In response to numerous requests, we have created an online version of the popular Romeo & Dye’s Section 16 Treatise and Reporting Guide: Section16Treatise.net. Dated as of Fall 2005, this 2nd Edition of the Treatise from Peter Romeo and Alan Dye is twice as long as the 1st Edition – and the online version of the Treatise has been updated from the hard copy Treatise mailed early in 2005 to reflect the SEC’s adoption of amendments to Rules 16b-3 and 16b-7.
We launched this site as many members have expressed frustration with the challenges of locating a copy of the popular Treatise within their own firm or company, as it remains the type of valued resource that everyone uses as a deskside reference. With this online resource, never go searching for that hidden copy again – try a No-Risk Trial today!
Breaking Barriers: The $1000 Billable Hour!
According to the latest National Law Journal billing survey, Benjamin Civiletti, the former U.S. attorney general and now chairman of the Venable law firm, is the first US lawyer to report charging $1,000 an hour. Apparently the old record was $875, charged by a London partner of Reed Smith.
Not really cause to celebrate – but it reminds me to prompt you to renew your membership to TheCorporateCounsel.net (and our other publications) now, as all our memberships run on a calendar-year basis and expire at the end of the month.
Can you believe that one full year’s worth of TheCorporateCounsel.net costs only as much as 45 minutes of Mr. Civiletti’s time (and we don’t clutter up the site with ads, etc.)!
Business Roundtable Issues Updated Governance Best Practices
In early November, the BRT issued an updated “Principles of Corporate Governance.” The BRT’s first Principles were released in May 2002. We have added these new guidelines to our “Model Governance Policies” Practice Area.
Here are some highlights from the updated Principles:
– Board leadership: The principles emphasize the critical importance of independent board leadership and, in recognition of the fact that no one leadership structure is right for every company. In a May 2005 survey, nearly 82% of member companies’ boards are at least 80% independent.
– Executive sessions: The principles recommend placing time for an executive session on the agenda for every regular board meeting, and follow-up with senior management at the conclusion of each executive session.
– Director-shareholder relations: The principles state that the board is responsible for responding to communications from shareholders and addressing issues of concern to shareholders – and contains an expanded set of best practice recommendations for boards in carrying out these responsibilities. In a May 2005 survey, 90% of BRT companies reported that they have established procedures for shareholder communications with directors.
According to this ISS article, union activist AFSCME has filed four more binding shareholder proposals seeking a majority vote standard. AFSCME was unsuccessful with its Paychex binding proposal two months ago, partially because the proposal didn’t contain a carve-out for contested elections (and thus didn’t obtain ISS support).
The article also notes that the Sheet Metal Workers International Association is targeting companies that have instituted director resignation guidelines – filing nonbinding proposals with ten of those companies.
Finally, in a meeting last Monday, the ABA Director Voting Task Force reiterated its support for the voluntary director resignation policy concept and said it plans to release specific recommendations and an explanatory report “no later than February 2006.”
SEC’s Attorney Responsibility Safe Harbors: Under Duress?
Last week, the Court of Appeals for the DC Circuit issued an opinion – American Bar Association v. FTC – that may spell trouble for the SEC with respect to the safe harbor aspects of its Part 205 Attorney Conduct rules. In its decision, the court affirmed the ABA’s view that a federal privacy law aimed at financial institutions (ie. Gramm-Leach-Bliley Act) does not cover the legal profession – as the ABA’s press release notes, “This ruling underscores that for more than two centuries we have rightly relied on state supreme courts to exercise responsibility for oversight in order to protect and safeguard the confidentiality of attorney-client communications and the public interest.”
The most recent entry in Knowledge Mosaic’s Soap Box does a little sleuthing of Corp Fin comment letters on internal control issues. Interestingly, only 50 comment letters posted on the SEC’s site contain the term “internal controls” – probably because the SEC is still playing catch-up in posting their comment letters issued since August 2004.
Here are some lessons learned according to Knowledge Mosaic:
1. Disagreeing with auditors can be a tough sell – Innovo Group, Inc. concluded that its internal controls were effective despite an auditor’s finding of material weakness. The SEC staff questioned just how the company could reach that conclusion in light of the finding. The company responded with an amended filing stating that their controls were, in fact, ineffective. Digital Recorders, Inc. believed that its disclosure controls were effective despite an auditor’s finding of material weakness in its internal controls. The company was asked to more fully explain how it could reach that conclusion. It did so in its subsequent 10-K filing, noting that the internal control weakness was limited in scope and that there were compensating disclosure controls in place.
