Monthly Archives: March 2007

March 16, 2007

Corp Fin Interpretive Letter: Form S-8 and SARs

A few days ago, Corp Fin issued this Beazer Homes USA interpretive letter that deals with the availability of Form S-8 for the exercise of stock appreciation rights and subsequent resale of underlying equity securities. General Instruction A.1(a)(5) of Form S-8 makes the Form available for the exercise of employee benefit plan options and the subsequent resale of the underlying securities by certain family members of an employee who acquired the options from the employee through a gift or domestic relations order.

The Staff was asked whether stock appreciation rights that may be settled in equity securities of the registrant may also be registered on Form S-8 in these situations. Given that the stock settlement of a stock appreciation right is economically equivalent to the cashless exercise of an option for the same number of shares, the Staff indicated that for purposes of General Instruction A.1(a)(5), in its view, the term “option” includes a stock appreciation right that may be settled in equity securities of the registrant.

Accordingly, when the other conditions of General Instruction A.1(a)(5) are satisfied, Form S-8 would be available for the exercise of stock appreciation rights and subsequent resale of underlying equity securities. This position is limited to stock appreciation rights that may be settled in equity securities of the registrant. All of this is not too much of a big deal as most practitioners haven’t questioned whether SSARs were covered under an S-8 – as we have written about in The Corporate Executive in the past – but it’s nice to have it clearly stated in an interpretive letter.

Tackling Global Warming: Even Corporate Lawyers Need to Take Heed

With climate control becoming an inevitable issue that we all will have to deal with – both in our personal and professional lives – we have launched a new website to help you navigate how global warming will impact the corporate & securities laws. Sponsored by and the National Council for Science and the Environment, this full-day June 12th webconference is free to all – and the agenda is listed on Here is a snapshot of that agenda:

– What the Studies Show: A Tutorial
– The Business Case for Tackling Global Warming
– The Board’s Perspective: Strategic Opportunities and Fiduciary Duties
– Why You Need to Re-Examine Your D&O Insurance Policy
– The Investor’s Perspective: What They Seek and Their Own Duties
– Disclosure Obligations under SEC and Other Regulatory Frameworks
– How (and Why) to Modify Your Contracts: Force Majeure and Much More
– Due Diligence Considerations When Doing Deals

It is notable that law firms are ramping up their climate control practices (see this recent NY Times article) and that an environment group recently hired an investment banker to help them negotiate their interests in an energy merger.

2500! A Blistering Pace

In our “Q&A Forum,” we have blown right through query #2500 (and even #2600) – which is really a higher number since many of these have follow-ups queries. As the pace has been blistering, I’m not sure if we can keep up with the growing pace of questions – you are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply…

March 15, 2007

Not Better Late Than Never? Corp Fin’s New Phone Interps

Perhaps to the chagrin of those finalizing – or have finalized – their proxy disclosures, Corp Fin posted a bunch of new “phone interps” yesterday (they’re actually not called phone interps anymore; they are more formally known now as “Compliance and Disclosure Interpretations”). There four new sets of interps, including:

Item 201 of Regulation S-K – Common Equity Information and Shareholder Matters

Item 403 of Regulation S-K – Security Ownership

Item 404 of Regulation S-K – Transactions with Related Persons

Item 407 of Regulation S-K – Corporate Governance

SEC Plans to Adopt Foreign Private Issuer Termination Rules

The SEC announced an open Commission meeting for next Wednesday to consider adopting rules that would allow foreign private issuers to deregister more easily – and Chairman Cox gave a speech during which he said he opposes weakening Sarbanes-Oxley…

Pop Quiz! Proxy Season Reminders

A member sent over the following conference notes, which serve as a nice pop quiz to determine how well you are “informed” this proxy season. At the Corporate Counsel Institute held at Georgetown University Law Center last week, Corp Fin Deputy Director Marty Dunn provided 10 points to remember for this proxy season:

1. Companies should confirm that the certifications required in Form 10-K by Regulation S-K Item 601 are accurate. A number of companies have been found by the Staff to have not adhered to the precise language of the Item.

2. Companies should carefully follow Item 601(b)(10) of Regulation S-K regarding material contracts required as exhibits, particularly with respect to per se material agreements such as those involving named executive officers.

3. Companies are not required to deliver board committee charters to shareholders if such charters are made available via a web site link – but companies must reference the website link in its disclosure.

