Monthly Archives: April 2004

April 16, 2004

Hear FASB Chair Bob Herz

Don’t forget Monday’s NASPP webcast – “The FASB’s Expensing Exposure Draft-What It Says and How to Implement It” – during which Bob Herz, Chair of the FASB; Paul Munter in KPMG’s National Office; and Ted Buyniski of Mellon Human Resources & Investor Solutions will discuss the nuances of the exposure draft and explore the various alternatives available to implement the proposed new standards.

An audio archive and transcript will be posted following the live webcast. The non-member fee for this special webcast is $495. If you wish to access this valuable program without paying this fee, you may simply take advantage of a no-risk trial.

SEC Action over Best Price Rule Deemed Arbitrary and Capricious

On April 6th, the US Court of Appeals for the DC District issued an opinion finding the SEC’s “cease-and-desist” order against WHX Corporation to be arbitrary and capricious. Some of you may recall that in March 1997, WHX launched a hostile “two-step” tender offer for Dynamics Corporation of America. WHX’s first-step tender offer for 19.9% – just below DCA’s pill threshold – was initially structured to include a “record holder” condition requiring DCA shareholders to be a holder of record on the record date for DCA’s upcoming annual meeting in order to be eligible to tender in the offer.

WHX’s goal was to acquire as many shares as possible with a right to vote at the annual meeting without triggering DCA’s poison pill. At the time, WHX’s lawyer contacted the SEC’s Office of Mergers & Acquisitions on a pre-commencement basis seeking guidance as to whether the proposed record date condition would violate the All-Holders, Best-Price Rule (i.e. Rule 14d-10). Despite the informal advice of a staffer in OM&A that such a condition would violate Rule 14d-10, WHX proceeded to launch its tender offer with the record holder condition intact. After a threat of an SEC enforcement action, WHX amended its offer to eliminate the record holder condition.

During the pendency of the offer, however, the SEC brought action against WHX for alleged violations of Rule 14d-10. An administrative law judge upon hearing the case ruled in WHX’s favor. Ultimately, WHX’s offer was unsuccessful because DCA was acquired by a white knight.

Nevertheless, a year later the SEC proceeded to issue a “cease-and-desist” order against WHX, prohibiting the company from committing or causing future violations of the rule. Here is a copy of the opinion finding the SEC’s action “arbitrary and capricious.” Thanks to Jim Moloney of Gibson Dunn for this fine recap and analysis!

April 15, 2004

Our Analysis of Common Non-Gaap

In our “Regulation G/Non-Gaap Measures Portal,” we have added a new “Analysis of Common Non-Gaap Measures.” Among other matters, this analysis covers 13 common non-gaap measures, complete with links to sample disclosures. These common measures include:

– Earnings Before Interest and Taxes (“EBIT”)
– Earnings Before Interest, Depreciation and Amortization (“EBITDA”)
– Earnings Before Interest, Taxes, Depreciation, Amortization and Rent (“EBITDAR”)
– Economic Value Added (“EVA”)
– Free Cash Flow (“FCF”)
– Funds from Operations (“FFO”)
– Net Asset Value (“NAV”)
– Net Operating Income (“NOI”)
– Net Operating Profit After Tax (“NOPAT”)
– Operating Cash Flow (“OCF”)
– Operating Earnings
– Operating Profit
– Standard & Poor’s Core Earnings

ABA Spring Meeting Notes on M&A

At the ABA Spring Meeting in Seattle a week ago, new Office of Mergers & Acquisitions Chief Brian Breheny made these observations:

– SEC considering amendments to “best price rule” – Rule 14d-10(a)(2) – to remedy differing approaches by courts
– Staff considering expanding application of position re: “lock ups” in merger transactions to other situations, including restructurings
– on October 27, 2003, the SEC settled enforcement proceeding for violation of “going private” rules in SEC v. Wilkerson
– On April 1, the Second Circuit overturned a district court in this order and issued an injunction against Highland Capital in connection with MONY/AXA merger – sending photocopies of management’s proxy card to shareholders does constitute the furnishing of a “form of revocation” and is not an exempt solicitation

April 14, 2004

US Sentencing Commission Votes to

Yesterday, the US Sentencing Commission issued a press release about last week’s meeting during which the Commission voted unanimously to amend the existing organizational guidelines to make more stringent the guidelines’ criteria for effective compliance and ethics programs. The new amendments to the sentencing guidelines will be submitted to Congress by May 1st and will take effect November 1, 2004 – unless Congress disapproves them during a six-month review period.

