Monthly Archives: March 2006

March 17, 2006

Poison Pill Proposals Found Excludable Upon Reconsideration

From my Blog: Last week, the SEC Staff issued a batch of no-action responses, where on reconsideration the Staff said that Bristol Myers (and other companies) could exclude John Chevedden’s poison pill shareholder proposals. The Staff originally took the position that the companies could not exclude the proposals under Rule 14a-8(i)(10), even though the companies had eliminated their poison pills and adopted a policy that any new pill would be put to a stockholder vote. The basis for the Staff’s initial refusal was that the proposal asked for the policy to be “in the bylaws or charter if practicable.” Upon reconsideration by the Commission, the Staff then overturned its earlier refusal and now has allowed exclusion of the proposals. We have posted a copy of the reconsideration responses in’s “Poison Pills” Practice Area.

Interestingly, the Staff’s responses in the reconsideration included this commentary:

“We note that there is a substantive distinction between a proposal that seeks a policy and a proposal that seeks a bylaw or charter amendment. In this regard, however, we further note that the action contemplated by the subject proposal is qualified by the phrase `if practicable’ and that the company has otherwise substantially implemented the proposal.”

One possible interpretation of this commentary is that the Staff hung their hat on the “if practicable” language and the Staff believes that there is a substantive distinction between a corporate policy and a bylaw provision.

I think a fairer reading is that the Staff simply changed its mind on this one, but that it still believes that a policy is not as binding as a bylaw. The truth of the matter is that the phrase “as practicable” is pretty subjective – and a company would still have to convince the Staff that it is not practicable to adopt the poison pill change requested by the proposal.

This also crosses paths with the majority vote issue and the position the Staff took that a Pfizer-type policy does not substantially implement a majority vote proposal. Some practitioners believe that it was the “location matters” argument (policy vs. bylaw) that the Staff relied upon for their conclusion in those letters. It seems that Time-Warner and other companies may be testing this theory when they recently adopted a director resignation policy, but put it in their bylaws.

And then you have to consider the complaint in the lawsuit against Hewlett-Packard for repayment of Carly Fiorina’s severance. Some view that as taking the recent News Corp. decision to the next level, arguing that disclosure regarding policies in proxy statements makes them binding contracts.

Towards Better Online SEC Filings

Going back to my roots in this podcast, during which Rhoda Anderson, CEO of EZOnlineDocuments, provides some insight into how companies can improve the effectiveness of their online proxy materials and other SEC filings (here are samples of what EZOnlineDocuments can do), including:

– What are most companies doing with their financial documents or shareholder communications today?
– What are common limitations in a typical SEC filing that is posted online?
– Why isn’t a PDF good enough for shareholders’ purposes?
– Why is it challenging to get online documents into the HTML format?
– What characteristics do effective online documents have?

The Canadian Approach to Internal Controls

Recently, the Canadian Securities Administrators announced a change in approach for Canada’s version of Section 404, which would be implemented as early as December 31, 2007. At this time, the Canadian securities regulators have decided not to require companies – of any size – to have an auditor attestation on internal control, stating: “After extensive consultation, the CSA has decided not to proceed with an earlier proposal that would have required companies to obtain from their external auditors an audit opinion in respect of management’s evaluation of the effectiveness of internal controls over financial reporting.”

Further details regarding the status of the Canadian proposals is provided in CSA Notice 52-313. In essense, the Canadian regulators have proposed a new element for the existing Section 302-like certifications requirements to include a Section 404-a like management assertion as to the effectivess of internal control over financial reporting – but not require a Section 404-b like auditor attestation.

A fuller description of the Canadian approach is available in FEI’s Section 404 Blog – there also are related law firm memos in Section 3.F of our “Canadian Law” Practice Area.

