Monthly Archives: January 2008

January 17, 2008

Proxy Statements: The Q&A Format

I’m a simple guy, so I dig the Q&A format of this Home Depot proxy statement from last year. For example, I think the Q&A format made it easier for the company’s audit committee report (pages 66-68) to provide more useful information regarding the activities of the committee as compared to the boilerplate-type language that some companies use.

I’ve seen some companies use Q&A in the forepart of their proxy statement, but not many that use it for the entire document. One usability recommendation: don’t use all caps for the questions (since that is hard for humans to read); rather, place the questions in boldface.

AFSCME’s Proxy Solicitation Expense Proposals

As noted in RiskMetrics’ “Corporate Governance” Blog, AFSCME intends (or has) submitted shareholder proposals seeking reimbursement for short-slate solicitation expenses at a handful of companies this coming proxy season. This is an alternative tactic to shareholder access that could render the access movement obsolete if it catches on.

In addition, according to RiskMetrics, AFSCME has now filed (or co-filed) binding proposals seeking shareholder access at four companies: Countrywide Financial; E*TRADE; Bear Stearns; and JP Morgan Chase. Additionally, CalPERS has submitted one to Kellwood.

Marty Dunn and other former senior Corp Fin Staffers will discuss all the latest types of shareholder proposals during our upcoming webcast: “The Former SEC Staff Speaks.”

Analysis of Distressed Debt Survey

In this podcast, Evan Flaschen of Bracewell & Giuliani provides some thoughts about the survey his firm (along with Debtwire) conducted entitled “Survey: Distressed Debt Creditor Insight,” including

– Why was the study undertaken?
– What were the study’s major findings?
– What were the biggest surprises?
– What is the overall outlook for 2008 and are you seeing any evidence so far?

– Broc Romanek

January 16, 2008

Crank Up the Blog (and Firm Memo) Machine: Supreme Court Affirms Stoneridge

One of the reasons for the popularity of this blog is because it is one of the very few that covers corporate finance law. Perhaps it’s because litigators love to talk more, but there are far more securities litigators blogging than financiers. Boy, do those litigators love a Supreme Court case – particularly one as tantalizing as Stoneridge, which was decided yesterday by SCOTUS. And in record time, the law firm memos started rolling in – we are posting them in the “Aiding & Abetting” section of the “Securities Litigation” Practice Area; here is a copy of the court opinion.

Here is a case summary from Dave: The theory of “scheme liability” as a basis for recovery against third parties in securities class actions bit the dust yesterday, with the Supreme Court’s 5-3 ruling in Stoneridge Investment Partners v. Scientific-Atlanta. Ultimately, as stated in the majority opinion delivered by Justice Kennedy, the Court concluded that “the private right of action [under Section 10(b) and Rule 10b-5] does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.” In his dissent, Justice Stevens states that the majority’s view of reliance “is unduly stringent and unmoored from authority.”

Without scheme liability, plaintiffs will find it difficult to reach secondary actors involved in a fraud such as customers, suppliers – or perhaps even investment bankers – since the Supreme Court’s Central Bank decision cut off the ability to sue those third parties as aiders and abettors. Stoneridge represents yet another decision in a line of recent Supreme Court rulings that are hostile to plaintiffs and more favorable to business.

And for more detailed analysis, check out these litigation bloggers:

“D&O Diary Blog”
– “Truth on the Market
– “Race to the Bottom
– “Ideoblog
– “Jake Zamansky’s Blog

My Ten Cents: Policies Barring Executives from the Web

A few months ago, Whole Foods took the step to amend and restate the company’s code of business conduct to bar top executives and directors from posting messages about Whole Foods, its competitors or vendors on any online forums (broadly defined to include blogs) that aren’t sponsored by the company (unless approved by the board’s nominating and governance committee). The restated code prohibits comments on third-party Web sites so executives will “avoid the actual and perceived improper use of company information. It not only bars postings that are anonymous, but also those under the person’s real name. The bar applies to “company leadership,” which includes directors, executive team members and regional vice presidents. The restated code (scroll to page 13) was disclosed in this Form 8-K.

