Monthly Archives: September 2004

September 15, 2004

FASB Discusses Employee Stock Purchase

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

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

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

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

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

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

Everything You Wanted to Know About SOX

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

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

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

September 14, 2004

More on the Disney Trial

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

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

Pension Plans to Disclose Votes?

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

Enforcement Action Regarding Disclosure Controls

Several weeks ago, I blogged about the importance of the recent SEC Enforcement action against Siebel because it involves disclosure controls – learn more about this important action from my interview with David Brown and Oni Holley on the SEC’s First Enforcement Action Involving Disclosure Controls.

September 13, 2004

Putting the Heat on the

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

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

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

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

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

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

Where is the Love?

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

Section 404 Guidance Manual

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

September 10, 2004

Sept-Oct Issue of “The Corporate

As we believe that this issue of The Corporate Counsel is unique – and can make a difference, the Sept-Oct issue has just been posted on the lower left side of the home page, in a publicly accessible section of – we provide a html version and a PDF version. This issue contains the last 5 steps of our 12 steps to responsible compensation practices, finishing up what was started in the May-June issue (which also is still available on the site on a complimentary basis).

Note that both of these issues contain links are to materials and memos that can only be accessed by those that sign up for the October 20 Major Compensation Conference. Register now and gain immediate access!

SEC Begins to Post Amicus Curiae Briefs

I could be wrong, but I believe that the SEC just starting posting amicus curiae briefs on its “Briefs” web page. Anyways, there are two recent 2nd Circuit ones posted now: one JP Morgan Chase brief addressing whether the lengthened statute of limitations in Section 804 applies to actions brought after the enactment of Sarbanes-Oxley for claims that had already lapsed under the previous limitations period – and the WorldCom brief that addresses whether the fraud-on-the-market presumption of reliance is applicable to analysts’ public material misreresentations.

The “J” Code Can Kill Ya

Alan Dye has some nice analysis in his Blog this week, responding to the Tuesday WSJ article regarding exchange funds. He notes that in his model form on exchange funds (Model Form 157 in the Romeo & Dye Section 16 Handbook, posted on that he advocated using code “S” – but drew a little resistance when he first made that recommendation, proving the benefit of being candid in reporting insiders’ transactions.

September 9, 2004

Disney Trial Set for October

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.

September 8, 2004

Agenda & Speakers Announced for

We have posted the Agenda & Speakers for our “Executive Standards – Meeting the New Standards” conference set for October 20th – available live in San Fran or by video/audio webcast.

It took so long for us to develop the program because each speaker was closely vetted during long hours of phone conversations – to ensure the program will be much more responsible and practical than any conference ever conducted before it. We hope you agree – look at the bulleted descriptions of each panel to see if our efforts have paid off.

We have also added a reasonable firmwide rate for multi-office law firms – only $2999 for anyone in your firm to access the webcasted conference, live or archived – as well have access to all the resources of! So register now!

SEC Issues Proposed NYSE Governance Listing Standards Changes

The SEC has issued proposed changes to the NYSE governance listing standards. The amendments – as was summarized in our September E-Minders – are intended to make clarifying language changes consistent with interpretations provided by the NYSE in response to questions and in its published FAQs, and also changes to Section 303A.02 to align it more closely with the similar standards of other listing markets.

Note the NYSE initially filed the amendments with the SEC on August 3rd and requested SEC approval on an expedited basis – but an amendment was filed on August 30th deleting the expedited approval request. The new SEC release states that the amendment also makes changes to the proposal’s description – and replaces the original filing in its entirety.

The SEC’s Recruitment Video

The SEC has posted a short recruitment video in its continuing efforts to find more staffers – starring role for John Stark of Enforcement and Paul Roye of IM (nice cameo by the dapper Keir Gumbs). It’s a nice video (with some repeated odd scenes of kids on their bikes, I guess to give the feel of investor protection).

In its ongoing efforts to find accountants, the Corp Fin web page now features a rotating banner in the top right corner – “CPAs Wanted.”

September 7, 2004

Earnings Releases and 10-Qs Getting

Getting a lot of questions on this topic lately, so to determine the possible impact of shorter deadlines on earnings release practices – as well as gauge whether companies already have adjusted their earnings release practices – we just posted a Quick Survey on Earnings Releases and 10-Qs. Please take the survey now!

Delaware Developments Regarding Alternative Entities

A lot of movement on the laws regarding LLCs, limited partnerships and partnerships during this year’s legislative session in Delaware. I just conducted this interview with Lou Hering on Delaware Developments Regarding Alternative Entities – Lou was on both committees that were instrumental to make these changes happen.

