In our “Conference Notes” Practice Area, we have posted notes from Corp Fin’s panel and workshop from the popular PLI “SEC Speaks” Conference, which was held over the weekend.
Corp Fin’s Position on Preliminary Proxy Statements and Exec Comp Disclosures
At the PLI’s “SEC Speaks” conference, Corp Fin Chief Counsel David Lynn provided some guidance about whether the Division intends to review executive compensation disclosure in preliminary proxy statements this year. For this proxy season, Corp Fin doesn’t intend to review preliminary proxy statements just because they have executive compensation disclosure under the new rules. In other words, companies may file their preliminary proxy statements that omit executive compensation without fear that the filing is so deficient that the 10-day clock doesn’t start to run, so long as the omitted disclosure isn’t the reason for the preliminary filing and the executive compensation disclosure isn’t otherwise made public. Of course, the executive compensation disclosure is required to be included when definitive proxy materials are filed.
This position isn’t much of a surprise given that IBM filed a preliminary proxy statement without executive compensation disclosure a few weeks ago – and General Electric filed a preliminary proxy statement without such disclosure last week…
NYSE Issues Annual Corporate Governance Letters
Last month, the NYSE issued its annual corporate governance letters to listed companies. The letters provide an overview of the things that listed companies should keep in mind when preparing for their annual meetings and Form 10-Ks or Form 20-Fs; there are two versions of the letter: the US issuer letter and the non-U.S. issuer letter.
On Friday, Corp Fin unveiled its new home page, with the content more organized along the lines of various subject matters. Looks good, but no new substance.
My favorite is a new catch-all called “Frequently Requested Materials,” which houses two ancient items: one is 45 years old and the other is nearly 20. A more accurate label is “Old Stuff You May Never Have Heard About (But Still Has Some Value)”…
More Proxy Filings Under the New Executive Compensation Rules
The new batch of proxy filings are starting to flow, and Mark Borges blogged Friday about a handful of them. Here are a few others that aren’t noted in Mark’s blog that Bob Dow of Arnall Golden Gregory sent me:
House Tax Measure to Omit Senate-Approved Limit on Deferred Pay
Following up on the Senate’s passage of a tax package that would include limits on nonqualified deferred compensation, as noted in the following excerpt from a Bloomberg article by Ryan Donmoyer and Vineeta Anand: “the U.S. House Ways and Means Committee will draft a tax cut for small businesses of as much as $1 billion that omits a Senate-passed penalty on employees who receive tax-deferred compensation in excess of $1 million, a congressional aide said.
The aide, who is involved in drafting the House legislation, confirmed that it wouldn’t contain the provision, a key element of an $8.3 billion measure passed Feb. 1 by the Senate. The House panel will debate its tax measure Feb. 12.
The omission is a victory for groups that opposed the Senate provision such as the Financial Services Roundtable and Financial Executives International. The deferred-pay rule was one of about a dozen revenue-raising measures designed to offset the cost of the tax cuts, which are included in legislation to increase the minimum wage for the first time in a decade. ‘This is a huge relief,” said Brick Susko, a partner in the New York law firm of Cleary Gottlieb Steen & Hamilton, who advises corporations on executive pay. “The Senate bill was misguided and not well thought out.”
The deferred-compensation provision may become a sticking point later this month when House and Senate lawmakers meet to reconcile differences between the two tax measures, possibly delaying passage of the broader minimum-wage legislation.” Here is a related Forbes’ article.
Tune in Monday for our webcast – “Last Minute Planning for the Proxy Season” – to hear Cathy Dixon of Weil Gotshal, Amy Goodman of Gibson Dunn, Ellen Friedenberg and Gloria Nusbacher of Hughes Hubbard, John Siemann of Georgeson Shareholder, and Bill Tolbert of Jenner & Block discuss the latest guidance to help you feel more comfortable that you have not missed anything for this year’s proxy season, including the SEC’s new related-party transaction rules, hot areas for MD&A and much more…
More D&O Questionnaires Posted
We have posted two new D&O Questionnaires in our “D&O Questionnaires” Practice Area, one for Nasdaq companies and one for NYSE companies. They come complete with a “crib sheet” for determining director independence.
