Monthly Archives: February 2005

February 28, 2005

How to File a Form 12b-25 and What to Watch Out For…

As we recently wrote about – in great detail – in the Jan-Feb issue of The Corporate Counsel, understanding Form 12b-25 in advance of this year’s Form 10-K filing deadline is particularly recommended because of the uncertainty many companies are facing with respect to their ability to get their internal control reports finalized and filed by the Form 10-K due date. This is likely to result in an increased number of Form 12b-25 filings and more detailed disclosure than what is typically found in those filings.

Bearing that in mind, it’s probably a good time to understand what is involved with a Form 12b-25 filing – particularly since the SEC Enforcement Division just brought a case against FFP Marketing (and the two employees responsible for preparing the 12b-25 filing) for deficient 12b-25 disclosure. If the independent examiner’s report in the Spiegel case didn’t drive the point home that Form 12b-25s are disclosure documents, this case certainly does. Learn more in this interview with Tom Hanley on SEC Enforcement’s Interest in Form 12b-25 Filings.

Siebel’s 1st Amendment Fight Against Reg FD

Today, is carrying this article about Siebel Systems’ upcoming court fight – on March 15 – during which the company will argue that the First Amendment’s right to free speech protects its CFO and an investor relations officer against a SEC complaint that alleges the company—for the second time—violated Regulation FD. This case is the first contested action ever brought by the SEC seeking to enforce Reg FD; the other five have settled.

IPO Litigation Opinion Now Available

On in the “Securities Litigation” Practice Area, we have posted the opinion and order of the District Court regarding In re Initial Public Offering Securities Litigation, which grants preliminary approval of the proposed settlement of plaintiffs with issuers and individual defendants in 298 coordinated cases involving IPOs of technology stocks, contingent on certain modifications.

The proposed settlement was opposed by the underwriter defendants on various grounds. The court conditioned its preliminary approval on modification of the proposed bar order – which the court found was broader than authorized under the Private Securities Litigation Reform Act. The opinion has a discussion of various PSLRA provisions, including proportionate liability (pp. 36-38); settlement discharge (pp. 38-43); and judgment reduction (pp. 43-46). Thanks to Mike Holliday for tracking this down!

February 25, 2005

Movement for Majority Votes in Director Elections

At its conference in October, members of the International Corporate Governance Network discussed the advantages of changing state laws to move from pluarality to majority voting, rather than have the SEC adopt its shareholder access framework.

Now, the ABA has formed the “Majority/Plurality Voting Task Force” – headed up by former Delaware Supreme Court Chief Justice Norman Veasey – to examine the possibility of updating the ABA’s Model Act in this area. The Model Act serves as a framework for corporate law in more than 30 states.

Investors clearly are interested in this topic. So far this year, IRRC reports that over 80 companies have received shareholder proposals that seek to have a majority vote standard implemented – and Corp Fin has been allowing the inclusion of these proposals. Last week, Corp Fin rejected Citigroup’s no-action exclusion request over this type of proposal.

More on the Art of Minute-Taking

Boy, look at the focus on minutes in this article in the Boston Globe. The article is about how – in the takeover of Gillette by Procter & Gamble – the Massachusetts Secretary of State (and future gubernatorial candidate) is “investigating” the takeover, to see if the Gillette CEO’s severance package may have motivated him to sell the company.

The article notes that the Secretary of State “said the minutes of the directors meeting the company provided him are too skimpy to reflect what he said is the magnitude of the deal combining the two consumer product giants. ‘There’s no evidence of extensive deliberations,” Galvin said. “I find it hard to accept that these are the actual minutes of what occurred.'”

Next week, the panel will discuss how to take minutes in the current environment on – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.

February 24, 2005

Enron Court Preliminarily Approves Director Settlement

On – in the “WorldCom Settlement Analysis” page in the “Hot Topics” box – we have posted the order of the Southern District of Texas District Court that preliminarily approves the proposed settlement with outside directors that includes $13 million of their personal funds. As you may recall, this amount is based on 10% of their net gain on sales of certain Enron stock including certain stock options.

