Recently, we have been seeing a number of questions in our Q&A Forum regarding issuer and affiliate share repurchase programs. When share prices are down and issuers have available excess cash or credit, buybacks can be a very effective tool to consider. One concern with share buybacks, however, has been that they are often perceived as unfriendly to an issuer’s bondholders because they use up cash or credit that the bondholders would rather see available for debt service.
Moody’s Investors Service recently conducted a study of 100 buyback programs announced over the last 19 months and determined that – in their sample – the announcement of a share repurchase program prompted no rating action 56 percent of the time. However, there was a change in rating outlook or a downgrade of the issuer’s credit rating in 44 percent of the situations that Moody’s sampled.
Moody’s notes that some of the factors which may potentially head off downgrades or changes in outlook following announcement of a repurchase program include:
– the funding for the share repurchases comes from excess cash on the balance sheet, predictable future operating cash flow, or asset sales (so long as the asset sales have no impact on collateral values or future earnings), rather than from incremental debt;
– the buyback program is too small to be material to credit quality;
– the buyback program leaves the issuer still adequately positioned at the current rating; or
– the repurchases will only place temporary pressure on credit metrics (for example for only one or two years).
Beyond the ratings concerns, there are of course a number of legal issues to consider when designing and implementing a share buyback program. For example, structuring the program under Exchange Act Rule 10b-18 is important in order to have a safe harbor from manipulation claims, and the issuer must be cognizant of potential anti-fraud liability for trading on material nonpublic information when it is buying back in its own securities. Issuers also need to consider any Williams Act or Regulation M implications of a buyback program, and disclosure of repurchases is now required in periodic reports under Item 703 of Regulation S-K. For more information, check out our “Stock Repurchases” Practice Area.
Are You DRS-Eligible?
As noted in this recent memo from Skadden Arps Slate, Meagher & Flom LLP, by January 1, 2008 all issuers whose securities are listed on the NYSE, Nasdaq and Amex must ensure that their listed securities are eligible for participation in the Direct Registration System – also known as DRS. Given the amount of time necessary to complete the process of becoming DRS-eligible, any issuers who are not already DRS-eligible have less than a month to take all of the necessary actions.
In this podcast, Allison Land of Skadden describes the latest issues with DRS, including:
– When is the DRS-eligible deadline and what happens if a company misses the deadline?
– What do companies need to do to become DRS-eligible?
– What are the common pitfalls that you are seeing for companies trying to become DRS-eligible?
– The Demise of the Broadly Written MAC: Will the Plain Language Standard Replace the Reasonable Acquiror Standard?
– Full “Walk-Away” Values at Termination and Change in Control
– How to Calculate the Full Walk-Away Value
– Merging Qualified Plans: Five Steps to Eliminate Post-Closing Headaches
– Due Diligence Review of Internal Controls: Focusing Beyond the Numbers
As all subscriptions are on a calendar year basis, it is time for you to renew your subscription. If you are missing these critical issues, try a 2008 no-risk trial to get a non-blurred version of this issue for free.
SEC Enforcement Director Linda Thomsen recently announced a surprising 14 percent jump in enforcement cases in fiscal 2007. As noted in this Bloomberg article, the 656 cases in fiscal 2007 represented the first increase in Enforcement’s new case tally in four years.
One contributing factor to the big increase in cases was options backdating, with 24 cases brought in 2007. Cases alleging improper financial disclosures (a category which includes options backdating cases) made up 33 percent of the 2007 total, up from 24 percent in 2006. 47 insider trading cases were brought in 2007, as compared to 46 such cases in 2006. Among these insider trading cases was one of the largest since the 1980s, involving employees at several investment banks. Cases against financial advisers and delinquent filers represented less of a share of total cases in 2007 as compared to 2006.
