Yesterday, SEC Chairman Chris Cox gave a speech before the Council of Institutional Investors. I like the way he debunked the theory that movie stars and athletes currently get paid in the same manner as CEOs in today’s world (by noting that market forces don’t universally set the levels of both these days, as boards “don’t always negotiate at arms’ length with their executives”). And here is an excerpt from the Chairman’s speech regarding why the SEC has proposed changes to executive compensation disclosures:
“Executive compensation matters — not only because if moral hazards inherent in these conflicts of interest are unchecked, executives will be paid too much, but also because it can play a valuable role in disciplining management across the board, and in protecting the entire range of shareholder interests.
By restraining executives from self-indulgent behavior — and using salary, bonuses, options, long term benefits, and other financial incentives in very purposeful ways — compensation committees acting on behalf of the shareholders can increase management’s incentives to improve corporate performance.”
Director Attendance at Annual Meetings
Since the beginning of 2004, Item 7(h)(3) of Schedule 14A has required companies to disclose their policy, if any, with regard to directors’ attendance at annual meetings, including stating the number of board members who attended the prior year’s annual meeting.
Thanks to Jeff Hopkins of Equilar, below is some analysis of fifty S&P 200 companies that have recently filed proxy statements:
– 64% of these companies disclosed 100% attendance by directors at the last annual meeting
– 22% of these companies disclosed one director missing the last annual meeting
– 8% of these companies disclosed two directors missing the last annual meeting
– 4% of these companies disclosed more than two directors missing the last annual meeting
– the median attendance was 100% and the average attendance was 95%
Of these 50, the company with the lowest attendance was Coca Cola Enterprises with only 8 of 16 directors attending – in contrast, Coca Cola Company disclosed that 13 of their 14 directors attended their annual meeting.
As a sidenote, it appears that roughly 12% of corporate governance guidelines out there mention attendance at the annual meeting by directors (but not all require attendance). Thanks to The Corporate Library’s Board Analyst for this last tidbit…
Interagency Advisory Impact on Auditor Engagement Letters
In this podcast, Barry Abbott of Howard Rice provides some analysis of a recent final interagency advisory – collectively issued by the Treasury Department, Fed Reserve, FDIC, OTS, OCC and NCUA – that informs financial institutions’ boards and senior managers that they should not execute agreements that incorporate unsafe and unsound limitation of liability provisions in their engagements with independent auditors, including:
– What is the interagency advisory on external engagement letters? And what does it state?
– Should any company other than financial institutions worry about this advisory?
– How might the advisory impact engagement letters generally?
– What do you recommend that companies now do with their audit engagement letters (eg. disclose limitations, negotiate harder, etc.)?
I was piqued by some comments in the mainstream media last week that Ralph Whitworth’s decision to accept a seat on the Sovereign Bancorp board in exchange for dropping his assault on the company was a “symbolic” move without much substance. These comments didn’t comport with my conversations with some folks that have been placed on boards by investors. And so I called up one of those guys with “skills“…
In this podcast, Rich Koppes, a former General Counsel of CalPERS and now at Jones Day, provides some analysis – and personal experience – regarding the placement of an independent director by investors on a board, including:
– How did you come to sit on a board as a shareholder representative?
– How were you treated by your fellow board members?
– Do you feel that you have had an impact as a shareholder representative?
– Have you ever been given directions about how to perform your duties from the investors that helped place you on the board?
The PCAOB’s New Implementation Dates for Independence Rules
On Tuesday, the PCAOB adjusted its implementation schedule for the ethics and independence rules that the SEC published for comment a few weeks back. Under this schedule, new Rule 3525 won’t apply to any tax service that is pre-approved by the audit committee pursuant to a policy and procedure so long as the pre-approved service began within one year of the SEC’s final approval. And as before, any tax service pre-approved on an engagement-by-engagement basis won’t be affected if pre-approved within 60 days of the SEC’s final approval.
Continuing Saga of SEC’s Investigation Into Overstock.com’s Allegations
As I blogged a month ago, the SEC reportedly is investigating allegations made by Overstock.com’s CEO that analysts and journalists conspired against him (which inspired his “Sith Lord” analyst conference call). In yesterday’s WSJ, Jesse Eisenger writes that communications made between him (and 8 other journalists) and the company’s CEO have now been the subject of a subpoena – and how that irks him. [Interestingly, another company – Biovail – has sued the same independent analyst, Gradient Analytics, in a similar case.]