March 16, 2006

Corp Fin Reverses WKSI Automatic Shelf Registration Position

Last week, I blogged about a position announced by Corp Fin at “SEC Speaks” that they would object to a takedown from a WKSI’s automatic shelf filed between filing of the 10-K and the proxy statement unless a company filed either an amendment to its 10-K or its proxy statement to include Part III information – or unless it included the Part III information in a prospectus supplement to the automatic shel.

From a bunch of kind members, I have heard that the SEC Staff has now withdrawn that position and the Staff’s current position is that they will not object to such a filing or a takedown during that period – rather, the Staff will leave it up to companies to make their own decisions as to whether the registration statement and prospectus satisfy applicable requirements. This position is consistent with the Staff’s traditional position regarding shelf takedowns.

However, the Staff stated that they have not changed their position – as historically stated in Telephone Interpretation H-6 – regarding their unwilliness to declare a non-automatic registration statement effective during the period between filing of the 10-K and the proxy statement unless the current year’s Part III information is included in the filing or incorporated (but not forward incorporated).

A Parody

March Madness begins (here is some tourney history)! Check out this video of an Ipod/Microsoft parody. No, I didn’t get it from Office Pirates, Time Warner’s new site designed to look like it was developed by renegades (just like “independent films” are now produced by the big movie studios).

Should Auditors Be Airport Screeners?

From Gary Zeune – who did this interesting podcast with me a while back – as posted on

“To test terrorism readiness, British authorities conducted Threat Image Projection (TIP) and digitally inserted one of 250 images of guns, knives and other banned objects into luggage. Initially the screeners’ performance was mediocre. But with practice it improved dramatically. Then the images were changed, and the screeners’ performance dropped like a rock to no better than when the program started. But why? There are several reasons.

First, because we ‘see’ only what we expect to see. It’s the same reason you don’t see the bottle of beer on the shelf in your fridge, RIGHT IN FRONT OF YOU, because you’re hunting for, and expect to see, a CAN of beer. So when the images of the grips on the guns or the orientation of the knives were changed, the screeners detection skills were back at the starting gate. For accountants, this means that if they haven’t received significant training in what the ‘red flags’ of fraud look like, they likely won’t detect fraudulent financial statement items.

Second, is ‘distractions’ or ‘noise’. That is, the more items in the bag, ‘noise’ or distractions, the more likely the screeners failed to detect the weapon. One’s ability to pick out a single item declines when it’s part of a complex scene, loaded with similar items. That may be why screeners at the Newark, NJ airport missed a butcher knife in a cluttered handbag. Likewise, financial statement auditors look at hundred or even thousands of transactions, journal entries, and events. So finding the one or few fraudulent items is difficult at best, and near impossible at its worst.

Cognitive scientist J. David Smith at State University of New York, Buffalo, used origami-like items. The 88 participants studied not just the original shape but variations and orientations. They eventually the spotted up to 76% of the targets. Then Smith slightly changed the target and performance fell off a cliff. Why? Because the screeners were looking for the original shapes and orientation, not the variations. Just like screeners have trouble applying their knowledge to new situations, might auditors not recognize a fraud or misstatement because they’ve not seen it, or been trained to look for it, before?

The failure to recognize variations of learned items is specific-token strategy. Screeners recognize the Beretta 9mm but not the 32 caliber revolver or the Beretta packed upright in the bag instead of lying flat.

Just to be sure the nature of the origami items was causing the poor results; Smith had the participants look for actual guns, knives and scissors in over-packed suitcases. Again, their ability to spot the items started low then eventually increased to 90%. But as soon as new banned items were inserted in the luggage, the number of missed items soared 300%.

Statement on Auditing Standards Number 99 says, “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” Thus, auditors have a positive affirmative duty to detect fraud. So, the question is whether auditors will detect methods of cooking the books if they haven’t been trained on those methods? Of course, there are about a bazillion ways to cook the books. In light of the specific-token phenomenon, is there any amount of training that will allow auditors to fulfill their obligation under SAS 99?

