Monthly Archives: October 2006

October 17, 2006

UnitedHealth’s Latest Revelation: Compensation Committee Chair Handled CEO’s Money

As the mainstream media drools over the imminent departure of UnitedHealth’s CEO for option backdating, I was stunned to see that one of the company’s directors, William Spears, resigned in the wake of revelations that Mr. Spears was handling some of Dr. McGuire’s financial investments at the same time he was presiding over the company’s compensation committee. The details of the financial entanglements are laid bare in this 14-page Special Committee Report prepared by Wilmer Hale (but this relationship was not disclosed in the company’s latest proxy statement).

One area where the plaintiffs’ bar continues to press in lawsuits is the lack of director independence. For example, the In re Viacom Inc. Shareholder Litigation case is scheduled to go to trial in January after New York Supreme Court Justice Charles Ramos denied Viacom’s motion to dismiss this past June. As you might recall from an earlier blog, this case is different than Disney because a finding that the board wasn’t independent likely would change the standard against which to measure the board’s conduct – from a “business judgment” standard to the more challenging “entire fairness” standard. An entire fairness standard would put the onus on Viacom’s directors to prove that they acted fairly in determining the amount of compensation.

And even if directors are not conflicted, they might be treated as a conflicted persons if they are “dominated” by someone who has a conflict, including an executive or another director. Based on recent caselaw, a court would probably investigate the extent to which other directors were dominated by Mr. Spears or Dr. McGuire – and perhaps apply a “director-by-director” analysis as done in Emerging Communications and Emerald Partners.

What about personal liability for those directors who went along with Mr. Spears, as head of the compensation committee? Personal liability requires greater culpability than a mere lack of independence. However, there are claims that could be brought (for example, corporate waste) that could give rise to personal liability – at which point, tricky indemnification and D&O insurance issues are raised. And remember that other issues are raised by lack of a compensation committee’s independence, such as the loss of the exemption under Section 16(b) – see our “Director Independence” Practice Area for more analysis.

Yesterday, the UnitedHealth board announced this series of actions it intends to take (including a pat on the rump for Director Spears). After the plaintiffs’ bar is through with them, me thinks this list will grow a wee bit longer…

A Conference Recap

I was pleased to be quoted in Sunday’s NY Times article by Gretchen Morgenson (who also cited both last week’s “3rd Annual Executive Compensation Conference” and our 2nd Annual Conference as well), but I didn’t agree with the characterization of Fred Cook as someone who has caused many of the compensation problems that we now face. At a time when quite a few compensation consultants are still afraid to step up to the plate and provide responsible advice to their clients, Fred Cook remains a bright beacon who is not afraid to say what he thinks is right, regardless of what those that defend the status quo might think.

For example, Fred has spoken about internal pay equity as an alternative benchmark at our past two conferences. Very few consultants are willing to speak on the topic, perhaps because they view it as an admission that their long-standing reliance on peer benchmarking was in error.

I was happy to speak to a few consultants in our audience who said that they were “coming around” and now recognize the utility of internal pay equity. I wouldn’t be surprised for internal pay equity to become as ubiquitous as tally sheets over the next few years.

Mourning for Larry the Mailroom Guy

The SEC is mourning the loss of one of the true great characters on the Staff. I had countless conversations with Larry during my two tenures at the SEC and he always brightened my day. Below is a note from Chairman Cox to the Staff:

“This is a grim day for the SEC, because we are mourning the loss of one of our community. Larry Levine, whose passing late Tuesday has saddened all of us, in many ways exemplified what is best about our organization.

At death we remember and celebrate life — and there was much about Larry’s life worthy of remembrance and celebration.

Despite being born with a developmental disability and being legally blind as an adult, Larry earned an AA degree at Montgomery College. He then made a career here at the SEC, for 28 years. Larry didn’t just put in his time here, but reveled in the fact that he was part of our mission. Like all of us, he was honored to wear the SEC badge. At times when the agency had early departure — whether because of inclement weather or building malfunction — Larry wouldn’t leave. He would just say to a supervisor or colleague, “brother, I have work to get out.”