4. Pursuant to Item 407 of Regulation S-K, where a company adopts its own definition for “independence” of directors, it must disclose the web site link where the definition may be found or append the definition to the proxy statement every three years.

5. Regarding disclosure of related-party transactions under Item 404(b) of Regulation S-K, a company must disclose its related-party transactions policy even if it doesn’t have any related-party transactions required to be disclosed under Item 404(a).

6. The beneficial ownership table required under Item 403 of Regulation S-K was amended pursuant to the new executive compensation rules to require disclosure of shares beneficially owned by directors and officers that are pledged as security.

7. Companies should be aware of the expansion of the plain English requirement from prospectuses to include executive compensation-type disclosure required under Items 402, 403, 404 and 407 of Regulation S-K.

8. Remember the requirement imposed in the securities offering reform rules that companies must make certain disclosures in their Form 10-K regarding unresolved comments from the SEC Staff.

9. Under the new executive compensation rules, companies are not required to disclose precise numbers if the amounts of salary and bonuses through the last calculable date cannot yet be determined. However, where companies do not do so and the compensation later becomes calculable, they are required to file a Form 8-K report disclosing these amounts pursuant to 5.02(f) of Form 8-K.

10. The peer index performance graph is no longer a proxy statement requirement but has not disappeared entirely. It is still required to be included in the “glossy” annual report required to be filed under Rule 14a-3.

Both Sides Declare Victory at H-P

Hewlett-Packard investors voted down a proposal that would have allowed shareholders who have owned at least 3% of HP’s outstanding stock for at least two years proxy access to nominate two board candidates. About 1.61 billion shares, or 52% of the total shares voted, were against the proposal. More than 800 million shares, or 39% of the total shares voted, were in favor. The percentages were enough for both sides to declare victory. Learn more at

March 14, 2007

Delaware Chancery Court Decision: Compensation Not Fair

I started blogging about this executive compensation case way back in 2005 – and at long last, we have an opinion in Valeant Pharmaceuticals v. Panic & Jerney – a case that went all the way to trial in Delaware’s Chancery Court (just like Disney). In the “Executive Compensation Litigation Portal,” we have posted a copy of the opinion.

Here is a recap of the decision from Travis Laster of Abrams & Laster: Vice Chancellor Stephen Lamb of the Delaware Court of Chancery held that a transaction bonus received by a former director and president of ICN Pharmaceuticals, Adam Jerney, was not entirely fair. The Vice Chancellor ordered Jerney to disgorge the entire $3 million bonus. He also held Jerney liable for (i) his 1/12 share (as one of 12 directors) of the costs of the special litigation committee investigation that led to the litigation and (ii) his 1/12 share of the bonuses paid by the board to non-director employees. The Vice Chancellor also ordered him to repay half of the $3.75 million in advancements that INC paid to Jerney and the primary defendant, ICN Chairman and CEO Milan Panic, to fund their defense. The Vice Chancellor granted pre-judgment interest at the legal rate, compounded monthly, on all amounts.

The ICN decision is a must-read for any practitioner who advises boards of directors or compensation committees on compensation issues. It contains a number of key holdings and comments. Here are some highlights:

1. Vice Chancellor Lamb found that all of the members of the board were interested in the bonuses paid in connection with an IPO of ICN, because even the outside directors on the compensation committee received a minimum of $330,500 per director. The Vice Chancellor viewed this compensation as making the compensation committee members “clearly and substantially interested in the transaction they were asked to consider.”

2. The Vice Chancellor was highly critical of the process followed by the compensation committee and its reliance on a compensation report prepared by Towers Perrin. The Vice Chancellor found that Towers Perrin was initially selected by management, was hired to justify a plan developed by management, initially criticized the amounts of the bonuses and then only supported them after further meetings with management, and opined in favor of the plan despite being unable to find any comparable transactions.

3. The Vice Chancellor rejected an argument that the Company’s senior officers merited bonuses comparable to those paid by outside restructuring experts. “Overseeing the IPO and spin-off were clearly part of the job of the executives at the company. This is in clear contrast to an outside restructuring expert…”

4. The Vice Chancellor held that reliance on the Towers Perrin report did not provide Jerney with a defense under Section 141(e) of the General Corporation Law, which provides that a director will be “fully protected” in relying on experts chosen with reasonable care. “To hold otherwise would replace this court’s role in determining entire fairness under 8 Del. C. sec. 144 with that of various experts hired to give advice….” The Vice Chancellor also held separately that Towers Perrin’s work did not meet the standard for Section 141(e) reliance.

