic information in confidence and then making undisclosed securities trades on the information is a "deceptive device or contrivance" within the meaning of Section 10(b). The brief does a great job of summarizing and explaining the misappropriation theory of insider trading liability.
- by Broc Romanek
Most corporate lawyers do a bit of traveling, so I thought this recent "The Navigator" column from the Washington Post will be welcome as it notes that the Department of Transportation is willing to help those with complaints against the airlines:
Attention, air travelers: The government has your back. The Transportation Department's airline cops have written big tickets in recent months, including a $375,000 fine against Spirit Airlines for, among other things, failing to comply with denied-boarding compensation rules, and a $600,000 fine against an online travel company called Ultimate Fares, for advertising violations. "Aviation consumer protection is one of my top priorities, and we are taking a fresh look at the industry from that perspective," Transportation Secretary Ray LaHood told me recently. Even air travelers are impressed with the "new" Department of Transportation, which, if you listen to the buzz, appears to be protecting consumers for the first time in years.Count passengers like G. Logan Jordan, a professor at Purdue University's business school, among the converted. Northwest Airlines wanted to charge him for his checked luggage on a recent flight to Florida, even though he'd booked his ticket before the airline added a baggage fee. So he contacted DOT for help. I'll get to the rest of Jordan's story in just a minute. But first, let me ask: Does the government really have your back? Or is this latest show of support for air travelers just a flight of fantasy?
I'm not unbiased on this issue. I'd like the government to take a more active role in helping travelers in general and air travelers in particular. Enforcing the existing consumer protection laws would not only make my job as an ombudsman easier, it would also improve the quality of your next flight, car rental, hotel stay or cruise immeasurably. In other words, I want to believe.
Jordan now does. After Northwest repeatedly turned down his request to refund the luggage fees, he contacted DOT's Aviation Consumer Protection Division. An agency employee picked up his case, asking Northwest whether it could review his request. "Suddenly my logic was crystal clear to Northwest," Jordan said. "Within a day, I had a refund."
In fairness, my friends at DOT furnished me with the good professor's name as an example of someone whom the agency helped. Not every ending is happy. Consider the case of Jan Hoeter, who missed a connection while flying from Pittsburgh to Hamburg, primarily because of a mechanical problem. He waited an extra five hours without any compensation from the carrier. The agency's response: Airlines do not guarantee their schedules. "DOT does not regulate this issue, and there is no law that requires airlines to provide you compensation unless it is an involuntary denied boarding," a representative wrote to Hoeter.
How do you persuade the government to advocate for you? You can call 202-366-2220, contact DOT online or write to the Aviation Consumer Protection Division, C-75, U.S. Department of Transportation, 1200 New Jersey Ave. SE, Washington, D.C. 20590. The division tries to respond "within one to three days," said a spokesman, and brief, factual queries tend to be most effective. The question of whether your call for help will do any good can't be answered with anecdotes. So how about a few numbers? The Aviation Enforcement and Proceedings office had 40 staffers in 2009, more than twice the number it had a decade ago.
In terms of consent orders -- the rough equivalent of citations issued to lawbreaking travel companies -- the numbers haven't notably gone up or down. A total of 256 orders have been issued since 2000, and except for that year, in which just nine tickets were written, they've fluctuated from a low of 20 (in 2001 and 2008) to a high of 38 in 2004. So far this year, the office has issued 30 consent orders.
Perhaps the most telling number -- and it's one that undermines the agency's argument that it has turned over a new leaf -- is the amount in fines assessed by the Aviation Consumer Protection Division. The grand total, from 2000 to the present, is only $28 million. Bear in mind that on most consent orders, half the fine is forgiven if there are no future violations. The fines are up and down year by year in a far more noticeable way, from a paltry $265,000 in 2000 -- which, for those of you keeping track, and who think only Democrats care about consumer advocacy issues, was the last full year of Bill Clinton's presidency -- to a high of $8.1 million in 2003. Do I need to remind you who was in office that year? So far this year, the department has assessed $2.5 million in fines. That's a respectable number, but hardly a record. The division fined airlines and other travel companies significantly more in 2004 and 2005 ($5.6 million and $3.9 million). To DOT's credit, this year's fines are the highest since 2005.
All this is a roundabout way of saying that although the Transportation Department can't quite say that it's back to fighting the good fight, it seems to be well on its way. But the agency needs to put some big numbers on the board in 2010 if it wants travelers to believe it. For what it's worth, I do.
- by Broc Romanek
If you work at - or have a client that is - a smaller company, you will want to check out these recent slides entitled "Common Financial Reporting Issues Facing Smaller Issuers" that were used by Corp Fin Chief Accountant Wayne Carnall during the PCAOB's "Smaller Business Forums."