In the final analysis the question is, how do auditors train their brains to generalize their fraud detection skills to recognize fraud indicators that they haven’t been trained on? So far, I’m not aware of anyone has figured out how to do that.”

March 15, 2006

The AIM Market in Play

Those following the tussle for control of the London Stock Exchange know that one of the reasons why the LSE is so attractive is that many of the IPOs during the past year have chosen to list there rather than on the Nasdaq or the NYSE (read Sarbanes-Oxley). In fact, I had announced this upcoming webcast – “How to Go Public on the London Stock Exchange’s AIM” – a few weeks back, before Nasdaq made its recent offer for the LSE (which clearly is still alive as Nasdaq reportedly is meeting with LSE’s largest shareholders).

In a somewhat related note, the newly-public NYSE Group filed this Form S-1 yesterday in an effort to remove a barrier to it making its own offer for the LSE. This registration statement will allow current shareholders (ie. former seat holders) to liquidate some of their new-found wealth (and lists Nasdaq’s LSE bid in the “Risk Factors” as well as discloses the pay levels of top NYSE executives).

And yesterday, the SEC and its UK counterpart, the Financial Services Authority, agreed to cooperate more closely in what they called a “landmark cooperation regulatory agreement” – these regulators also said they have discussed a possible deal marrying the London Stock Exchange with a top US exchange.

The Latest on Attorney-Client Privilege Waivers

Last week, the House Judiciary Committee held a hearing on attorney-client privilege waivers, primarily as part of a campaign spearheaded by a number of major big business groups (including the American Chemistry Council, Business Roundtable, Financial Services Roundtable, National Defense Industrial Association and U.S. Chamber of Commerce).

The National Association of Criminal Defense Lawyers (NACDL) and the Association of Corporate Counsel (ACC) are coordinating this attack on the “culture of waiver,” collaborating on their main piece of evidence – which is a survey of NACDL’s 13,000 members and ACC’s 15,000 members.

Here’s information relating to the first hearing; the second hearing was postponed for now. This story in the Corporate Crime Reporter does a good job of summarizing this development.

And don’t forget you have only until March 28th to submit comments on the US Sentencing Commission’s Sentencing Guidelines Commentary on Waiver of Attorney-Client Privilege and Work Product.

AICPA Issues Proposed Statement on Auditor Communications

Last week, the AICPA published this proposed Statement of Auditing Standards: The Auditor’s Communication With Those Charged With Governance. The proposed statement would replace SAS No. 61 and would establish standards for auditor/audit committee communications. Comments must be submitted by May 31st. Since the PCAOB lists this topic among its priorities for this year, I’m not sure why the AICPA is also tackling it…

March 14, 2006

ABA Committee Issues Majority Vote Report

Yesterday, the Committee on Corporate Laws of the ABA’s Section of Business Law released its Report containing proposed amendments to the Model Business Corporation Act. Now the 3rd comment opportunity commences, which ends on May 30th – so the Report isn’t quite “final.” We have posted a copy of the Report in our “Majority Vote Movement” Practice Area.

In the Report, the Committee concluded that the “failed election” consequences make it unwise to change the statutory plurality default rule – because it would apply universally to all companies governed by state statutes adopting the Model Act provisions. Rather, the Committee decided that the statutory framework should facilitate individual corporate action.

Among other proposals, the Committee would permit shareholders – or directors by private ordering – to adopt a bylaw providing for a form of majority voting. Thus, the heart of the Committee’s proposal is a carefully-tailored majority voting bylaw standard that can be adopted unilaterally by either the board of directors or the shareholders. This approach, coupled with other measures described in the Report, would normally have the effect of not seating, for more than a 90-day transitional period, a director whose election or reelection has effectively been rejected by a majority of votes cast.

In response to concerns regarding the validity of voluntarily-adopted board policies, the Committee also is separately proposing to adopt a statutory method expressly to facilitate and enforce resignations tendered by directors. The Report raises a number of specific questions that the Committee seeks input on – last chance to speak up!