ABA’s Letter to SEC Chairman: Seeks Revised Cooperation Guidelines
On Monday, the President of the ABA wrote to SEC Chairman Cox urging the SEC to revise its cooperation guidelines to bar the SEC staff from demanding that companies waive the privilege. We have posted a copy of the letter in our “Attorney-Client Privilege” Practice Area.
Earlier this week, the SEC released its budget request for 2008, as well as it’s Congressional justification for the request. As is the case for most federal agencies not dealing with homeland security or the military, the SEC’s budget would remain flat in terms of constant dollars as it increases to $906 million from $878 million, as noted in this article.
More importantly, the headcount at the SEC would once again be cut for almost all substantive functions, including Corp Fin and Enforcement – although the budget assumes the SEC will finish fiscal 2008 with 3,567 full-time employees, the same number the agency is expected to have at the end of the current fiscal year. With accountants making up the bulk of Corp Fin these days, the number of lawyers in the Division today is quite low compared to the good ole days when some of us roamed her halls…
SEC Filing Fees: Any Update?
A member recently asking if Congress ever approved the SEC’s budget, which in turn would lower the SEC’s filing fees. Although a delay from approving the SEC’s budget – whose fiscal year ends September 30th – is an annual rite of passage, this year’s ongoing delay might be a record! Four months and counting (although there finally has some movement on approving the Federal budget this week). Here is the SEC’s most recent resolution that extended temporary funding through February 15th. So, filing fees remain at last year’s rates for the time being…
– Director compensation rose 12% to $160,000/yr., mostly due to higher value of equities.
– Stock option use continued to decline, down to 54% of directors from 58% in 2005 and 66% in 2004. Restricted stock use increased to 51%, compared to 44% in 2005.
– Annual retainers remain the most popular, with 95% of boards getting them.
– Increased disclosure of stock ownership requirements; 37% in 2006 v 28% in 2005. 56% of S&P 500 now have such requirements, typically 5 times board retainer.
– Diversity hasn’t changed from 2005 to 2006. Still 12% of directorships held by women; 10% by minorities.
Yesterday, Delaware Chancellor Chandler delivered two opinions in declining to dismiss complaints alleging backdating of options (in Ryan v. Gifford) and spring-loading of option grants (in Tyson Foods). We have posted copies of these opinions in our “Backdated Options/Grant Policies” Practice Area.
Here is some analysis of these opinions courtesy of Potter Anderson & Corroon:
The backdating case is Ryan v. Gifford. The Chancellor declined to stay the case in favor of earlier filed California federal actions, citing, among other things, the interest of Delaware courts in deciding novel and important issues of Delaware law. Not surprisingly, the Chancellor refused to dismiss the complaint, saying very strongly that intentional backdating constituted bad faith and that the board made fraudulent disclosures to shareholders by putting out proxy statements and other documents saying that the grants complied with the plan when in fact they did not, because the plan required the options to be priced at fair market value on the date of grant. The Chancellor did dismiss the complaint as it related to backdating that allegedly occurred before the plaintiff acquired his stock in a stock-for-stock merger.
The Tyson Foods opinion deals with a complaint challenging many aspects of compensation and alleged self-dealing. Among the allegations were several instances of “spring-loading”; that is, issuing options ahead of news the directors allegedly knew would move the stock higher. In refusing to dismiss the spring-loading complaint against the members of the compensation committee that granted the options, the Chancellor found it “difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at ‘market rate’ and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more.”
The Chancellor went on to clarify that it was important to his decision that the plan in question was approved by shareholders and that to survive a motion to dismiss the plaintiff must plead that the directors knew they had inside information and intended to “circumvent otherwise valid shareholder-approved restrictions upon the exercise price of the options.”