2. Equivocating won’t wash – Both Proliance International, Inc. (formerly known as Transpro) and Rentrak Corp. claimed that their controls were effective, but noted certain exceptions. That didn’t fly. Your controls are either effective or they aren’t. Both companies submitted new filings acknowledging their controls to be ineffective. (See letters to Proliance and Rentrak, amended filings of Proliance and Rentrak.)
3. You gotta come clean – Comstock Homebuilding Companies, Inc. admitted to material weaknesses in its internal controls, but failed to provide any real detail on the nature of the problems. In response to the staff comment letter, the company’s amended filing used bullets to clearly identify six specific areas of material weakness.
Friday’s NY Times ran this article that laid out a proposed framework by Vice Chancellor Strine that would result in the elimination of shareholder proposals across the board. VC Strine himself doesn’t endorse this framework; he just proposes it as food for thought.
The framework goes like this: state laws are changed to allow contested elections of directors – outside of the takeover context – every three years. If insurgents, who would appear on the ballots sent out by management, received 35% of the vote, they would get some of their expenses reimbursed as well as have the chance to win the election. In exchange, shareholders would lose the power to be able to submit nonbinding resolutions to companies.
Although interesting, I believe the reality is that it would be very hard for companies and shareholders to come to a meeting of the minds on this. Whenever reform of 14a-8 is proposed by the SEC – which happens once per decade on average – a huge battle erupts. There simply is too much history behind the shareholder proposal rule to eliminate it entirely.
No Big Surprise: Corporate CEOs Lacking Public Confidence
The “lack of confidence” tone of this article from the NY Times on Friday is consistent with a letter recently sent to the SEC by a number of American, Canadian and European investors. Below is a quote from that letter that reflects why executive compensation is the #1 hot button for shareholders these days:
“Sixty companies in the bottom decile of the Russell 3000 lost $769 billion in market value and $475 billion in economic value over the five years ended in 2004, while paying their top five executive officers more than $12 billion.”
SEC’s Hedge Fund Rules in Peril?
According to news reports, pointed questions from two of the three paneled judges in the US Court of Appeals for DC over whether the SEC had the appropriate authority to regulate hedge funds indicate that a majority of the panel might vote to overturn the new rules that take effect in February.
Personally, I have no opinion as to whether the SEC overstepped their bounds – but I wouldn’t be surprised if the next spate of monumental frauds will be somehow interwined with the hedge fund industry. Anyone remember Long-Term Capital almost bringing the market to its knees?
In this podcast, Glen Wittenberg of ADP Investor Communication Services provides tips and insights into how to save money and avoid processing errors during the proxy season:
– What are the most common methods that companies can use today to save extra money?
– How many companies are leveraging edelivery to their shareholders last year (and other evoting stats)?
– What types of companies are good candidates to take advantage of “drop” mailing?
– What are the most common processing errors that you see companies make?
Keith notes: You may recall that when the SEC adopted Rule 10b5-1, there was no corresponding safe harbor in California law – but ultimately a California regulation was adopted (10 CCR 260.402). The Friese decision is interesting because it is the second published opinion issued by the California Courts of Appeal since the VantagePoint decision that considers the internal affairs doctrine. In this case, the court does not mention the VantagePoint decision – but it instead discusses the same State Farm case that the VantagePoint court used to support its decision.
This case also distinguishes the second case, Grosset v. Wenaas. In that case, the Court of Appeal decided that the issue of whether a stockholder can maintain a derivative action on behalf of a corporation is governed by the internal affairs doctrine. In this case, the court found that the insider trading law is a securities law and not governed by the internal affairs doctrine.
While neither case resolves the question of what a California court will do with respect to the California’s pseudo-foreign corporation statute (Corp. Code Sec. 2115), they certainly demonstrate that the courts won’t be taking a “one-size-fits-all” approach to the application of the internal affairs doctrine. Therefore, it is fair to say we don’t know yet whether the smoke is black or white as to whether Section 2115 will be upheld by the California courts.
Another Latrell Sprewell Moment?
Yesterday’s Washington Post reports: “’No, the Ballmer children don’t have their Xbox 360 yet . . . unfortunately, thanks to the wonders of Sarbanes-Oxley, management does not get a free Xbox 360 anymore,’ Steve Ballmer, chief executive of Microsoft Corp., told a crowd of 500 local technology executives who gathered at the Capital Hilton yesterday to hear him speak.