I understand why the company took such an action, given the revelations that the CEO posted anonymous messages about the company and its competitors from 1999 through 2006 – and the SEC’s and market’s reactions to such revelations. But I hope that no companies would feel the need to follow Whole Food’s “lead” here, because common sense should rein in company leaders from posting anonymous messages of the type made by the company’s CEO (ie. misrepresenting oneself) and this is one area not crying out for yet another corporate policy.

In fact, I believe Whole Food’s policy is too broad and would limit the company’s leadership to engage in the important online “conversation.” Ironically, Whole Foods is one of the few companies currently contributing to that conversation since it has allowed blogging by its leaders (at least the CEO; here is his blog). In today’s world, the importance of being allowed to learn from like-minded individuals can’t be overstated and the easiest way to do to engage them is through the Internet, either by e-mail or the Web.

One of the more influential books on my career is “The Cluetrain Manifesto,” which essentially foretold the social networking/Web 2.0 craze that is here to stay. When the book was published in the late ’90s, I saw the authors present here in DC at a local “Netpreneurs” event, complete with a guy in a Gorilla suit and beach balls being bounced above the crowd. Ah, those glorious ’90s when I still had hair…

C’Mon, Step Up and Predict the Future

Opinion Polls & Market Research

– Broc Romanek

January 15, 2008

The Latest E-Proxy Stats

Many of the companies I have spoken with continue to have a “wait and see” attitude about whether they will try voluntary e-proxy this year. The latest e-proxy statistics from Broadridge bear this out. Below is a summary of their findings as of the end of December; a more complete set of stats are posted in our “E-Proxy” Practice Area:

– 69 companies have used e-proxy so far (with 2 having to do a second notice); another 40 have committed to do e-proxy

– Size range of companies using e-proxy varies considerably; all shapes and sizes

– 2/3 of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management and 6% had non-routine matters proposed by shareholders

– Retail vote goes down dramatically using e-proxy (based on 51 meeting results); number of retail accounts voting drops from 17.1% to 4.0% (over a 75% drop) and number of retail shares voting drops from 28.0% to 13.3% (over a 50% drop)

– Real money can be saved; aggregate of $17.5 million net savings for the 69 companies

Foreign Private Issuers: May Try to Exclude US GAAP Even Before March 4th

Yesterday, the SEC posted this notice that it will entertain requests to allow foreign private issuers to file Form 20-Fs without US GAAP reconcilation even before the March 4th effective date of the SEC’s new rules on the topic. The request has to be in writing to the SEC Staff (although they can call the Staff in advance to hash out their circumstances). Here is an excerpt from the SEC’s notice:

In response to questions, the staff has advised companies that until this new rule is effective that they are subject to the existing rules regarding the inclusion of U.S. GAAP information in filings with the Commission. However, the staff is aware that some foreign private issuers with a fiscal year ending after November 15, 2007 that prepare their financial statements using IFRS, as issued by the IASB, will want to file their annual report on Form 20-F before March 4, 2008. These companies also want to exclude U.S. GAAP information from that filing. The staff does not want to discourage companies from filing their 20-F before March 4, 2008. Accordingly, these companies are encouraged to contact the staff in the Division of Corporation Finance to discuss this issue. These companies can contact either Craig Olinger – Deputy Chief Accountant (202-551-3547) or Wayne Carnall — Chief Accountant (202-551-3107) to discuss their particular facts or circumstances.

The staff also noted that this same release provides similar relief from the requirement to provide U.S. GAAP information if the financial statements are filed under Rules 3-05, 3-09, 3-10 and 3-16. Likewise, companies that intend to file financial statements with a fiscal year ending after November 15, 2007 that are prepared using IFRS, as issued by the IASB, that exclude U.S. GAAP information in a filing under the Securities Exchange Act of 1934 before March 4, 2008 are similarly encouraged to discuss their fact pattern with the staff.