Hear more about this important Report in the upcoming webcast – “Practical Considerations: Implementing a Majority Vote Standard” – whose panel includes the Committee Chair Norman Veasey.

FASB and IASB Seek Comments on Fair Value Accounting

As highlighted in this recent podcast with Jack Ciesielski, this is the year of fair value accounting. Last week, the FASB and IASB issued this request for comment about the financial analysis of companies that report some – or all – financial instruments at fair value. Here is some background on the request – and here is the related questionnaire. Responses are sought by April 14th.

Reminder: Careful with Your Voicemails!

I got a kick out of this voicemail that was discussed in Sunday’s NY Times column by Gretchen Morgenson. It was left by a retail investor for analyst Michael Krensavage.

Brought back memories from my days working in Corp Fin’s Office of Chief Counsel, where you spend hours each day talking to whomever calls OCC’s hotline and receive some quacky voicemails. Also reminded me of the voicemail left by an associate working on a deal that made the online rounds a few years back, as so eloquently blogged by Wilson Chu on the Blog.

Is Hiring A Defense Attorney Obstruction of Justice?

From the White Collar Crime Prof Blog: “The Second Superseding Indictment in the case of United States v. Singleton provides some fascinating language in Count Ten, an obstruction charge under 18 USC 1512(c)(2). It seems that comments made by an employee during an internal investigation are now being used to form the charge of obstruction. The indictment actually states that the defendant “informed the Outside Lawyers that he had retained an attorney and wanted to reschedule the interview for a time when his attorney could be present…..The attorney was a criminal defense attorney.”

This approach of using employee statements during an internal investigation to form the basis of a charge in an indictment was seen in the case of Computer Associates (see post here).

The ramifications of the government taking this approach is that employees will be less likely to participate in internal investigations. Such an approach will not be beneficial to the company, not assist the shareholders, and certainly destroys any trust between a company and its employees. And if the conversations will no longer take place, then the government will get nothing. This is not an impressive move by the government. Is it really worth getting the information in these two cases to cause such damage to the corporate environment?”

March 13, 2006

Form 10-K Confusion: Voluntary Filer Status

As companies fill out the new checkboxes on the cover of their Form 10-Ks, there appears to be a bit of understandable confusion regarding the checkbox that relates to “voluntary filer” status (eg. see #1569 in our Q&A Forum; in addition, a number of companies that have already filed checked the wrong box). This checkbox states:

“Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ___ Yes ____ No”

Rest assured that if “yes” is checked for this checkbox, that means the company is stating that it is a voluntary filer (and the EDGAR nest in the header should also be “yes”).

I can understand how the double negative in the checkbox causes some confusion; we probably would have been better off with a single box – like the Item 405 checkbox – rather than being faced with a “yes/no” set of boxes.

Comments on the SEC’s E-Proxy Proposal

The comment period closed on February 13th for the SEC’s E-Proxy proposal and final rules shouldn’t be expected anytime soon given that the new Corp Fin Director hasn’t started work yet. Scanning through the comment letters, it appears that the nature of the comments are all over the lot, with some fully supporting the idea and others not favoring it at all.

One of the more interesting comments came from AARP, which polled its members regarding their Internet use – 1500 retirees responded! – and found that 84% have access to the Internet at home (with 64% of those having high-speed access – we have posted the full survey results). Even despite the relatively high level of Internet use, it’s not too surprising that this group favors regular mail for their proxy materials.

In this podcast, Carl Hagberg provides his thoughts on the E-Proxy proposal (here is the comment letter that Carl submitted to the SEC), including:

– What are the primary issues that you see in the SEC’s e-proxy proposal?
– What should companies consider doing regarding these issues?
– What are your recommendations to tweak the SEC’s proposal?
– Does the SEC’s proposal change the playing field at all?

