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