Lawsuits Against Audit Firms
Against the backdrop of the push for capping auditor liability, here is an interesting paper on large claims filed against the auditing firms. As the paper notes, the incidences of such claims has declined – and these claims may be dismissed, dropped or settled for substantially less than the amounts claimed. The paper also discusses trends in the litigation. The paper is posted in our “Securities Litigation” Practice Area – which has grown so large that it’s almost a website unto itself – under “Studies Re: Securities Litigation Trends.”
Forecast for 2007 Proxy Season and Strategies to Consider
We have posted a transcript of the popular webcast: “Forecast for 2007 Proxy Season and Strategies to Consider.”
According to this Forbes article, the Mob is doing PIPE deals! Anways, following up on last week’s blog on the SEC Staff’s guidance on resales of securities underlying convertible notes, Andy Thorpe of Morrison & Foerster fleshes out what Marty Dunn and Shelley Parratt said at the Northwestern conference:
Corp Fin’s goal is to elicit clear disclosure in the registration statement so that purchasers in the secondary sale understand the background of the convertible note transaction and its effect on the company and on the shareholders. Regarding the 10-12 items it seeks, the Staff may request the following types of disclosure:
– The determination of the number of shares to register
– The dollar value of the securities registered for resale
– Amount of all fees and all payments made to the selling securityholder, its affiliates, or any other party such as a placement agent in connection with the transaction
– Amount of all proceeds to the issuer and amounts deducted from the proceeds
– Possible profits from the conversion of the notes (including profits as a result of a market discount built into the conversion formula)
– Prior transactions among the issuer and the selling securityholders
– Relationships between the selling securityholders and relationships between the selling securityholders and the issuer
– Issuer’s intention or ability to make payments under the terms of the notes
– The dilutive effect of the conversion
– The identities of natural persons with voting or investment power over the securities registered on behalf of the selling securityholders
– Short positions of the selling securityholders known to the issuer
Marty and Shelley also stated that transactions are more likely to withstand scrutiny as a valid secondary transaction if there are a large number of selling securityholders that are not affiliated with each other or the issuer – and where no single securityholder is selling a large number of securities.
Regarding the 60-day/six-month guidance, Marty indicated that the test is to be determined on a per selling shareholder (and its affiliates) basis. This means that a company can file a resale registration statement for a subsequent PIPE transaction before 60-day or six-month period if it contains new selling securityholders that are unaffiliated with those on the previous registration statement.
By the way,we just announced a new webcast – “The Latest on PIPEs II” – during which the panel will discuss the lay of the land for PIPEs now.
Analysis: Congress’ Proposed Legislation on Deferred Compensation
On February 1st, the Senate overwhelmingly approved the “The Small Business and Work Opportunity Act of 2007,” which would amend the Internal Revenue Code that would significantly curtail any employee’s ability to defer compensation in excess of $1 million per year under Section 409A. In addition, the Act would broaden the definition of “covered employee” under Section 162(m) so as to apply the $1 million deduction limitation to payments made to a “covered employee” even after such individual ceases to serve in that capacity. In this CompensationStandards.com podcast, Art Meyers of Seyfarth Shaw provides some insight into this proposed legislation, including:
– What’s in the Senate’s bill regarding deferred compensation?
– What would be the implications if the bill became law with no changes?
– What might happen in the Senate-House conferencing to change the bill?
Implementing Scrutiny-Proof Grant Procedures
For NASPP members, catch the webcast tomorrow – “Implementing Scrutiny-Proof Grant Procedures” – to hear Howard Dicker of Weil Gotshal, Sharon Hendricks of Heller Ehrman, Bill Dunn of PricewaterhouseCoopers and JD Higginbotham of Monolithic Power Systems discuss grant practices that all companies should consider implementing, as well as important control to prevent errors or even fraud.
Don’t forget to tune in next Monday for our webcast – “Last Minute Planning for the Proxy Season” – to hear Cathy Dixon of Weil Gotshal & Manges, Amy Goodman of Gibson Dunn & Crutcher, John Siemann the Managing Director of Georgeson Shareholder, and Bill Tolbert of Jenner & Block discuss the latest guidance to help you feel more comfortable that you have not missed anything for this year’s proxy season, including the SEC’s new related-party transaction rules.