M&A: The ‘Former’ SEC Staff Speaks

Catch the webcast tomorrow – “The ‘Former’ SEC Staff Speaks” – to hear former Senior Staffers from the SEC’s Office of Mergers & Acquisitions weigh in on the latest rulemakings – and interpretations – from the SEC. This webcast will provide a complete “bring-down” of what’s happening at the SEC – and provide practical guidance about what you should be doing as a result. Join:

– Dennis Garris, Partner, Alston & Bird LLP and former Head, SEC’s Office of Mergers & Acquisitions
– Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions

The grace period for has expired. As all memberships are on a calendar-year basis, if you haven’t renewed, you won’t be able to catch this webcast or this upcoming one: “MAC Clauses: All the Rage.” So renew your membership today!

– Broc Romanek

January 14, 2008

Now Publicly Available: SEC’s Executive Compensation Comments and Responses

For the subset of the 350 companies that were both reviewed by Corp Fin as part of the executive compensation review project and have received one of these “all clear” letters from the Staff, you will soon find your comment letter and response posted on the SEC’s website. It looks like the Staff hung pretty close to the timeline of “45 days since the Staff started informing companies that they were clear,” which is earliest that the Staff can post letters/responses pursuant to its own policy (which was confirmed in the Staff’s Report on executive pay).

I just took a cursory swing through the SEC’s database over the weekend and found these:

– Allstate – comment letter and response

– Bristol Myers – comment letter and response

– Berkshire Hathaway – comment letter and response

– Travelers Companies – comment letter and response

There’s a few more out there and we’ve posted a more comprehensive list on in a new “SEC Comments” Practice Area. Hopefully, somebody can prove me wrong – but it’s quite challenging to run searches on the SEC’s comment letter database – as well as the third-party providers’ databases – to find these letters. The good ole boolean-type searches don’t seem to work for these particular batch of letters…

Why the Blogosphere is Putting the “Hurt” on Mainstream Media

As everyone knows, mainstream media is in trouble, particularly daily newspapers. For example, the Washington Post has reduced its staff to such a degree that the “Business” section regularly runs a list of product recalls on its front page (and a majority of the Post’s revenue stream now comes from its Kaplan Training enterprise; not its newspaper).

Here is a case in point why bloggers with greater knowledge in their niche can outdo the mainstream journalists. In this article from Saturday’s Post, the reporter tries to make a story out of a fairly bland comment issued by Corp Fin last August asking how Berkshire Hathaway handles director nominations submitted by shareholders (comment letter and response are linked to above; note the article is written by a Bloomberg reporter, reaffirming how scantily the Post is devoting resources to business).

Here an excerpt from the article, which is entitled “Berkshire Hathaway to Formalize Director Nomination Procedure”:

“The nominating committee does not have a formal policy by which shareholders may recommend director candidates,” the SEC wrote in a letter to Hamburg dated Aug. 21. “Please state why it has no such policy, as required. Hamburg responded that company policy “will provide that Board of Director candidates recommended by shareholders will be evaluated using the same criteria as are applied to all other candidates.” Hamburg didn’t return a call seeking comment. A subsequent SEC letter to Hamburg, dated Nov. 27, said its review of Berkshire was complete, with no further comments.

A few years ago, the SEC added Item 7(d)(2) of Schedule 14A to require companies to disclose in their proxy statements if they have a “nominating or similar committee” and “whether the committee will consider nominees recommended by security holders” and, if so, “describe the procedures to be followed by security holders in submitting such recommendations.” Apparently, Berkshire Hathaway forgot to include a description of their procedures in their proxy statement. From their response, it seems like the company will simply codify their existing procedures in a policy. These procedures – that all candidates are considered based on their qualifications – are pretty much the same as 99% of Corporate America.

These typical procedures are the backdrop of the ongoing extensive battle over proxy access. Very few companies receive nominations from shareholders (and I mean very few) because it’s unlikely that their candidates will have the skill sets that boards are looking for – and of course, because they haven’t gone through the board’s recruiting process that often takes as long as six months. Most shareholders realize its a futile exercise and don’t bother to submit nominations.