With Section 404 Deadline Fast Approaching, Chamber of Commerce Calls for Delay
Despite the SEC, PCAOB and COSO efforts to make the internal controls assessment process more manageable for smaller companies, the US Chamber of Commerce is calling for yet another one year delay in Section 404 implementation. The Chamber of Commerce is asking Congress to hold hearings on the issue. In this press release, Michael Ryan of the Chamber notes that their recently conducted survey of Section 404 costs demonstrates “why small companies complying for the first time with SOX 404 should not be the guinea pigs for the improved rules adopted by the SEC and the PCAOB.”
As recently as this past summer, the SEC has rebuffed attempts to push back the Section 404 implementation timetable. As it now stands for non-accelerated filers, management must begin providing its own internal control assessment in the annual report filed for the fiscal year ending on or after December 15, 2007, however an auditor’s internal control attestation is not required until the annual report filed for the fiscal year ending on or after December 15, 2008.
The Chamber of Commerce survey of smaller companies attempts to show that compliance costs are expected to be high for these issuers. Over half of the survey respondents with a public float of less than $75 million except costs to implement the management assessment portion of the requirement to exceed $200,000, while slightly less than half of the respondents expected implementation of the auditor attestation component to also exceed $200,000. Despite the “staged” implementation approach adopted by the SEC, over 80% of the non-accelerated filer respondents have already engaged an auditor as part of their preparations for rendering management’s assessment.
Not surprisingly, 79% of the respondents to the Chamber’s survey indicated that a delay in the compliance deadline for Section 404 would be helpful to their company.
Annual Reports: How to Create Them for an Online World
Tune in for Thursday’s webcast – “Annual Reports: How to Create Them for an Online World” – to learn how to create more effective – and more “usable” – annual reports. Too many companies continue to make the same mistakes with their online documents and put themselves at a disadvantage when soliciting votes, particularly if a third-party mounts a counter-solicitation or a “just vote no” campaign.
Broc makes this case in point: “For those companies doing voluntary e-proxy so far, the proxy materials they are posting are merely “dumb” PDFs. Not even a linked table of contents. These are far less usable than the HTML filings made on EDGAR. Why have we gone backwards in this age of interactive documents – particularly given the SEC’s push for interactive data? As one member emailed me, ‘I think it passes regulatory muster, but only barely?’”
The FASB has decided to postpone the effective date of Interpretation 48, Accounting for Uncertainty in Income Taxes (June 2006), for those nonpublic entities that have not yet applied the interpretation. Under the postponement, FIN 48 would be applied by those nonpublic entities for periods beginning after December 15, 2007. The FASB’s proposal to delay effectiveness of the Interpretation is now out for a 30-day comment period.
Interpretation 48 will continue to be effective for public companies for fiscal years beginning after December 15, 2006. For more on FIN 48, check out our “Tax Uncertainties” Practice Area.
In a recent national survey of chief financial officers and senior comptrollers conducted by Grant Thornton, 47 percent of the CFOs polled said that they were not aware of XBRL. About half of the responding CFOs believed that XBRL would not become mandatory for SEC filings until 2010 and beyond. Apparently these CFOs are not big followers of Captain XBRL.
The CFOs may be in for a surprise, as the interactive data momentum clearly continues to build at the SEC. On Friday, the SEC announced that Chairman Cox had been holding bilateral talks at the International Organization of Securities Commissions (IOSCO) conference on the timetable for implementation of XBRL for regulatory filings. Cox noted that “[w]ithout question, 2008 will be a watershed year for interactive data.”
The Grant Thornton survey also found that a surprisingly high 43 percent of the CFOs polled said that they did not want to be CEO of a company in the future. In the survey, 61 percent of the CFOs felt that their CEO was paid at a level that is appropriate, while approximately 16 percent believed that their CEO was underpaid.
Good News for Portal
A few months ago, I blogged about the “summer of alternative trading platforms for unregistered securities” (kind of like the “Summer of Love” for traders), noting that a number of investment banks were developing platforms for trading in Rule 144A securities. As noted in this article from today’s Wall Street Journal, those efforts have now been abandoned in favor of revamping Nasdaq’s Portal system. Efforts have been underway for some time to make Portal a useful trading system, and now it looks like the threat of competition from Wall Street will not undermine those efforts.
