Monthly Archives: October 2006

October 31, 2006

John White on Related-Party Transaction Disclosures

A few weeks back, Corp Fin Director John White delivered his latest speech from his series on the SEC’s new rules. This one is entitled “Principles Matter: Related Person Transactions Disclosure and Disclosure Controls and Procedures.” Here is an excerpt regarding charitable donations:

“I have heard very intelligent people assert, quite emphatically, that a charitable donation cannot trigger required disclosure, allegedly because it cannot be a transaction (“it’s only a gift”) for these purposes. I respectfully disagree. Determining whether disclosure is ultimately required under Item 404 involves walking through the entirety of the analysis behind the principle and the key objective (including whether a related person has a direct or indirect material interest) but I do not think there is anything in the language of the rule or in the principle that forecloses the possibility that a charitable contribution may be a transaction or a related person transaction. Remember the broad definition the Commission uses for “transaction” as well as the rest of the key objective behind related person transaction disclosure.

Imagine this hypothetical. A company makes a sizeable (that is, more than $120,000) donation to an environmental organization which the company’s CEO particularly likes. Is that a related person transaction that requires disclosure? Going back to our key objective, it seems attenuated to me, without more, to find a “direct or indirect material interest” for our hypothetical related person, the CEO, so disclosure may not be required. But it seems clear to me that it’s a transaction based on the Commission’s definition and discussion. It may be lack of materiality that precludes disclosure.

Change the facts a little. What if the environmental charity employs the CEO’s son? What if the charity was in dire straits before the company’s donation and the son was likely, like everyone else who works at the charity, to lose his job? The company’s sizeable donation, however, allows the charity to remain in operation. That one seems fairly easy. In that hypothetical, the company’s donation has allowed the CEO’s son to keep his job, and I imagine most parents would have at least an indirect material interest in their children’s employment and careers. Alternatively, what if the prominent and highly regarded head of the charity writes a letter (and pulls some strings) after the contribution is received and lands the CEO’s daughter a prestigious internship with an international wildlife agency? I have no idea standing here today what the right answer to that one is, but I believe we could figure it out if we had all the relevant facts and walked through them with the principle in mind. Remember, it’s the principle that matters. And I at least think that the fact that the Commission has designed Item 404 to be principles-based tells us pretty quickly that we can’t shirk the analysis by saying that a charitable contribution does not fit into someone’s preconceived notion of transaction. As an understanding of principles-based rules and disclosure make clear, lacking express language or a direct example in the rulemaking we must return to the principle. That is not at all the same as saying we can stop our analysis or conclude that disclosure is not required.”

Valuing Warrants and Shareholder Approval

Nasdaq has begun to solicit comments on a new proposal regarding the method of valuing warrants when applying its shareholder approval requirement. Get your comments in by mid-January…

Happy Haunting


October 30, 2006

Bank of America Tries a Different Majority Vote Approach

Check out this recent Form 8-K filed by Bank of America regarding their board’s adoption of by-law amendments and governance guidelines to implement majority voting for directors. The points that you may find of interest are the bylaw provision cannot be amended without shareholder approval and the governance guidelines with respect to director resignation, which are different from those that have been adopted by most companies (e.g. directors must agree to submit resignation in advance of next annual meeting). Here is the related press release – and the amended corporate governance guidelines.

Ken Wagner of Bank of America has just joined the webcast panel – “Shareholder Access and By-Law Amendments: What to Expect Now” – to explain why his company took the approach that it did.

Stocks Populi

With the SEC’s re-consideration of its outstanding shareholder access proposal on December 13th, reports of heated debates within the SEC regarding “what to propose” are not surprising – here is former SEC Chairman Arthur Levitt’s opinion on the topic from Friday’s WSJ:

“Ever since the recount of 2000, partisans of both parties have paid particular attention to everything from who votes to how they vote and how their preferences are recorded. Counting every vote is not only integral to our political life; it is central to our economic life as well. Shareholder capitalism enables our markets to thrive, our companies to grow and our economy to remain strong. And central to this system is the principle that shareholders can have a voice in the running of the companies that they own, that their votes will count.

This fall, the issue has been the focus of a series of court cases, decisions and now potential Securities and Exchange Commission action. How the SEC handles this can have a profound effect on the future of shareholder democracy, corporate governance and the future of our markets. It’s a matter of interest to all investors.

