May 18, 2005

NYSE’s Financial Distress Exception Regarding Shareholder Approval for Plans

According to footnote disclosure in the equity plan compensation table of its proxy statement, Delta Airlines has relied on the financial distress exception to the NYSE’s shareholder approval rules – and the NYSE staff has accepted the company’s application of the exception. [Here is how the process works: the NYSE’s rule allows for exceptions in the case of financial distress – the NYSE staff reviews each fact pattern to be sure that the company is properly applying the rule. The NYSE doesn’t technically grant the exception.]

Delta adopted two broad-based plans at the end of 2004, with a total of 62 million shares reserved – and these plans create potential dilution of 44% (and now the total potential dilution of all Delta’s plans are over 80%! Note that Delta has three shareholder proposals related to compensation on their ballot).

According to a report from IRRC, the use of the financial distress exception is rare and must be based on audit committee documentation and other factors. Here is the disclosure in footnote 2 of Delta’s table:

“During the December 2004 quarter, we adopted, as part of the Shared Reward program, broad-based pilot and non-pilot stock option plans due to the substantial contributions made by employees to our out-of-court restructuring efforts. We did not seek shareowner approval to adopt these plans because the Audit Committee of our Board of Directors determined that the delay necessary in obtaining such approval would seriously jeopardize our financial viability. The NYSE accepted our reliance on this exception to its shareowner approval policy. A total of 62,340,000 shares of Common Stock may be issued under these plans.”

More Practice Pointers on

New practice pointers continue to be added to – yesterday, I added nearly ten from Towers Perrin and Mercer Consulting, among others. I also added Professor David Yermack’s latest version of his much-talked about airplane perks paper – this one includes a section indicating that a company’s decision to begin disclosing the aircraft perk is highly correlated with shareholder lawsuits for securities fraud. See the updated paper in the “Airplane Use” Practice Area.

We have a lot of momentum for our October 31st “2nd Annual Executive Compensation Conference,” with Stanford Directors’ College and Harvard Law School’s Program on Corporate Governance colloborating with us – and John Reed and other current/former CEOs joining us to speak on responsible compensation practices. More details to come in the next few weeks – but you might want to get a jump on reserving a room at the Chicago Hyatt Regency since last year’s hotel was sold out early (don’t forget to mention the NASPP when you book a room to get the group rate).

What Happens If You Flunk Your 404 Exam?

There are so many good law firm memos on that I am always trying to figure out a better way to highlight them. One idea is to occasionally include them in my blog. Here is a Foley Lardner memo that emanated from a panel discussion – which included NYSE and Nasdaq representatives – that addressed what companies should do if they have internal control problems. It is “short but sweet” and in our “Internal Controls” Practice Area. Law firm memos on the new SEC and PCAOB internal controls guidance also are now posted there (scroll to bottom).