Corporate Governance Lawsuits
Lawsuits remain a means for compelling corporate governance reform, especially in situations where other methods for accomplishing reform have not worked. In this podcast, Stuart Grant of the law firm Grant & Eisenhofer describes the latest developments in corporate governance reform lawsuits, including:
– What are examples of companies that have been targeted for governance reform through lawsuits in the past year or two?
– Typically, how does the filing of a governance lawsuit impact whether the company’s management will consider governance changes?
– What do you recommend that management groups faced with these lawsuits consider when entering a dialogue with those that file the lawsuit?
We’ve been getting quite a few questions about whether D&O questionnaires should be tweaked for this proxy season. Alan Dye notes that, other than the possible NYSE independence issues if they get adopted in time, he’s not aware of any new rule or regulation that would cause the questionnaire to change (assuming it was up-to-date last year).
The Corp Fin Report on executive compensation (and John White’s “Where’s the Analysis?” speech) is more for drafters of the proxy statement, and doesn’t necessarily impact the questionnaire. However, Alan notes that some companies continue to uncover perks they hadn’t known about – so some companies may need to beef up their questions regarding perks to cover more examples, including spousal travel and matching charitable gifts. And reviewing the February and August Corp Fin interpretations of S-K 402 (and our compilation of Staff comments) vis a vis your questionnaire is a good idea.
Anyone else have items to consider for this year’s questionnaire? Please email me if you do…
E-Proxy and California Law
In our “Q&A Forum,” we continue to receive follow-on questions related to the issues raised by California law as it intersects with the SEC’s new e-proxy rules – so I decided to go to the source who first raised the issue in this blog.
In this podcast, Keith Bishop of Buchalter Nemer, and a former California Commissioner of Corporations, describes how the SEC’s new e-proxy rules might conflict with California law, including:
– I understand that the SEC’s new e-proxy rules may conflict with California law. What might the conflict be? And which companies might it impact?
– Can the problem be solved by mailing annual reports only to actual shareholders of record?
– Should companies ignore the California conflict if the risk of enforcement is low?
– Any other potential conflicts that companies should be aware of when they implement e-proxy?
My Midlife Facebook Crisis? Nah…
I make my living primarily on the Web these days, but I still feel too old for the social networking craze (although I would argue that all of our sites are “closed” social networks since they are all community-themed). Last Saturday, the WSJ ran this great article – “My Midlife Facebook Crisis” – on what it’s like for us old-timers to join the social networking bandwagon.
In the middle of last year, Facebook began allowing anyone to join its network and start accumulating “friends.” So I spent a few minutes – very few – creating a profile for my alter ego, “Billy Broc Oxley.” A friend of mine took one look at Billy Broc’s profile and promptly said “it probably violates the laws of all states but Utah and Nevada (for different reasons).” Not sure how he got that, but I don’t think this experiment is gonna go anywhere…
[Boo-yah! For the past several months, whenever I have appeared on the speaking circuit, I have said “if you don’t get anything else out of this seminar, buy Broadridge stock.” Based on what Broadridge has done over the past two days, I can say “I told you so!” And thus ends my stock-picking career.]
Five brave souls have volunteered for our latest contest (and one anonymous contributor), setting forth some practice pointers regarding “Preparing Your Form 10-K.” Each contributor took a moment out of their busy life to write up something that might help you during the proxy season; they had no restrictions on what they could submit, so the format and nature of their pointers vary. Thanks to Carrie Darling, Linda DeMelis, John Newell, Jeff Taylor and Mike Woodard for entering our inaugural contest; each deserves much praise for giving this a try!
How to Vote: Now, you need to do your part and cast a vote. You are free to vote more than once – and when you vote, you can vote for as many of the contributors as you wish (even all six contributors if you want). Voting is completely anonymous.
