March 4, 2005

Implications of SEC’s Action Against Titan on Mergers

On Wednesday, the SEC announced a settled enforcement action against Titan Corporation alleging Foreign Corrupt Practices Act violations for funneling approximately $2 million towards the election campaign of Benin’s then-incumbent President. The amount of this settlement – $15.5 million in disgorgement and prejudgment interest and a $13 million penalty – is the highest ever paid for FCPA violations.

However, the most significant aspect of this proceeding is a Section 21(a) Report of Investigation that asserts that representations in an agreement filed as an exhibit can be actionable by the SEC if they are materially false. This assertion relates to a FCPA representation made by Titan in a Merger Agreement with Lockheed Martin (my alma mater!), which was also publicly disclosed in Titan’s proxy statement (since the Merger Agreement was in the proxy statement). It is noteworthy that the Report does not allege a violation by Titan of Sections 10(b) or 14(a) – or Rules 10b-5 and 14a-9 – and that the SEC has not charged Titan with such violations.

The Report recognizes that Titan shareholders were not beneficiaries of the FCPA Representation in the Merger Agreement, but states that the inclusion of the Representation in a disclosure document filed with the SEC, “whether by incorporation by reference or other inclusion, constitutes a disclosure to investors.” The Report goes on to say that disclosures regarding material contractual terms such as representations may be actionable by the Commission. The Commission will consider bringing an enforcement action if it determines that “the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted.”

NYSE Speaks on 303A Requirements

In response to a number of inquiries regarding the 2005 disclosure requirements in Section 303A of the NYSE Listed Company Manual, the NYSE has posted some FAQs, including:

– All disclosures required by Section 303A and/or Rule 10A-3 must be included in any specified document distributed in 2005.

– Incorporation by reference of any required disclosure is not permitted.

– Failure to include any Section 303A required disclosure in the specified document or inappropriately incorporating a disclosure by reference is considered material non-compliance and as such is a Section 303A.12(b) reportable event of non-compliance. Companies that have inadvertently failed to make the required Section 303A.12(a) disclosure in this year’s annual report should consult their Exchange Corporate Governance specialist regarding necessary action.

– Companies must identify which directors are deemed independent and disclose the basis for that determination.

– Categorical standards of independence, if adopted, must be disclosed, not incorporated by reference.

– The proxy must also include a discussion of any relationships considered by the board in determining a director’s independence, unless the company had adopted categorical standards, in which case, the relationship need only be disclosed if it falls outside of the categorical standards.

– This year’s annual report to shareholders must disclose that the company submitted a Section 12(a) CEO Certification to the NYSE last year. Companies need only reference that the previous year’s CEO Certification was submitted to the NYSE. The text of the certification need not be included in the annual report.

– If the previous year’s CEO Certification was qualified in any way, the company must disclose that qualification.

– Section 303A.12(a) also requires that companies disclose in this year’s annual report whether or not they filed with the SEC the CEO/CFO certification required under Section 302 of Sarbanes-Oxley in the prior year as an exhibit to their Form 10-K. The text of the certification need not be included in the annual report.

To review law firm memos on the NYSE’s latest changes to its standards, go to the “NYSE Guidance” Practice Area.

SEC Commissioners Continue Internal Dissension

Yesterday, the SEC approved the PCAOB’s 2005 budget, but the WSJ reported that over the objections of SEC Chair Donaldson, the two Republican Commissioners, Glassman and Atkins, extended a written invitation to PCAOB Chair McDonough and FASB Chair Herz, to take part in yesterday’s open Commission meeting. Both did not attend.

I agree with the comments of Commissioner Campos – as reported in the WSJ – that having a Q&A with these two chairs doesn’t serve any real purpose. Commissioner Atkins spent quite a bit of time – nearly 45 minutes – going through each item in the proposed budgets, I guess to create a record. And there is no requirement for the SEC to consider the PCAOB and FASB budgets at an open Commission meeting – they can do it seriatim. Probably better done that way…