So the fact that Berkshire Hathaway will add this disclosure to their proxy statement is not really news at all. Rather, my opinion is that it’s a reporter’s lack of understanding about how the Corp Fin comment process works. Not surprising since it would be hard for an industry outsider to know…

The Latest on Fairness Opinions

We have posted the transcript from our recent webcast: “The Latest on Fairness Opinions.”

– Broc Romanek

January 11, 2008

CD&A: “To Be Competitive” is Not Analysis

We just mailed a Special Supplement to The Corporate Counsel, highlighting a potential trap for those in the process of preparing their CD&As. When seeking to justify compensation amounts, companies may be lulled into saying that they pay those amounts “to be competitive” – which may, in fact, become a red flag to highlight compensation decisions that were made without critical analysis. In this regard, it is not enough to merely describe analytical tools such as tally sheets – issuers need to provide the critical analysis and what is done in response to that analysis. Take a look at our final copy of the January-February 2008 issue of The Corporate Executive for examples of how the necessary analysis – and the actions taken in response to that analysis – can be described in your CD&A.

In order to keep this sort of essential guidance on your proxy disclosures coming, be sure to renew your subscriptions to The Corporate Counsel and The Corporate Executive today. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial.

GAO Study on the Audit Market: No Immediate Action Required

The Government Accountability Office has released another study of the market for audit services (the last study was mandated by the Sarbanes-Oxley Act), and this time the GAO reports that while there is significant concentration of auditors for large public companies, there is no need for Congress to step in at this point.

The GAO noted that 82 percent the Fortune 1000 saw their choice of auditor as limited to three or fewer firms, and about 60 percent viewed competition in their audit market as insufficient. Smaller companies, on the other hand, reported that they were satisfied with the auditor choices available to them. The study noted that concentration in the audit market for large companies is likely to continue, particularly given the challenges faced by those smaller accounting firms seeking to audit more public companies. The GAO also considered steps that have been suggested to increase competition – such as capping auditors’ liability – but it did not recommend that any such steps be pursued at this time.

The GAO’s findings will be food for thought for Treasury Department’s Advisory Committee on the Auditing Profession (discussed in this blog), which is expected to issue a report this summer.

All Quiet on the Corp Fin Front?

After such a huge push in rulemaking during 2007, it is understandable (and perhaps welcome) that Corp Fin has not announced any significant rulemaking projects over the next six months. The recently released Unified Agenda (also known as the Semiannual Regulatory Agenda) – which summarizes the rules and proposed rules that each Federal agency expects to issue during the next six months – doesn’t list any new rulemakings on Corp Fin’s plate in the coming months. On some outstanding rule proposals and solicitations of comment, such as proxy access, the next action is listed as “to be determined.” For the executive compensation rules, the agenda lists a projected final action in May 2008, so it remains to be seen what is contemplated on that front.

Absent from the latest Unified Agenda are some of the potential rulemaking initiatives that the Staff has been talking about over the past year or so, including rules regarding voluntary filers, amendments to Item 4.02 of Form 8-K, and the roll-out of mandatory interactive data. But the fact that a rulemaking doesn’t make it to the Unified Agenda is by no means a signal that it is not going to happen in the near future, because plans can change pretty quickly at the SEC these days.

– Dave Lynn

January 10, 2008

More Bad PIPEs Law

A few months ago, I blogged about the case of SEC v. John F. Mangan, Jr. and Hugh L. McColl, III, where the court dismissed the SEC’s allegations that Mangan violated Section 5 by shorting PIPE shares before the resale registration was declared effective, and then covering the short sales with the PIPE shares after the resale registration statement was effective. As if that ruling wasn’t bad enough for the SEC, last week a judge in the Southern District of New York issued this opinion reaching the same unfortunate result in the case of SEC v. Edwin Buchanan Lyon, IV and his Gryphon Partners entities.

You can read more about these decisions (including our take) – and what the SEC intends to do about them – in the just-mailed November-December issue of The Corporate Counsel. Since all of our publications are on a calendar-year basis, renew your subscription to The Corporate Counsel today. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial, so you can get the latest analysis on topics such as this in The Corporate Counsel.