Larry was a dedicated worker who never lost sight of how important his task was. In nearly three decades his sense of duty never wavered. His excitement carried over to his personal life — including a love of horse racing, and the Dallas Cowboys. He loved his family, and was a loyal son to his parents Frances and Albert, a dedicated brother to sister Cindy and brother Rusty, and an adoring uncle to his niece.

Larry overcame the odds and served his country, and America’s investors, with distinction. His example of transcending difficulty and meeting life’s challenges with enthusiasm will remain an example to us all.”

October 16, 2006

California: Majority Vote Law Enacted

Back on September 30th, California Governor Schwarzenegger did signed SB 1207 into law (a topic that has been the subject of several blogs). Here are a few thoughts from Keith Bishop:

1. The amendments allows a “domestic corporation” that is also a “listed corporation” to amend either its articles of incorporation or bylaws.

2. Not every publicly-traded corporation is a “listed corporation”. A “listed corporation” is defined as a corporation with outstanding “shares” listed on the NYSE or the AMEX or a corporation with outstanding “securities” listed on the National Market System of the Nasdaq Stock Market (or any successor to that entity). Cal. Corp. Code Section 301.5(d).

Note that California has not yet amended Section 301.5(d) to take into account the recent change in status and name of the Nasdaq markets. Publicly traded companies with only debt securities listed on the NYSE or AMEX, shares traded on the OTC Bulletin Board or the Pink Sheets will not be affected by the new law.

3. The new law doesn’t require a majority vote – it requires “approval of the shareholders” which is defined a little bit differently. Under California law, “approval of the shareholders” requires the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present. This requirement is similar to a majority of the votes cast (i.e., abstentions don’t have a negative effect).

However, California adds an additional requirement that the shares voting affirmatively must also constitute at least a majority of the required quorum. For example, assume that a corporation has 100 shares issued and outstanding and 51 shares are present at a meeting. If 25 votes are cast FOR, 24 votes are cast against and 2 votes are abstention, the first part of the test will be met. 25 votes represents a majority of the shares represented and voting (25/25+24 = 51%). However, the second part of the California test will not be met. The required quorum is 51 and 26 votes would be required to constitute at least a majority of the required quorum.

4. The new law does not limit the right of the board appoint a candidate who fails be reelected to special circumstances. The bill simply provides that a vacancy may be filled in accordance with existing Section 305 of the Corporations Code. That section generally allows vacancies (other than by removal) to be filled by “approval of board” or if the number of directors then in office are less than a quorum by (i) the unanimous written consent of the directors then in office; or (ii) the affirmative vote of a majority of the directors then in office.

This rule may be abrogated by the articles or bylaws. Thus, it is important to check them. If the vacancy is the result of a removal, the directors may not fill a vacancy unless the articles or a bylaw adopted by the shareholders so provides. Although the failure to be reelected has the effect of a removal, I don’t believe that a vacancy occurring by reason of a failure to be reelected should be treated as a removal for purposes of Section 305. I hope that this and other drafting problems with the new law will be corrected in the future.

5. As a result of the enactment of SB 1207, California domestic corporations that are listed corporations must now decide whether to retain (or even re-adopt) cumulative voting (in which case the provisions of the new law won’t be available). If they elect to opt out of cumulative voting or have already done so, the board (unless the power to amend or adopt bylaws has been restricted or eliminated) or the shareholders could choose to adopt the new voting procedures.

Wave of Class Actions Filed Against Sponsors of 401(k) Plans

From a recent Gibson Dunn memo (which is included in our “ERISA Securities Litigation” Practice Area): “A wave of putative class action lawsuits were filed last week against sponsors of 401(k) plans and other defined contribution retirement plans. The lawsuits were filed in federal courts throughout the country against some of the largest and best known companies in the U.S. The lawsuits, alleging violations of the Employee Retirement Income Security Act of 1974 (“ERISA”), target the fee structures found in some plans that offer mutual fund investments as well as plans that permit participants to invest in a fund comprised solely of the sponsor’s stock. Several observers have predicted that additional similar lawsuits will be filed in the future against other companies and their 401(k) plans or other defined contribution retirement plans.