SEC Continues to Get Slapped Around
On Thursday, a Senate committee released its interim investigation findings on the SEC’s Enforcement Division’s handling of an investigation of hedge fund, Pequot Capital Management. You may recall that two Senate committees began grilling the SEC last summer after a former Staffer, Gary Aguirre, said he was fired for complaining that the Pequot investigation had been derailed because of political considerations. Here is an excerpt from a Friday NY Times’ article:
“At best, the picture shows extraordinarily lax enforcement by the S.E.C.,” Senate investigators concluded. “At worse, the picture is colored with overtones of a possible cover-up.” The report strongly suggests that Mr. Aguirre was fired in retaliation for his criticism. At the same time, Senate investigators said they were “deeply troubled” by the failure of the S.E.C.’s inspector general, Walter J. Stachnik, to investigate Mr. Aguirre’s accusations properly.
[As an aside, I can’t help but remember the good old days of prank of folks calling a fellow Staffer and pretending to be the SEC’s inspector general. Those were some real gems.]
Corp Fin Adds An Asset-Backed Interp
On Friday, Corp Fin added #17.06 to its Regulation AB telephone interps, making a lot of ABS practitioners very happy. The new interp provides guidance on when a vendor hired by a servicer should not be viewed as a party participating in the servicing function (and thus will not need to provide separate assessment and attestation reports for inclusion in a 10-K).
Last week, the NASD filed a rule change with the SEC to amend its filing fees for WKSIs under Rule 2710, with a maximum fee of $75,500 for each such filing. The NASD rule was effective upon filingbut with an implementation date of February 26th. The maximum filing fee has been $75,500 for a while now.
The problem regarding filing fees for any shelf offering is that, even though the amount registered on the shelf would justify payment of the full fee, the NASD has been willing to allow the first broker-dealer that takes down a tranche need only pay a filing fee on that tranche, and then each following broker-dealer pays more fees – up to the $75,500 maximum per registration statement.
The NASD has followed this practice ever since the shelf rules allowed undesignated shelfs – and issuers and broker-dealers argued that the mere fact that the issuer had registered $500 million of securities, for example, did not mean the NASD should collect a fee on that amount, since the issuer may only sell a small amount from the shelf.
Thus, NASD was willing to base its fees for shelf offerings on the amounts sold off the shelf rather than the amount registered with the SEC. It appears that for WKSI filings, the NASD staff concluded that the practice was just too cumbersome and could hold up a no-objections letter. Since the n-o letter isn’t issued unless the fee is paid there is too little time in today’s filings for the underwriters to wait for the filing fee to be sent, received, recorded at the NASD.
For those negotiating agreements related to registering securities, the practice point is that you should ensure that the issuer is obligated to pay all NASD filing fees or otherwise clearly state what is expected up front – otherwise the broker-dealers, selling shareholders, and issuer will end up arguing about who is responsible for the full NASD filing fee when it is due upon filing of a shelf. I hear that there have been instances of selling shareholders doing a shelf takedown and discovering that the NASD wants the fee for the entire shelf covering all primary and secondary shares…
SEC Clears Market-Based Option Valuation
A few months ago, I conducted this podcast about Zions Bancorp and its use of market value for auctioning employee stock options. Last week, the Office of Chief Accountant issued this letter to the company approving the market-based valuation approach after the company tweaks what it has been doing. This WSJ article provides more details – and look for more information on this topic on an upcoming NASPP program.
In his “AAO Weblog,” Jack Ciesielski weighs in on whether ESOARs will fly in the marketplace.
Our February Eminders is Posted!
We have posted the February issue of our monthly email newsletter.
Today, the Senate overwhelmingly approved the “The Small Business and Work Opportunity Act of 2007,” in which I think Sections 226 deals with 409A and 226 deals with Section 162(m). It’s hard to parse this bill, which is S.349 if you plug it into this Bill Locator.