I agree with Professor Joe Grundfest’s quote in Jesse’s article: “While subpoenaing journalists directly was a “big mistake,” says Stanford law professor Joseph Grundfest, “it shouldn’t be surprising and it shouldn’t disappoint anybody” that the agency is going after market participants’ communications with journalists. “It would be a very strange world if people could be held liable for every lie they told except for the biggest lies they told to reporters,” he adds.”
“No, not that one. It’s the sort of bomb that Fidelity dropped on Hewlett-Packard when it disclosed that a company laptop containing personal information on 196,000 HP employees was recently stolen.
The laptop contained “… data including the participants’ names, addresses, birthdates and social security numbers.” It was reportedly being used for an offsite meeting. Fidelity is doing big-time damage control:
Fidelity, which provides financial services for about 21 million people, says it hasn’t detected any misuse of the information and that safeguards in place may prevent misuse. The application with the data had a temporary license that has expired, so the data would be difficult to interpret and “generally unusable,” a spokeswoman says. And the company is requiring additional authentication to access the affected HP accounts.
So if I’m an HP employee, I’m hopping mad. If I’m one of the other 20 million or so customers of Fidelity, I’m thinking the word “Vanguard” sounds rather inviting right about now, Paul McCartney ads notwithstanding (turn your speakers down).
In an age of growing concerns about customer privacy, I find it staggering that personal data is moving around on the laptops of a company as sophisticated as Fidelity. Particularly when it includes the Rosetta Stone: apparently unencrypted SS numbers. Do you think this is the only time this has ever happened at Fidelity? The only time it has happened in the financial services industry? What about the healthcare industry?
The politicians are still arguing about this stuff. Despite all the privacy protections instituted by many companies, if laptops or sync-able PDAs can copy and take offsite deeply personal customer information, legislation or regulation will soon follow. Thus the innocent are punished by the sins of the guilty.
It’s another reason why “privacy” is going to be a key word for GCs and their corporate compliance programs in the future. Like tomorrow. Fidelity employee stuck in traffic?”
It looks like Nasdaq has begun utilizing the new public letter of reprimand based on this Form 8-K filed by Paula Financial under Items 3.01 and 9.01. As I blogged in December, the Nasdaq recently added the letter of reprimand to its arsenal of enforcement tools. Previously, Nasdaq only had the delisting letter at its disposal – which was akin to going from zero to 60 in 60 seconds.
As noted in Paula Financial’s related press release, the letter of reprimand was related to a failure to abide by Nasdaq’s requirement that the board be comprised by a majority of independent directors. When two directors resigned, the company failed to maintain a majority – and failed to notify Nasdaq of the resignations and its non-compliance. The company then regained compliance and Nasdaq exercised its option to issue a letter of reprimand rather than a much more serious delisting letter.
Note that the letter of reprimand is voluntarily posted on the company’s website, but it’s not filed as an exhibit to the Form 8-K. As I read NASD Rule 4804(b), companies receiving a letter of reprimand have four business days following receipt to make a public announcement about it through the news media – but there is no Nasdaq requirement to file it with the SEC or post it (and Item 3.01 of 8-K requires filing an 8-K upon receiving the letter of reprimand – describing it, etc. – but it doesn’t require filing of the actual letter).
A Director’s Independence Saga
Along the same lines, I thought this Form 8-K filed recently under Item 3.01 by Applied Materials was interesting. The company disclosed that Nasdaq contacted the company and told them that, in their view, one of their audit committee members was not independent. The director had been a consultant prior to joining the board and had received an option grant. Nasdaq’s interpretive view is that the option has to be assigned a value (but not necessarily using Black-Scholes) – and the value exceeded $60,000 in this case.
The director resigned from the audit committee – but not from the board – and fortunately the company had an audit committee that was sufficiently large so that they weren’t immediately out of compliance. Note that if we are only talking about an option grant, the Nasdaq lookback period starts from the date of the option grant.