While each lawsuit is founded on the specific terms of the plans in question, they all have several common characteristics:

1. The named defendants are the corporate plan sponsors, the administrative committees for each plan, and, in some instances, the individual members of the board of directors for the corporate sponsor.

2. Each lawsuit asserts that the compensation paid to investment managers and other service providers is excessive, thereby violating the prohibited transaction rules of ERISA. The complaints allege that, in addition to “hard dollar” forms of compensation, many of the investment managers and/or administrative service providers are compensated by undisclosed revenue sharing for having steered plan investments to a particular investment vehicle. These allegations echo complaints made by investors and others in the past few years against brokerages and mutual funds for not disclosing certain fees and compensation paid to the broker for making the fund available to investors.

3. Several of the plans in question are ERISA § 404(c) plans that permit participants to select the investment fund in which their account balances will be invested. The class action suits allege that the failure to disclose the true compensation arrangement for service providers constitutes a violation of the disclosure rules under ERISA.

4. Some of the lawsuits challenge the fees charged participants in connection with funds in which the participant can invest in the sponsor’s stock.

October 13, 2006

The SEC: Ready to Take Action

On Wednesday, the SEC announced that it will take action on a number of items, including:

– adopting changes to the tender offer best price rule next Wednesday, October 18th

– delaying a proposal to amend Rule 14a-8 from next Wednesday to December 13th (remember this is the AFSCME case response from the SEC)

– proposing guidance on internal controls on December 13th (part of the SEC’s recommended package of 404 relief announced by the SEC a few months ago)

– adopting rules for foreign private issuer deregistration on December 13th

– adopting rules for e-Proxy (i.e., Internet proxy delivery) on December 13th

Based on the SEC’s notice about next week’s “best-price” rule consideration, it appears that the SEC will apply the amendments to both issuer and third-party tender offers and will clarify that the best-price rule (i) does not apply to securities that are not tendered in a tender offer; and (ii) does not apply to consideration paid according to employment compensation, severance or other employee benefit arrangements with securityholders. It does not appear that the amendments will provide similar exemptive relief or a safe harbor with respect to other agreements with securityholders (e.g., commercial arrangements) or that they will include a de minimus exception.

And as the shareholder proposal rule amendment quickly became a political issue – and potentially a 3-2 vote along partisan lines if shareholder access was not included as part of the SEC’s proposal – my guess is that the delay might have been to move it to a post-election date…

SEC Issues NYSE’s Proposal to Eliminate Treasury Stock Exception

Last week, the SEC issued the NYSE’s proposal to eliminate the treasury stock exception from the requirements for shareholder approval under Section 312.03. Under current rules, listed companies have to calculate the number of shares issued to determine whether the shareholder approval requirement is triggered. This calculation may be affected if the company reissues treasury stock. Historically, this rule has not applied to any issuance of treasury shares. Under the NYSE’s proposal, listed companies would be required to include treasury stock in that calculation. There is a 21-day comment period for the proposal.

If adopted as proposed, the NYSE’s proposal would also:

– require listed companies to notify the NYSE when they issue treasury stock

– clarify that the shareholder approval requirement for related-party issuances to a “series of related transactions”

– clarify that “market value” means the official closing price as reported to the Consolidated Tape immediately before entering into a binding agreement selling securities

The NYSE also put companies on notice that any agreements entered into after 5 business days from the date the SEC publishes notice of this proposal in the Federal Register will not be grandfathered. Not much of a transition period and something to be aware of as this window period will close shortly.

You Ain’t Really Done Vegas…

…until you can say you have done time in her emergency rooms. I spent Wednesday night in a Vegas emergency room. Food poisoning or food allegery. Started puking at noon and by 9 pm, I thought I was gonna die. Couldn’t breathe nor swallow.