[Dave “The Animal” was bounced before the competition even started when he submitted these pointers:
1. First, get yourself a six-pack. In fact, you might need a case if you are one of them there large accelerated filers.
2. Don’t be making yourself a fool by filing your 10-K under an 8-K header submission type – it hurts.
3. Speaking from experience, its not a good idea to file the CEO’s credit card numbers and social security numbers as as an exhibit.
4. I don’t like too many commas.
5. Don’t listen to all those pesky little voices coming out of your refrigerator when you are trying to draft some disclosure. My tin foil hat tends to drown them out.]
The SEC’s “Small Business-ish” Open Commission Meeting: Next Thursday
Late yesterday, the SEC published a Sunshine Act notice to announce an open Commission meeting for next Thursday to consider adoption of these proposals:
– Streamlined Smaller Public Company Reporting
– Amended Rules 144 and 145
– Stock Option Registration Exemption
– Financials prepared in accordance with IFRS without Reconciliation
Note that these three proposals are not on the agenda: shareholder access; Form-Reg D; simplified Form S-3 – so there may be another open Commission meeting around the corner (or maybe there won’t be – we don’t know yet).
At next Thursday’s meeting, the Commission will also consider proposing new rules to improve mutual fund disclosure by requiring more plain English – and enhancing the availability of more detailed fund information on the Web.
Some CD&A Guidance
As I alluded to yesterday, we have just wrapped up our just-completed “Special Fall/Winter 2007 Supplement” of the Compensation Standards newsletter, which should help you (and your board) address the CD&A disclosures that the SEC will be looking for this proxy season. Don’t forget to renew – or try a no-risk trial.
The community has spoken! On CompensationStandards.com, we have posted the 51 executive compensation disclosure tips that we received in response to our contest seeking ideas from our members. We will be announcing awards for these tips soon – take a look at them and let me know which ones you like best. Here’s the strange thing – I billed the contest as “51 tips” and I received exactly that number!
What is a “Severance Package”?
In the wake of Merrill Lynch CEO Stanley O’Neal’s resignation, there were some articles noting that he didn’t have a severance agreement with the company. Here are some thoughts from The Corporate Library on the topic:
“In a study released last week, The Corporate Library reports that the “non-severance” package awarded to O’Neal is not what it seems. Long rated a high concern board by The Corporate Library, Merrill Lynch’s actions are deemed too little, too late, by Paul Hodgson. ‘Stanley O’Neal’s departure from Merrill Lynch with ‘no severance’ and no 2007 bonus would seem to present a picture of a decisive board in control. Yet, when ‘no severance’ equals $161.5 million and an office and executive assistant for three years, what else did they think they needed to give him?’” Notably, Mr. O’Neal’s separation package comes in at #5 on a list of 10 of the most excessive severance packages this decade.
In addition to the severance panel discussion during the recent “4th Annual Executive Compensation” Conference, we have written quite a bit on severance and steps you should be taking to fix outstanding arrangements (and not make the same mistakes going forward) – look for more in a Special Supplement to the Compensation Standards print newsletter coming out very soon. Sign up for complimentary copies!
CII on CD&A
Back in September, the Council of Institutional Investors sent this letter to the SEC explaining what it seeks from companies when it comes to the “Compensation Analysis & Disclosure” section of the proxy statement. It’s interesting to compare CII’s letter to John White’s speech and the Corp Fin Staff Report that came out subsequently. For the Jan-Feb issue of The Corporate Executive, we are busily writing analysis (and model language) about what CD&As should look like next year – we hope to have that available within a month.
With the elimination of the S-B Forms (and Regulation S-B) probable in the near future, Corp Fin has reorganized the operations group headed by Assistant Director John Reynolds so that it’s now the “Office of Beverages, Apparel and Health Care Services.” John’s group used to handle all the small business filings and was called the “Office of Emerging Growth Companies.” Going forward, small business filings (including SPACs) will be processed in the operations group based on the industry they are in – just like any other company.