Sarbanes-Oxley has been blamed for a lot of things, but the deprivation of Steve Ballmer’s kids is certainly a new one. ‘If I get an XBox 360 from the company, that’s income to me, and it’s got to be disclosed,’ he said. ‘And our audit committee decided it wasn’t worth it.’ Thankfully, Santa doesn’t answer to the same regulators.”
My response: Basketball fans might feel a hint of Latrell Sprewell in these remarks. Latrell told journalists last year that he wouldn’t play hard because the team wasn’t trying hard enough to extend his contract when they only offered $21 million over three years. His response to that offer: “I’ve got a family to feed.” Latrell was making $14.6 million per year at the time (now he is out of work because no team will sign him). Read Dick Vitale’s thoughts and this humor piece about Latrell’s attitude.
Anyways, maybe Mr. Ballmer’s comments were taken out of context – but if not, I don’t see the harm in him taking a few hundred out of the millions he makes annually and buy the Xbox for his kids himself…
If you are a deal junkie, here is one you gotta check out! In this podcast, Rusty McGranahan of Skadden Arps provides some insight into what it’s like to do a deal under the new ’33 Act reform rules as he participated in the first Form S-3ASR ever filed (ie. for Temple-Inland), including:
– What was done differently in drafting the base prospectus?
– What was done differently during the offering process? Were any free writing prospectuses used?
– Did any issues arise on filing day?
– Did any issues arise in drafting the underwriting agreement? How about when delivering the legal opinions?
The SEC and Avian Flu
My wife sometimes thinks I’m a bit of the hypochondriac. I don’t think so – at least not any more than any other married man – but it is true that I have been worried about widespread outbreak of the avian flu long before the media started to carry daily articles about it. So I was relieved to see the SEC issue this interpretive release that will allow drug companies to immediately record sales of life-saving vaccines stockpiled by the federal government for future pandemics.
As noted by the US Senators pushing this move, current rules prohibit companies from recognizing revenue until the products were withdrawn from inventory – and that offered no incentives to fill orders (although that ain’t the reason that most drug companies gave up on vaccines as a primary source of business). The SEC’s interpretation may not be extended by analogy to other circumstances – drug companies may make the accounting change in the first quarter of their next fiscal year.
Court Rejects SEC’s Imposition of Civil Penalties against Directors in Early SOX Test
A week ago, Bruce Carton ran the guest post below from Nicolas Morgan of DLA Piper Rudnick Gray Cary:
If the SEC thought it would gain home court advantage by asking Congress to allow monetary penalties to be awarded in administrative proceedings under Sarbanes-Oxley, the DC Circuit has set the record straight. On November 15, 2005, in The Rockies Fund v. SEC, the DC Circuit scolded the SEC for arbitrarily and capriciously awarding “the harshest available penalties” against the Funds’ directors without any showing that their conduct “created a significant risk of substantial loss to others.”
The SEC accused the Fund of mischaracterizing and overvaluing certain holdings on its SEC filings, but the SEC failed to demonstrate in the administrative proceeding that such conduct put any investors at risk of loss. Sarbanes-Oxley permitted the SEC to seek civil penalties in an administrative proceeding presided over by an SEC administrative law judge rather than in a federal court action. However, the DC Circuit confirmed that the SEC must make the same evidentiary showing to obtain civil penalties no matter which forum the SEC brings its enforcement action in.
When filing your registration statements, don’t forget the new S-K Item 512 undertakings for Rule 415 offerings – FAQ #3 clearly says that you have to! The ’33 Act reform amended the provisos after Item 512(a)(1)(iii) and added 512(a)(5)-(6). There have been quite a few registration statements filed recently that do not include the new undertakings.
It appears that some companies simply forgot that revised undertakings are now required. Also be careful not to just copy a law firm memo’s form undertakings, as there are different undertakings for different contexts (eg. undertakings for Form S-8s vs. Form S-3s). Read the regulations first.
As examples, here are two Form S-3ASRs that appear to have provided the correct undertakings (of course, there are others that also have done it correctly): eBay and General Electric.
ISS Clarifies Majority Vote Positions
Yesterday, ISS posted 8 FAQs about its majority vote position, dealing with a number of issues that have been raised since its 2006 voting policies were released last month. For example, ISS clarified that it will review director resignation guidelines on a case-by-case basis and noted that no single form of a resignation guideline has been “precleared” by ISS. If you are facing a shareholder proposal on this topic, this is a “must read” document.
SEC Speaks at the Annual AICPA Conference
No fewer than 11 SEC Staffers spoke at the Annual AICPA Conference in DC over the last few days. This is not more than the number of Staffers that speak at PLI’s Annual SEC Speaks – but it is unusual that so many of the Staff’s speeches get posted on the SEC’s website.