The ER was a trip; no proof of insurance required – so standing room only and folks appeared to be near death left and right. So my case was just like anyone else and the wait was loooong. So now I can say I have really done Vegas! I’m so happy to be alive!

October 12, 2006

A Deeper Look: How Contested Elections are Inspected

I hope you caught last week’s webcast – “Understanding Overvoting and Other Tricky Voting Issues” – and if not, it’s never too late as the audio archive is available. One of the panelists, Bill Marsh, President of IVS Associates (the largest independent tabulator), responded to my recent blog that wondered why it would take so long to finalize the results of the recent contested election at Heinz. Here is some education from Bill:

IVS was the tabulator and inspector of election for Heinz and was the focus of questions regarding the length of the tabulation process. Such questions are not unusual and, for the most part, inspectors are used to it. Some things to bear in mind:

– Proxy fights often take several weeks, and even longer, for inspector certification.

– The inspectors’ tally begins after the polls have closed (according to IVS practices). No additional votes are accepted by the inspectors under any circumstances.

– In proxy contests, record holders (those who hold certificated shares) are generally mailed three or more proxy cards from each side and sometimes have the ability to vote electronically(telephonic or Internet). Of course, how many times they vote really does not matter as far as the outcome is concerned; only the latest-dated valid vote counts. The point is that the tabulator spends many hours sifting through proxy votes (both hard copy and electronic voting files) to find the last-dated valid instruction for all the record holders. Some of the larger contests have well over 25,000 record holders.

Also, there is the “street vote” (beneficial holders through banks and brokers) – as administered mostly by ADP. This part of the tabulation involves gathering data from printouts of often more than a hundred pages and entering it into a database. If there are overvotes (a bank/broker voting more shares than assigned by the depository), the inspectors contact the bank/broker (usually through ADP) to get them resolved (per Delaware Law, which IVS follows if other states are silent).

When the inspectors have completed the preliminary tabulation, attorneys and solicitors from each side of the contest have the right to review all votes and present challenges to the inspectors. This process can last anywhere from several hours to several days – several weeks even.

The entire process is time consuming and tedious. Also, speed is the not the major concern- accuracy and the integrity of the voting results are. Shareholders and advocates should take comfort in the time and diligence that is put into the tally and getting it right so the holders votes are what carry day.

October 11, 2006

How to Watch Tomorrow’s Conference

If you are attending tomorrow’s “3rd Annual Executive Compensation Conference” by webcast, remember that the panel times are Pacific/West Coast time, which means Las Vegas is 3 hours behind the Eastern seaboard (but the four “bonus” panels are already posted and can be listened to at any time).

Course materials for each panel are posted directly beneath the links available for that panel. As always, each panel has a set of “talking points” posted, which are very helpful for taking notes. I have combined them in a PDF, if you want to print off a complilation of the talking points created for this year’s Conference. And there are many other materials listed below each panel’s links.

To gain access to the Conference, simply go to the home page of and follow the prominent link that will be at the top of the page and input your ID/password (which should be the same ID/pw for if you are a member that registered for the Conference). Then, you have three choices: (1) watch the panels consecutively live; (2) watch a specific panel live; or (3) watch a panel by archive (it will take 5-6 hours for a panel to be archived after it is over).

One technology item to note: You need approximately 600k of continuous incoming bandwidth in order to view a panel through a 500k link. If that high level of bandwidth is not available for you, your player will either not open or continuously buffer (i.e., freeze). If you experience this type of problem, it is highly recommended that you switch to a 56/100k link to watch the video. Here are other troubleshooting tips if you need them. If you’re coming to Las Vegas, see ya there!

CLE Credit: We also have posted this list of states with the status/number of hours available for CLE credit, divided into two categories: those attending online and those attending in DC. If you are in a state for which the Conference is accredited for online CLE – please register for CLE for webcast attendance and follow the instructions there (then, approximately 3-4 weeks after the Conference, we will e-mail you a Certificate of Attendance).