For years, shareholder advocates have been working to gain better access to companies’ proxies so that they can put forward resolutions and, most importantly, their own candidates for director slots. Even though boards of directors have improved considerably since the passage of new independence standards and disclosure requirements in Sarbanes-Oxley, the ability of shareholders to remove directors is critical when seeking to revive a moribund corporation. Yet currently, board elections are one-party affairs, with the incumbent board’s choices winning in virtually every case. Shareholders can only put forward candidates after costly proxy campaigns. A director has a better chance of being struck by lightning than losing an election.

After failing to convince the SEC to pass a proxy access proposal in 2003, shareholder advocates tried to make changes in the bylaws of companies that govern the elections of directors in order to make them fairer. They argued that this was a matter of process under applicable law (that is, did not directly relate to the election of directors, a basis of exclusion), and thus management had to put such a proposal on its proxy card to shareholders. In September, in a case concerning AFSCME, the large public employee union that wanted to put forward these changes at AIG, an appeals court ruled that such a bylaw change was proper and that management would have to open its proxy to proposals regarding how directors were elected. (Full disclosure: I was retained by AIG’s board to help restructure its corporate governance; I had no involvement in this matter.)

In response, the SEC rightly decided to re-examine this issue and clarify the law. An open hearing on the topic was scheduled in October but was delayed until Dec. 13. The outcome of this session is critical to the future of shareholder capitalism. The signal the commission sends is an important one. Support of the AIG decision will make it clear that the reforms of the past few years were not ephemeral, and that even though the markets are once again delivering high returns, the commitment to good governance will not falter.

The upcoming meeting is the right time and place for the commission to set expectations for our public corporations. Indeed, an understandable desire for consensus on such a difficult matter is less important than the clarity of the SEC’s message. While passing an entirely developed proxy access plan may be too much to ask, the SEC can set a direction by making it clear that it will not ignore the issue of fairness that precipitated this latest litigation and put forward a series of steps that will strengthen shareholder democracy.

Part of this should include safeguards such as a minimum requirement of shares held in order to put forward director nominees. Other changes that can be made are: an increase in the number of exempt solicitations from 10 persons to 20 as long as those solicited are institutions or “accredited investors” so that investors can easily communicate with each other; the electronic transmission of proxy materials to those who desire them in that form, a move that can boost shareholder participation and reduce cost; and an endorsement of the principle of majority rule and schemes that bring this to publicly traded companies. A growing number of corporations have taken this last step, and it’s important for the SEC not only to allow but also to affirmatively promote it as a best practice — even urging the exchanges to include majority-voting among their listing standards.

By setting this tone, the SEC will make a strong statement about corporate governance. It will demonstrate that accountability is a principle that will not be compromised. It will bolster its admirable efforts on executive compensation; after all, disclosure provisions are toothless if shareholders are unable to act upon them. And an endorsement of shareholder democracy will show investors world-wide that in our markets, their voices matter and their votes count.”

Sign On The Dotted Line

From “The Rule 10b-5 Daily Blog“: Sarbanes-Oxley requires the chief executive officer and chief financial officer of a company to certify the accuracy of each periodic report containing financial statements. Plaintiffs often argue that these certifications can support the pleading of scienter (i.e., fraudulent intent) in cases alleging accounting misrepresentations.

In what appears to be the first circuit court opinion to address the issue, the U.S. Court of Appeals for the Eleventh Circuit has held that SOX certifications, by themselves, are not indicative of scienter. In Garfield v. NDC Health Corp., 2006 WL 2883238 (11th Cir. Oct. 12, 2006), the court found that SOX “does not indicate any intent to change the requirements for pleading scienter set forth in the PSLRA [Private Securities Litigation Reform Act of 1995].” Accordingly, a SOX certification “is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements.”

Quote of note: “If we were to accept [plaintiff’s] proferred interpretation of Sarbanes-Oxley, scienter would be established in every case were there was an accounting error or auditing mistake made by a publicly traded company, thereby eviscerating the pleading requirements for scienter set forth in the PSLRA.”

October 27, 2006

Executive Compensation Disclosure: Canadian Regulators Cooking Up New Rules Too

From ISS’ “Corporate Governance” Blog: “The Globe and Mail had an interesting article the other day by Janet McFarland and Elizabeth Church titled “New Disclosure Rules to Reflect Evolving World.” The article states that Canadian investors will soon have the opportunity to learn more about executive pay packages as regulators prepare to revise compensation disclosure rules introduced more than a decade ago.

The Canadian Securities Administrators (CSA) expects to have a new set of rules ready early next year, requiring full disclosure of virtually every detail of executive compensation.”