SEC Proposes PCAOB’s Independence and Ethics Standard

Last week, the SEC finally issued the PCAOB’s proposal – which was sent to the SEC last July! – that would prohibit auditors from engaging in aggressive and abusive tax services, among other matters. The SEC and PCAOB staff had a lot of interatction on this proposal before it was ever proposed by the PCOAB, so it is certainly due. Comments are due 35 days from publication in the Federal Register.

March 10, 2006

US Chamber of Commerce’s Report on the SEC’s Enforcement Efforts

Yesterday, the US Chamber of Commerce issued a 44-page report on the SEC’s enforcement program. This Reuters’ article includes a reply from SEC Chairman Cox.

The Chamber seeks a special advisory committee to study – and possibly reform – the SEC’s Enforcement Division and its procedures. In addition, here are some of the report’s 15 recommendations noted on pages 7-8:

– review of whether the SEC is using its litigation and settlement positions to attempt to shift standards for civil liability, such as “materiality” and “scienter,” to an inappropriately low level

– refrain from interpreting or expanding the SEC’s regulatory reach through enforcement actions and clarify legal standards before initiating enforcement actions for violation of those standards

– greater SEC reliance on formal reprimands instead of enforcement actions to remedy inappropriate corporate behavior

– avoid blurring the line between civil actions and appropriate criminal prosecutions and ensure that SEC referrals to DOJ for securities violations are reserved for clearly egregious cases

– clarification that a waiver of attorney-client privilege or work product protection is not required to be viewed as cooperating with an SEC investigation

– refrain from imposing fines on companies entirely for lack of cooperation during investigations (because the SEC already has adequate tools through subpoena enforcement actions, threat of such actions, and rules on document maintenance to command cooperation)

– over the last several years, the investigative process has become more adversarial and less objective in finding the facts and determining whether a violation has occurred (so there should be more open dialogue and a reconsideration of the practice of industry sweeps due to overly broad requests for information)

What About Periodic Updates from Enforcement on Open Matters?

On a somewhat related note, on Tuesday’s webcast – “How to Handle a SEC Enforcement Inquiry Today” – Russ Ryan mentioned proposed legislation that would require the SEC to provide regular updates to companies under investigation. This would go a long way towards solving the dilemma discussed on the webcast – to quote Jay Dubow: “Do you want to call and get that confirmation or are you afraid you’re going to wake the sleeping dog; that it was on someone’s back burner and now they’re going to relook at the open matter?”

A few members asked for the name of the proposed legislation. It is the bill that seeks to reform OCIE called “HR 4618: Compliance, Examinations, and Inspections Restructuring Act of 2005.”

A Peek at

Howard Dicker sent me over to to get a taste of what OMB is up to these days. By plugging “securities” and “exchange” into the search tool, I found that the SEC’s OCIE received a “moderately effective” grade in 2005. In 2004, Enforcement received a “not performing” – and Corp Fin received a “not performing” in 2003.

March 9, 2006

Notes from PLI’s “SEC Speaks”

We have posted notes from the Corp Fin and Accounting panels from PLI’s “SEC Speaks” conference in our “Conference Notes” Practice Area. Notes from Corp Fin’s Office of Mergers & Acquisitions are posted on’s “Conference Notes” Practice Area.

One-Time “Hall Pass” to Fix Cash Flow Classifications

One issue not discussed by the SEC Staff at PLI’s “SEC Speaks” is the SEC’s informal position that provides companies with an opportunity to fix erroneous cash flow classifications – in the discontinued operations context – without having to restate. This issue was first raised at the AICPA’s National Conference in December when Corp Fin Staffer Joel Levine stated that companies had better start paying attention to their cash flow classification. Joel also identified certain presentation formats that the Staff considers inconsistent with SFAS No. 95. Here is Joel’s speech and his PowerPoint from that conference.

Then, on February 15th, the AICPA issued CPCAF Alert #90, which notes which presentation formats are acceptable to the Staff – and that the Staff will allow companies to amend their classifications in their next Form 10-K or Form 10-Q without having to treat such amendments as a correction of an error. The Alert also states that any issues discovered and corrected in a later SEC filing will be treated as a correction of an error and require amendments of prior filings.

