December 27, 2005

Coke Adopts “Shareholder Approval of Severance Arrangements” Policy

Late last week, it was reported that Coca-Cola has adopted a policy of obtaining shareholder approval for its severance arrangements with senior executives if the payout exceeds 2.99 times the sum of the executive’s annual base salary and bonus. The topic of excessive severance pay angers investors more than any other compensation issue – and the recent House bill would require shareholder approval of all severance arrangements for officers.

According to this WSJ article, “Coke spokesman Charlie Sutlive said the company’s board approved the policy in October. It was first publicized yesterday by the International Brotherhood of Teamsters General Fund, which, as a Coke shareholder, unsuccessfully proposed a similar policy at Coke’s annual meeting in April.

Coke’s board opposed the proposal at the time. However, the measure earned support of roughly 41% of shares cast, indicating strong interest among investors.

“We believe this new policy both responds to and is in the best interests of shareowners,” Mr. Sutlive said. He said the board and its compensation committee adopted the policy after noting “the sentiment of many shareowners,” including the Teamsters.

Mr. Sutlive said the new policy reflects the board’s practice of reviewing corporate-governance policies and improving them where warranted. In this case, he said, the board’s compensation committee recommended the policy as a way to add controls while continuing to allow the board to render “prudent judgments.”

The move by Coke comes amid some criticism of executive pay. Steven Hall, a New York-based compensation consultant, said measures such as the one Coke adopted could serve to limit severance deals going forward.

Coke was criticized for the $17.7 million separation package it awarded to former Chief Executive M. Douglas Ivester, who stepped aside in early 2000 after about two years in the job. Steven J. Heyer, who left as Coke’s No. 2 executive in 2004, received a severance package of at least $24 million after three years on the job.

Douglas Daft, who stepped down as Coke chairman and CEO in June 2004, received 200,000 restricted shares of Coke, valued at $8.8 million at the time.”

In Sunday’s NY Times, Gretchen Morgenson wrote about this development in her column, including quotes from NASPP Chair Jesse Brill and Mike Kesner of Deloitte Consulting, who have spoken on this topic at our annual compensation conferences. Learn more about how to handle severance pay in our “Severance Arrangements” Practice Area on

SEC Posts Proposing Release for Non-US Company Deregistration

On Friday, the SEC posted the proposing release, under which it would be easier for foreign private issuers to deregister and terminate their SEC reporting obligations. European organizations have been urging this response to a perceived “Hotel California” problem for several years.

However, it is predicted that only a few dozen companies would take advantage of the new rules if adopted. On the other hand, these rules could curtail this problem: many companies have decided to list on the London Stock Exchange rather than a US exchange over the past year. So the rule changes might entice non-US companies to list on the NYSE and Nasdaq again.

Under the proposal, a foreign company that is listed in its home country would be able to terminate the SEC registration of its shares if it has been registered for two years, has filed all required SEC reports, has not offered its securities in the U.S. market for a year (including in a Rule 144A transaction or other private placement) and meets one of two quantitative tests:

• The first test, which is available to all companies, requires a deregistering company to have 5% or less of its public float held by U.S. residents.

• The second test, available only to well known seasoned issuers (generally companies with a market capitalization of at least $700 million) would increase this threshold to 10% for companies that have 5% or less of their worldwide trading volume in the United States.

SEC Finally Issues PCAOB Proposal re: Reporting on Previous Material Weaknesses

Late last week, the SEC finally issued the PCAOB’s proposed Auditing Standard No. 4 regarding reporting on whether a previously reported material weakness continues to exist. Comments are due to the SEC 21 days from publication in the Federal Register. The PCAOB originally issued AS-4 way back in July – AS-4 will not become effective until approved by the SEC.

Here is a recap of AS-4 from Mike Holliday: “AS-4 would be for a voluntary engagement at the request of the company, to enable the auditor to express an opinion on whether a previously reported material weakness in internal control has been eliminated. It would apply only where the material weakness has been identified in an auditor’s previous report on internal control issued pursuant to Auditing Standard No. 2. AS-4 would permit reporting on the elimination before the next AS-2 audit assessment of internal control, which is normally as of the fiscal year-end. (Additional requirements would apply to a successor auditor.)

Because the audit of financial statements and AS-2 audit of Internal Control normally occur only as of fiscal year-end, in the usual case AS-4 normally would be limited to material weaknesses identified in the annual assessment process. NOTE that in the usual case where the audit of financial statements occurs only at fiscal year-end, AS-4 would not apply to a weakness discovered during an interim period and eliminated in an interim period prior to the next annual assessment — for example, a weakness identified in the second quarter and eliminated during the third quarter would not be covered.

One of the main comments of investors to the PCAOB, in response to the March 31, 2005 request for comments, was to allow auditor reporting on material weaknesses identified subsequent to the company’s most recent annual assessment of internal control over financial reporting. The PCAOB did not accept that comment and retained the limitation to material weaknesses previously reported by an auditor in an AS-2 audit of internal control in conjunction with an audit of the financial statements.