No Secrets: How Funds Vote Your Shares

Last week’s WSJ included this article about how mutual funds vote their shares; here is an excerpt:

“A burgeoning number of researchers are focused on the data, with two general conclusions so far: The biggest mutual-fund companies overwhelmingly do vote with management, more so than at least one leading independent adviser recommends. But they don’t appear to favor companies where they run 401(k) retirement-savings or other investment programs. And on select issues — those seen as directly affecting stock returns, such as votes over anti-takeover provisions — fund companies have proved willing to go to battle.

Mutual funds of the nation’s biggest and best-known money-management companies voted in support of management 92% of the time during the 12 months ended June 30, 2005, according to a study by Corporate Library, a governance-research firm in Portland, Maine. When it came to resolutions sponsored by shareholders, which managements generally oppose, the funds voted in favor less than one-third of the time, or 30%. (These statistics don’t include so-called socially responsible funds, which often vote against managements.)

In contrast, during the same period Glass Lewis & Co., one of several prominent firms that provide so-called proxy-vote recommendations to institutional investors like foundations and pension plans as well as mutual-fund companies, recommended that its clients vote for 80% of management-proposed resolutions and more than half — 53% — of shareholder resolutions.”

October 10, 2006

Food for Thought: Delaware Law Concerns and Majority Vote By-Law Amendments

Here is another pearl of wisdom from Kris Veaco:

I learned something the other day during a conversation about majority voting with John Johnston of Morris Nichols that I think is worth raising since the majority vote movement is in full swing. Morris Nichols has just written a memo entitled “The Nuts and Bolts of Majority Voting” that raises some significant concerns about the effectiveness – under Delaware law – of certain by-law amendments being adopted to implement majority voting.

As we know, a number of companies have adopted some form of a majority vote standard – and of those, some have elected to amend their by-laws to accomplish that, instead of amending their governance guidelines. For those Delaware corporations that have used by-law amendments like the one below, or are contemplating doing so, it sounds like a conversation with Delaware counsel may be in order. I just looked through Broc’s spreadsheet on those companies with majority voting standards and picked out this representative by-law provision:

“Except as provided in Section 3 of this Article II, each director shall be elected by the vote of the majority of the shares cast with respect to the director at any meeting of stockholders for the election of directors at which a quorum is present, provided that if at the close of the notice periods set forth in Section 13 of Article III, the Presiding Stockholder Meeting Chair (as described in Section 14 of Article III) determines that the number of persons properly nominated to serve as directors of the Corporation exceeds the number of directors to be elected (a “Contested Election”), the directors shall be elected by a plurality of the votes of the shares represented at the meeting and entitled to vote on the election of directors. For purposes of this Section, a vote of the majority of the shares cast means that the number of shares voted “for” a director must exceed the number of votes cast “against” that director. If a director is not elected in a non-Contested Election, the director shall offer to tender his or her resignation to the Board of Directors. The Governance and Nominating Committee of the Board of Directors, or such other committee designated by the Board pursuant to Section 5 of this Article II for the purpose of recommending director nominees to the Board of Directors, will make a recommendation to the Board of Directors as to whether to accept or reject the resignation, or whether other action should be taken. The Board of Directors will act on the committee’s recommendation and publicly disclose its decision and rationale within 90 days following the date of the certification of the election results. The director who tenders his or her resignation will not participate in the Board’s decision with respect to that resignation.”

The Morris Nichols memo points to those features of the current by-law provisions that are troublesome – and offers some alternatives. For example, they note that by-laws requiring a director to resign appear to be contrary to Section 141 of the DGCL, and that the new provision of Section 141(b) allows a director to tender an irrevocable resignation conditioned on the failure to receive a specified vote.