I don’t know why the SEC staff didn’t mention this position at the conference as I think it’s important for companies to know of this position if they have not been reporting cash flows relating to discontinued operations the way the SEC wants them to.

Talk About Having a Bad Day

As a former in-house lawyer, the thing that struck me about Google’s gaffe -that led to some internal projections being included in an “Analyst Day” presentation posted on the company’s IR web page – is that it might have cost some lawyer his or her job. Being in-house is tougher than you might imagine if you haven’t “been there, done that.” First, non-lawyers are your ultimate boss – and they often don’t like lawyers at all (since lawyers are the ones who say “no”). Second, one simple mistake like this and you can cost the company 5% of its market cap. Third, I often worked harder when I was in-house than when I worked in law firms – meetings all day, real work at night.

Now, we don’t know if a lawyer was to blame for Google’s gaffe (it depends on whether the unintended projections were included in a draft that the lawyer reviewed; I sure hope lawyers are involved in vetting analyst presentations!). In fact, the projections could have been added after it was reviewed and most in-house lawyers are absolved of any responsibility once a document leaves their hands. But this gaffe highlights the need to include double-checking on what is about to be filed with the SEC or posted on the company’s IR web page as part of a company’s disclosure controls and procedures. This mundane task clearly is as important as drafting the original disclosure since the end result is what really matters to investors. Here is Google’s Form 8-K that describes its gaffe.

March 8, 2006

Hewlett-Packard Sued Over Severance Pay

According to this NY Times article, two large shareholders sued Hewlett-Packard on Tuesday, contending that a $21.4 million severance package for former CEO Carly Fiorina violated the company’s policy on executive compensation. The lawsuit was filed in US District Court in the Northern District of California; we have posted a copy of the complaint in the “Litigation Portal” (remember there are two other compensation lawsuits heading to trial shortly!).

Here is an excerpt from the NY Times article:

“The suit says Ms. Fiorina’s severance pay exceeded a limit shareholders approved in 2003 that restricted such compensation to 2.99 times an executive’s base pay plus bonus. The lawsuit seeks to recover the money paid to Ms. Fiorina, who was forced to resign in February 2005.

A Hewlett-Packard spokesman said the company “believes the suit is without merit” and declined to comment further. A spokesman for Ms. Fiorina said she had not seen the suit and would not comment.

The lawsuit shows that executive compensation is of increasing concern to owners of public companies, said Gary Lutin, an investment banker at Lutin & Company in New York who advises institutional investors in corporate control battles. “The lawsuit indicates a growing sense of shareholder responsibility for controlling the diversion of corporate assets by the property managers,” he said, “especially by the ones who failed.”

In the most publicized case, Disney shareholders fought their company to rescind the $140 million severance package that was given to Michael S. Ovitz, who was fired after 14 months as president. Disney won that case last year when the judge ruled that the Disney board “fell significantly short of the best practices of ideal corporate governance,” but it did not violate its fiduciary duty.

It was shareholder outrage at the size of Hewlett-Packard’s award of about $17 million to Michael D. Capellas, who was Hewlett’s president for seven months, that prompted stockholders to approve the policy that limited future severance awards. The shareholder proposal was sponsored by the Service Employees International Union.

The lawsuit notes that Ms. Fiorina’s severance package of $21.4 million was 3.75 times her $5.6 million salary and bonus. The suit contends that her severance package could be worth as much as $42 million when the potential value of her stock and options and her pension are factored in. Under the company policy, any award that exceeds the limit must be approved by shareholders.

The crux of the case depends on how one defines the bonus that Ms. Fiorina received under what Hewlett calls the long-term performance cash program. The three-year incentive plan, approved by shareholders in May 2003, provided bonuses to executives if certain financial targets were met. However, the plan stated that executives who were fired would not receive the bonuses.