5. The Vice Chancellor held that doctrines of common law and statutory contribution would not apply to a disgorgement remedy for a transaction that was void under Section 144. Hence Jerney was required to disgorge the entirety of his bonus without any ability to seek contribution from other defendants or a reduction in the amount of the remedy because of the settlements executed by the other defendants.

As an aside, it bears noting that this case is one of the rare situations in which a special litigation committee has realigned the company as plaintiff and pursued the claims originally brought by a stockholder plaintiff as a derivative action.

The ICN opinion shows the significant risks that directors face when entire fairness is the standard of review. The opinion also shows the dangers of transactions that confer material benefits on outside directors, thereby resulting in the loss of business judgment rule protection. Although compensation decisions made by independent boards are subject to great deference, that deference disappears when entire fairness is the standard. “Where the self-compensation involves directors or officers paying themselves bonuses, the court is particularly cognizant to the need for careful scrutiny.” Contrast, for example, the outcome in ICN, involving an interested board, and the quite different outcome in Disney, involving an independent board.

[Broc’s Final Four Picks: Georgetown over Florida in the final, with Texas A&M and Kansas also making the last weekend; it was tough not to take Texas over Georgetown. I correctly picked Florida to win it all last year, so I can rest on those laurels for at least a decade, right?]

Backdated Options and ERISA Claims

In this podcast, John Gamble of Fisher & Phillips provides some insight into how ERISA claims will be brought in the options backdating lawsuits, including:

– For what we can tell, what were the backdating circumstances at Mercury Interactive?
– What role do you think human resource professionals played in backdating (compared to other employees)?
– How do ERISA claims come into play regarding backdating?

International Investors Endorse Say-on-Pay

From ISS’ “Corporate Governance Blog“: An international coalition of 13 institutional investors has endorsed the right of U.S. shareholders to have an annual advisory vote on executive compensation practices.

In a letter to Securities and Exchange Commission Chairman Christopher Cox, the investor group argued that advisory votes on executive pay would “improve communication between shareholders and directors; encourage pay-for-performance practices; increase focus on individual company circumstances and strategic goals in the development and evaluation of executive compensation plans; and provide a counter-weight to upward pressure on executive compensation from enhanced disclosure requirements.”

The group urged the SEC to take action to establish shareholder votes on pay through regulatory action or through exchange listing standard changes. The investors also said they would support legislation to provide such a right. U.S. Rep. Barney Frank, the chairman of the House Financial Services Committee, introduced a bill in 2005 that called for votes on pay plans, but the measure stalled in Congress, which was then controlled by Republicans.

So far this proxy season, labor pension funds and other U.S. investors have filed more than 60 proposals seeking advisory votes on pay practices.

The Jan. 25 letter, which was orchestrated by the Universities Superannuation Scheme of the United Kingdom, was signed by eight other U.K. institutions, two from the Netherlands, one from Australia, and the Connecticut Retirement Plans and Trust Funds. Among the other signatories are ABP Investments from the Netherlands; Hermes Equity Ownership Services, F&C Asset Management, the Local Authority Pension Fund Forum, and Shell Pensions Management Services, all from the U.K.; and UniSuper Management from Australia.

Such advisory votes are required in the United Kingdom, Australia, and Sweden, while Dutch firms must submit pay policies to a binding shareholder vote. According to the international investor group, the votes in these markets have made companies more receptive to shareholders on compensation issues. The investors cited the example of British drugmaker GlaxoSmithKline, which adjusted its remuneration plan after a 51 percent negative vote in 2003. In Australia, shareholder opposition prompted gaming company Tabcorp to withdraw an options plan for its CEO last year, while packaging firm Amcor agreed to increase performance hurdles and extend vesting schedules, according to the investor group. Other firms in these markets now are using longer-term performance targets in incentive plans and have improved their pay disclosure.

March 13, 2007

More Reform Recommendations: The US Chamber of Commerce’s Commission Report

Yesterday, the US Chamber of Commerce released a 179-page Report from a Commission it formed that makes a series of reform recommendations (here is an executive summary of the Report). This Report comes on the heels of a number of other reports urging reform, all of which are posted in our “Sarbanes-Oxley Reform” Practice Area; also noteworthy is today’s NY Times article on CEOs mingling with Congress leaders and Bush adminstration officials over reform efforts.