In other words, there is a way to accomplish the goal, but it requires the director to have made an election to resign in advance. For example, the annual D&O Questionnaire could include an advance irrevocable election to resign made by each director that the Board would then use if the director failed to gain the required vote. In addition, they raise concerns about the recusal provision and the language about contested elections.

Nasdaq Proposes Consistency Change for Related-Party Transactions

Last week, Nasdaq filed a proposed change to the threshold in its director independence rule from $60,000 to $120,000 to be consistent with the SEC’s new related-person rules.

Transcript Available: John Olson on “The Board Presentation”

Due to popular demand, we have posted a transcript of John Olson’s keynote presentation from our September executive compensation disclosure conference. The video archive of John’s remarks is still available at no charge – and continues to get rave reviews!

October 9, 2006

John White: Executive Compensation Disclosure and the Important Role of CFO’s

Last week, John White delivered another speech in his series on the SEC’s new executive compensation rules. Speaking before a group of CFOs, John discussed:

– CFOs’ involvement in the substance of disclosure, particularly the new Compensation Discussion & Analysis

– CFOs’ involvement in refining and adjusting disclosure controls and procedures

– CFOs’ involvement with compensation committee and its new Compensation Committee Report

What is a Director’s Duty to Go Beyond Management’s Board Book?

In the General Motor’s recent development – Jerome York quitting the board (York was placed on the GM board by 9.9% shareholder Kirk Kerkorian) – the issue of what is a director’s duty to look beyond the board materials prepared by management is raised. York claims one of the reasons he quit was because “I have not found an environment in the board room that is very receptive to probing much beyond the materials provided by management (and too often, at least in my experience, materials are not sent to the board ahead of time to allow study prior to board discussion).” This is an excerpt from York’s resignation letter filed as an exhibit to this Form 8-K. An interesting question that is discussed, among others, in our “Board Materials” Practice Area.

New Whistleblower Decision Provides Clarification on Protected Activity

From a recent Gibson Dunn memo (related memos are posted in our “Whistleblowers” Practice Area): In one of the most important Sarbanes-Oxley ” “whistleblower” decisions to date, the Department of Labor’s Administrative Review Board (“ARB,” or “Board”) has reversed the decision of an Administrative Law Judge and ruled that FLYi, Inc. did not violate the Act. Platone v. FLYi, ARB Case No. 04-153 (September 29, 2006). The case, which was handled before the ARB by Gibson, Dunn & Crutcher LLP and Ford & Harrison LLP, provides important new guidance on what constitutes protected “whistleblowing” under Sarbanes-Oxley (“SOX”).

The complainant, Stacey Platone, was employed as a labor relations manager for FLYi (then known as Atlantic Coast Airlines). As part of its collective bargaining agreement with the Air Line Pilots Association (“ALPA”), FLYi paid certain pilots for time that they spent on union activities when they otherwise would have been flying. The union was then to reimburse the Company for this “flight pay loss.” Platone alleged – and reported to her superiors – that some pilots were abusing the system by intentionally scheduling flight time on days they otherwise would have taken off, but that they knew were reserved for union business. By then dropping the flights to attend to union-related business, Platone charged, the pilots were able to collect flight pay.

At about the same time, it was learned that Platone was romantically involved with a pilot who was an influential member of ALPA. After an investigation, her employment was terminated due to what the Company judged to be an undisclosed conflict of interest.

Platone filed suit under SOX, claiming that her employment was terminated because she had reported mail, wire, and securities fraud within the meaning of the Act. Specifically, she claimed, the alleged flight loss abuses were improperly funneling money to certain pilots at the expense of the union or – in the event the union refused reimbursement – at the expense of the Company. The ARB, overruling an earlier decision by an Administrative Law Judge, concluded that Platone’s internal reports did not constitute protected activity under SOX, and that FLYi’s decision to terminate her therefore did not violate the Act.