Learn what this all means for director’s pocketbooks on next Thursday’s webcast on – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.

Judge Orders Reinstatement for 1st Sarbanes-Oxley Whistleblower

An article on reports that a DOL judge ruled last week that Cardinal Bancshares is required to reinstate a former employee who had blown the whistle on its accounting practices and pay him nearly $65k in back pay/damages and $108k in legal fees. Last year, this whistleblower was the first person to win protection under Section 806 of Sarbanes-Oxley.

The DOL opinion sets out specific terms and conditions, and rebuts point-by-point arguments by Cardinal Bankshares that bringing the whistleblower back would be too onerous. The bank plans to file an appeal with the DOL Administrative Review Board over the next week. If that board decides not to take up the case, then the bank will consider whether to appeal it to a federal court.

Since Sarbanes-Oxley took effect, whistleblowers have filed 144 claims with the Department of Labor. The Cardinal Bancshares whistleblower is one of just three workers to win protection so far. Another 16 cases have ended in settlements.

Impact of SEC’s Letter on Lease Accounting

Today’s Washington Post carries an article that notes the dramatic impact of the letter on lease accounting from the SEC’s Chief Accountant on some retailers, causing restatements. The letter was issued two weeks ago. I have heard a number of complaints from members on how the letter is wreaking havoc on their 404 plans.

February 23, 2005

IRS Makes Settlement Offer for Stock Option Scheme

Yesterday, the IRS announced a settlement initiative for executives and companies that participated in an abusive tax avoidance transaction involving the transfer of stock options or restricted stock to family controlled entities. Under this scheme, executives – often facilitated by their employers – transferred options to family controlled partnerships and other related entities typically created for the sole purpose of receiving the options and avoiding taxes on compensation income normally taxed to the executive. The tax objective was to defer for up to 30 years taxes on the compensation and, in many cases, resulted in the corporation deferring a legitimate deduction for the same compensation.

To date, the IRS has identified 42 companies, many more executives and unreported income of more than $700 million involved in this scheme, which was aggressively promoted by financial advisors about 5 years ago. The IRS still is looking to find other companies that engaged in this practice.

Executives who engaged in these transactions will have until May 23rd to accept an IRS settlement offer to resolve their tax issues. The offer also extends to companies that issued the options to executives and directors as part of their compensation. Proof that the SEC is paying attention to compensation issues; Chairman Donaldson issued a statement praising the IRS’ action.

On, we have posted a host of materials related to this IRS initiative in the “Hot Topics” Box on the home page under “IRS Stock Option Settlement Offer.”

Status of Disney Trial

Many members have asked me about the status of the Disney trial. The parties have just begun briefing, which is scheduled over the next two months. Then there may be oral argument, so the decision is not likely to occur until sometime in June. And of course, there are all sorts of factors that can delay it further.

SEC Sets of Date of Internal Controls Roundtable

The SEC has set the date of its internal controls roundtable for April 13th in its HQ in Washingto DC. Panelists have not yet been selected. The SEC seeks comments on internal control issues by April 1st so that they can be considered for discussion. As an aside, by the time of the roundtable, the SEC’s HQ likely will be half-empty as the HQ move should be well underway – last chance to visit 450 5th Street!

February 22, 2005

The Location of the 404 Management Report

In response to many questions from members, I have posted a “Quick Survey on the Location of the 404 Management Report” on the home page of The five questions address:

– where in the 10-K you intend to include the report
– whether you also will include the report in the glossy annual report, proxy statement, web page – or cross-reference from those places
– where in the glossy annual report you will include it
– whether the CEO and CFO will sign the report
– whether you will forego the statement about management’s responsibility for the financials

Please weigh in and answer the survey – and let me know if there any other items you wish to be canvassed.

Useful Examples of Internal Control Disclosures

Here are some useful examples of recent internal controls disclosures:

1. Transition Relief – Here is an example of a company – Bassett Furniture Industries – that is relying on the SEC’s exemptive order that allows accelerated filers with market caps under $700 million to have a 45 day extension for filing the 404 management report and auditor attestation.