NASDAQ Rewrites its Rulebook

Recently, NASDAQ unveiled a proposed rewrite of the NASDAQ Marketplace Rules applicable to companies listed on the NASDAQ Stock Market. NASDAQ’s goal is to make the rulebook clearer and easier to understand by simplifying the organization and presentation of the rules, as well as the language of the rules themselves. This commendable effort does not appear to be directed at changing the substance of the initial and continued listing standards, but rather to present those standards in a more user-friendly way.

NASDAQ has put the proposed rulebook out for public comment until February 1, 2008, and it plans to file the proposed rule changes with the SEC by the end of the first quarter.

SAB 108 Implementation

Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, was issued to address the diversity in practice concerning the quantification of errors that arose in prior years, and it was effective for fiscal years ending after November 15, 2006. The SAB requires companies to use both the “iron curtain” and “rollover” approaches when quantifying misstatement amounts. SAB 108 does not require previously filed reports to be amended when companies correct prior-year financial statements for immaterial errors – rather, the errors may be corrected the next time the company files the prior year financial statements.

Audit Analytics recently published a study of companies adopting SAB 108 for years ended from November 15, 2006 to June 30, 2007. The study notes that a relatively small number of companies (296) have adopted SAB 108 in their 10-Ks. The companies making adjustments under the SAB were concentrated in a few industries, with finance and insurance companies comprising the largest sector. Clients of KPMG accounted for almost 40% of the total companies adopting SAB 108. Audit Analytics indicates that the relatively low number overall – and the concentration in some industries – may be accounted for by the lack of restatements among those companies or industries, where immaterial errors would have likely been corrected in the course of restating the financials. The study indicates that errors affecting liabilities and reserve accounts and tax accounting errors made up bulk of corrections under SAB 108.

– Dave Lynn

January 9, 2008

DOL Guidance on Proxy Proposals

The U.S. Department of Labor recently issued Advisory Opinion 2007-07A to the U.S. Chamber of Commerce, responding to the Chamber’s concerns about “the use of pension plan assets by plan fiduciaries to further public policy debates and political activities through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a company.”

Mike Melbinger notes in his blog: “By way of background for those not familiar with ERISA, the DOL has long considered the right to vote proxies related to a retirement plan’s stock holdings as a valuable asset of the plan. In Advisory Opinion 2007-07A, the DOL said:

‘Under section 404(a)(1)(A) and (B) of ERISA, plan fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, the Department would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of section 404(a)(1)(A) and (B).
* * *
Consistent with these various pronouncements, the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would, in the view of the Department, violate the prudence and exclusive purpose requirements of section 404(a)(1)(A) and (B).’

Those of us familiar with ERISA’s fiduciary requirements were sometimes curious as to how some union plan fiduciaries could square their proxy activism with ERISA. Apparently, the DOL was too.”

An Uptick in Securities Fraud Class Action Lawsuits

The latest study from Stanford’s Securities Class Action Clearinghouse and Cornerstone Research finds that the number of companies sued in securities fraud class action lawsuits rose 43 percent between 2006 and 2007, up from 116 in 2006 to 166. The current level of litigation activity still remains well below the ten-year historical average of 194 companies sued per year.

The study attributes the 2007 jump in cases to the subprime mortgage mess and increasingly choppy market conditions. Lawsuits against companies in the finance industry more than quadrupled to 47 in 2007, with 25 of those cases involving subprime issues.

In a demonstration of longevity, the study finds that of the 2,218 securities class action cases filed since 1996, 19 percent are continuing – primarily those filed in the past few years. Among the 81 percent of cases that have been resolved, 41 percent were dismissed and 59 percent were settled.

Among the other notable 2007 class action litigation developments cited in the study were:

– William Lerach’s guilty plea;
– The JDS Uniphase trial, notable in that the case actually went to trial and the defendants won; and
– The Supreme Court’s decision in Tellabs v. Makor

It now appears that the two-year lull in class action activity is over, and continued market volatility (like the day we had yesterday) seems likely to help propel the upward trend for the time being.