Here are the six “primary recommendations” from the Report:

1. Modernize the SEC – Reform and modernize the federal government’s regulatory approach to financial markets and market participants, including realigning its organizational structure (by forming a few new Divisions, including promoting a few offices to a Division such as the Office of International Affairs).

2. Give the SEC More Exemptive Authority – Congress should pass a law to provide the SEC with the flexibility to address issues relating to the implementation of the Sarbanes-Oxley, including folding SOX into the Securities Exchange Act of 1934.

3. Minimize Earnings Guidance – Companies should stop issuing earnings guidance altogether or move away from quarterly earnings guidance with a single earnings per share number to just providing annual guidance with a range of projected EPS numbers.

4. Protect Auditors – Policymakers should consider proposals to reduce the significant risks faced by auditors raised by litigation and criminal prosecution; consider the notion that auditors be allowed to raise capital from private shareholders rather than just audit partners.

5. More Retirement Savings Plans – Retirement savings plans should be multiplied by connecting all businesses with 21 or more employees which lack these plans to financial institutions that will provide such a plan.

6. Encourage More to Save for Retirement – Employers should sponsor retirement plans and enhance the portability of retirement accounts through the introduction of a simpler, consolidated 401(k)-like plan.

There are quite a few recommendations in the Report beyond these six primiary ones. For example, in the accounting area, the Report encourages continued of convergence of international and US accounting and auditing standards and seeks a change to the SEC’s existing approach to reconciliation (the Report recommends deciding whether to eliminate should be made on a country-by-country basis, with mutual recognition). The Report also would have the SEC’s Chief Accountant conduct rulemaking about when a restatement of financials is required.

In the enforcement area, the Report believes the SEC should implement – with Congressional support via targeted legislation – an enhanced “prudential” role over financial intermediaries and recommends that the DOJ and SEC should not consider the waiver of privilege as a factor in determining whether there was cooperation in an investigation. The Report also urges the SEC to study whether its enforcement program is effective (as well as the PSLRA’s impact on the effectiveness of the federal securities laws).

The Report tackled the thorny issue of formal vs. informal guidance from the SEC Staff – although informal guidance from the SEC is encouraged in the Report, “all parts of the SEC – including the Office of Chief Accountant – should adhere to the notice and comment procedures of the Administrative Procedures Act for significant changes in policy.” That sounds fine in principle but I get worried that all Staff guidance will be shut down (and the queries in our Q&A Forums will triple).

Other bloggers have analyzed this Report, including the D&O Diary and FEI’s Financial Reporting Blog.

Fixing CEO Pay From “Within”

Congrats to our own Jesse Brill for being profiled in today’s front-page WSJ article for his efforts to rein in CEO pay. Working with Jesse for these past 4-plus years has taught me a lot – including how important it is for us lawyers to speak up and say what we think, regardless of how unpopular the message might be. Somewhere over the past few decades, the legal profession changed and has tended to look more and more like a pack of sheep. Jesse has a lot of backbone and isn’t afraid to use it.

All I Ever Wanted Was a Human…

Thanks to Jim McRitchie of for pointing us to, a site that blissfully lists how to get ahold of a human on the phone rather than the automated mazes we encounter too often in our daily life. Of course, the human you get may very well be far away in India or some exotic locale…

March 12, 2007

Counterpoint: Executive Compensation Disclosures Not “Overlawyered”

On Friday, I blogged about Chairman Cox’s speech during which he noted that some explanations of executive compensation in proxy statements are running more than 40 pages and yet are not telling investors enough about how the bosses are being paid. He also noted that there is a lack of plain English in some CD&As. And he used the term “overlawyered.”

I received quite a bit of feedback from members that have been working long hours on these disclosures and took offense to the Chairman’s “overlawyered” comment. First, they noted that no one should be surprised that compensation disclosures are running more than 30 pages. This was the page count predicted by most when the new rules were adopted – and this was the length of Pfizer’s compensation disclosure last year when that company made proxy disclosures that roughly complied with the proposed rules that existed at the time.