Rising CEO Pay

Yesterday, the NY Times ran this article about the highest paid CEO for this year, based on data from a recent report from The Corporate Library. In this podcast, Paul Hodgson of The Corporate Library discusses this recent 18-page special report on CEO pay trends, including:

– Why does your survey come out so late compared to others?
– What was the driving force behind the large increase in CEO pay?
– What happened this year with restricted stock grants to CEOs?
– Are stock options going to play as large a role in the future as they have in the past?
– Why is the increase in CEO pay so much lower for small cap companies compared to larger companies?

CEOs as Independent Directors

From In 1990, out of the largest 500 American companies, 358 active CEOs served on outside boards filling 794 seats. As of June 2006, only 265 served on an outside board filling 376 seats, a 53% decline. CEOs who continue to serve have reduced their seats by 36%. Service on outside boards for CEOs of the largest 100 companies went from almost 90% to less than 60%.

Jim Drury, founder and CEO of search firm JamesDruryPartners, argues companies need to make outside board service a priority for their own CEOs. “CEOs learn a lot when serving on boards other than their own. After all, many companies deal with the same issues: international expansion, global sourcing, product innovation, technology enhancement. When a CEO gains an inside look at how other companies handle these crucial problems, she can be a more effective leader in her own firm. And CEOs can work more effectively with their own boards if they’ve experienced life on the other side of the table.” “With CEOs abandoning the boardroom, it’s time for reformers to remember that ‘too much of a good thing is never a good thing.’” (Boardroom Brain Drain,, 10/16/06)

Directorship views the picture from a somewhat different perspective. “The good news is that once a nominating committee is willing to look beyond the traditional specifications, the pool of talented potential directors widens considerably.” One obvious source of supply is the cohort of recently retired CEOs; another is active CFOs and the retired managing partners of the big accounting firms. Women and minorities are viewed as a third source. “The emphasis on skill sets is steering some nominating committees toward candidates with particular expertise rather than particular titles.” “With boards under pressure to represent shareholders’ interests more visibly, some observers think the universe of investor relations professionals could be a future source of potential directors.” “A seat on the board of a public corporation is increasingly seen as necessary training for up-andcoming executives.” (Who Will Sit on Tomorrow’s Boards?, Directorship, 10/06)

Shaping Strategy from the Boardroom, argues that CEOs should have more influence over who sits on the board, not less. Nominating committees have been given too much control over board composition. CEOs should have more say in picking directors who know the business. But boards should be more involved in driving corporate strategy. Boards must also make strategy as important as compliance when they manage their work and reform their processes. Industry expertise may be more important than previous board experience. (The McKinsey Quarterly, 10/18/06)

Many reformers would be happy to have CEOs of their companies sit on another board to get such cross-fertilization of ideas, if the CEO of their board is nominated by shareholders of the other company. Board loyalties tend to be to those who brought them to the dance (to paraphrase Nell Minow). Its about time that at least some of the invitations go out from the owners.

October 26, 2006

More on Overvoting

We have posted the transcript from our recent webcast: “Understanding Overvoting and Other Tricky Voting Issues.” The webcast panelists went beyond the “big picture” – but this big picture is noteworthy, including:

– there are a lot more close votes than many of us realize (in other words, there’s a lot more overvoting than meets the eye)

– overvoting is on the rise

– over-voters are almost always short-termers and not even “owners” at all

– there are a number of unresolved legal issues and/or ambiguities

Bush ‘Astounded’ by CEO Pay, Urges Link to Performance

According to the following excerpt from a Boston Globe article from Tuesday, President Bush said he is “astounded” by the size of some executive pay packages and urged companies to tie salaries to performance, while stopping short of advocating government action.

“These compensation packages can get out of hand,” he said in an interview on CNBC. While incentives for performance are necessary, he said, companies should “make sure the incentive pay is rational.” The president, who didn’t mention any executives or companies by name, encouraged investors to pressure corporate boards on compensation. “I don’t think government should control salaries,” Bush said, “but I would hope shareholders would take a close look at some of these compensation packages.”