Here are the 11 speeches – including this speech from Chairman Cox. Among other topics, the Chairman addresses greater competition beyond the Big 4; greater simplicity and transparency in financial reporting; and XBRL.
Going Private and Going Dark
Even though I knew today’s DealLawyers.com webcast – “Going Private and Going Dark” – would be well received by those interested in that area, I have to admit even I have been surprised by the huge level of interest in this topic. Perhaps the demand of those waiting to go private and dark is even greater than the fairly sizable number of companies that has already done so over the past few years.
Join the expert lawyers and banker who will spend some time analyzing the feasability of these apparently attractive options – and look for John Jenkin’s excellent 18-page memo regarding the state law issues for going dark and going private transactions that I just posted in the “Going Dark” Practice Area.
Last month, I blogged about the French data protection agency – the CNIL – issuing draft guidelines that could resolve some of the conflicts in the whistleblower area between Sarbanes-Oxley and EU data protection laws.
Last week, the CNIL issued final guidelines and we have posted a redlined versions of them – translated into English – in our “Whistleblower” Practice Area, marked from the draft guidelines. Much thanks to Mark Schreiber of Edwards Angell Palmer & Dodge LLP Boston for those!
In addition, Mark and his partner Jeff Held have conducted this podcast to provide analysis of what the final guidelines mean, including how US companies can now comply with both US and French law simultaneously.
Speaking of France…
Just flew back from a long weekend in Paris (my wife’s b-day present); my first trip there and it was unbelievable. I need to get out more! Found cheapie plane tickets – taxes cost more than the flights!
SEC to Act: Accelerated Filers, Best Price Rule and Deregistration of FPIs
The SEC announced yesterday that it will hold an open Commission meeting next Wednesday, December 14th at 10 am, to consider the following three items:
1. The adoption of the proposed amendments to the “accelerated filer” definition in Rule 12b-2, the new definition of “large accelerated filer” and the proposed amendments to the final phase-in of the Form 10-K and Form 10-Q accelerated filing deadlines. We have posted numerous law firm memos on the accelerated filing definitions and deadlines.
2. The long-awaited proposal of amendments to the “best-price rule” (Rule 14d-10) for issuer and third-party tender offers. According to the Sunshine Act notice, the proposals “would clarify that the best-price rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer and should not apply to consideration offered and paid according to employment compensation, severance or other employee benefit arrangements entered into with employees or directors of the company that is the target of a third-party tender offer.”
3. The proposal of a new rule that would enable foreign private issuers to terminate their Exchange Act registration and reporting obligations and the proposal of a rule amendment that would apply the exemption from Exchange Act registration under Rule 12g3-2(b) to a class of equity securities immediately upon the effective date of the issuer’s termination of effectiveness regarding that class of securities.
Last week, the SEC brought its first action for a violation of the 1934 Act Section 13(k) prohibition of personal loans to executive officers. The administrative proceeding was brought against the CEO and CFO of Stelmar Shipping, a foreign private issuer. The issuer had claimed that the extensions were mere “advances” and not loans.
In the Fall of 2003, Stelmar’s CEO and CFO authorized interest-free loans from the issuer to themselves – note they were not approved by the board. During the course of the 2003 audit, the outside auditors learned about the loans and concluded that they were prohibited by Section 13(k). In March 2004, Stelmar reported the violation on a Form 6-K containing its proxy. (Interestingly, the issuer also imposed a financial fine of $50,000 and $30,000 on the CEO and CFO, respectively.) Stelmar was acquired early this year, but the CEO and CFO remained employed by Stelmar until (close to) the time of the acquisition.
Ultimately, the CEO and CFO agreed to a cease-and-desist order with the SEC.
PCAOB Member Gradison Named Acting Chairman
On Friday, the SEC named PCAOB Board Member Bill Gradison as Acting Chairman of the PCOAB. At the inception of the PCAOB in 2002, Gradison was named to a two-year term and was reappointed in 2004 to an additional five-year term.
Former PCAOB Chairman William McDonough’s resignation was effective as of last Wednesday, November 30th.
DealLawyer.com’s Webcast Transcript Now Up!
The transcript for the DealLawyer.com’s webcast, “The Latest on Special Negotiating Committees,” is now available.