2. M&A Exception – Here is an example of a company – Black & Decker – which used the carve-out for a recent acquisition. The carved-out entity represents $1.1 billion of B&D’s $5.5 billion in assets.

The Challenges in Setting Pay-for-Performance Goals

The media has paid a lot of attention to companies that provide incentives to executives even though the company hasn’t performed (see last week’s WSJ article about how the CEOs of the major Wall Street firms got a hefty pay raise despite lackluster stock prices). One example I have heard of relates to a CEO that has an arrangement to receive a higher salary if his options go underwater. Of course, this begs the question – what is the purpose of incentive compensation?

Setting pay-for-performance formulas are difficult, particularly since there often are unusual items that might impact benchmarks used in such formulas. Along those lines, here are some 8-Ks that disclose that bonus performance criteria were not met – but the compensation committees awarded bonuses anyway due to unusual items: Fifth Third Bancorp and Cinergy.

As these companies did, one solution for imperfect formulas is to allow the compensation committee to use its discretion in ferreting out the impact of unusual items – but the risk then arises that the committee can manipulate a formula so that payouts occur under any set of circumstances. Challenging indeed…

February 18, 2005

Last Minute Proxy Season Planning

We have posted the transcript from our popular webcast, “Last Minute Planning for the Proxy Season.”

The SEC’s 2006 Budget

On Wednesday, the SEC posted this “Budget in Brief” analysis of its 2006 budget. But it ain’t brief – its 48 pages. Corp Fin’s piece of that pie will be approximately $100 million (down from $102 million in 2005). Corp Fin anticipates that it will review 4,720 reporting companies’ filings in 2006, which is equivalent to 38% of the reporting companies and is a 4% increase from the level it anticipates for fiscal 2005.

As always, the SEC will be a cash cow for the government, with anticipated Section 6(b) and Section 31 fees of $1.435 billion collected during 2006. The SEC doesn’t get to keep any of the money it collects. It all goes into the US Treasury – and then the Commission is at the whim of Congress to approve its budget each year.

WorldCom Judge Corrects Opinion

The WorldCom court issued a corrected opinion on February 14th on the proposed settlement of the outside directors, correcting footnote 14 on page 24 of the February 9th opinion by changing the word “only” to “not.” We have posted the corrected opinion in “Alerts” on the home page of

February 17, 2005

A Separate Executive Compensation Filing – the PAY-K

Here is an excerpt from Mark Borge’s “The Compensation Disclosure Blog” on (Mark continues to amaze with his regular analysis of recent disclosures; this particular item is more newsworthy):

Yesterday’s Wall Street Journal features an interesting article on page C1 (subscription required) about the frustrations with the current executive compensation disclosure system. The article notes how the WSJ needed to retain an actuary and an excise-tax expert to calculate the pay due to Gillette’s CEO as a result of the company’s pending merger with Proctor & Gamble. Even then, the final figure was significantly different ($12 million) from that calculated by another paper’s expert.

The author suggests that part of the problem stems from the disparate ways executive compensation information is currently reported — some in the proxy statement, some in Forms 4, and, now, some in interim filings on Form 8-K. He also notes the lack of a single location where all compensation, including retirement benefits and accumulated deferred compensation, must be reported.

The solution? He suggests that the SEC develop a separate report for disclosing executive compensation – the “Pay-K” – that would be updated throughout the year as needed. It’s an interesting idea, and certainly one that would simplify the piecemeal disclosure situation we’re now in with the new Form 8-K requirements.

Surprises Caused by Audit Confirmation Letters

Having trouble with audit confirmation letters? Get help from this interview
with Clark Fitzgerald and David Howard on Surprises Caused by Audit Confirmation Letters.

Nasdaq’s Rulemaking for Non US-Companies

Nasdaq has filed a rule change with the SEC – which will be effective around March 3rd – that would modify its rules to allow foreign private issuers to follow home country practice in lieu of certain requirements of the Nasdaq corporate governance rules without the need to seek an individual exemption from Nasdaq.