Note that Gerry LaPorte’s Office of Small Business Policy continues to exist and serves as the advocate and policy-maker for smaller companies. Our organization chart – as well as Corp Fin’s chart – has been updated.
Corp Fin: Who to Contact with EDGAR, CTRs, FOIA, Etc. Queries
A few months ago, I blogged that Patti Dennis took over Herb Scholl’s old job as Chief of Corp Fin’s Office of Disclosure Support and that Herb’s old office was formerly known as the “Office of EDGAR and Information Analysis.” What I neglected to clarify is that Herb’s old office has been split into two as follows:
– Office of Disclosure Support, which is responsible for EDGAR posting/dissemination of comment letters, confidential treatment and FOIA requests
– Office of Information Technology, whose Chief is Cecile Peters and which answers general EDGAR questions about ’33 Act and ’34 Act filings the Division processes (so this is the office that handles many of the functions that Herb’s OFIS used to do)
SEC Staff Issues SAB 109 on Fair Value Accounting for Written Loan Commitments
Yesterday, Corp Fin and the Chief Accountant jointly issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB 109 provides the Staff’s views on the accounting for written loan commitments recorded at fair value under GAAP – and the SAB revises and rescinds portions of SAB 105.
As noted in this press release, the SAB revised the Staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the Staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment.
Feeling the heat of a majority vote on a “say-on-pay” proposal, Verizon Communications became the second company to adopt a policy to put its compensation plans to an annual vote by shareholders in 2009. AFLAC became the first company to adopt such a policy earlier this year. Notably Verizon’s “say-on-pay” proposal barely received majority support with 50.18% votes cast supporting it. RiskMetrics reports that a majority vote has been achieved at 7 companies so far this year for “say-on-pay” proposals (e.g. 69% at Activision).
So why is Verizon the first of these 7 companies to adopt a “say-on-pay” policy? I have no inside scoop, but one reason might be that they want to abide by the will of the majority, even if it’s barely a majority. Another reason might be that the company’s executive pay practices have been widely criticized – and publicly so, ranging from being on The Corporate Library’s short “pay-for-failure” list to this Union press release (also see this letter from a group of institutional investors).
And of course, you shouldn’t forget the novel Electronic Shareholder Forum that I blogged about a few months ago. The Forum’s Verizon program was organized with the support of the Association of BellTel Retirees, the source of the Verizon shareholder proposal – and clearly, this Forum had some role in obtaining the majority vote given how close the vote was. Gary Lutin, who is responsible for conducting the Forum (with rigorous standards of independence), speculates that the higher vote may have been attributable to the broader range of investors involved in an open program – that had previously established principles based on shared management and shareholder interests – rather than the confrontational approach of the “say on pay” campaigns currently being waged by others.
[By the way, Verizon also approved a revised policy that more specifically defines the types of payments that will be included in the calculation of a severance payment – and adopted a policy that addresses the independence of its compensation consultant.]
The “Pink Sheets” Speak
Over the past few years, there have been a lot of changes in the pink sheets. In this lengthy podcast, Cromwell Coulson, CEO of the Pink Sheets, describes the latest upgrades to his market, including:
– How have the Pink Sheets gone electronic?
– What are your OTCQX market tiers?
– What are the new Pink Sheets disclosure categories?
– What is the role of securities counsel in the OTCQX market tiers and Pink Sheets disclosure categories?
– What are your thoughts on the SEC’s Rule 144 proposals?
You may want to check out BRIBEline, which is a secure, multi-lingual site through which companies and individuals can anonymously report bribe demands by answering 9 multiple-choice questions. The site is operated by TRACE, a non-profit membership association of multinationals.
Here is some info from the BRIBEline website: No names are requested or collected, and reports made to BRIBEline are not used for investigations or prosecutions. Instead, the information is aggregated and publicly reported by country and by sector (the customs service, the judiciary, etc.), shining a spotlight on the worst offenders, providing companies with an additional risk mitigation tool, encouraging governments to reduce corruption in their ranks and helping those working to increase transparency and reduce bribery more effectively target their efforts.
