June 22, 2005

More on Failure to File 10-K as a Credit Default

Following up on last week’s blog regarding not filing a 10-K as a credit default, Tom White of Wilmer Cutler Pickering Hale & Dorr notes that Saks is not the first company to deal with this issue. In fact, Tom points out that bondholders might not necessarily agree that this is merely a “technical” default, as Professor Coffee implies. Without current reported financial information, it becomes more difficult for holders to trade the bonds.

The countervailing consideration is that sending the notice can itself cause a downgrade, sell-off or other bad repercussions (that assumes this is “bad” from the bondholders’ perspective – some bondholders might view a sell-off as an opportunity to acquire more bonds) .

Starting the 60-day clock gives the bondholders leverage (note how Saks is now offering to buy back $1.2 billion of its debt in exchange for waiver of the requirement to timely file its 10-K). Besides putting pressure on the company to get the reports done, it enables the bondholders to bargain for consent fees and other concessions (e.g. public disclosure of certain selected current operating and balance sheet data) in exchange for a waiver in case the company can’t file the 10-K within 60 days (which typically is the cure period provided for in the indenture before repayment is accelerated).

Whether bondholders would play it out and actually threaten to accelerate would be an interesting question. If they thought the company had the financial capacity to refinance the bonds, it might be a gambit to get them paid at par. The collateral consequences, however, are so dire that it is likely that bondholders would be hesitant to pull the trigger absent a payment default.

One interesting legal issue is whether receipt of the notice of default is an 8-K Item 2.04 or Item 8.01 disclosure. Tom believes it’s an 8.01 disclosure.

SEC (Partially) Rebuked Over Fund Board Independence

Yesterday, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ordered the SEC to reconsider recently adopted rules requiring mutual funds to be overseen by independent chairmen and that fund boards be comprised of 75% independent directors. Today, about 80% of fund companies, including the two biggies (Fidelity and Vanguard), have boards run by insiders. Here is the 19-page court opinion in Chamber of Commerce of the United States of America v. U.S. Securities and Exchange Commission.

The Chamber of Commerce had argued that the Investment Company Act of 1940 didn’t provide authority for the SEC to regulate “corporate governance” and, in any event, that the SEC had adopted the rules without adhering to the requirements of the almighty Administrative Procedure Act.

The Court held that the SEC didn’t exceed its statutory authority in adopting the rules and that the SEC’s rationales for the rules satisfied the APA. The Court, however, also found that the SEC did violate the APA by failing adequately to consider the costs mutual funds would incur to comply with the rules – and by
failing to adequately consider proposed alternatives (such as mandatory disclosure by funds regarding the level of independence of their board), the Court remanded the rulemaking to the SEC so it can address the deficiencies identifed in the opinion.

It’s a little unclear if the Commission will need to take another vote on the fund rules once the cost-benefit analysis is complete, alternatives are considered and public comments are received (my guess is “yes”). The discussion of “Consideration of Alternatives” on pages 17-19 is particularly significant. In fact, the entire opinion is worth reading.

It will be interesting to see if any last-minute rule adoptions come out of the SEC before Chairman Donaldson’s departure on June 30th. Now, we might not see the ’33 Act reform calendared on June 29th – as Reuters reported a few weeks back – because this court decision understandably might lead the Chairman to be gun shy (Note: a few hours after I originally posted this, the SEC announced a meeting on the 29th). Isn’t it remarkable that Commissioners Glassman and Atkins will get “another bite at the apple” on fund board independence – they were vehemently opposed to the new rules – without incoming Chairman Chris Cox having to intervene? Of course, we don’t know Mr. Cox’s views on these fund issues yet.

M&A Bootcamp – Delaware Law Considerations

On, you can now listen to Delaware law experts John Grossbauer and Mark Morton of Potter Anderson during their 45-minute session on Delaware Law Considerations. These guys do a great job covering the waterfront in such a short period of time. It’s not too late to take in the Bootcamp – with reduced membership rates for the “Rest of 2005” now available – only $100 for a single user license!

I’m (Nearly) Going to Disneyland!

I’m heading to Los Angeles tomorrow for the Society of Corporate Secretaries annual conference – always an informative and fun event. I’m excited to serve on the Society Board’s Executive Committee during the last year of my term in office; also did so during my first year on the Board. I love working with such knowledgeable and dedicated colleagues.

Then off on vacation next week as we drive up the California coast. Giant Forest, hear we come! I will blog remotely for a few days and then Julie Hoffman will be blogging for your pleasure next week. Have a great 4th!