Thanks to FEI’s “Section 404″ Blog for pointing this article out…

“Paulson Committee” May Soon Recommend Dramatic Limits on Securities Class Actions

The Boston Globe article then went on to note: “The president also said he and Treasury Secretary Henry Paulson are looking at ways the Sarbanes-Oxley Act can be “fine tuned” to make sure it’s not driving capital away from US public markets. Congress passed the legislation, which subjects companies to stricter auditing rules and stiffer penalties for financial crime, in 2002 after accounting frauds at Enron Corp. and WorldCom Inc. eroded investor confidence. ‘One way you become less competitive is through overregulation,’ Bush said. ‘Secretary Paulson and I have spent a lot of time talking about this issue.'”

Here is more on a related topic from the “Securities Litigation Watch Blog“: Since early September 2006, a committee composed of “independent … U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders” has fairly quietly been conducting a study into how to improve the competitiveness of the U.S. public capital markets. Next month this committee (The Committee on Capital Markets Regulation, also referred as the “Paulson Committee” because it will present its recommendations to US Treasury Secretary Henry Paulson), will issue an interim report with recommendations on several topics. Most notably for this blog, these topics include “Liability issues affecting public companies and gatekeepers (such as auditors and directors) with a focus on securities class action litigation….”

John Coffee, a professor at Columbia University School of Law, said at a recent ALI-ABA conference that he is an adviser to the panel and has suggested several reforms designed to mitigate the threat of securities litigation. According to the article, Coffee believes that in the “near future,” the Paulson Committee can be expected to make recommendations “to impose limits on securities class actions” and that the “SEC could take some action to change the role of [the] securities class action” in the next 6 months.

Among the possible changes that could result, Coffee said, were the eye-opening ideas that:

1. The SEC could “dis-imply” a private cause of action under Rule 10b-5 against corporations, leaving enforcement of that rule to the government, not private plaintiffs. The SEC might also “dis-imply” such a private cause of action with respect to the corporation only when the SEC has sued the corporation. Coffee states in the article that “That idea does have some support”; or

2. “Stock drop” cases could be moved out of the courts and into the arbitration arena.

The Paulson Committee’s recommendations are due out by the end of November 2006. If either of these ideas are among them, look for a barrage of deafeningly loud disapproval from the plaintiffs’ bar and consumer groups…. Stay tuned.

October 25, 2006

NYSE Proposal: Eliminate Broker Voting Starting in 2008

Yesterday, the NYSE filed this proposal with the SEC to amend Rule 452 and eliminate broker discretionary voting for director elections (as such elections would no longer be considered “routine”) for any shareholder meetings held on – or after – January 1, 2008. The proposal is subject to approval by the SEC.

The NYSE’s proposal dovetails with a set of recommendations from its Proxy Working Group issued in June. Surprisingly, the proposal notes that the NYSE didn’t receive any comments on the Proxy Working Group’s recommendations (although the NYSE Staff only had solicited comments back in June to share with the SEC, not the public). Interesting that the NYSE acted so soon, given that it was reported that this proposal would be postponed just a month ago.

This proposal amplifies the stakes in the majority vote movement/shareholder access debate and will be discussed during our upcoming webcast: “Shareholder Access and By-Law Amendments: What to Expect Now.”

Survey: Compensation Committee Meetings/Disclosure Committee Meetings

As our perk survey continues, we have posted a new quick survey regarding meetings of the compensation committee and disclosure committee, including:

– In the wake of the SEC’s new compensation disclosure rules, our compensation committee has the following people attend their meetings

– Does someone from your independent auditor attend your disclosure committee meetings

– If someone from your independent auditor attends some or all of your disclosure committee meetings, does that person

– If someone from your independent auditor attends some or all of your disclosure committee meetings, what is the purpose for attendance

Please take a moment to participate in both these surveys.

NYSE’s Elimination of Annual Report Delivery: What to Do Now

As I blogged a few months back, the NYSE amended Section 203.01 of its Listed Company Manual regarding the provision of annual financial reports to shareholders. The amended rule is intended to allow listed companies to satisfy the NYSE’s annual financial statement distribution requirement by a website posting of a company’s Form 10-K (but this only benefits foreign private issuers until the SEC adopts e-Proxy and amends Rule 14a-3).

As a follow-up to its revised 203.01, the NYSE Staff recently issued this message:

“Companies have asked whether they can still satisfy the NYSE’s requirements by traditional physical delivery of the annual financial statements, without the necessity of making the website postings and simultaneously issuing a press release as provided for in the amended rule. The answer is yes.