The ARB’s decision provides important guidance on protected activity under SOX:

– By its terms, protected activity under SOX includes reporting what one reasonably believes to be a violation not only of the securities laws, but also of the federal criminal mail, wire, and bank fraud statutes. However, the ARB made clear in Platone, an allegation of mail or wire fraud “must at least be of a type that would be adverse to investors’ interests” in order to be protected by SOX. Slip Op. at 15. Thus, in this case for example, to the extent Platone was reporting potential losses to the union (which reimbursed the flight pay loss), she was not engaged in Sarbanes-Oxley protected activity.

– Sarbanes-Oxley protected activity “must relate ‘definitively and specifically’ to the subject matter of the particular statute under which protection is afforded,” the Board said. The Act “does not provide whistleblower protection for all employee complaints about how a public company spends its money and pays its bills.” Id. at 16 (emphasis added). “Thus, for example,” the Board continued, “an employee’s disclosure that the company is materially misstating its financial condition is entitled to protection under [SOX].” Id. at 17. In this case, however, Platone “raised a possible violation of internal union policy and she expressed concern on how this might affect [FLYi’s] ability to collect a debt, but nothing approximating fraud against shareholders.” Id. at 18.

– Third, the ARB made clear, where the purported protected activity involves reported fraud against shareholders, the materiality of the potential loss is significant. The materiality of a misrepresentation or omission is a “basic element[ ]” of a securities fraud claim, the Board elaborated, but “Platone testified to less than $1,500 of potential losses” to FLYi. “It is unlikely that a reasonable shareholder would find a loss of less than $1,500 material.” Id. at 21. This statement by the Board contrasts with earlier pronouncements by Labor Department administrative law judges that materiality is irrelevant to SOX whistleblower claims.

Because Platone did not engage in protected activity, the ARB reversed the decision of the Administrative Law Judge and dismissed the complaint.

The ARB declined to address other issues in the appeal, including the important question of when a parent company that does not directly employ the complainant is a proper respondent under Sarbanes-Oxley. In another case before the Board, the Solicitor of Labor has submitted an amicus brief arguing that the familiar four-part “integrated employer” test should determine whether a company is a covered employer under the Act. See Brief of the Assistant Secretary of Labor for Occupational Safety and Health, Ambrose v. U.S. Foodservice, Inc., ARB Case No. 06-096 (Sept. 1, 2006).

October 6, 2006

Updated Sample D&O Questionnaire Now Available!

On both and, we have posted an updated sample D&O questionnaire; updated for the new SEC rules. Note that this is a mere “sample,” so the typical disclaimers apply…

Sample Compensation Disclosure Checklist

Thanks to Todd Rolapp of Bass Berry, I also have posted a “compensation disclosure checklist” in a Word file in “The SEC’s New Rules” Practice Area of This is not a mock-up; rather it’s a document that can be used as a starting point to help get a head start on preparing next year’s proxy – you can use it to assign sections to the appropriate persons within the company responsible for gathering certain types of data (and it can help get people motivated and not drag their feet in getting this big job done).

Section 409A Deadlines Extended!

On Wednesday, the IRS and the Treasury Department issued a notice which deals with the Section 409A regulations, including discounted stock option grants (here are some memos analyzing this notice). Here is some analysis from “Mike Melbinger’s Compensation Blog” on I try not to blog twice in one day, but this news is too good not to share. Just moments after I sent my previous Blog, the IRS published Notice 2006-79, which provides transition relief from the December 31, 2006 deadlines of 409A by:

– Announcing that the final regulations will not become effective until January 1, 2008,

– Generally extending through 2007 the transition relief provided for 2006 in the preamble to the proposed regulations except with respect to certain discounted stock rights,

– Providing additional transition relief for certain payment elections in linked plans and certain collective bargaining arrangements, and

– Extending the amendment date for certain plans that took advantage of transition relief provided for 2005.

October 5, 2006

Our “What is a Perk?” Survey is Up!

As promised, we have posted our Quick Survey on “What is a Perk?” with fourteen different scenarios for your input. I received dozens of other suggested scenarios from members – but I didn’t want to overwhelm you, so I picked the ones that appeared most likely to be universally applicable. Please take a moment to complete the survey now.