The Nasdaq rule filing states that, except for certain provisions of Rule 4350, a foreign private issuer would be allowed to rely on home country practices in lieu of the Nasdaq corporate governance requirements by providing a letter from outside counsel in that issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws and making appropriate disclosures in its annual reports filed with the SEC and, if applicable, in a registration statement.

Nasdaq also filed a proposal with the SEC that would modify its rules to require that foreign private issuers must publish semi-annual financial information in a press release or on a Form 6-K. Nasdaq proposes that the new requirement be effective for interim periods ending after January 1, 2006.

February 16, 2005

Everything You Wanted to Know About the SEC Chief Accountant…

…but you didn’t know enough to ask. Interesting profile in Monday’s WSJ about SEC Chief Account Don Nicolaisen. Sounds like he is a real team player.

NY Times Dissects Rule 14a-8 Process

On Sunday, the NY Times carried this article that interviewed long-time proponent Emil Rossi. It was a one-sided article – and an unflattering portrait – of how companies use Rule 14a-8 to exclude proposals, including a blow-by-blow description of how one particular company used the procedural bases of 14a-8 to exclude a proposal.

Unfortunately, the article didn’t note how certain investors – that merely own $2000 worth of a company’s stock – can waste a whole lot of the company’s money (ie – hurt other shareholders) through submission of frivolous proposals. I agree that many companies unnecessarily fight shareholder proposals – but there is a flip side as many shareholders abuse the process too. I am in favor of raising the ownership bar so that shareholders with more of an interest can gain an audience with management and the board, and cut down on some of the more eccentric proponents that waste shareholder money.

For the many of you that have dealt with Emil in the past, the NY Times article has a photo of him and his sons, who also have been active proponents over the years. Also, here is a more detailed article on the Rossi family from a few years back.

And for die-hard fans of the gadflies, this Fort Wayne Gazette article states that Evelyn Davis was the only speaker at Disney’s annual meeting on Friday, where the crowd hissed at her. For more on Evelyn, here is last year’s Washington Post interview with her that I have posted on

February Installment of Carl’s Corner

I have posted the February edition of Carl’s Corner, this one dealing with sequential triggering events, tag-along and drag-along rights and restrictions on transfer in shareholder rights’ agreements.

February 15, 2005

Latest Comp Lawsuit Targets Compensation Committee Report!

Last Tuesday, each director on Abercrombie & Fitch’s board was sued in the Delaware Court of Chancery for waste and breach of duty of good faith and loyalty for allegedly overpaying its CEO. The directors also were sued for breach of the duty of disclosure!

The complaint appears to be solely based on the company’s 2002 Compensation Committee report in the proxy statement, which the plaintiff claims is false. Paragraph 18 of the complaint repeats the Compensation Committee report verbatim – and then Paragraph 19 cites an excerpt from the company’s 2003 proxy statement, which discusses an amended and restated employment agreement with the CEO. This complaint is posted in the “Compensation Litigation” Portal on

Against those disclosures, Paragraph 20 of the complaint cites a Bud Crystal article on from August 4, 2004, in which Crystal points out that the Abercrombie CEO pay was at the top of the peer group. This basically was all that the plaintiff firm needed to file the lawsuit!

The bottom line is that this is further evidence of the continuing scrutiny of compensation by the plaintiffs bar looking for the “next” Ovitz case. Learn how directors can take steps to avoid liability in our March 3rd webcast on – “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney” – featuring John Olson of Gibson Dunn; Marty Lipton of Wachtell Lipton; Frank Balotti of Richards Layton; and Rich Koppes of Jones Day.

Corp Fin Focuses on Cash Flows in Letter Sent to Certain Companies

In January, Corp Fin sent letters to certain companies related to their presentation of cash receipts from inventory sales in their statements of cash flows. In order to affect wide-spread awareness of this issue – and to refocus companies on the proper presentation in their consolidated statements of cash flows – the SEC posted a copy of this letter, which includes sample comments, so that companies will consider these issues for future filings.