Some members noted that the new rules are very extensive and companies are concerned about being sued by the SEC or the plaintiffs’ bar if they have not completely described everything. For many companies, there is a need for lengthy narrative disclosure explaining the numbers in the Summary Compensation Table as well as the other tables (eg. yesterday’s NY Times’ column cites an example of a negative “total” number in a a recently filed SCT; that circumstance surely requires some narrative explaining). In fact, as I noted on Friday, I believe that some companies have not provided enough disclosure as it’s hard to follow the dots in their compensation story.

More importantly, quite a few members note that it is the lawyers who are helping to cut through the HR department’s attempt to put boilerplate in the proxy statement. They worry that the Chairman’s comments may backfire as people now have a basis for rejecting the lawyer’s comments, for example: “We don’t really have to disclose the performance goals; you’re just overlawyering this.”

“Say-on-Pay”: What Would Disclosures Look Like?

If Congress passes a law requiring companies to put their compensation arrangements to a non-binding vote by shareholders, what would the disclosures look like? In my mind, that really is the key issue in the debate over whether “say-on-pay” is a good idea. If this issue is resolved, I don’t have a beef with the concept of “say-on-pay” since it would not be Congress attempting to dictate the level of CEO pay through the tax code. Rather, a “say-on-pay” law would merely be Congress allowing shareholders to have a clearer voice on executive compensation arrangements. The risk of unintended consequences is much lower for this type of law compared to tax code shenanigans.

Looking at what other countries that already require “say-on-pay” can help. In the United Kingdom, there are two provisions that make up their law: companies prepare an annual “remuneration report” as required by Chapter 46, Part 15, Chapter 6, Sections 420-422 (ie. the Companies Act 2006) – and companies are required to put the report to an advisory vote by Chapter 9: Section 439.

Here is an old renumeration report from GlaxoSmithKline. This 2003 renumeration report is perhaps the most cited example of such a report because it had just over 50% of the company’s shareholders disapprove of it – and the law then was in its first year of existence. Fyi, in late 2006, the UK adopted the Companies Act 2006 to amend and restate almost every facet of English law that applies to companies – “say -on-pay” was already on the books and restated in the Companies Act 2006. Looking at what UK companies disclose, I think the SEC’s new rules – if properly complied with – elicit the type of disclosure that should allow investors to make an informed voting decision.

How to Find Those CD&As

Some members asked how to find those hundreds of new proxies with CD&As now on file at the SEC. The easiest way is to go to the SEC’s free-text search tool and plug in the search term of: “compensation discussion & analysis” (include the quotation marks).

March 9, 2007

SEC Chair: “Overlawyered” Executive Compensation Disclosures

Yesterday, SEC Chairman Cox gave a speech during which he said that incoming executive compensation disclosures are in some cases suffering from “overlawyering” and need to be written in plain English – and that some explanations of executive compensation in proxy statements are running more than 40 pages, yet not telling investors enough about how the bosses are being paid. Having read a few CD&As myself so far this proxy season, I agree that some feel like they have considerable gaps when it comes to describing the company’s compensation arrangements.

The Chairman also said the SEC Staff would be electronically tagging the executive compensation data in proxy statements and posting the interactive data around June, which would allow the public to compare compensation data for several hundred of the largest companies.

Shareholder Access in ’08?

According to this WSJ article, SEC Chairman Cox indicated that the Commission has made progress towards proposing a shareholder access rule and is hopeful to have something adopted in time for next year’s proxy season.

Executive Compensation: House’s Financial Services Committee Hearing

As reflected in this WSJ article, there were no real surprises during yesterday’s House Financial Services Committee hearing on Rep. Barney Frank’s “say-on-pay” bill. Here is the prepared testimonies of the hearing witnesses – and here is a related Reuters’ article.

Internal Pay Equity Legislation: Another Angle for Legislators to Cap Pay

For those following our musings on, you hopefully know that we have been touting internal pay equity as a simple balancing methodology to help handle the challenges of utilizing peer group benchmarking to set CEO pay levels.

Recently, two Maryland state senators, Paul Pinsky and Richard Madaleno Jr., have sponsored a bill to prohibt Maryland corporations from deducting executive pay as a business expense if it exceeds 30 times what the lowest-paid worker earns. I doubt this bill will go anywhere – and I don’t think legislating pay levels is the way to go – but it illustrates that pay practices need to change voluntarily before they are changed for you…

March 8, 2007

Another Record Year for Restatements

As nicely laid out in this article, restatements reached a new high last year – not too surprising given option backdating, etc. In our “Restatements” Practice Area, we have posted copies of several recent studies.