We have created a list of underwriting agreements that have been filed with the SEC that seem to take the ’33 Act reform into account. We will periodically update this list. Among the agreements filed so far are:
– Thomas Weisel Partners S-1 underwriting agreement (Buy.com, 11/28/05) (Note: form of legal opinions not included)
First Automatic Shelfs and Free Writing Prospectuses Filed
The race to file automatic shelfs is on. Temple-Inland was first at 9:04 am – and the first FWP was filed by Platinum Underwriters Holdings at 9:29 am.
Here are some Form S-3ASRs filed yesterday (stands for “S-3 automatic shelf registration”):
– Temple-Inland (12/1/05)(pay-as-you-go and included a “description of securities” section)
– XL Capital Ltd (12/1/05) (pay-as-you go and included a “description of securities” section)
– Golden West Financial (12/1/05) (registered $2B of debt, pay-as-you go and included a “description of securities”)
Death of the BlackBerry?
Yesterday’s papers carried stories about how RIM has lost yet another critical patent lawsuit – and how the odds of BlackBerry service continuing are not looking too good.
I know how life without a BlackBerry is unthinkable for many of you – but take it from a guy who has managed just fine without it, you will feel much freer without that beast ruling your life! I’ll never forget sitting on a panel with a dude who was checking his BlackBerry as he was speaking from the dais. Free Willy!
Yesterday, Corp Fin issued 25 FAQs that flesh out the ’33 Act reform. According to a Cleary Gottlieb alert, highlights of the FAQs include:
– If an underwriter agrees not to use a free writing prospectus without the consent of the issuer, the issuer’s consent, in and of itself, will not constitute authorization or approval of the free writing prospectus for purposes of determining whether it is an “issuer free writing prospectus.” However, if the issuer’s actions amount to “adoption of or entanglement with” the free writing prospectus—a determination that will turn on the particular facts and circumstances of the situation—the issuer will be considered to have approved or authorized the free writing prospectus.
– Item 10(e) of Regulation S-K, which restricts the use of non-GAAP information in documents required to be filed with the SEC, does not apply to free writing prospectuses, unless they are included in, or incorporated by reference into, a registration statement or included in an Exchange Act filing. Regulation G, which restricts the use of non-GAAP information in public disclosures by issuers required to file Exchange Act reports, does apply to free writing prospectuses used by such issuers.
– Canadian issuers filing annual reports on Form 40-F under the Multi-Jurisdictional Disclosure System cannot qualify as “well-known seasoned issuers.”
– Convictions of an issuer or a subsidiary in a non-U.S. court of certain felonies or misdemeanors, such as larceny, robbery and the making of false reports, will result in ineligibility of the issuer under the definition of “ineligible issuer.”
– Notice that a sale was made pursuant to a registration statement, which is required by Rule 173 when a final prospectus is not delivered, may be made within two business days following the date of settlement.
I’m sure we will continue to see guidance from the SEC Staff as the reform is so broad in scope and there will be so many unanswered questions as we deal with the new rules in practice – such as how will confidential treatment requests relating to automatically effective shelfs be processed?
’33 Act Reform: Now Effective!
Remember that the ’33 Act reform rules become effective today! There are lots of resources in our “Securities Act Reform” Practice Area, including notes from the recent ABA Fall Meeting regarding the NASD’s positions in the WSKI shelf context. There also are numerous law firm memos on what companies should do with their outstanding shelfs, including this new memo from Cleary Gottlieb.
Just as I was reading this Washington Post article about all the vacancies at the SEC’s top levels, I received an email that the SEC’s General Counsel, Giovanni Prezioso, announced he is leaving at the end of the year to return to the private sector (destination unknown yet). Here is the SEC’s press release.
By the way, the Post article provides a pretty nice overview of what is happening at the SEC these days, including a handful of quasi-inside scoop (eg. Commissioners are socializing outside the building! News at 11!).
PCAOB Issues Report on Initial Implementation of AS No. 2
Yesterday, the PCAOB issued a 19-page report discussing issues identified in the course of its monitoring of the implementation of Auditing Standard No. 2, the internal controls guidance from the PCAOB.
No real surprises here – the PCAOB found that both auditors and issuers faced enormous challenges in the 1st year of implementation, including strains on available resources; a shortage of staff with prior training and experience in designing, evaluating, and testing controls; and the limited timeframe that issuers and auditors had to implement Section 404.
The PCAOB gave a warning shot as it said that its monitoring (mainly conducted through the inspection process) revealed that some audits performed under these difficult circumstances were not as effective or efficient as AS No. 2 intends and as the PCAOB expects they can be in the future. In its report, the PCAOB identified specific areas in which auditors should become more effective and efficient “by obtaining sufficient evidence for an opinion in a manner that appropriately conserves time and other resources.”