March 15, 2005

Last Batch of Internal Control Disclosure Samples

With the 10-K deadline looming, here is the last batch of samples:

1. Material weaknesses leading to ineffective internal control:


2. Using 45-day extension:

Insurance Auto Auctions
Citizens & Northern Corp.
ATS Medical (warning that they will report a material weakness)

3. Using the special exclusion for Variable Interest Entity (VIE) under FIN 46:

Brandywine Realty Trust

Thanks to Bob Dow, who has been indispensable during these trying internal control times!

The Recapture of Bonuses

The article in Sunday’s NY Times did a great job questioning the wisdom of so many companies not having clawbacks in their employment arrangements so that companies (and their shareholders to whom managers and boards owe fiduciary duties!) can reclaim any incentive awards paid out to managers who inflated the company’s results so that targets were met.

It is refreshing that at least one company – see this 8-K from International Paper – recently has revisited its long term incentive compensation plan to make it clear that the company can “recover compensation paid to a participant in cases of a restatement of the company’s financial statements due to errors, omissions or fraud.” I would love to hear of more examples if you see them!

Tears Shed for John Chevedden

On the other hand, I wasn’t enthusiastic about this article in Sunday’s NY Times that was sympathetic to frequent proponent John Chevedden because his holdings at some companies dipped below the requisite $2000 eligibility level found in Rule 14a-8 (so those companies were able to successfully exclude his shareholder proposals because he was not eligible to submit proposals).

The $2,000 floor is meant to relieve companies from bearing the burden of time and expense of dealing with shareholders with nominal holdings; many that have dealt with Mr. Chevedden know that their shareholders would not be happy if they knew how much of a burden he can be (despite the fact that he selects proposal topics that often receive majority votes).

Analysis of SEC’s Section 21(a) Report in Titan

I am excited to see how others fare in the “Nuggets” format, as Rick Climan of Cooley Godward, Joel Greenberg of Kaye Scholer, and Wilson Chu of Haynes and Boone work their magic during tomorrow’s webcast: “30 M&A Nuggets in 60 Minutes.”

And I have received a number of questions for Brian Breheny, Chief of the SEC’s Office of Merger & Acquisitions, who will open this webcast by explaining the SEC’s Section 21(a) Report regarding Titan, which asserts that potential liability exists under the Exchange Act for publication of false or misleading material disclosures regarding material contractual provisions such as representations.