Here is an excerpt from the article: “Companies with U.S.-listed securities filed 1,538 financial restatements in 2006, up 13 percent from what had been a record number in 2005, according to an annual study by Glass, Lewis. Out of that total, 118 restatements were made by foreign issuers.

All told, the number of companies that restated last year—1,244 U.S. companies and 112 foreign companies—filed 1,538 financial restatements to correct errors represent 9.8 percent of all U.S. public companies. In 2005, only one in 12 companies restated their financial results. More interesting, in 2006, there was a 14 percent decrease in the number of restatements from companies that were mandated to comply with Section 404 of the Sarbanes-Oxley Act, “a sign that larger companies are making progress on cleaning up their books,” the proxy research firm asserted. However, restatements rose a whopping 40 percent among companies that haven’t yet been required to comply with Sarbox 404—smaller companies.”

Not that it matters, a different study noted in this WSJ article found even greater numbers of restatements last year…

US and EU Will Accept Global Financial Reporting Rules

At Wednesday’s Roundtable on International Financial Reporting Standards, SEC Chairman Cox announced that he and EU Internal Markets Commissioner Charlie McCreevy have struck an agreement that would eliminate the reconciliation to U.S. GAAP by 2009. In other words, US and European regulators pledged to recognize each other’s rules by 2009 for how companies report financial data, a move that may facilitate more international investing and reducing corporate compliance costs. Here is a related Washington Post article – and here are FEI’s notes on the Roundtable.

This development was a long time in the making, here is a timeline:

– 1996 – Congress passes the “National Capital Markets Efficiency Act, which directs the SEC to respond to the growing internationalization of securities markets by giving “vigorous support” to the development of “high-quality international accounting standards as soon as practicable.”

– 2000 – SEC issues a Concept Release that solicits comment on whether we should consider accepting International Financial Reporting Standards in the US.

– 2002 – FASB and IASB began in earnest to achieve short-term convergence between their respective sets of accounting standards after signing the “Norwalk Agreement.”

– 2002 – European Parliament and the Council of the European Union determine that all listed European Union companies have to prepare their consolidated financial reporting using IFRS, beginning in 2005.

– 2005 – SEC lays out International Financial Reporting Standards “Roadmap.”

Proposed Tweaks to FASB’s FIN 48

Last week, the FASB proposed guidance for FIN 48, the new standard that requires companies to state the value and risks of uncertain tax positions more clearly. Proposed FSP FIN 48-a provides guidance regarding when a position is “settled” and thus no longer is in need of a FIN 48 review. Comments are due by March 28th.

March 7, 2007

Section 11 and the Reliance Requirement

Last month, the Eleventh Circuit affirmed a district court’s dismissal of a complaint filed under Section 11 brought by investors who were 30% shareholders in a company that merged with defendant company in APA Excelsior III L.P. v. Premiere Technologies. This case is about whether the sophisticated investors who signed traditional lock-ups/irrevocable proxies at the outset of arms-length merger negotiations should be able to recover under Section 11 based on the subsequently filed registration statement for a stock-for-stock merger.

The court found that the plaintiffs made a legally binding investment decision when they signed their shareholders’ agreements, months before the registration statement was filed – so that the plaintiffs weren’t entitled to an implied presumption of reliance on the registration statement when they made their investment decision. The court highlighted that these particular types of investors have access to even better information than what is traditionally disclosed in the registration statement by virtue of their due diligence rights.

As Section 11 does not normally require a showing of reliance, the court looked to the legislative history of the liability provision to interpret it as setting forth a presumption of reliance – not a strict liability statute – and further found the presumption was rebutted here due to the “pre-registration commitment theory.”

What Might Be the SEC’s View of the APA Excelsior Decision?

A decade ago, when the SEC proposed the Aircraft Carrier package of reforms, the SEC provided an interpretation that shares in these types of mergers could be registered on a Form S-4, even if investors were really making their investment decision at the time they entered into these types of shareholders’ agreements. In the Aircraft Carrier proposing release, the SEC stated it would be “codifying” a Staff position – and since the Commission voted to propose the release, I think an argument can be made that the SEC blessed the Staff’s interpretation of the issue even though the proposed rule never got adopted.