In our “Sentencing Guidelines” Practice Area, there is a recent 24-page memo from O’Melveny & Myers about the guidelines – and more to come as this develops.

Retail Investors Communicating Online about their Voting Decisions

The ability for investors to communicate online easily about their voting decisions is an interesting concept that is being borne to fruition as told in my interview with Brian Heil and Mark Frigon of

Remember My Warning about Online Forms

A few months back, I blogged a warning about using online forms as many are outdated. Along those lines, Richard Rafferty of Haynes & Boone points out that the Schedule 14A on the SEC’s website – which was updated in March – doesn’t reflect the changes to Schedule 14A made pursuant to the SEC’s November release on “Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors.”

SEC Adopts Foreign Banking Exemption from 402 and Proposes No S-8s for Shell Companies

At an open Commission meeting yesterday, the SEC voted to adopt a rule that would exempt foreign banks from the insider lending prohibition of Section 13(k) of the ’34 Act – as added by Section 402 of Sarbanes-Oxley. The SEC also proposed rules that would prohibit shell companies from using S-8s and would require these companies to file a 8-K when they ceased being a shell that would include all the requisite information for registering a class of securities. The SEC wants to stop the practice of reverse mergers of private operating companies into shell companies.

April 13, 2004

Did I Speak Too Soon…SEC

It’s a coincidence I’m sure, but after I blogged yesterday about waiting for the SEC to notice the PCAOB’s rulemaking regarding attestations and internal controls – the SEC noticed it. There is a 21-day comment period.

The compliance date for accelerated filers to comply with the SEC’s requirements regarding management’s internal control report is the first fiscal year ending on – or after – November 15, 2004. The new attestation standard will apply to the annual audit for that fiscal year. Other dates apply for non-accelerated filers and foreign private issuers.

Company Sues Shareholder Proponent for Defamation

Back in January, as reported recently by the Atlanta Journal-Constitution, Cintas Corp. filed a defamation lawsuit against against Timothy Smith, SVP of the investment firm Walden Asset Management. Cintas alleges he made defamatory remarks at its October annual meeting.

According to the suit, Smith linked the company to a “sweatshop” factory in Haiti. He was urging passage of a shareholder resolution calling on Cintas to assess the effectiveness of its vendor code of conduct and the compliance of its factories and suppliers. Apparently, Smith declined to comment on the case for the Journal-Constitution, but Amy Domini of Domini Social Investments, which sponsored the resolution with Walden, said that Cintas had ignored numerous attempts to discuss this issue before the meeting. Cintas is asking for damages of at least $75,000, plus unspecified punitive damages – and also wants Walden barred from repeating his sweatshop comparisons.

I waited to blog about this lawsuit because it just doesn’t seem like it could really happen in this era of improved shareholder relations…I’m not sure that Cintas was thinking about the bigger picture of IR as this likely will draw negative press – and the ire of other investors – for some time to come.

Indemnification of Buyers in Acquisitions

The April installment of “Carl’s Corner” is up – regarding indemnification in acquisitions. As usual, Carl provides interesting commentary and annotated provisions. This is a topic that also has been addressed by the “Deal Guys Blog.”

April 12, 2004

SEC General Counsel Speaks Out

At the end of the ABA’s Business Law Section meeting in Seattle last Saturday, Giovanni Prezioso, the SEC’s General Counsel, gave a speech that should serve as interesting reading.

Among other topics, Giovanni noted that the SEC still is considering adoption of its outstanding “noisy withdrawal” proposal and that he believed that the SEC’s existing rule pre-empts any state laws that are contradictory. Notably, he warned that the SEC is closing watching how lawyers apply the new standards and monitoring how the state bars address the issue of lawyers’ obligations to clients.

SEC “Notices” PCAOB’s Auditing Standard No. 1

The SEC finally has “noticed” the PCAOB’s Auditing Standard No. 1, which deals with what it means to say your audit complied with the PCAOB’s auditing standards versus GAAS. As you might recall, the PCAOB is required to have all of its rules approved by the SEC before they become effective. It is my guess that odds are low to nil that the SEC won’t approve any of the PCAOB’s rules, but the SEC has been slow to move the PCAOB’s rules through this process so far (e.g. we’re still waiting for the SEC to notice the PCAOB’s Standard No. 2 regarding internal controls).

Imbedded in this notice appears to be a posturing – and important – reminder that “we’re bigger than they are” (ie. that your financials must comply with the PCAOB rules but you’d better never forget the preeminent place of the SEC). The SEC also uses the occasion of this notice to announce that it will be coming out with an interpretive release of its own.