As the NYSE stated in its rule filing with the SEC, the rule amendment was intended to “provide significant efficiencies to listed foreign private issuers exempt from the proxy rules under Exchange Act Rule 3a12-3.” The NYSE recognized in the filing that “the proposed rule changes will have minimal effect on domestic companies subject to the proxy rules”, and as noted above, the entire proposal was presented as a mechanism by which companies would be allowed to achieve compliance with NYSE requirements to provide annual financials to shareholders. Accordingly, the NYSE will deem companies that distribute annual financials to shareholders in compliance with the SEC’s proxy rules to be in compliance with the requirements of Section 203.01.”

October 24, 2006

Survey Results: More on Regulation FD

Here are the survey results from our latest quick survey on Regulation FD (which fits neatly with last year’s Regulation FD survey):

1. Our company posts information on its corporate website and takes the position that this is sufficient to satisfy Reg FD:

– Yes, our company takes this position for anything posted on its corporate website – 3.8%
– It depends, our company takes this position for certain items posted on its corporate website (but not all) – 28.3%
– No, our company does not yet take this position – 67.9%

2. Our company has a written policy addressing Reg FD practices:

– Yes, and it is publicly available on our website – 5.6%
– Yes, but it is not publicly available on our website – 60.4%
– No, but we are in the process of drafting such a policy – 15.1%
– No, and we do not intend to adopt such a policy in the near future – 18.9%

3. Regarding reaffirmation of earning announcements, our company uses one of the following rules of thumb regarding private reaffirmations:

– We do not allow private reaffirmation – 60.8%
– Rule of thumb allowing for private reaffirmations of one week or less – 7.8%
– Rule of thumb allowing for private reaffirmations of one to two weeks – 13.7%
– Rule of thumb allowing for private reaffirmations of two to three weeks – 9.8%
– We permit private reaffirmations – but never use a rule of thumb, instead we require confirmation of no material change with CEO, GC, etc. – 7.8%

4. At our company, our CEO and other senior managers: (multiple answers apply, may total more than 100%):

– Are not permitted to meet privately with analysts – 6.7%
– Are only permitted to meet privately with analysts so long as someone else accompanies them (such as general counsel or IR officer) – 35.0%
– Are permitted to meet privately with analysts after briefing by IR officer, general counsel, etc. – 18.3%
– Are only permitted to meet privately with analysts during certain designated times – 18.3%
– Are not permitted to talk about certain topics – 33.3%

Regulation FD Dissemination: The Blogging of Material Information

On the heels of our survey on whether dissemination of material information through the Web satisfies a company’s Regulation FD obligations, Sun Microsystems CEO Jonathan Schwartz – who is one of those rare CEO bloggers – has asked the SEC to allow companies to disclose significant financial information through blogs. Mr. Schwartz’ letter to the SEC is copied in his blog.

Here are some thoughts from Stan Keller on this topic: “Absent definitive guidance from the SEC, I believe that if you want to disseminate information by means of your website to satisfy Regulation FD, you should file a Form 8-K (or issue a press release) saying you have done so. The 8-K should be descriptive enough so that investors will know the subject matter – like a release noticing an FD compliant call.”

SPACs: How to Use a Special-Purpose Acquisition Company

We have posted a transcript from our recent webcast: “SPACs: How to Use a Special-Purpose Acquisition Company.” And today, catch Jim Freund, Mediator and former Partner of Skadden Arps Slate, Meagher & Flom LLP – and one of the foremost M&A lawyers of any generation – on the webcast: “M&A Dispute Resolution: Getting Deal Lawyers Into the Game.”

October 23, 2006

Sample Director Confidentiality Agreement

Reading the latest details about how H-P’s hired gumshoes closely followed a WSJ reporter gave me the shivers. Folks, feel free to sift through my trash anytime – trust me, there’s nothing in there too interesting save maybe some old boxers (my wife is now applying a one-year rule).

In our “Board Duties” Practice Area, I just posted a sample director confidentiality agreement contributed by a member.

Another member asked me recently: “On the issue of director confidentiality, because of some of the “defects” with regard to common law duties of confidentiality, we ask directors to sign a confidentiality agreement. We’ve purposely made it as benign as possible, under the theory that it supplements, rather than supplants, common law director duties and it is too difficult to negotiate with prospective directors over the terms of their confidentiality agreements. So far, we’ve had no issues with directors signing it. We’ve wondered about the types of things that would cause concern and the only context we could come up with is in the case of some sort of investigation—would a director be compelled by the terms of the agreement to not disclose something to a regulator?”

