August 3, 2006

More on Anti-Dilution Provisions and FAS 123(R)

Following up on my blog from a few weeks ago, in this podcast, Jon Lewis of Fried Frank Harris, Shriver & Jacobson analyzes the issues raised by applying FAS 123(R) to anti-dilution provisions in equity plans, including:

– What are the Big 4 saying about anti-dilution provisions in equity plans?
– What are examples of situations, such as changes in capitalization and restructurings, that might cause problems?
– Will the FASB weigh in on this issue?
– What should companies do now to determine if they have an issue? And if they do have a problem, how can they fix it?

And the impact of this problem is starting to be felt – as noted in this Form 8-K, Core Labatories recently cancelled a planned stock-split after being alerted to the accounting problems raised by this issue.

As an aside, a member e-mailed me wondering if anyone would feel that an option plan that was silent about adjustment for stock splits would be allowed to adjust as a matter of contract construction, at least in the context or warrants or other contractual rights to receive stock. Has anyone yet dealt with that? Shoot me an e-mail if you have (and I will keep your identity hidden if you wish).

ISS on “Does Cumulative Voting Complement Majority Voting?”

As a result of the ongoing debate festering on this blog, ISS weighed in with its voting policy regarding cumulative voting and majority vote on the “Corporate Governance Blog“: “An interesting post ran last week on Broc Romanek’s Blog. If one agrees, as mentioned in the piece, that cumulative voting helps protect shareholder rights–which ISS policy does–then majority vote standard and cumulative voting compliment each other. Without majority vote standard, cumulative voting in an uncontested election has no teeth because then a director could still be elected if he/she receives one single vote.

As for cases of contested elections, it is a non-issue because plurality voting standard would remain the election standard maintaining the status quo. Having majority vote standard in an uncontested situation would actually serve as a takeover defense. Therefore, in evaluating shareholder proposals requesting majority vote standard, ISS looks for such carve-out for contested elections in the language of the resolution.

Regarding ISS’ policy on cumulative voting with respect to majority vote standard, we would not support a cumulative voting shareholder proposal if the company has majority vote standard in place. This is not because the two are incompatible, as many companies have been arguing. Rather, the rationale behind this policy is to provide an incentive mechanism (the carrot) for companies to move toward a majority voting standard for electing its directors.

It is true that cumulative voting can be viewed as a vehicle to allow special interest shareholders to make their voice heard in that, in theory, it makes it easier for a minority holder to get at least one director elected. However, many would say this isn’t necessarily a negative byproduct. ISS’ current policy is willing to “trade off” a cumulative voting provision if the company is willing to adopt a majority vote standard.”

New Treasury Secretary Doesn’t Like Sarbanes-Oxley’s Impact

From a Dorsey & Whitney alert: “Hank Paulson, the former head of Goldman Sachs worldwide who left that position last month to become the new US Secretary of the Treasury, has used the occasion of his first public address as Secretary to suggest that the US Sarbanes-Oxley Act of 2002 has caused too much damage to US competitiveness internationally and should be revised.

Early in his speech, Paulson noted that the US had taken “corrective measures to address corporate scandals and increase investor confidence” following the Enron and WorldCom failures. But, he added, “often the pendulum swings too far”. He said that the US now needed to follow its initial corrective measures with “a period of readjustment”, and that “the challenge” facing the US is “to achieve the right regulatory balance to allow us to be competitive in today’s world”.

The Secretary of the Treasury has no authority to amend SOX or the rules that have been promulgated under it, and he has no authority over the US SEC or the PCAOB (Public Company Accounting Oversight Board), the new agency that drafts SOX auditing rules. Changes to SOX must be made principally by the US Congress, which itself wrote most of the detail in SOX about which non-US companies complain.

Nevertheless, the person serving as Treasury Secretary is usually listened to carefully by US legislators and regulators when speaking on broad policy issues. And, this particular Treasury Secretary will likely be listened to even more closely, due to his personal background as a top international financier and his position as a late entry in the Bush cabinet charged with finding solutions to a number of economic issues that are currently worrying Washington.

Paulson’s swipe at SOX is part of a general concern in the US that may soon lead to real efforts to change the law. The US has its next Congressional elections in November 2006, at which time both Senator Paul Sarbanes and Representative Mike Oxley, the sponsors of the law, plan to retire from office. The Congress that meets following this election will likely be more open to amending the statute, which at that time will be over four years old and will have generated a substantial track record that should help SOX critics argue for meaningful revisions. And, at that time, Hank Paulson should still be Treasury Secretary.” Here is more commentary about Paulson’s speech at