Yesterday’s WSJ included this negative opinion of the bill; I agree that Congress should not try to regulate executive compensation through the tax code as boards can evade the law with tax gross-ups and other employees may be unfairly penalized. Of course, Congress shouldn’t be blamed for excessive compensation as the op-ed intimates; that blame should fall on the shoulders of directors.
The Senate and the House now have to reconcile this Senate bill with a much simpler House version. Here are more documents related to the Act:
Here We Go Again: Caremark’s Severance for Those Not Terminated
I easily could blog on executive compensation every day. I really don’t want to and I don’t think you want me to either. But it’s hard not to, particularly with boards continuing to prove that they are either aloof or indifferent as to what their shareholders want. Take Caremark as the latest example. As yesterday’s Washington Post column from Steve Pearlstein outlines (as well as this press release), many of Caremark’s executives will receive hefty change-of-control payments when CVS completes its acquisition of Caremark – even though those executives also will receive handsome employment agreements with the merged company! No pay practice infuriates shareholders more than this one.
A lawsuit related to this merger has been filed in Delaware’s Chancery Court, with Chancellor Chandler getting another whack at these types of egregious compensatory arrangements (you may recall that Chancellor Chandler is the one who sent the Disney case to trial). With boards like Caremark, I don’t blame Congress for “getting into the game” and trying to rein in existing practices, even though the end result will likely cause unintended consequences…
President Bush on Rethinking Pay Practices
And putting the nail in the coffin that CEO pay truly is a hot political topic, President Bush called on Wall Street to rethink pay practices in a speech yesterday. Here is an excerpt from today’s related NY Times article:
“White House officials said that Mr. Bush decided to raise the issue out of his own sense of outrage over deals in which executives have left flagging or failed companies with huge compensation packages, as workers and lower-level executives have been left far behind.
But officials said there was also an economic concern: that distrust of corporate executives over their pay had the potential to scare individual investors out of the market.”
Yes, Many CEOs of US Public Companies Really Are Overpaid…
This recent op-ed from the Washington Post is probably the most misguided one I have seen yet on executive pay. As I often do, I dutifully posted a comment with my views but what struck me the most was the outpouring of anger from others in the comment section. Executive pay likely will be an issue to contend with in upcoming elections, as reflected already in the recent Congressional activity in this area.
Harvard Law School has a new corporate governance blog and I will be posting some rants now and then on it. Below is a response to Professor Kaplan’s comments on the recent New York Times article about private equity funds:
While it’s true that some private equity funds are luring sitting CEOs with higher pay, I think it’s far from a widespread trend. There are about 14,000 sitting CEOs today; maybe a dozen have been lured away, if that.
And since the terms of the pay arrangements given to privately held CEOs are not publicly available, we don’t really know what those arrangements consist of. Will private owners continue to pay for poor corporate performance? Will they pay out a huge severance package–or any severance–to a fired CEO? I doubt that private owners would follow the lead of so many public companies in these criticized areas.
But more importantly, we must remember the difference between CEOs of private companies and public companies. Private owners are free to pay someone as much as they want; it’s their money. In the public company context, the board of directors have their fiduciary duties to consider when paying someone and appropriate processes must be used. Unfortunately, the processes followed today often are broken – and have been for some time.
In this “Open Letter to All Journalists,” I try to explain how board processes for setting CEO pay levels can be improved. For example, can you believe that boards didn’t consider the total amount already committed to be paid to a CEO before layering on more compensation as recently as three years ago? On CompensationStandards.com, we coined the term “tally sheet” in 2004 when we started pushing boards to begin consulting spreadsheets before adding/changing an element of a CEO’s pay package.
I continue to get too many confidential emails from board advisors describing naive – and uninformed – acts by directors to buy into the notion that CEOs are underpaid. Many processes continue to be broken and even when the processes are repaired, boards have not yet addressed the excesses created by more than a decade of bad practices. This is all common sense: if we pay a highly paid CEO even more, will shareholders get better performance? I think the millions most CEOs already receive should be incentive enough.