Monthly Archives: April 2008

April 16, 2008

Mandatory XBRL: Here It Comes

On Monday, the SEC will hold an open Commission meeting to vote on a proposal to mandate XBRL. Given that this has been one of Chairman Cox’s top priorities since he took office – and the Chairman and SEC Staff have not been shy about their timeframe to kick-start mandatory XBRL – this is no surprise.

We just announced a May 15th webcast – “XBRL: Understanding the New Frontier” – to help you understand the signficance of what these means for you (and your CPA brethren). As a warm-up for this program, here are three quickie “foods for thought”:

1. This Ain’t Edgar – You’ll note that the webcast panel is populated by reps from the major financial printers. Don’t let this fool you into thinking that XBRL is just another version of Edgar, with tasks that can be contracted out. This is much more than that – and I believe entails a new skill set that all the finance and auditing folks are gonna have to know. It’s gonna be a huge education effort. As with most new things, there is plenty of misinformation out there. One article I just read called XBRL the “new Edgar.” The only rationale I can conceive for that statement is that XBRL will increase public access to information filed via Edgar.

Let’s see if I can make this clearer: Edgar tagging just involves placing tags on a disclosure document to enable it to be filed on the SEC’s system. In comparison, XBRL will likely affect how companies approach their financial disclosure. Information coded in XBRL will likely used – and abused – in ways that companies don’t worry about today. Similar to the many speeches that Chairman Cox has delivered over the years, SEC General Counsel Brian Cartwright gave this speech on Saturday at the ABA Spring Meeting.

2. We Need Time to Learn – I can appreciate that Brian was trying lay out the simplicity of the concept of XBRL because many of us still have not grasped what it really is – but I worry about the speed by which it will be implemented. I hope there will be a fairly long phase-in period before it becomes mandatory (and I think that will be the case since the SEC’s meeting notice refers to a “near- and long term-schedule”). As noted in this article, others have similar concerns – for example, the SEC’s Advisory Committee on Improvements to Financial Reporting urged the SEC to wait three years. The Advisory Committee also wants to phase-in the legal liability of XBRL documents, starting with them being considered “furnished” rather than “filed,” as it’s currently done in the SEC’s Pilot Program.

3. XBRL Will Provide “Bennies” – For me, there certainly is an upside to XBRL. The most fascinating aspect is not the enhancement to disclosure through “conversion” of financials into a XBRL format simply by adding tags. Rather, the value-creation occurs when XBRL becomes embedded into a company’s enterprise resource management system, so that data can be extracted and analyzed to drive business decisions with greater speed and precision. Public financial reporting simply is an ancillary by-product of embedded XBRL. Thanks to Jim Brashear for allowing me to “borrow liberally” from some of his ideas…

Delaware Court of Chancery Permits Insurgent To Nominate Short Slate

On Monday, the Delaware Court of Chancery ruled on another advance by-law case (here is a blog about the other case). Here is some analysis from Travis Laster: If the recent JANA Partners v. CNET decision (currently on expedited appeal) wasn’t enough to make corporations review and update their advanced notice bylaws, the attached opinion should do the trick. In Levitt Corp. v. Office Depot, Inc.,, Vice Chancellor Noble holds that (i) a bylaw requiring advanced notice of “business” to be proposed at an annual meeting extends to director elections and director nominations, but that (ii) the advanced notice bylaw was not applicable because the corporation had given notice that the election of directors would be an item of business at the meeting. In light of the second holding, the Court concluded that the stockholder did not have to give advance notice of its intent to run a short slate. As with CNET, this is a decision that will likely prompt an appeal.

On March 14, 2008, Office Depot sent out its notice of annual meeting. Item 1 on the list of items of business was “To elect twelve (12) members of the Board of Directors for the term described in this Proxy Statement.” The proxy statement contained standard Rule 14(a) disclosures regarding how votes would be tabulated in an uncontested versus a contested election. On March 17, 2008, Levitt filed its own proxy statement seeking to nominate two candidates for director.

Office Depot had a relatively standard advanced notice bylaw which provided that “business” could be brought before the annual meeting if (i) specified in the notice, (ii) otherwise properly brought before the meeting by the board, or (iii) proposed by a stockholder in compliance with advanced notice requirements. The time period for advanced notice was “not less than 120 calendar days before the date of the Company’s proxy statement released to shareholders in connection with the previous year’s annual meeting.” The bylaw required the stockholder proposing business to provide standard information, including basic stockholder information and a brief description of the business to be conducted.