I note that Nasdaq’s interpretive advice in this case is consistent with the SEC’s Telephone Interpretation in the 1999 supplement on the valuation of stock options for 404(a) purposes (Black-Scholes or binomial). For those not aware, it is noteworthy that the Nasdaq Staff continues to monitor compliance with its board independence rules by reading proxy statements…
Legal Fees for Indicted Employees
Yesterday’s WSJ ran this article on how prosecutors have been pressuring companies to not advance legal fees to indicted officers. It’s a reminder for companies to draft more balanced indemnification agreements so that the company isn’t faced with huge legal bills to defend someone that stole from shareholders. I am not suggesting that companies throw indicted employees to the wolves, but I do get troubled when fraudulent officers “use up” D&O insurance (and company’s assets) at the expense of innocent directors and officers.
Here is an excerpt from the article: “The fee-payment issue has gained prominence in recent years, following a 2003 U.S. Justice Department memo that advised prosecutors to credit companies that cooperate with the government in an effort to avoid indictment. The memo, written by former Deputy Attorney General Larry Thompson, advises that a company’s willingness to advance legal fees to “culpable employees” may signal a lack of cooperation. A spokesman for PepsiCo Inc., where Mr. Thompson is now the general counsel, says he wouldn’t discuss the memo.
Until now, the nonpayment of legal fees has been most heavily debated in the government’s ongoing tax-shelter case against former executives of KPMG LLP, which is scheduled for trial in New York in September. Yielding to government pressure, the accounting firm hasn’t reimbursed these executives since 2004 in what Stanley Arkin, an attorney for one of the defendants, calls “a way of unfairly breaking down the defendants’ ability to resist the government.” KPMG declines to comment.
In their investigation of accounting fraud at HealthSouth Corp., federal prosecutors informed the company that the payment of fees to indicted executives would be viewed as a sign of noncooperation, according to lawyers in the case. The company later withheld fees to former chief executive Richard Scrushy, the only indicted executive who pleaded not guilty to federal charges. A jury in Birmingham, Ala., acquitted him of fraud in 2005.
Federal prosecutors also encouraged Symbol Technologies Inc. to withhold fees from executives charged in an alleged accounting fraud at the New York maker of bar-code scanners, according to company counsel Andrew Levander. Last month, in Central Islip, N.Y., U.S. District Judge Leonard Wexler ended the trial of three former Symbol executives after jurors said they were deadlocked.
Symbol was able to pay the executives’ fees after it convinced prosecutors that company bylaws required it to do so, Mr. Levander says. “The government is not sensitive to the fact that a failure to indemnify can harm a company’s ability to attract talented officers and directors in the future,” the lawyer says.”
As part of the ’33 Act reform that became effective December 1, 2005, large accelerated filers and accelerated filers are now required to disclose – under new Item 1.B of Form 10-K – whether they have unresolved written SEC Staff comments on their periodic or current reports issued more than 180 days before the end of the fiscal year. These companies also must disclose the substance of any of the unresolved comments that they believe are material – and can include their position on the unresolved comments if they so desire.
The disclosures made so far vary quite a bit; some specify the number of unresolved comments and provide detailed information regarding the nature of them – other disclosures are much more general. And a few companies state their position regarding outstanding comments – for example, see this Form 10-K recently filed by Getty Realty Corp. (on page 11, the company describes its rebuttal to the Staff).
SEC’s 2007 Performance Budget
No big surprises in this 2007 Performance Budget for the SEC. Corp Fin’s rulemaking schedule is on page 6. As noted on page 12, the SEC expects to review 44% of total reporting issuers during ’07, down from 47% in ’06. On page 13, the SEC predicts a ramp-up of demand for searches of EDGAR filings – 600 million in ’07, nearly a 36% increase from the 379 searches in ’05 (ie. XBRL). And on page 19, referrals to Enforcement from Corp Fin continues to grow at a very healthy clip…
The Watchdog That Didn’t Bark
In his AAO Blog, Jack Ciesielski describes what is in the PCAOB’s two new releases on inspection reports in much more detail than I did last week in this blog. For example, Jack writes:
“The second report is a bit more interesting; it details some of the steps taken by firms to improve their quality controls. Among them:
– changing the organizational structure so that there’s separation of the audit performance function from responsibility for ethics, independence, client acceptance, and audit quality monitoring. (Seems so basic, you wonder why it had to be brought up.)