This question will be posed to the panel during our upcoming webcast, “The Art of Boardroom Etiquette and Confidentiality.” During a recent prep call I held with the panel, most agreed that entering into confidentiality agreements with directors is a bad idea – because directors already are bound by their fiduciary duties and thus there is no reason to bind them with contractual obligations. On the other hand, the use of agreements can be useful to remind directors that their obligations to the company are very real. This issue will be discussed during the webcast, but I’d be interested to hear your own thoughts on this practice.

A Record-Breaking IPO

Did you catch the numbers for Friday’s record-breaking IPO of Industrial & Commercial Bank of China? Not only did the IPO raise $21.9 billion, the total volume of orders was $430 billion! $350 billion of demand from global investors and $80 billion within China. Mind-boggling! And according to this WSJ article, demand for Chinese IPOs has been stimulated all year; last month, China Merchants Bank had $100 billion of demand for its $2.4 billion IPO.

With the ICBC deal under its belt, the Hong Kong Stock Exchange surpassed the London Stock Exchange for the highest aggregate volume of IPOs for 2007 so far (with the NYSE way back behind both). A global shift seems to have occurred…

First Shareholder Access Proposal Submitted for this Proxy Season

As Pat McGurn of ISS notes, investors are chanting “I want my MTV,” meaning majority threshold voting standards. He predicts that over 200 companies will receive shareholder proposals calling for majority vote standards to be adopted; over 150 were submitted this year and they garned average support levels of 47%. As noted below, and as will be discussed during our upcoming webcast: “Shareholder Access and By-Law Amendments: What to Expect Now” – the first proposals seeking shareholder access have been submitted (as well as the first letters to the SEC opposing access, see this Business Roundtable letter that I just posted in our “Shareholder Access” Practice Area).

From the ISS Corporate Governance Blog: “Four pension funds this week submitted a resolution that seeks to allow shareholder-nominated candidates to run for seats on Hewlett-Packard’s board of directors. This was the first proxy access proposal filed after a Sept. 5 federal court ruling that the Securities and Exchange Commission improperly allowed American International Group to omit a 2005 access resolution by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME).

The proposal at H-P was filed Sept. 25 by AFSCME, the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds, and the North Carolina Retirement Systems. The resolution asks the company to change its bylaws to allow any shareholder group holding 3 percent of the shares outstanding for at least two years to nominate one or more directors. Collectively, the pension funds own more than 30 million H-P shares with a market value of $675.9 million, according to their press release.

“Proxy access is critical to insuring shareholder rights,” New York State Comptroller Alan G. Hevesi said in a press release. “While we wait for the SEC to rule on this topic regarding all corporations, we are moving forward on a case-by-case basis to establish what should be a basic right for all shareholders.”

H-P had no immediate comment on the shareholder proposal. The Palo Alto, California-based computer manufacturer has been embroiled in a controversy over a boardroom leak investigation authorized by former Chairman Patricia Dunn. Dunn resigned Sept. 22, two weeks after the company acknowledged that it hired a private investigator to obtain the phone records of directors and journalists. The SEC, federal prosecutors, and California Attorney General Bill Lockyer are investigating the company’s handling of the leak probe, while U.S. lawmakers are holding hearings on the matter.

“The H-P board is completely dysfunctional and has been for a long time, which is an example of why shareholders have fought so hard for proxy access,” Richard Ferlauto, AFSCME’s director of pension investment policy, told Governance Weekly. “We seek to nominate directors at H-P who will make the board do its job better through an election process that is not stacked against investor interests.”

October 20, 2006

Trying to Curb My Enthusiam: Judge Finds Grasso Breached Duties

I know I can’t hide my grin today. Yesterday’s partial summary judgment from New York State Justice Ramos validates a lot of what our mission has been about on over the past three years – at many companies, the process of setting pay levels has been broken for years. The fixes are relatively simple; the hard part is convincing CEOs and boards that the gravy train is over.

True, the NYSE is a New York non-profit and the circumstances are fairly unique – but the real message for me here is that the courts are “loaded for bear” when evaluating pay packages. Interestingly, Justice Ramos is presiding over the In re Viacom Inc. Shareholder Litigation case slated for trial in a few months.

Here is an excerpt from an article in today’s WSJ:

“Among Justice Ramos’s findings: that the NYSE board wasn’t made aware of a huge chunk of the retirement pay Mr. Grasso was due and that Mr. Grasso had a duty to disclose that pay to the board. The justice also had harsh words for the board.

