September 28, 2006

Sample Option Grant Policies

In response to heavy demand, we have posted three sample equity grant policies in the “Timing of Stock Option Grants” Practice Area on These are in Word – and one of the samples relates solely to new hires.

John White on Director’s Role in the SEC Comment Letter Process

In this speech entitled “An Expansive View of Teamwork: Directors, Management and the SEC,” SEC Corp Fin Director John White appeals to directors to take a more active role in the SEC comment letter process by at least receiving copies of the SEC comment letters and responses from the company – and not allow management to “shield” directors from those documents.

As part of his series of speeches on the topic, John also spoke about the SEC’s new executive compensation rules – for example, see this excerpt about the director’s role in preparing the CD&A:

“I mentioned very briefly that your CEO and CFO will now be called upon to certify your company’s Compensation Discussion and Analysis. As I also said earlier, that section of your company’s disclosure must address the policies and decisions related to executive compensation. One objection that we heard to having that section be company disclosure is that it unfairly makes the CEO and CFO responsible for board and compensation committee actions that are outside the officers’ “jurisdiction”, for lack of a better word.

Your compensation committee report, as well as any consultations and discussions you may have about your CD&A section, can help provide your officers with the necessary insights and understanding they need in making their certifications. And this, in fact, is a two-way street. Your own comfort and your own knowledge can be equally fortified and improved through this process. And if you become more involved and more adept with these issues, that will inure to the benefit of your shareholders and investors more generally, which of course comes full circle to your overlap with the SEC.

The Commission has carefully structured a disclosure system in this area designed to further the interests and address the needs of investors. I hope you can see it in many ways as also offering the potential of furthering your interests and addressing your needs as directors. One important footnote — I would encourage you again to take a look at my remarks on principles based disclosure. They highlight and explain this crucial concept and, I believe, may help you and your company in drafting and evaluating your CD&A sections in the future.”

Late SEC Filings as Bond Defaults: New York State Court Weighs In

A few weeks ago, I blogged about how some investors are leveraging late SEC filings as a way to accelerate repayment of outstanding bonds. Here is news of a recent development in this area from Davis Polk (and this memo is posted in our “Late SEC Filings” Practice Area):

The Supreme Court of New York, New York County (New York State’s trial level court) on September 18, 2006, issued an opinion in The Bank of New York v. BearingPoint, Inc., a litigation where a central issue was whether a company’s failure to file Exchange Act reports when required by the SEC constituted an Event of Default under a convertible bond indenture.

In the BearingPoint litigation, the company failed to file, within the time period required by the SEC, its annual and quarterly reports on Form 10-K and 10-Q for a variety of publicly announced reasons, including the existence of material weaknesses in the company’s internal controls and financial accounting. Following the company’s failure to file those reports within the SEC-prescribed time period, certain holders of its 2.75% Series B Convertible Subordinated Debentures sought to declare an Event of Default under the covenant default provisions as set forth in Section 7.01(g) of the indenture. The particular covenant under which holders alleged a default was Section 5.02 (entitled “SEC and Other Reports”) which provides:

“[T]he Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall comply with the other provisions of TIA Section 314(a). [Emphasis Added.]”

Although the Indenture clearly states that the company had no obligation to file SEC required reports until those reports were actually filed with the SEC, the court nonetheless ruled that the company’s failure to file those reports when required by the SEC constituted an Event of Default under the indenture.

Section 314(a) of the Trust Indenture Act does not specify a time period during which a company must file SEC required reports, but merely states that an issuer must file SEC reports with the indenture trustee. The court reasoned that a reading of the indenture that required the company to file those reports whenever it actually filed them with the SEC would frustrate the purpose of Section 314(a) the TIA which, according to the court, “was to make BearingPoint’s financial information available to Series B Debenture Holders … [so that] investors can make informed decisions about their investment and guard against the risks attendant to incomplete information.”

The BearingPoint decision is the New York trial court’s opinion upon summary judgment. As a result, it is not certain whether other courts would reach a different conclusion or whether, upon appeal, the New York Court of Appeals would affirm the trial court’s decision. In addition, because Section 314 of the TIA does not directly incorporate the filing requirements described above into every TIA qualified indenture and only obligates an issuer to make those filings as a matter of statute, the court did not address whether a failure to comply with Section 314 would have any effect on an indenture that did not expressly incorporate that section. Moreover, where the indenture does incorporate Section 314 of the TIA, as did the BearingPoint indenture, the court did not address contractual remedies other than acceleration that could have been included in the Indenture, such as a mandatory increase in interest rates.