July 18, 2005

Section 162(m) Disclosure Developments: The Shaev Case

On Friday, Mike Melbinger blogged this disturbing news in his “Melbinger’s Compensation Blog” on “Apparently some plaintiffs class action lawyers are suing companies for their 162(m) disclosures based on the Shaev v. Datascope Corp. (3d Cir. 2003), case. In Shaev, the court found a potential violation of federal securities laws where the corporation allegedly did not fully disclose the material terms of an executive’s incentive compensation program.

The court held that the material terms of the company’s incentive plan and the performance goals on which the chief executive’s compensation was based were “material” within the meaning of Code Sec. 162(m)(4)(C)(ii), even though the specific business criteria, discussed in Reg. §1.162-27(e)(4), were not. Thus, the company’s failure to disclose those terms could be a material omission under SEC Rule 14a-9.

In other cases, lawyers are alleging that the Compensation Committee report promised pay-for-performance – but then adopted a plan that paid significant amounts no matter what. Although these claims seem legally unsupportable, companies should pay more attention to both the Compensation Committee Report discussion of Internal Revenue Code Section 162(m), and the description of the plan in the shareholder approval section of the proxy statement. So let’s be careful out there.”

In our “Section 162(m) Policies” and “Section 162(m) Compliance” Practice Areas on, we have numerous practice pointers about how you – and your compensation committee – can reduce liability for your 162(m) disclosures, including this handy “Section 162(m) Compliance Checklist” from Tim Sparks.

SEC Posts Shell Company Adopting Release

On Friday, the SEC posted the adopting release that provides guidance on how shell companies can – and can’t – use Forms S-8, 8-K and 20-F.

Settlement Pipeline Soars Past $15 Billion

Bruce Carton reports on his blog that the ISS Settlement Pipeline, which reflects the sum of all pending or tentatively announced securities class action settlements for which the claim deadline has not passed, has soared to an amazing $15.006 billion. Introduced in July 2004 at a then-impressive $5.5 billion, the ISS Settlement Pipeline has been boosted significantly by the historic settlements in the WorldCom and Enron cases. The top 10 settlements currently in the pipeline are as follows:

1. WorldCom (combined): $6.12 billion
2. Enron (combined): $4.7 billion
3. IPO Securities Litigation: $1 billion
4. McKesson HBOC: $960 million
5. Dynegy: $473 million
6. Broadcom Corp.: $150 million
7. TXU Corp.: $149.75 million
8. BankOne Corp (First Chicago): $120 million
9. Deutsche Telecom AG: $120 million
10. CVS Corp.: $110 million