“That a fiduciary of any institution, profit or not for profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care,” Justice Ramos wrote in a partial summary judgment, a pretrial ruling on certain aspects of a case. The case is particularly striking because the Big Board boasted an all-star roster of directors, including the chiefs of some of Wall Street’s largest financial companies, each of whom made tens of millions of dollars in annual pay.

Jim Barrall, head of the global executive-compensation and benefits practice at Latham & Watkins LLP in Los Angeles, described the findings as “stunning.” “I have never heard of a court decision finding a breach of fiduciary duty based on the failure to disclose all the numbers” about the size of a supplemental pension. At a minimum, Mr. Barrall suggested, corporate CEOs will have to make sure “the board understands the numbers and all the elements of the [leader’s] pay package and how they work together.” At many companies, the size of an executive’s supplemental pension swells along with the magnitude of bonuses and equity awards.”

Act Now: We continue to receive numerous requests for access to the video archive of last week’s “3rd Annual Executive Compensation Conference.” Apparently word is spreading – particularly about the need to take specific actions now – including implementing the three key analytic tools that need to be discussed in your upcoming CD&A.

You should watch the three separate panels on how to implement tally sheets, wealth accumulation, and internal pay equity – so that you will know how to disclose what your company is doing in these areas.

Market-Valued Employee Stock Options

In this podcast, Ben Stradley of Towers Perrin provides some insight into what the new financial instrument that mimics an employee stock option, the employee stock option appreciation right (also known as an “ESOAR”), including:

– What are ESOARs?
– Why would a company want to issue ESOARs?
– What are potential problems?
– What were the results of the Zions’ auction?
– What issues should companies consider regarding ESOARs?
– Are there other market-based approaches companies could consider?

At Last, There Goes My Innocence…

…guess I’m finally a grown-up now. The latest report from The Corporate Library on backdated options claims that director interlocks played a big role in the backdating scandal. Here is an excerpt from their press release:

“A new study by The Corporate Library of the 120 companies now implicated in the options backdating scandal finds new evidence that the practice of backdating stock options may have been spread by word of mouth through the network of directors sitting on the boards of more than one company. Director interlocking relationships now appear to be the most important governance characteristic and indicator of backdating problems.

The number of companies implicated in the options backdating scandal has more than doubled since The Corporate Library’s first report on this subject, rising from 51 at the end of June 2006 to 120 companies at the end of September 2006. At the same time, the number of companies with directors sitting on other companies implicated in the scandal has risen almost fivefold, from 11 to 51. The most important relationships involve several directors who served on boards prior to 2002, when most backdating activity occurred, and continue to serve now, including Scott Kriens and Stratton Sclavos. Kriens and Sclavos, for example, are responsible for the central position of Juniper Networks within the network of linked companies, and between them sit on four other implicated boards.

In analyzing the director network, the authors of the report also found a wealth of intertwined relationships involving the Silicon Valley law firm of Wilson Sonsini Goodrich & Rosati. A number of the firm’s senior partners, including Larry Sonsini, played multiple roles at many companies implicated in the backdating stock option scandal.”

October 19, 2006

SEC Adopts “Best Price” Rule Amendments

Yesterday, the SEC adopted long-awaited amendments to the best-price rule, Rule 14d-10, which brings the M&A world back to “normal” in the wake of conflicting decisions among the US Circuit Courts in this area during the past few years. Here is an opening statement from Corp Fin – and here is an opening statement from Chairman Cox.

As expected, the amendments:

– clarify that the rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer

– clearly exclude compensation arrangements, so long as they meet certain requirements

– provide a safe harbor for compensation arrangements that are approved by independent directors

– include an exemption that contains specific substantive standards that must be satisfied

Join two of the SEC Staffers who drafted the rule amendments – as well as two former SEC Staffers who served in Corp Fin’s Office of Mergers & Acquisitions – in this newly announced webcast: “The Evolving ‘Best Price’ Rule.”

Good News for Members!

For the many of you that are members of, we have just tweaked our database so that you can use your ID and password for to access the thousands of pages of content on

We have made this switch now, since the two sites will be combined next year – creating an even more comprehensive resource for all your Section 16 needs. Try a no-risk trial for 2007 if you are not yet a member (and get the rest of 2006 for free) – or if you already are a member, renew your membership today (as all memberships are on a calendar-year basis).

Watch Out for those “Stealth” Restatements II

A few members reacted to my blog on “stealth” restatements. Here is one of those reactions: “I saw the WSJ article on “stealth restatements” and pulled the Form 8-Ks referenced in the article. My take on it is that the SEC Staff, through the comment letter process, is “informally” changing its policy on when an Item 4.02 Form 8-K is required.