And thanks to Brink Dickerson of Troutman Sanders, we have posted this list of potential perks in’s “Management Perks” Practice Area to help you identify the types of items/services you should be on the lookout for as you enhance your disclosure controls & procedures.

“Perk Tester” Flow Chart, Sample Board Presentations and More

In “The SEC’s New Rules” Practice Area on, I continue to post all sorts of useful information, including a few sample PowerPoint presentations that can be tailored for a board presentation and a nifty flow chart from Lou Rorimer of Jones Day to help ascertain “what is a perk?”

Emissions Reduction as a Corporate Governance Issue

One area that I intend to cover more are the “social” issues that have emerged as real business issues. In this podcast, David van Hoogstraten of Hunton & Williams explains how emissions reduction has emerged as a corporate governance issue, including:

– In what ways are greenhouse gas emissions reductions now seen as a corporate governance issue?
– What are shareholders doing to push for more disclosure of emissions?
– How are the markets and investment banks fostering sustainable production as a hallmark of the well-governed company?
– Why do we see more internal evaluations of companies’ sustainability efforts?
– Why should lawyers be involved in the preparation of public environmental reports?

October 4, 2006

Watch Out for those “Stealth” Restatements

A few weeks back, the WSJ ran this article about the SEC Staff’s push for more companies to disclose their restatements under Item 4.02 of Form 8-K. Apparently, a lot of companies are restating without filing a Item 4.02 8-K – rather these companies are including the new financials in their next 10-Q or 10-K, despite the fact that FAQ 1 of the SEC’s 8-K FAQs says you can’t do that.

The Staff is busy issuing comment letters to companies who have not filed the Item 4.02 8-K, because investors rely on seeing a 8-K to signal that a restatement has taken place. The comments often ask the reasons why a Form 8-K wasn’t filed – rather than demand that one be made – because Item 4.02 isn’t triggered for every restatement, just “material” ones. So companies get an opportunity to argue why a 8-K wasn’t necessary.

Of course, companies aren’t going to always win this argument. Apparently, Inter-Tel (a company quoted in the WSJ article) apparently didn’t file the 8-K because they determined that the changes made in the restatement were immaterial to any prior quarter or reporting period, but the Staff reportedly asked that they go back and highlight the restatement in a specific filing.

How Does SAB 108 Work Here?

Juxtapose these stealth restatement situations to newly-issued SAB 108 which states, as noted in this press release: “The Staff will not object if a registrant records a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial – quantitatively and qualitatively – based on appropriate use of the registrant’s previous approach.” SAB 108 describes the circumstances where this would be appropriate as well as the required disclosures that must be made.

I guess the bottom line here is to go ahead and clean up the balance sheet to correct those immaterial errors – but if you determine that you need to restate, don’t skip the 4.02 8-K filing.

New FAS 158 on Pension Plan Accounting

On Friday, the FASB issued FAS 158 on “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Here is a summary of FAS 158. This is quite a complex statement that covers retiree health care benefits in addition to pension plans. The impact on companies will vary – and could be quite significant for some. The resulting balance sheet changes could have effects on contractual provisions (e.g. loan agreements) and measurements for other purposes, such as net worth or shareholder’s equity.

FAS 158 requires employers to recognize the overfunded or underfunded status of a defined benefit post-retirement plan (other than a multi-employer plan) in the statement of financial position, measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation. It also would recognize – as a component of other comprehensive income, net of tax – the gains or losses and prior service costs or credits that arise during the period, but pursuant to FAS 87 and 106 are not recognized as components of net periodic benefit cost. There also are disclosure requirements.

The recognition and disclosure requirements are effective for fiscal years ending after December 15, 2006 – so it will apply this year for calendar year companies. There are separate effective date and transition provisions for a new measurement date requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position.

FAS 158 is phase one of the FASB’s project on pension and other post-retirement benefit plans. Phase two will address other issues, including income statement treatment of pension plan adjustments.