Here is the relevant excerpt from the Aircraft Carrier proposing release: “The use of lock-up agreements in business combinations has become common. As part of the negotiations for these combinations, the acquiring party usually requires that management and principal security holders of the company to be acquired commit to vote for the acquisition. These so-called “lock-up” agreements are made when the acquisition agreement is finalized, before any action by the public security holders. These agreements could be considered investment decisions under the Securities Act. If they are, the offers and sales of securities were made to persons who entered into those agreements before the business combination is presented to the non- affiliated security holders for their vote. Under this reasoning, those offers and sales could not be included in the registration statement for the offering to the persons not entering into lock-up agreements.

In recognition of the legitimate business reasons underlying the practice, the staff has permitted the registration of offers and sales under certain circumstances where lock-up agreements have been signed. We propose a rule that codifies this position. Our proposed rule would allow registration of those offers and sales when: (i) The lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the voting equity securities of the company being acquired; (ii) The persons signing the agreements own less than 100% of the voting equity securities of the company being acquired; and (iii) Votes will be solicited from shareholders of the company being acquired who have not signed the agreements and who would be ineligible to purchase in an offering under Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D.

The first condition would assure that the only persons who signed the agreements were insiders with access to corporate information who arguably would not need the protections of registration and prospectus disclosure. The last two conditions would make certain that registration under the Securities Act is required to accomplish the business combination. Where no vote is required or 100% of the shares are locked up, no investment decision would be made by non-affiliated shareholders and the transaction would have been completed via the lock-up agreement. If the non-affiliated shareholders were able to purchase under one of the private offering exemptions from registration, the entire transaction would be more akin to a private placement and registration of only resales would follow from that characterization.”

After McNulty: Changes in the Attorney-Client Privilege and Investigations

Tune in tomorrow for our webcast – “After McNulty: Changes in the Attorney-Client Privilege and Investigations” – to hear David Becker of Cleary Gottlieb, Peter Moser of DLA Piper, Keith Bishop of Buchalter Nemer, Joseph Burby of Powell Goldstein, and Christian Mixter of Morgan Lewis discuss the changing processes of government and internal investigations after the long-awaited McNulty memo, which provides prosecutors with a revised set of corporate fraud charging guidelines, including new policies on waiver of the attorney-client privilege and the advancement of attorney’s fees to employees under investigation. As an aside, here is a speech by Attorney General Alberto Gonzales at last week’s ABA White Collar Crime Conference.

The SEC’s 8-K Rule Changes: How They Impact You

We have posted the transcript from the webcast: “The SEC’s 8-K Rule Changes: How They Impact You.”

March 6, 2007

Warren Buffett’s Frustration Over CEO Pay Practices

Always a fascinating read, here is Warren Buffett’s 23-page 2007 letter to shareholders. Warren always has something to say about executive compensation practices and this year’s letter is no exception. On page 19, he notes that he has served as a director on 19 boards and he has been the “Typhoid Mary” of compensation committees. “At only one company was I assigned to comp committee duty, and then I was promptly outvoted on the most crucial decision that we faced. My ostracism has been peculiar, considering that I certainly haven’t lacked experience in setting CEO pay. At Berkshire, after all, I am a one-man compensation committee who determines the salaries and incentives for the CEOs of around 40 significant operating businesses.”

Warren goes on to wax about a pack mentality regarding executive compensation, which results in: “CEO perks at one company are quickly copied elsewhere. ‘All the other kids have one’ may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees.

Irrational and excessive comp practices will not be materially changed by disclosure or by an independent comp committee. Indeed, I think it’s likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent. Compensation reform will only occur if the largest institutional shareholders – it will only take a few – demand a fresh look at the whole system. The consultants’ present drill of deftly selecting “peer” companies to compare with their clients will only perpetuate present excesses.”

CD&As Pouring In

As the proxy season heats up, proxy statements are now being filed in droves (Mark Borges blogged about a bunch of them last night). This Temple-Inland proxy statement is noteworthy because they decided to write the entire CD&A in a Q&A format.

Shareholder Access: SEC Looks Abroad

The Financial Times reports that SEC Chairman “has commissioned a study of how Europe and other foreign jurisdictions handle shareholder voting rights as the regulator grapples with whether to relax rules allowing shareholders access to company proxy documents. The move will be welcomed by large European shareholder groups which have warned that the US risks falling behind in corporate governance standards and that limiting access to proxies could discourage foreign shareholdings in US companies.” Meanwhile, the European Parliament approved the “Proposal for a Directive on Shareholder Voting Rights.” And today’s Washington Post contains a blurb stating that the SEC may hold public hearings on access in the near future.