NYSE Updates 303 Written Affirmation Forms

Last week, the NYSE updated its 303 Written Affirmation Forms and Instructions for both US and non-US companies. The 2005 forms and instructions were updated to reflect the 303A.02(b)(iii) rule change effected on November 3, 2004, the expiration of the first year transition period and to provide expanded textual guidance for frequently asked questions. Here is a more detailed comparison between the 2005 and 2004 forms.

Corp Fin Sends Letter to Oil & Gas Companies

Recently, I received an email from a member who had noticed a number of oil companies reporting their year-end reserves in Section 2.02 of Form 8-K. Oil & gas companies have been under the gun from the SEC’s Division of Enforcement – and now the Division of Corporation Finance has posted this letter that it has sent to all oil & gas companies. The letter asks the companies to answer accounting questions in the areas of exploratory drilling, buy/sell arrangements and disposition of properties.

February 14, 2005

WorldCom Judge Issues Opinion on Rejection of Director Settlement

Last Wednesday, Judge Cote issued a 38-page Opinion in the WorldCom case, which expounds on the one-page Order she issued on February 2nd that rejected the request to approve a cap called for by the proposed settlement on the amount by which any judgment against the non-settling defendants could be reduced.

Under the proposed settlement, the settling directors would have had to pay out of their own pockets but would have avoided the risk of paying even more if they had stayed in the case. The Court’s decision did not change the amount those directors would have paid under the settlement, but would have the effect of potentially reducing the amount the plaintiffs could collect from any verdict or judgment against the non-settling defendants if the settlement became effective.

Mike Holliday notes that this Opinion explains why she denied the application for approval of the Judgment Reduction Formula in the proposed settlement insofar as the “Contribution Credit” in the Formula was adjusted to reflect any limitation on the financial capability of the Settling Directors. The February 2nd Order led to the termination of the proposed settlement by the Lead Plaintiff.

The decision is dictated by the complex interplay of provisions of the Private Securities Litigation Reform Act of 1995, in a result which the Opinion notes “will make it extraordinarily difficult for outside directors to settle Section 11 claims before all deep-pocket defendants facing joint and several liability have done so . . . .” The Opinion discusses how the PSLRA applies to settlements involving outside directors.

The proposed settlement contained a condition that the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the “Settlement Credit,” the “Insurance Credit” or the “Contribution Credit.” Mike referred in my February 3rd blog to the “Settlement Credit” and the “Contribution Credit” – the “Insurance Credit” apparently was added in a revision to the original proposed settlement.

At issue here is the “Contribution Credit” – what the settling directors’ assessed proportion of the judgment would have been without the settlement but limited to what those directors would actually be capable of paying. The Court found that the proposed reduction limited to the financial capability of the settling directors violated the statue.

The two other prongs of the Reduction Formula were the “Settlement Credit,” or amount of the Settlement, of $54 million, $18 million to be paid by the settling directors and $36 million by the insurers, plus any interest; and the “Insurance Credit,” or available insurance coverage, which the Opinion concluded would be at most $85 million. It was reported that the proposed $18 million to be paid by the directors represented in excess of 20% of their cumulative net worth (excluding primary residences, retirement accounts and jointly held assets) which offers some insight into the capability of the directors to pay.

Criticism of the SEC Restitution Fund

Recently, the SEC’s restitution fund has been criticized, such as in this NY Times article from yesterday and today’s Washington Post article.

Learn How to Blog

For all of you that enjoy this blog – and the others we maintain on our sites – and wonder if blogging is for you, you may want to check out this webcast program that will be held this Thursday.

Of course, feel free to always contact me to ask questions on about how to become a blogger – as it is one that I am passionate about (and I am always looking for new talent!). If you can believe it, I am about to enter into my fourth year of blogging and it has been immensely rewarding in several different ways (see today’s NY Times article on blogging). One obvious way is that you can brand yourself in a way that would have been difficult to do before the Web; but less obvious ways include the email relationships it has fostered with so many of you. Keep the feedback coming, I appreciate it!