September 2, 2004

Getting Sued as Acquiror’s Counsel

There is a pretty interesting blog today in the Deal’s Guy Blog regarding a scary new case blaming acquiror’s counsel for lack of disclosure – here is an excerpt from that blog: “How many times have you delivered disclosure schedules that contained a one-line reference to a set of closing docs that evidence an otherwise complex transaction? In light of Vega, can you sleep at night knowing that you’ve “properly disclosed.” What happened to caveat emptor and opposing counsel’s obligation to its client to figure out what’s in that stack of documents?”

The Filing of Schedule 13Ds

As we head into the unofficial end of the summer, I thought I would ruminate about the latest doings by the colorful owner of the Washington Redskins – and they are not sport-related. Dan Snyder filed a Schedule 13D for Six Flags on Monday, noting that he had been buying up stock recently and intended to pressure management to make changes (it is noteworthy perhaps that well known M&A lawyer, Dennis Block, was hired to prepare the 13D).

The next day, long-time 11% owner Bill Gates (yes, that Bill Gates) files a 13D also expressing displeasure with management and noting that he might seek a board seat. In the press, these two business giants say they are not working in concert, which is believable given that Gates has owned his shares for five years (he had filed a Schedule 13G and amended it three times). Whatever they do, I hope they don’t get rid of the old bald dude from those commercials…

Nasdaq Rule 2710 Clean-Up

For those of you wanting to be as accurate as possible, here are some corrections to Rule 2710 – either to the Rule itself or the CCH version of it:

1.In the CCH looseleaf text of Rule 2710, as amended, the Fifth Exception for Purchases Based on a Prior Investment History states that a prior investment must be at least one year before the filing of the offering – but the right language is “two years.” The two years was in the NTM04-13 announcing adoption of the rule, in the SEC approval order, and in Amendment No. 9 to the filing (the last amendment with the full text filed). The error stems from the second publication for comment which erroneously included one year. (I only wish it were one year, to be consistent with new Rule 2790.)

2. The errors in the published text of the amended rule in Notice to
Members 04-13 have been corrected in the CCH looseleaf version, which are that:

“a. the Listed Securities definition covers markets registered with the SEC pursuant to Section 11A of the Securities Exchange Act of 1934, i.e., Nasdaq; and

b. the exemptions from the lock-up requirements for securities that are not an item of value cover Listed Securities.

2. The NASD staff takes the position that the availability of the S-3/Rule 415 exception from filing is determined at the time of each takedown off a shelf registration (of course, based on the pre-1992 standards for the form). Thus, a shelf registration could come into and out of compliance with the filing exception during the life of the shelf.”

September 1, 2004

Another Breeden Report The 500+

The 500+ Breeden Report regarding Hollinger International was filed yesterday on a 8-K – and makes very interesting reading! “Summer drinks” that cost $24, 950! What was in those drinks?

As the NY Times and other major business publications explore at length today, the role of each director is closely dissected in the report (e.g. Mr. Perle admitted that he never understood the underlying transactions before signing off on them).

If your compensation committee members can’t understand the basic tally sheets that we are posting on – they will want to hear all about them during our October 20th major compensation conference! And avoid being mentioned adversely in a report like this – not to mention the liability…

The Form N-PX’s are In!

Yesterday was the deadline for investment companies and mutual funds to disclose their voting records for the first time. These disclosures are made on Form N-PX. Over 1000 of these forms were filed during this first mutual fund “proxy season,” with Fidelity alone filing more than 130 of them. Here is a sample if you want to see what they entail,

Nasdaq Proposes Shareholder Approval Requirement Exception for Discounted Private Placements

The SEC has published a Nasdaq proposal to provide an exception from the shareholder approval requirements for purchases of the issuer’s securities by officers, directors, employees or consultants when such issuances are not made as part of a public offering and are for less than the greater of book or market value of the stock. Nasdaq is proposing to amend Rule 4350(i)(A) – and the related interpretation in IM-4350-5 – to provide this de minimis shareholder approval exception solely in these limited circumstances:

1. officers, directors, employees, or consultants are sold discounted stock as part of, or in connection with, sales to third parties, at the same price and on the same terms, and that do not involve any public offering;

2. the total number of shares sold to all such officers, directors, employees or consultants, either individually or in the aggregate, be less than five percent of the total shares to be issued in the transaction, and

3. the shares issued or to be issued in the transaction aggregated with all other discounted sales to officers, directors, employees, or consultants during the preceding 12-month period do not exceed one percent of the total shares outstanding at the beginning of the 12-month period.

Further, although not required by the proposed amendments to the text of Rule 4350(i)(1)(A), the changes to IM-4350-5 state that Nasdaq intends that the new exception will only be used in situations where third parties investing in the company require a minimum level of participation by company insiders as a condition to their investment.