– adding internal guidance requiring more experience audit personnel review the contractst carry the most risk for material misstatement. (Another common-sense step.) – increasing the number and depth of the firms’ own inspections and evaluations of audits. (This refers to the fact that audit firms have their own internal auditing functions; they inspect how effectively the firm has carried out their engagements.)- changing the way partners are compensated and promoted by increasing the emphasis on technical auditing skills and decreasing the emphasis on “rain-making.”
– tightening up on the criteria for client continuation
There’s plenty more, but you get the drift: what were once habits are now recognized as vices. The dog didn’t bark this time; there’s nothing to bark about. The firms kept their end of the bargain and straightened their respective houses. But let’s hope the watchdog stays awake.”
Ever cry at a basketball game? Or make love to 20,000? Took my boys yesterday to see the basketball miracle of the century as my George Mason Patriots beat the prohibitive favorite to win the national championship, UConn.
For those that don’t follow basketball, George Mason was the last team to receive a bid into the tournament and many believed that they were not worthy of getting in at all. Against all odds, they have beaten three former national champs to earn a place in the Final Four. Boy, the place was rocking at Verizon Center; scared my 8-year old plenty…
Practical Considerations: Implementing a Majority Vote Standard
– Keith Bishop, Partner, Buchalter Nemer LLP
– Joshua Cammaker, Partner, Wachtell, Lipton, Rosen & Katz LLP
– Peggy Foran, SVP-Corporate Governance, Assc. General Counsel & Secretary, Pfizer Inc.
– David Katz, Partner, Wachtell, Lipton, Rosen & Katz LLP
– Cary Klafter, VP-Legal & Govt. Affairs; Director of Corporate Affairs & Secretary, Intel Corporation
– Charles Nathan, Partner, Latham & Watkins LLP
– Stephanie Schaeffer, Vice President, Chief Legal Officer, Paychex, Inc.
– Thomas Welch, Jr., Vice President – Legal, General Corporate Counsel, Dell Inc.
– Honorable Norman Veasey, Partner, Weil, Gotshal & Manges LLP
With Alaska Air Group, Altera and Safeway being the latest to join the ranks of those adopting pure majority vote standards – as noted by ISS on Friday – this is a program you don’t want to miss!
The Latest Proxy Compensation Disclosures
In his “Proxy Disclosure Blog” on CompensationStandards.com, Mark Borges continues to blog daily on the latest compensation disclosures as proxy statement are being filed. Here are two of his latest entries:
Comcast Execs Pay Their Own Way
My recent posts on perquisites don’t necessarily tell the entire story of what’s going on in this area. Take, for example, the Comcast proxy statement. While a footnote to the Summary Compensation Table notes the amounts that each named executive officer received as perquisites and to cover tax liabilities, it also discloses that, pursuant to a company policy regarding management perquisites, the NEOs paid the company certain amounts for items that otherwise would have been personal benefits.
The Board Compensation Committee Report sets out the company’s perquisites policy:
“Comcast’s policy on the provision of executive perquisites with respect to Messrs. Brian L. Roberts, Ralph J. Roberts and Burke is to allow each of them to receive perquisites up to a maximum taxable value of $50,000. If the executive receives benefits that would otherwise be considered perquisites in excess of this amount (generally calculated based on the associated tax value), he is required to pay Comcast the amount of such excess. With respect to the other named executive officers, they are generally required to pay Comcast for the full taxable value of any benefits that would be considered perquisites, other than the provision of parking at Comcast’s headquarters.
In addition, Comcast pays, or reimburses, premiums on life and executive long-term disability insurance policies for all named executive officers who participate in these plans and provides a tax gross-up with respect to certain of these payments.”
It appears that the policy has been in place for a few years, so it isn’t a response to the SEC proposals. It also appears that the policy calls for the NEOs to reimburse the company based on the tax value of the benefit, with the company disclosing the incremental difference between that amount and its cost in the SCT. That’s why, in spite of the policy, some perk amounts wind up in the table. Thanks to Ron Mueller for pointing out this disclosure.