Sample Annual Meeting Scripts

Due to popular demand, we have created a new “Annual Stockholders’ Meetings” Practice Area, complete with 2 sample annual meeting scripts in Word files.

April 8, 2004

Auditor Engagement and Request Letters

At the ABA Spring Meeting, one hot topic was the growing struggle between counsel and auditors over audit request letters. Recent issues of The Corporate Counsel have analyzed the latest issues arising in this area – and upcoming issues will continue to address these issues as they evolve.

Along these lines, I have received a lot of emails from members rife with horror stories related to auditor request letters – as well as some success stories in pushing back. Please share your stories with me and then I will try to post a comprehensive (and anonymous) analysis of what appears to be happening in the industry.

Here is an example of a recent horror anecdote I received from a member: “Our company just received an audit request letter with the following language: Please confirm that all information brought to your attention indicating the occurrence of a possible illegal act committed by the Company, or any of its agents or employees, has been reported to [the Auditing Firm] and to the Company’s Audit Committee.”

By the way, the new edition of the “AICPA Audit and Accounting Manual” suggests the following key ingredients for engagement letters:

– Identification of the client
– Records retention policy
– Description of the services to be provided
– Responses to subpoenas and outside inquiries
– Staffing of the engagement
– Explanation of how fees and costs will be billed
– Description of client responsibilities
– Payment terms
– Designation of client contacts
– Consequences of non-payment
– Timing of the work
– Alternative dispute resolution
– Consequences of extending completion deadlines
– Withdrawal and termination
– Requests for additional services
– Client signature
– Client communications required by the AICPA
– Provisions to resolve potential ethical conflicts
– Any matter or terms unique to an engagement that are agreed upon in advance of rendering services

April 7, 2004

Required Disclosure of Issuer Repurchases

March 15 came and went without much fanfare, but it signaled the start of a new disclosure obligation for public companies. Beginning with their first quarterly or annual filing for a fiscal period ending on or after 3/15/04, they must provide a tabular disclosure regarding repurchases of their own securities. This disclosure is set out in Item 703 of S-K and is required by new Items 2(e) of Form 10-Q and 5(c) of Form 10-K.

A number of companies voluntarily complied with this disclosure requirement in their recent 10-Ks. With the 10-Q filing deadline approaching quickly for calendar year companies (for an accelerated filer with a quarter ended March 31, the 10-Q must be filed by May 10 this year), we have posted in our “Disclosure Analysis and Samples” practice area a new “Issuer Repurchases” page with links to some of those early examples.

The Demise of Physical Stock Certificates and T+3?

Last month, the SEC issued a concept release asking for comment regarding various topics relating to securities transaction settlements. In the release, the Commission is seeking comment on shortening the settlement cycle for securities trades from the (in)famous T+3 (so proceeds and securities would have to move more quickly after the trade date, which they often already do in our wired and wireless world) and on the elimination of physical stock certificates, bringing us closer to a paperless world.

The elimination of physical stock certificates has been a long-standing initiative of the Securities Industry Association and could serve to save companies money and administrative headaches if proposed and eventually adopted. Comment letters are due to the SEC by June 16th.

And Now, It’s that Much Easier to Submit Comments to the SEC

Recently, the SEC upgraded its website to allow anyone to submit comments on a proposal by filling out an “EdgarFeed” form. If you go to a proposing release on the SEC’s website and click the link where it says “Click to Submit Comments,” an online form pops up where you can input the relevant contact info as well as your comments – and then just hit “Submit.”

Although submitting comments before was fairly easy, this new form should facilitate the process even more (e.g. the commenter no longer needs to remember to include the file number as it’s handled automatically). It looks like die-hard commenters can use the new form to submit comments on any rulemaking that was proposed in 2004, not just those that still have open comment periods. Perhaps the shareholder access proposal would have had 20,000 comment letters instead of 13,000 with this form…

April 6, 2004

SEC Brings Another Certification Enforcement

A week ago Thursday, the SEC’s Enforcement Division filed another lawsuit based on false CEO/CFO certifications as well as other fraud offenses. This complaint is entitled SEC v. Cedric Kushner Promotions.

According to Ken Winer of Foley & Lardner, based on the allegations in the complaint, the conduct at issue was egregious. so the case probably would have been brought even without the Section 302 certification.