Heads Up on New Rule 144 Changes

Protect your company (and your key executives and clients) by learning what you need to know by catching our January 30th webconference – “New Rule 144: Everything You Need to Know – And Do NOW.” The conference will be archived in case that date doesn’t work for you.

Jesse Brill, Bob Barron and Alan Dye are busy working on the Key Conference Materials, which will provide the specific procedures, new memos, legends, representation letters, etc. that you will need to protect yourself. Take advantage of reduced rates for those of you that use the and The Corporate Counsel by registering online or via this order form.

Opinion Polls & Market Research

– Dave Lynn

January 8, 2008

Smaller Companies: How Your 10-K Changes This Proxy Season

With the SEC’s recent overhaul of the regulatory framework that applies to smaller companies, we have decided to do a webcast – “Smaller Companies: How Your 10-K Changes This Proxy Season” – in two weeks to help you navigate the changes to your Form 10-K this proxy season. This webcast will not just recap the new rules; instead, you will receive practice pointers on how to prepare your Form 10-K this proxy season, with a focus on what changes you need to make this year due to the new rules and regulations.

On the webcast, John Jenkins of Calfee, Halter, Harry Pangas of Sutherland Asbill and I will address – among other topics:

– What are the less obvious changes to your 10-K that you need to be aware of?
– What are the pros and cons of the a la carte approach? Where does it make a real difference regarding the amount of work – and does it have any ramifications to use the reduced disclosure in one place and not in others?
– Do smaller companies have to change their 10-K or 10-KSB this year?
– A laundry list of practice pointers to help you hit the ground running

Since all memberships are on a calendar-year basis, you will need to renew your membership to catch this webcast as well as the one featuring Pat McGurn on January 22nd: “Forecast for 2008 Proxy Season: Wild and Woolly.”

Corporate Governance Survey Results from Shearman & Sterling

Recently, Shearman & Sterling released its annual survey on corporate governance practices of the 100 largest U.S. public companies. Among the trends described in the survey are:

– Majority voting continues to make headway as companies respond to shareholder pressure, with 56 of the 100 largest companies now requiring directors to be elected by a majority of the votes cast rather than a plurality (except, for the most part, in contested elections).

– Anti-takeover measures such as “poison pills” and classified boards continue to be on the decline. Only 17 of the 100 companies surveyed had poison pills in place, down from 33 in 2004, while 33 companies had classified boards, down from 54 in 2004.

– Independent directors comprise 75% or more of the boards of 87 of the surveyed companies, while the CEO is the only non-independent board member at 40 of the 100 largest companies.

– Of the 22 top 100 companies at which separate individuals serve as Chairman and CEO, only 5 have adopted policies requiring separation of those roles.

– Half of the surveyed companies have placed a limit on the number of boards on which a director may serve, up from 29 of the top 100 companies in 2004.

– Of the 66 surveyed companies addressing the topic of term limits for directors, only 3 have adopted mandatory term limits for their directors.

– 86 of the top 100 companies have disclosed a mandatory retirement age for their non-employee directors, with 72 being the most common mandatory retirement age.

– Of the top 100 companies, 71 disclosed related person transactions, with employment of a relative of a related person being the most commonly disclosed transaction.

Delinquent Filer ABCs

Last Friday, the SEC imposed 10-day trading suspensions on twelve companies, all starting with the letter “A.” The SEC said that it suspended trading in the securities of these companies because they had not filed periodic reports in over two years. A temporary trading suspension may last well beyond the 10 business day period contemplated in Exchange Act Section 12(k), because brokers cannot resume quotations until they determine that the issuers have satisfied the informational requirements of Rule 15c2-11. Often, the SEC will follow temporary trading suspensions with actions to revoke the company’s Exchange Act registration under Exchange Act Section 12(j). Here is the order for the first six companies and the order for the second six companies.

Given that they only got to Alford Refrigerated Warehouses, Inc. so far, it looks like the Enforcement Staff is just getting started on a potentially long list of delinquent issuers to target in 2008.