As an aside, one of the two outstanding shareholder proposals on access has been withdrawn at Reliant Energy; the proponent did not provide a reason for the withdrawal of the proposal. And ISS has backed the shareholder access proposal coming up for a vote at Hewlett-Packard.

March E-Minders is Up!

We have posted the March issue of our monthly email newsletter.

March 5, 2007

Another 409A-Related Deadline: California Developments Linked to Backdated Options and Section 409A

Tahir J. Naim of Fenwick & West provides this timely warning about a March 15 deadline from the California Franchise Tax Board: California’s Franchise Tax Board has implemented a program related to collection of its taxes for 2006 income recognized by certain taxpayers due to Section 409A that parallels the IRS program described in IRS Announcement 2007-18. The deadline for participation in this program is March 15, 2007.

It is the position of California’s Franchise Tax Board that, as of 1/1/05, California’s Revenue and Taxation Code Section 17501 automatically incorporated into California law the provisions (including the 20% tax and interest) of Section 409A of the Internal Revenue Code.

In other words, California taxpayers whose deferred compensation arrangements trigger the application of the federal 409A tax will also have a commensurate California tax liability for a total tax liability of at least 85% (federal = 35% + 20% + 1.45% + 409A interest + CA of 9.3% + 20% + CA 409A interest) on income which in at least some instances the taxpayer will not yet have received.

Executives who are “specified employees” (as defined in Section 409A) will want to pay particular attention to ensuring their severance arrangements include the 6-month delay on any payments that would trigger the tax under Section 409A (more broadly, this will also heighten the need of issuers with employees in California to have backing for the position that their stock option exercise prices are no less than fair market value of the underlying shares on the date of grant).

Although the law was effective with respect to 2005 income, it may be that California – like the IRS – will concentrate its focus on the collection of taxes arising in 2006 and thereafter. For example, it is only with California’s 2006 Form 540 that mention is made of 409A taxes (see the instructions to Line 33 of the form).

If you need more information, contact the California Franchise Tax Board at 916.845.7057. [And speaking of 409A, Corp Fin has issued its second tender offer prompt payment exemptive letter.]

Pay Bosses More! Gimme a Break…

I keep thinking we have seen the last of the WSJ opinion columns urging that CEOs be paid more. Wrong again! This recent opinion column from two senior fellows at the Cato Institute really takes the cake.

You know we are in for a laugher when the column starts off with the theme of: “Excessive executive compensation harms no one but perhaps the stockholders who put up with it.” Getting past that excessive compensation does indeed hurt employee morale (not to mention how leaders are viewed by many in this country, etc.), I don’t see how these senior fellows make their argument that “stockholders are putting up with it” with a straight face.

First, shareholders haven’t known how high levels of CEO compensation have really gotten because the SEC rules historically haven’t elicited the full compensation story from companies (these rules were changed last summer, but the new and expanded disclosures aren’t in quite yet). For that matter, most boards themselves didn’t know how much they are paying their own CEOs until tally sheets became a mainstream practice within the last year or so. As tally sheets have begun to be used for the first time, the “Holy Cow” surprise felt by the NYSE board in the Dick Grasso incident has proved not to be an isolated event.

Second, many shareholders simply aren’t putting up with it. Unfortunately, they have only limited tools at their disposal to try to effectuate change: submitting nonbinding shareholder proposals to companies to place on annual meeting ballots, and more recently, “just vote withhold” campaigns against director nominees. This soon may change as the movement to force annual shareholder advisory votes on executive compensation is gathering momentum on Capitol Hill (and with companies as Aflac just became the first US company to agree to do it in 2009).

With more disclosure in their hands and a vehicle to express dissatisfaction, I believe we will soon have pretty solid proof that shareholders don’t want to “put up with it”; they’ve just been stuck with it as boards continue to follow outdated – and ill-formed – processes that have led to mind-boggling compensation packages to CEOs. As I have long contended, I don’t believe most directors want to overpay CEOs – it’s just that the processes put in place over a decade ago led to some unintended results.

This cycle must end. It’s incumbent on boards to fix these problems and have some backbone to realize that layering on a few more million won’t really incentivize a CEO to perform just a wee bit more when the CEO is already sitting on a pay package worth tens of millions. Arguing otherwise doesn’t seem to be a logical read of human nature.

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