Bank of America’s Proxy Statement
Bank of America’s recent proxy statement filing follows the recent trend of incorporating elements of the SEC proposals into the executive compensation disclosure. Here are some of the highlights:
BofA begins with a description of its standard fees arrangements and then provides a table showing the amounts received by each director. The table starts with a total compensation column and then lists various cash and stock fees and retainers. This information is followed by a description of changes to the company’s director compensation program that go into effect in 2006. There is also a discussion of stock ownership guidelines for directors and a description of a retirement arrangements with one of the directors.
Summary Compensation Table
Like the director table, the Summary Compensation Table includes a Total Compensation column. The Other Annual Compensation column is supplemented by a perquisites table (which itemizes each perquisite without regard to the minimum disclosure threshold) and the All Other Compensation column includes pension accrual amounts. For the majority of the named executive officers, these pension accruals reflect the amount of compensation credits under the company’s qualified and non-qualified pension plans with respect to plan-eligible compensation paid each year.
BofA provides summary descriptions of its multiple pension plans – two tax-qualified plans (including one for former employees of Fleet Bank) as well as various pension restoration plans and supplemental executive retirement plans. These descriptions are followed by a simple table setting forth the years of service and estimated annual benefits for each NEO.
These enhancements typify what I’m seeing in 2006 proxy disclosure. While some companies are making subtle refinements to their board compensation committee reports, most efforts appear to be devoted to improving tabular disclosure, both through the use of a Total Compensation column and perquisite and director pay tables. This makes sense, as these modifications are relatively easy to make, don’t involve difficult interpretive issues, and are consistent with next year’s disclosure regime.
Thanks to Stephen Quinlivan and Jill Radloff for this memo that lists the areas that you should bear in mind as you are preparing your upcoming Form 10-Q. I have posted the memo in our “Form 10-Q” Practice Area.
Understanding the Sell Side
If you need a laugh, check out this hilarious voicemail from a sell side research analyst. [Did I mention that I teach a class at George Mason, the Cinderella darlings of the tournament! Not that I picked them to even beat Michigan State. Go Patriots!]
US Litigation Overseas: Impact of the UK’s Company Law Reform Bill
The UK’s Company Law Reform Bill is a hot topic with the securities bar in England, specifically whether the Bill’s proposed reforms should be considered as a step towards the import of US-style securities litigation into the UK. In this article, which looks at the Bill from an American point of view, Werner Kranenburg – a London law student with a flair for writing – argues that the US securities bar needn’t be too interested in this Bill and seek to relocate to England soon, as the Bill’s reforms fall well short in providing a system that encourages and effectively facilitates shareholder representation.
Werner argues that, likewise, the Bill’s influence in the US should be neglible, citing four recent actions against three UK corporate defendants to highlight the differences of the existing approaches to private civil actions in the UK and US.
As noted in this LA Times article, Bristol-Myers Squibb and Staples recently agreed to disclose – and have their directors oversee – soft money political contributions made with corporate funds. Last year, Morgan Stanley, Johnson & Johnson, Schering-Plough, Pepsico, Coca Cola and Eli Lilly adopted similar political transparency and accountability policies. Under a typical policy, all soft money political contributions are reviewed at the Board level on an annual basis and the company posts a complete list of corporate political contributions as well as their guidelines for their political giving.
In addition, according to this press release, Amgen recently became the first company whose board endorsed a shareholder resolution calling for disclosure and board oversight of the company’s soft money giving. This development is part of a movement fostered by the Center for Political Accountability, among other groups.
Keith Bishop also notes that a bill was recently introduced in California that would require disclosure of political contributions related to California by corporations. The corporation would be required to make refunds or contributions to charities for objecting shareholders. We have posted a copy of the bill in our new “Political Contributions” Practice Area.
Yesterday’s WSJ ran an article (not available electronically) about CEOs that serve on multiple boards that caught my eye. Back in the day before I knew better, my dream was to serve on a few boards to pass time once my kids moved out of the house. Now after serving five years on the board of a local domestic violence non-profit, I realize the serious time commitment that serving on a board really entails (putting aside the liability concerns).