– Dave Lynn

January 7, 2008

Final Copy: Model CD&A Disclosures

We just mailed the final copy of the January-February 2008 Issue of The Corporate Executive, which provides model CD&A disclosures. We had posted an advance copy of this issue last month; there are slight changes from the advance copy. As all subscriptions are on a calendar-year basis, renew your subscription for ’08 to receive this issue.

Or if you aren’t a subscriber yet, try a no-risk trial. I will be writing the lead piece in each issue of The Corporate Executive this coming year.

The ’07 IPO Market That Few Talked About

A few weeks back, the WSJ ran this article about how a fourth of the IPOs in ’07 were blank check offerings. And here is an excerpt about the ’07 IPO market from Renaissance Capital’s “2007 Annual IPO Review“:

“During 2007, all of the talk about IPOs was that London and Hong Kong were stealing the New York IPO market’s thunder. But, with the largest number of IPOs and highest dollar volume since 2000, the 2007 U.S. IPO market performed well against the backdrop of the subprime and credit market crises. Driving the IPO market were fast growing Chinese companies in search of US capital and hot U.S. technology companies. Although IPOs were mostly immune from the problems of foreclosures, bad loans and deteriorating credits, the four largest issuers this year were financial companies, two of them money managers whose investments were potentially in these now contaminated realms of the credit markets. Technology continued its rebound, although performance was bifurcated, with sought after on-demand and virtualization software companies soaring and smaller names tanking.

Not all of the IPO action occurred in the US, however. The London Stock Exchange continued to attract European issuers, although many of its IPOs were smaller. But the LSE didn’t produce any global marquee names this year. Instead, the headline grabbing issuers were Chinese companies eschewing the New York exchanges for Shanghai and Hong Kong.

The 2007 was notable for the following:

– Highest volume and proceeds raised in seven years
– 2007 IPO first day pop and aftermarket returns were good but below 2006
– The Renaissance IPO Index® significantly outperformed the major indices
– Largest issuers were financials, which had disappointing debuts
– The majority of top performers were Chinese IPOs
– Stop the presses! Worst performers weren’t mostly biotech
– Tech IPOs were the largest component of the calendar, followed by healthcare
– Establishment of Hong Kong and Shanghai as hubs for hot IPOs
– Non-US exchanges Woo IPOs
– International activity, lead by China, continued to be strong
– Tremendous demand for small, high growth companies
– More Profits on the Come as Tech Deals Dominated
– Our predictions for 2008 are offered
– Highest Volume of IPOs and Proceeds in Seven Years

Deal volume was up 16% and proceeds raised increased 23% over 2006. The average market capitalization of IPOs rose as well, due to a continuing number of megadeals as well as investor preference for companies with credible track records.”

Foreign Private Listings on the NYSE Rises During ’07

According to this NYSE page, there were 42 new foreign companies listed on the NYSE during 2007, bringing the total number of foreign companies listed to 424. A pretty good year compared to the 29 listed for 2006, 19 listed for 2005 and 20 listed for 2004.

By the way, the SEC posted its adopting release regarding the ability of foreign private issuers to use International Financial Standards without US GAAP Reconcilation a few weeks back.

– Dave Lynn

January 4, 2008

Chancellor Chandler Elaborates On Special Committee Waiver Ruling

Travis Laster notes: You might recall Chancellor Chandler’s November 30th opinion in Ryan v. Gifford, in which the Chancellor ordered production of communications between a special committee created to investigate option backdating and its counsel. The Chancellor provided two bases for his ruling: first, a traditional “good cause” analysis under Garner v. Wolfinbarger, and second, a more novel analysis in which the special committee was found to have waived privilege by presenting its report orally to the full board, including directors who were the subject of the investigation.

The company (but notably, not the committee or its counsel) sought interlocutory review of the waiver analysis in the November 30th decision. In a new opinion (posted in our “Options Backdating” Practice Area on, the Chancellor denied the application, noting that the company did not challenge the Garner analysis and thus any appeal would be futile.