The crux of an Item 4.02 filing is that a company’s Board, or the chief accounting officer, or the company’s external auditor concludes that previously issued financial statements “should no longer be relied upon because of an error in such financial statements” as addressed in APB No. 20. There are lots of situations – including, it would appear, the Sun Microsystems and Inter-Tel restatements – where a company restates its financial statements to correct and error, but the restatement does not cause the company or the external auditors to conclude that the prior financial statements cannot be relied upon. My reading of Item 4.02 is that a Form 8-K would not be required in those instances. By their comment letters, the SEC Staff seems to be expanding Item 4.02 to reach restatements where that critical conclusion has not been made. I don’t see any basis for that in the instructions to Item 4.02 or in the FAQ’s. Am I missing something in this analysis?”

Feel free to weigh in with your own analysis or experiences on this one by shooting me an email.

October 18, 2006

PCAOB Staff Issues Option Valuation FAQs

Yesterday, the PCAOB Staff issued a set of 22 FAQs entitled “Auditing the Fair Value of Share Options Granted to Employees.” The FAQs address auditing the fair value measurements associated with determining compensation cost. It highlights risk factors that auditors should be aware of and addresses the auditor’s consideration of the process for developing a fair value estimate, significant assumptions used in options pricing models, and the role of specialists in fair value measurements.

M&A Dispute Resolution: Getting Deal Lawyers Into the Game

Next Tuesday, catch Jim Freund, Mediator and former Partner of Skadden Arps Slate, Meagher & Flom LLP – and one of the foremost M&A lawyers of any generation – in the webcast: “M&A Dispute Resolution: Getting Deal Lawyers Into the Game.” Settling the all-too-frequent post-closing disputes spawned by M&A deals is too important to be left solely to the litigators! Transactional lawyers should step up to the plate to help achieve commercially-sound solutions through negotiation or mediation.

Among other topics, Jim will cover:

– Why is resolving disputes such tough work
– How deal lawyers can add real value for their clients in the mediation process
– What are some common pitfalls in M&A disputes – and how to overcome them
– What are the keys to persuading a mediator as to the merits of your cause

And now you can catch this program at no cost if you take advantage of our no-risk trial for 2007 (and get access to for the rest of 2006 for free).

Sovereign Bancorp: “I Pity the Fools”

Last week, Sovereign Bancorp “fired” its CEO. You may recall that Sovereign Bancorp was last year’s “governance posterchild of the year” in my humble opinion. Of course, I use the term “fired” loosely since the company’s board didn’t remove the CEO “for cause” – why do that when you can pay the guy a bushel of the shareholder’s money on the way out the door? I pity Sovereign Bancorp’s shareholders.

Here is a related WSJ article from Saturday:

“By all appearances, Jay S. Sidhu was forced out in the past week as chairman and chief executive of Sovereign Bancorp Inc. Under his employment agreement, that could allow him to walk away with a severance package valued at tens of millions of dollars.

Several board members at the Philadelphia bank had been pressing for Mr. Sidhu’s dismissal due to concerns about the company’s earnings outlook, its stock performance – it trades at a discount to peers – and about deals he has engineered. But there is a catch: Sovereign’s official explanation for his departure didn’t match what was happening behind the scenes. The company said Wednesday that Mr. Sidhu “resigned and retired…for family health related reasons.”

If he jumped from the plane on his own volition as Sovereign says, compensation experts argue, Mr. Sidhu isn’t entitled to the golden parachute he appears to have gotten.

Nobody expected this to keep Mr. Sidhu from securing a rich goodbye package. His contract doesn’t include poor performance as a reason to deny him severance, so pay experts say he deserves the money if he was effectively fired. And Sovereign is hardly the first company to gloss over the reasons for an executive departure. But critics in the corporate-governance community say the company’s story should match its actions.

“It isn’t acceptable if he is being terminated to say that he is leaving voluntarily, nor is it acceptable for the company to pay him severance if he is leaving without good reason,” says Paul Hodgson of research firm Corporate Library. A Sovereign spokesman declined to comment. Mr. Sidhu didn’t respond to requests for comment.

Late Friday, Sovereign disclosed in a regulatory filing that Mr. Sidhu would, in fact, collect more than $40 million in payments stemming from his departure. And the company acknowledged that “the resignation and retirement came in the face of a threatened termination by the company.”