So I can’t understand how a CEO of a major company could have the time to serve on more than one or two boards in addition to his/her own company. I would think even one extra board seat would be a challenge. Yet the article lists a few CEOs that serve on more than 10 boards! How do they even schedule board meetings without multiple conflicts?
ISS policy is that it generally will recommend withholding from directors who are CEOs of publicly-traded companies who serve on more than three public boards, i.e., more than two public boards other than their own board (but not recommend withholding at the CEO’s own company unless the overextension is particularly problematic or the company’s performance is poor).
And remember that the SEC only requires directors to disclose the public company boards that they sit on – directors aren’t required to disclose private company or non-profit directorships, which can be quite time-consuming too. If I sat in the shoes of a major investor, I want a CEO that spends some time with their family…
How to Handle a SEC Enforcement Inquiry Today
We have posted the transcript from the recent webcast: “How to Handle a SEC Enforcement Inquiry Today.”
Remembrance of Regina Baker
For those SEC alumni out there, I am sad to note that long-time Corp Fin Staffer Regina Baker passed away Tuesday after an extended illness. Regina was one of my favorite Staffers and I believe that anyone who worked alongside her – during her 40-year tenure – felt the same way. She was a very special person and we will all miss her. My condolences to her family and friends.
Yesterday, the US Supreme Court ruled unanimously in favor of Merrill Lynch in a decision that limits the ability of shareholders to bring so-called “holders” class action lawsuits in state court – even if the claim is only that shareholders were induced to hold on to their stocks, not to buy or sell – because such lawsuits were found to be preempted by the Securities Litigation Uniform Standards Act of 1998.
In vacating the decision from the US Court of Appeals for the Second Circuit (and overruling the majority of courts that have addressed this issue), Justice John Paul Stevens’ opinion rejected the argument that SLUSA only preempts lawsuits involving a purchaser or seller by narrowly constructing SLUSA and finding it would give rise to wasteful and duplicative litigation – thus, the phrase “in connection with the purchase or sale” of securities was given a broad reading.
As you might recall, after the enactment of the PSLRA, plaintiffs began to bring more state law securities class actions in state courts – and after SLUSA was passed, plaintiffs commenced the filing of “holders” class actions in state court. These practices should be over now; wonder what will be the next angle sought by the plaintiff’s bar? Lots of blogs will undoubtedly analyze this decision as they love the Supreme Court stuff, like Ideoblog and The 10b-5 Daily.
Nifty Chart: Initial and Continuous Listing Standards of US Trading Markets
They say it couldn’t be done! Many thanks to Neil Kaufman and Chris Seamster of Davidoff Malito & Hutcher for this handy one-page chart that compares initial and continuous listing standards of the US trading markets, including the NYSE, Nasdaq, Amex, OTC Bulletin Board and pink sheets.
It’s amazing that so much information can be boiled down onto one page! I tend to get excited about simple things like this, but I know more than one of you are reading this saying, “What. Ever.” I have posted this chart in a number of our Practice Areas, including “NYSE Guidance,” “Nasdaq Guidance,” “Small Business” and “IPOs.”
PCAOB’s Two Releases on Auditor Process to Address Quality Control Criticisms
Yesterday, the PCAOB issued two releases concerning the implementation of the Sarbanes-Oxley provision that gives registered accounting firms incentive to address quality control criticisms included in PCAOB inspections reports within 12 months after the reports have been issued. Specifically, Section 104(g)(2) of Sarbanes-Oxley provides that “no portions of the inspection report that deal with criticisms of or potential defects in the quality control systems of the firm under inspection shall be made public if those criticisms or defects are addressed by the firm, to the satisfaction of the Board, not later than 12 months after the date of the inspection report.”
The first release details the PCAOB’s process for determining whether a registered accounting firm has addressed quality control criticisms included in an inspection report to the Board’s satisfaction.
The second release describes the efforts undertaken by the Big Four audit firms to address quality control concerns included in the August 2004 reports regarding limited PCAOB inspections. This release includes a general summary of some of the steps taken by the firms to address the PCAOB’s quality control concerns.
Here are the survey results regarding auditor inspection reports and engagement letters:
1. Have you requested information from your independent auditor about the non-public portions of the PCAOB’s inspection report (ie. Part II of the report) that could impact your company’s audit?
