Yesterday, Delaware Chancellor Chandler heard a plea from attorneys for former Walt Disney president Ovitz to remove Ovitz from the list of defendants in the shareholder suit over his $140 million severance package – based on the argument that Ovitz didn’t owe a fiduciary duty to Disney when his severance agreement was drafted because he was not yet an employee.
It is an interesting argument because the Sept-Oct issue of The Corporate Counsel, which is being printed today, has this quote from a colleague: “The court in Disney made it pointedly clear [at pgs 29-32 of the opinion] that the executive has a fiduciary duty here as well. Query whether a committee could bootstrap that into some leverage: ‘We think you, Mr. Executive, have a fiduciary duty to the company and its shareholders to be sure that the package was fair and appropriately authorized and if you don’t cooperate with our re-examination under a
review that applies the proper process and asks the right questions, we think you are breaching your fiduciary duty, and therefore providing a basis for us to terminate you, Mr. Executive.’ In other words, the executive may have a self-interest in having the committee re-evaluate the existing compensation arrangements and defending the pay by being able to show that the committee had thoroughly considered it.”
The plaintiffs in the Disney case seek more than $200 million – that’s a lot of personal liability! The four-week trial is set to begin on October 18th – just two days before our “Executive Standards – Meeting the New Standards” conference.
PCAOB Releases Summary of Big 4 Inspection Reports
Last week, the PCAOB released limited inspection reports for each of the Big 4 audit firms. These reports are based on 16 different audits, conducted over a 6-month period last year, and identified significant audit issues missed by the Big 4. The reports express concerns about each audit firm’s internal control systems.
Significant for companies is that the PCAOB found that these auditors allowed clients to incorrectly classify some debt as a long-term liability – and in several cases, the PCAOB staff asked the auditors to convince their clients to restate financial statements (but did not name which clients).
In a statement, the PCAOB laid out the differences between public and non-public portions of inspection reports, as the PCAOB is mandated by Section 104(g) of Sarbanes-Oxley to not disclose quality control defects found at an auditor for a period of 12 months after the date of an inspection report.
Also noteworthy is that the PCAOB reaffirmed in its statement that an auditor can voluntarily release any portion of an inspection report. This is significant because we have heard that auditors have been rejecting requests from clients that seek copies of inspection reports that implicate them – and the rationale provided for these rejections is that the PCAOB requires that inspection reports be kept confidential. Footnote 9 on page 4 of the PCAOB’s statement refutes this argument – and companies might consider including provisions in their engagement letters requesting copies of these reports (as Alan and I recommended in Nugget #5 of our 50 Nuggets II webcast a while back).
Lastly, these four inspection reports (scroll to the bottom to find them) are valuable because they provide detailed descriptions of the type of matters that the PCAOB is focusing on – as well as a description of the types of procedures the PCAOB will use during their inspections – although both of these likely will change as the PCAOB moves from “limited” to “full” inspections this year.
New “Poison Pill” Practice Area
We have created a new “Poison Pill” Practice Area – breaking out some of the content from the “Mergers & Acquistions” Practice Area that has continues to grow.