More importantly, the Chancellor’s new opinion goes into much greater detail regarding the various factors that caused him to find a waiver from the presentation to the full board. These included (i) the lack of Special Committee authority to take action independently of the full board, (ii) the broad scope of the investigation combined with the absence of any written report presenting the committee’s findings, (iii) the fact that directors who were the subject of the investigation had their personal counsel present to hear the report, (iv) the willingness of the company to refer to the committee’s work in public filings and communications with regulatory authorities, and (v) the extensive reliance by the individual defendants on the exculpatory effects of the committee investigation, including in a subsequently withdrawn summary judgment brief.

The Chancellor also takes pains to confirm the narrow scope of his ruling: “[I]t is worthwhile to repeat that the relevant factual circumstances here include the receipt of purportedly privileged information by the director defendants in their individual capacities from the Special Committee. The decision would not apply to a situation (unlike that presented in this case) in which board members are found to be acting in their fiduciary capacity, where their personal lawyers are
not present, and where the board members do not use the privileged information to exculpate themselves. Similarly, the decision would not affect the privileges of a Special Litigation Committee formed under Zapata, or any other kind of committee that (unlike the Special Committee here) has the power to take action without approval of other board members.”

The Chancellor’s ruling thus does much to limit the potentially broad sweep of his earlier and much briefer opinion. Future special committees can still expect to see plaintiffs make waiver arguments based on Ryan, but it should be far easier for counsel to navigate around the waiver problem based on the additional analysis that the Chancellor has now provided.

SEC Staffer Added to Executive Compensation Disclosure Webconference

I’m excited to announce that Mike Reedich, a key member of the SEC’s Division of Corporation Finance’s Executive Compensation Review Team has joined the panel for the first of two webcasts for our upcoming program: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!

Since all memberships are on a calendar-year basis, you will need to renew your membership to catch Mike, Dave Lynn, Mark Borges, Ron Mueller and Alan Dye on January 23rd and 31st.

Reaction: The Corporate Library Reports on Compensation Consultants

Here are some thoughts from an anonymous member about Dave’s blog on a study from The Corporate Library finding that companies using compensation consultants tend to pay higher CEO compensation, and such compensation levels do not necessarily relate to increased shareholder returns:

“I cannot help but comment on the The Corporate Library report that you blogged about. I am very concerned about anyone relying on or using the results of The Corporate Library Report. The methodology is so flawed that I seriously question the validity of the report. It also demonstrates a complete lack of understanding of executive compensation practices. For example:

– It combines STIs and cash long-term incentive plans and then measures them as a percentage of base salary, with no reference to the peer groupings. The results could simply be a function of which companies have cash LTIPs in addition to STI plans, the mix of compensation elements at those companies, as well as the revenue sizes of the companies that each consultancy has as clients.
– It tries to measure long-term incentives by vehicle (e.g., stock options separately from performance plans), when the mix of LTI vehicles varies widely from company to company
– It ignores restricted stock grants and performance shares, significant elements of executive pay.
– It ignores the types of clients that the consultancy firms have. For example, some consultancy firms have a higher concentration of high-tech company clients, which generally focus on stock options (e.g., Compensia, Radford).
– It ignores the fact that many companies use 162(m) bonus pools in the Grants of Plan-Based Awards table which distorts what is actually attributable to the incentive plans
– It doesn’t look at total pay
– While detailing the average target value of all performance-related equity awards and average maximum value as a percent of target for nonequity compensation for companies using consulting firms, the Report does not indicate those percentages for companies not disclosing they used compensation consulting firms. Thus, the numbers provide no comparison on which to make a judgment on the effect of compensation consulting firms on this issue.
– It does not acknowledge an obvious finding which is there is not a correlation of higher CEO pay to multi-service firms. In fact, the data appears to support a different conclusion, i.e., higher CEO pay is associated with boutique executive compensation consulting firms. This seems to indicate that independence is not an issue at multi-service firms.
– Finally, we disagree that compensation firms have very different methods of designing executive compensation practices. Our experience is that other factors are much more relevant, including the company’s pay objectives, business strategy, competitive market for talent, life cycle, and culture, than the consulting firm or individual practitioners at those consulting firms.”

– Broc Romanek