– Yes, our auditor agreed in the auditor engagement letter to provide a copy of the inspection report – 3.3%
– Yes, our auditor agreed informally to provide a summary or a copy of the inspection report – 40.0%
– Yes, but auditor refused our request to receive information regarding the non-public portions of the inspection report – 13.3%
– No, we have not made such a request from our auditor – 43.3%
2. Does your most recent engagement letter with your independent auditor include a provision that imposes a cap on the auditor’s liability (ie. no liability except for willful misconduct and gross negligence)?
– Yes – 63.3%
– No – 36.7%
3. Does your most recent engagement letter with your independent auditor include a provision that waives a jury trial?
– Yes – 70.0%
– No – 30.0%
New Survey: Trading Policies for Outside Directors
Please take our new survey on trading policies for outside directors.
SEC Files Amicus Brief in At Home Corp. v. Cox Communications
A few weeks back, the SEC filed its amicus curie brief with the Second Circuit in At Home Corp. v. Cox Communications, Inc., a case discussed in the November 2004 issue of Section 16 Updates. Below is some commentary from Alan Dye snipped from his Section16.net Blog:
Interestingly, 12 of the 24 pages of legal argument are devoted to the level of deference courts should pay to the views of the SEC as expressed in amicus briefs. On that issue, the SEC argues that the Commission’s interpretations of its own regulations are “binding, unless they are plainly erroneous or inconsistent with the regulations,” and that its interpretations of federal securities statutes should be considered “controlling,” or entitled to “Chevron deference,” if the statute is ambiguous and the SEC’s interpretation is reasonable.
The facts of the At Home case are discussed in an August 17, 2004 posting in the Litigation Corner. Briefly, Cox, Comcast and AT&T at one time shared control of At Home, and on March 28, 2000, AT&T agreed to purchase shares of At Home stock from both Cox and Comcast based on a hybrid pricing structure. In Cox’s case, AT&T agreed to purchase shares for a purchase price of $1.4 billion. If the price of At Home’s stock on the date of exercise were $48 per share or less, the number deliverable would be determined by dividing $1.4 billion by $48. If the price of At Home’s stock exceeded $48 per share (based on the market price during the 30 trading days beginning 15 days before Cox’s exercise of the right), then the number of shares deliverable would be a number having a value of $1.4 billion. Cox exercised the right on January 11, 2001, when the market price of At Home’s stock was $7.72 per share, and therefore Cox was entitled to the fixed price of $48 per share. (Because AT&T would have incurred significant tax liability had it purchased the shares, the parties worked out an agreement in on May 18, 2001 whereby AT&T satisfied its liability to Cox by allowing Cox to keep the shares and also to receive shares of AT&T stock.) Comcast entered into substantially identical transactions with AT&T.
At Home ended up in bankruptcy, and the bankruptcy trustee brought an action against Cox and Comcast, alleging that their put rights were not derivative securities because they did not have a fixed price. As a result, the trustee alleged, the exercise of the rights resulted in non-exempt purchases, matchable with the “purchase” of the shares back from AT&T within less than six months. As an alternative theory of liability, the plaintiff alleged that Comcast’s establishment of the put was a sale, matchable with Comcast’s purchases within six months of three cable companies which also owned At Home securities in their portfolios. Judge Buchwald dismissed the complaint, holding that the put rights were hybrid securities, having both a fixed exercise price and a floating exercise price, and that the rights therefore were derivative securities from the time they were created in March 2000. The exercise of the rights at the fixed price, in turn, was exempt from Section 16(b) by virtue of Rule 16b-6(b). Comcast’s purchase of the three cable companies was held to be outside Section 16 under the unorthodox transaction doctrine.
The SEC’s brief reaches some interesting conclusions. The opening section states that the SEC “agrees with the district court that defendants are not liable under Section 16(b).” The Commission then goes on to argue that (i) the puts were hybrid securities, and therefore were derivative securities to the extent of their fixed price component, (ii) the establishment of the puts on March 28, 2000 constituted “sales” of the stock that could sold at the fixed price, (iii) the puts were never effectively exercised on January 11, 2001, because the underlying stock was never delivered, and (iii) the options were “cancelled for value” on May 18, 2001, resulting in a “purchase” of the underlying shares on that date (more than six months after the March 28, 2000 sales).