From Kevin Miller of Alston & Bird: In a recent decision – Louisiana Muncipal Police Employee’s Retirement System v. Countrywide Financial Corp. – Vice Chancellor Noble of the Delaware Chancery Court addressed “what would appear to be the outer limits of the minimal quantum of evidence a shareholder must adduce in order to demonstrate a credible basis to suspect corporate wrongdoing that would constitute a proper purpose to inspect corporate books and records under 8 Del. C. § 220.”
The only evidence presented to support LAMPERS allegation of corporate misconduct was a statistical correlation suggesting the possibility of backdating or springloading of certain stock options granted to executive officers of Countrywide Financial. The question before the Court was not whether the backdating or springloading of stock options had occurred, but whether LAMPERS had established a credible basis, by “presenting “some evidence,” from which the court could infer possible issues of corporate misconduct warranting further inquiry through a limited inspection of corporate books and records.”
The court expressed concern that by finding in favor of the plaintiff solely on the basis of a mere statistical correlation that it risked “opening a floodgate of demands from shareholders seeking to inspect the books and records of Delaware corporations on the basis of spurious or contrived statistical correlations purporting to suggest the possibility of corporate wrongdoing.” The court emphasized that indiscriminate “fishing expeditions” cannot be tolerated in Section 220 actions, that each case is fact specific and must be individually analyzed to avoid abuse of the Section 220 process.
Ultimately the court concluded that “although statistics alone must not be enough to establish the ultimate issues underlying these cases, i.e., that corporate wrongdoing in fact occurred, the Court discerns no compelling reason why a statistical correlation, if adequately supported by a sound, logical methodology and competent expert testimony, cannot constitute “some evidence” of possible corporate wrongdoing sufficient to permit a shareholder limited access to a narrowly circumscribed set of corporate books and records.”
Nevertheless, the court found that the statistical evidence presented by LAMPERS was just barely sufficient to carry the minimal burden imposed by Delaware law and only permitted a limited inspection of Countrywide Financial’s books and records. We have posted a copy of the opinion in our “Books & Records” Practice Area.
Europe’s “Big Bang”
As described in this article from the Economist, the “Markets in Financial Instruments Directive” took effect yesterday and effectively creates a common market for share, commodities and derivatives trading across 30 countries in Europe. The new rules should have a big impact as it reduces the hold of national stock exchanges over share trading and throws open the field to newer electronic exchanges and even big investment banks.
Required Reading? Nah…
A member found this old memo among his papers and sent it along – it’s scary to see a sampling of your writing from your youth, particularly when its dated before there was widespread use of personal computers. I wonder if the SEC Historical Society has this among it’s gems…
Thanks to Kris Veaco of the Veaco Group, we have posted a second “Pro or Troll?” quiz that will test your knowledge about board agendas. Give it a try (and let me know if you want to compile your own quiz for our amusement)!
Survey: CFOs and Controllers on Governance Issues
Grant Thornton recently conducted a national survey of CFOs and senior comptrollers on some governance issues. Here are the results:
1. Do you believe the roles of CEO and chairman of the board should be independent of each other? Yes – 79%; No – 21 %
2. Should the SEC revise 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations and for all instances in which the auditor chooses not to stand for reappointment? Yes – 76%; No – 21%
3. Do you believe shareholders in public companies should have greater access to the proxy? Yes – 66%; No – 30%
4. Do you believe that small cap companies who test internal controls (according to Sarbanes-Oxley) will be looked upon more favorably by investors than those who do not test internal controls? Yes – 69%; No – 30%
5. Do you consider the newly issued guidance (AS 5) from the SEC on internal controls and the new audit standard for auditing internal controls to be a significant improvement over previous rules? Yes – 44%; No – 48%
Our November Eminders is Posted!
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