Nevertheless, Ken points out that the complaint is interesting in one respect. The SEC charged that the CEO “signed [the annual report] and the Sarbanes-Oxley certification without having read either document and without having taken any steps to determine their accuracy or truthfulness, relying instead on nothing more than Angel’s representation to that effect.” According to the complaint, Angel was a 27-year old executive vice president, whose responsibilities included working hand-in-hand with the issuer’s auditors to ensure that filings are complete and accurate, and to review filings for completeness and accuracy prior to presenting them to the CEO and to the executive vice president who was principal finance and accounting officer.

Thus, the enforcement action signals that a CEO must do more than obtain conclusory assurances from a senior officer of an issuer. Certifying officers should not take comfort from the appearance that this case does not break new ground. Ken fully expects that the SOX certification will result in the SEC bringing enforcement actions against certifying officers that would not have been brought absent the certification.

April 5, 2004

U.S. Court of Appeals Overturns

On Friday, the U.S. Court of Appeals for the Second Circuit unanimously ruled in favor of MONY and directed entry of a preliminary injunction preventing a dissident shareholder, Highfields Capital, from violating the SEC’s proxy rules by mailing proxy material that included reproductions of MONY’s proxy card to stockholders in connection with MONY’s proposed merger with AXA Financial (without complying with the disclosure requirements of the proxy rules). The Court held that “MONY will suffer irreparable harm if [the dissidents] are allowed to enclose duplicates of management’s proxy cards in their solicitations to MONY shareholders without complying with the disclosure requirements” of the federal proxy rules.

As previously blogged about on February 16th, the judicial pendulum has swung back to reversing what had been the SEC staff’s position (the SEC’s now invalid position was that the applicability and scope of Rule 14a-2(b)(1) – the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6 – allowed dissidents to include management proxy cards in their mailings without preparing full blown proxy materials of their own).

IASB Issues New Accounting Standards

Last Wednesday, the International Accounting Standards Board (IASB) issued a number of new standards (and amended other standards). As I blogged a few weeks ago, these standards take effect in 2005 for more than 90 countries. Controversial standards regarding derivatives are still subject to change from what is included in these standards.

U.S. companies are still following U.S. rules, but IASB and FASB are working to create a single set of rules that both can use.

Correlation between Corporate Governance and Corporate Performance?

The latest GMI Governance and Performance Analysis study finds a statistically significant correlation between governance and performance when measured across a number of variables over a multi-year period.

Results of the new analysis are consistent with those of GMI’s 2003 report as well as other studies in the field, including “Corporate Governance and Equity Prices” by Paul Gompers, Joy Ishii and Andrew Metrick (Quarterly Journal of Economics, February 2003) and Chapter 5 of The Recurrent Crisis in Corporate Governance by Paul MacAvoy and Ira Millstein (Palgrave MacMillan, 2003).

April 2, 2004

Intel’s New Two-Year Incentive Plan

On Wednesday, Intel caused a stir when it filed its proxy statement which revealed that it included a novel company proposal to replace its expiring shareholder-approved plan and a nonshareholder-approved plan (which still has three years of life in it) with a single equity plan that has a two-year life. The company says that it will seek shareholder approval every year beginning in 2005 to extend the plan for an additional year.

As the analysis on the NASPP’s website reveals, this is a significant development as most companies roll out plans with a ten-year life. In fact, the only company that the NASPP could find with a similar arrangement is Altera.

No-Action ’34 Act Reporting Relief for Bankrupt Companies

As the Corp Fin staff has emphasized for some time – since 1997 with Staff Legal Bulletin 2 – it is hard to obtain no-action relief for modified, reduced ’34 Act reporting for bankrupt or reorganized companies. I bet the staff rejects more requests in this area than it grants.

In fact, as this new no-action letter denying relief reflects, the Chief Counsel’s office will not hesitate to do some sleuthing of its own to rebut a company’s representations that it has few market makers or low trading volume.

Here is an excerpt from the SEC staff’s response: “Specifically, despite the company’s belief that there have been 5 market makers for the company’s common stock, the OTC Bulletin Board reports 17 active market makers for the company’s common stock as of March 22, 2004. In addition, although not included in the company’s letters, the trading volume for the company’s common stock during the months preceding the letters generally ranged in the hundreds of thousands to millions of shares per day.”

By the way, who are these investors that heavily trade a bankrupt company’s securities…

SOX on Sky Radio

So I’m on a cross-country flight yesterday, flipping through United’s radio stations and come across a program on “Corporate Governance and Best Practices.” It featured several vendors (that I never heard of before) who sliced and diced a bunch of Sarbanes-Oxley topics, including internal controls. That’s proof to me that SOX has gone mainstream. [And Michigan won that “other” basketball tourney! Go Blue!]