The SEC disagreed with the district court’s conclusion that the unorthodox transaction doctrine applies to Comcast’s purchases of the three cable companies, arguing that the doctrine applies only to “forced” transactions that present no potential for speculative abuse because the insider has no access to inside information. The SEC asserted instead that Comcast’s purchases of the cable companies were not “purchases” of At Home stock as the term “purchase” is defined in Section 3(a)(13) of the Exchange Act. While that definition is broad enough to pick up Comcast’s purchases of the cable companies, the SEC argues that the lead-in to the definition says “unless the context otherwise requires.” The Commission argues that a change-of-control transaction typically is not motivated by a desire to purchase the acquiree’s portfolio securities and therefore should be presumed not to be a purchase for purposes of Section 16(b) (because the “context otherwise requires”). The Commission argues that the plaintiff would have the burden of rebutting the presumption, such as by proving that the acquisition of another company was a subterfuge for purchasing the underlying securities.
It likely will be several months before the Second Circuit issues its decision.
Thanks to this comprehensive survey by Claudia Allen of Neal, Gerber & Eisenberg, there are a surprising number of companies that have recently adopted a pure majority standard without fanfare. These companies include Motorola, Allied Capital, Texas Instruments, Career Education, Freeport-McMoRan Copper & Gold and United Technologies. We have added all these companies to our own “Majority Vote Chart” and posted Claudia’s survey in our “Majority Vote Movement” Practice Area.
Of 116 companies listed in Claudia’s survey as having taken definitive action since the emergence of the majority vote movement, 78% adopted policies, 18% adopted bylaws, and 4% adopted both a policy and bylaw. Of course, the more important stats relate to which companies adopted pure majority vote standards versus director resignation provisions. Check out Claudia’s survey for more info on that – as well as our chart which is even more comprehensive: we show about 75 companies with a pure majority vote standard (that # likely is comprehensive for that category) and another 50 with a director resignation policy (that # likely is not comprehensive, as these policies are harder to track). And don’t forget about our March 28th webcast: “Practical Considerations: Implementing a Majority Vote Standard.”
Voting Results on First Majority Vote Proposals of the Proxy Season
Last week saw the first voting results from this proxy season on the Carpenters’ Union proposal to implement a majority vote standard. These results indicate that such proposals may not fare too well this year at companies that have adopted director resignation policies.
The proposal received a 35% vote at Analog Devices; 31% at Ciena and 45% at Hewlett-Packard; all of these companies had adopted a director resignation policy in advance of their annual meetings. In comparison, majority vote proposals received an average level of support of 44% last year, as noted in the ISS “Corporate Governance Blog.”
Update on CII and the Majority Vote Movement
Last June, the Council of Institutional Investors asked the 1,500 largest US companies to adopt a majority vote standard for director elections, as covered in this popular podcast with Ann Yerger, Executive Director of CII. About 200 response letters were received.
A few weeks ago, CII completed two follow-up mailings: one letter geared to companies considering the reform, and the other letter pressing non-responders for action. CII already has received 30 responses to the follow-up mailings and more are pouring in every day.
Over 65 companies replied that a form of majority voting was in place, and well over 100 responses said the Council’s request would be taken under consideration at an upcoming governance committee or a full board meeting.
For Those With a New Majority Vote Standard: A Word to the Wise
“For those companies using some form of ‘majority voting’ arrangement for directors this proxy season: You should give an early heads-up to your transfer agent and to ADP if you plan to have director vote choices on your proxy other than the traditional Yes and Withhold. Intel is using For, Against and Abstain this year, and that affects the proxy card and the ADP Voting Instruction Form (VIF). For example, on the VIF each of the director nominees will be treated like a separate proposal in terms of formatting, numbering of proposals, etc.
Our transfer agent, Computershare, and ADP were each a bit surprised when we raised the point and it took some discussion to resolve the matter. ADP says that it is now fully prepared, but it only knows if you are using a non-traditional vote choice when it gets your proxy statement or if you contact in advance. Advance notice to your service providers would be useful.”