The board gave Ms. Fiorina $14 million, which was 2.5 times her salary and regular bonus, and an additional $7.38 million from the long-term bonus plan. “It is a severance payment no matter what they call it,” said Michael Barry, a partner at Grant & Eisenhofer, which filed the lawsuit on behalf of the unions.

The company changed the terms of that plan to apply to fired executives after Ms. Fiorina received her severance in February 2005. The suit says the plan was amended secretly.”

House Representatives Oxley and Baker Support SEC Authority

On Monday, following the request for comment on the SEC’s Advisory Committee on Smaller Public Companies Final Report, House Financial Services Committee Chairman Michael Oxley (OH) and Capital Markets Subcommittee Chairman Richard Baker (LA) wrote a letter to SEC Chairman Cox to express their view that the SEC holds the necessary authority to act on the Committee’s recommendations should it choose to do so.

The letter likely was in response to Committee member Kurt Schacht, Director of the CFA Center for Financial Market Integrity, who wrote in dissent that “it is unclear to many whether the broad exempting recommendations of this subcommittee are even within the commission’s legal authority.”

Nasdaq Seeks “Covered Securities” Relief for Listed Companies

Last week, Nasdaq filed a rulemaking petition with the SEC so that securities listed on the Nasdaq Capital Market are considered “covered securities” for purposes of Section 18 of the ’33 Act (and hence be preempted from the reach of blue sky laws).

Particularly since NASAA doesn’t oppose Nasdaq’s request, it certainly seems like a “no-brainer” that the SEC would make this rulemaking, which is why I found it unusual that Nasdaq filed a rulemaking petition rather than informally ask the SEC to act. But since Nasdaq is allowed to file these petitions by statute, it’s not a bad move to provide people with an opportunity to comment (and voice their support, which perhaps might spur the SEC to take faster action).

March 7, 2006

The SEC’s Compensation Proposals: Our Comments and Critical Fixes

Last week, Jesse Brill submitted a comment letter to the SEC regarding the executive compensation disclosure proposals. Jesse’s comments are embedded in the Jan-Feb 2006 issue of The Corporate Counsel, which was mailed over the weekend (and a copy of this issue is posted on We hope you will read these 8 pages as “food for thought” as you consider what issues you intend to comment upon.

Meet Our Compensation Consultants: Ratchet, Ratchet and Bingo

In this year’s 23-page letter to shareholders, Warren Buffett takes his annual swing at excessive CEO pay. My three favorite quotes from this year’s letter:

1. “The deck is stacked against investors when it comes to the CEO’s pay. Outlandish ‘goodies’ are showered upon CEOs simply because of a corporate version of the argument we all used when children: ‘But, Mom, all the other kids have one.'”

2. “The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.”

3. “Comp committees should adopt the attitude of Hank Greenberg, the Detroit slugger and a boyhood hero of mine. Hank’s son, Steve, at one time was a player’s agent. Representing an outfielder in negotiations with a major league club, Steve sounded out his dad about the size of the signing bonus he should ask for. Hank, a true pay-for-performance guy, got straight to the point, ‘What did he hit last year?’ When Steve answered ‘.246,’ Hank’s comeback was immediate: ‘Ask for a uniform.'”

New Disclosure Requirement? How Much You Got Paid to Draft Those Compensation Disclosures

Got a chuckle reading Evelyn Y. Davis’ comment letter to the SEC regarding the executive compensation disclosure proposals. If you don’t know about Evelyn, here is some background information.

Evelyn asks the SEC to require disclosure of “all outside legal fees.” Not sure how that would work within the SEC’s proposed framework nor am I sure what that would accomplish (do shareholders really want to know how much companies pay each vendor they work with?). She appears incensed that one company paid $800 million in legal fees in a one year period – I agree that sounds more than a tad bit high.

Why Rules Can’t Stop Executive Greed

This NY Times article from Sunday is among the best I have seen on the complexities of pay-for-performance metrics. It also addresses the importance of boards taking charge to tackle the perils of excessive executive compensation. I recognize that shareholders have a role here, but the burden truly does rest on the board’s shoulders.

March 6, 2006

WKSIs: Automatic Shelf Registration Issue

As many WKSIs will soon be filing 10-Ks that forward incorporate Part III information from a proxy statement, be aware that an automatic shelf registration statement may not be available if the WKSI has not already made the Part III information publicly available. The issue relates to the filing of an automatic shelf registration statement by a WKSI registrant after filing a Form 10-K (that forward incorporates by reference the Part III information) and before filing the proxy statement.

Historically, the Staff had the policy (as set forth in the Telephone Interpretations Manual H.6) that they would not declare effective a registration statement on Form S-3 until the company either amended its 10-K to include the Part III information or filed its proxy. Informally, however, the Staff did allow registrants to do shelf takedown offerings from a shelf registration statement that had been declared effective prior to the filing of a Form 10-K.

At PLI’s “SEC Speaks” on Saturday, Corp Fin Chief Counsel David Lynn fleshed out this issue as follows. The Staff says that an automatic shelf registration statement filed during this period will continue to be automatically effective as set forth in the new rules. However, the Staff believes that the prospectus contained in the registration statement does not satisfy the requirements of Section 10(a) of the Securities Act and therefore cannot be used by a WKSI until: it files either an amendment to its 10-K or its proxy statement to include Part III information – or unless it includes the Part III information in a prospectus supplement to the automatic shelf.

The bottom line: while a WKSI technically can file an automatic shelf registration statement after filing its Form 10-K and before filing its proxy, it cannot conduct an offering under that newly-filed automatic shelf registration statement until such time as the Part III information is filed (via 10-K/A, proxy statement or prospectus supplement). We will be posting more notes from “SEC Speaks” soon…

SEC Chair Cox Discusses Disclosure of SEC Investigations

This Reuters article from last week quotes SEC Chairman Cox on the issue of when companies should disclose the existence of an investigation or the offer of a settlement. For Chairman Cox, the disclosure threshold is that “material” disclosures should be made – but he confessed that determining what constitutes “materiality” is difficult. The article notes a recent speech by Commissioner Atkins during which he expressed frustration with companies that disclose tentative SEC settlement agreements before the Commissioners had an opportunity to vote on whether to further pursue the Enforcement action. Here is an interesting excerpt from Commissioner Atkin’s speech:

“Often in the SEC enforcement process, public companies, or sometimes their regulated subsidiaries such as broker-dealers, decide to pursue a settlement with the Commission. In the settlement process, the settling party deals directly with our enforcement staff, but the staff does not have the authority to bind the Commission to the terms of a settlement. Simply put, the settling party is offering to the enforcement staff to settle the matter based on certain violations of the securities laws, with certain remedies such as bars, penalties, or disgorgement, and in return the enforcement staff is agreeing to recommend to the Commissioners that they approve the settlement as offered.

At this stage nothing is final, and because of that lack of finality I find it hard to believe that the agreement by the staff to recommend settlement to the Commission is, by itself, necessarily an event that must be reported to shareholders. Although we Commissioners have deep respect for the work of enforcement staff, I can assure you that the next step in the process is not a rubber stamp approval by the Commission.”

So when is the appropriate time to make disclosure? Find out what four former SEC Enforcement Staffers think during our webcast tomorrow: “How to Handle a SEC Enforcement Inquiry Today.”

Request for Comments on Small Business Advisory Committee Draft

On Thursday, the SEC released a draft of the Final Report of the Advisory Committee on Smaller Public Companies and seeks comment by April 3rd. This draft isn’t much different that the draft report released before the Committee’s last meeting – the recommendations are the same, but some of the language has been fleshed out. Since the Advisory Committee is required to unwind in April, the Final Report is expected no later than April 23rd.