Levitt did not try to comply with the advance notice bylaw. Office Depot rejected Levitt’s nominations for failure to comply.

In granting judgment on the pleadings for Levitt, Vice Chancellor Noble first held that the scope of “business” under the Office Depot advanced notice bylaw extended to director nominations by stockholders. The Court construed the plain meaning of the term “business” broadly to include all “affairs” or “matters” that could be considered at an annual meeting. This included director elections. (11-12). The Court also relied on Section 211(b) of the DGCL, which provides for an annual meeting to elect directors “and other business.” As a matter of plain language, the Court held that this section indicated that electing directors was “business.” (13)

This holding makes sense as a matter of contractual interpretation, but it conflicts with widespread corporate practice. Many corporations have separate advance notice bylaw requirements, one for “nominations” and another for “business.” The information requested for the former is typically different than the latter. The advance notice windows are also often different, with the former including additional windows for issues such as an increase in the size of the board. The Levitt decision could render the bylaws of companies with dual structures ambiguous, as nominations now arguably will be covered by two competing sections. It would be prudent to clarify when “business” means “all business, including nominations of candidates for and the election of directors” versus “all business other than nominations of candidates for and the election of directors.” Interestingly, the opinion indicates that Office Depot previously had a dual structure, but eliminated its “nomination” bylaw. The Court declined to give significance to the amendment.

Based on this first holding, one would think that the Office Depot advanced notice bylaw would apply to Levitt’s nominations. But the Court then went in a different direction. The Court instead agreed with Levitt that because Office Depot had sent out a notice of meeting saying that the business of the meeting would include the election of directors, that item of business was properly before the meeting under the advanced notice bylaw and the stockholder did not have to separately give advance notice. (15-16). The Court rejected the argument that the notice of meeting contemplated only a vote on the corporation’s nominees for directors, finding that it was not supported by the text of the notice (which referred generally to “elections of directors”). In support of its interpretation that the notice also contemplated a contested election, the Court cited the standard Rule 14(a) language on contested elections that appeared in the Office Depot proxy statement.

As in JANA, the Levitt decision effectively left the corporation without any advance notice protection whatsoever for director nominations. This, of course, is an odd result for a company that nominally has an advance notice structure in place. In support of this outcome, the Court observed that “neither Subchapter VII of the [DGCL] nor any provision of Office Depot’s Bylaws discusses or imposes limitations on the nomination process.” The Court did not explain how it reached this conclusion given its prior holding that the term “business” in Office Depot’s advanced notice bylaw included director elections and nominations.

In light of the Levitt decision, corporations should make sure that their bylaws explicitly discuss “nominations.” Corporations also may wish to consider changing the historic and ubiquitous language that appears in notices of annual meetings and identifies the first item of business as “election of directors.” One alternative to avoid the Levitt problem would be to say “election of the Board of Directors’ nominees.” Because all candidates are voted on as a single item of business, however, the better route is likely to be to maintain the historic language in the notice of meeting and instead make sure that the bylaws have a specific advance notice structure for stockholder nominations.

We have posted a copy of the Levitt opinion – and memos analyzing it – in our “Annual Stockholders’ Meeting” Practice Area.

Conduct of the Annual Meeting

We have posted the transcript from our recent popular webcast: “Conduct of the Annual Meeting.”

– Broc Romanek

April 15, 2008

Obama Pushes “Say on Pay” to the Fore

As noted in this WSJ article, both Senator Barack Obama and Senator John McCain attacked executive compensation last week. You may recall that Senator Obama introduced a bill on “say on pay” in the Senate after it passed in the House last year. Below is an excerpt from Sen. Obama’s Friday speech (and here is a video and full text of the speech):

We all believe in that fundamental, American value that if you do good work, if you’re successful, you should be rewarded. But if you’re a Wall Street CEO today, it doesn’t seem to matter whether you’re doing a good job or a bad job for your shareholders and workers: You’ll be rewarded either way.

Take the home building company, KB Home. They lost nearly $1 billion last year. But their CEO walked away with a $6 million cash bonus, and that’s on top of his $1 million base salary. And just the other week, we learned that when Countrywide Financial was sold a few months ago, its top two executives got a combined $19 million. Nevermind that Countrywide is as responsible as anyone for the scandalous mortgage crisis we’ve got today – a crisis that’s the source of many of our other economic problems.

This is an outrage. But as I said in a recent speech at the Cooper Union in New York City, this isn’t an accident. It’s because of decisions made, not just in boardrooms or trading floors, but in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales, using their clout to rig the game against everyday Americans.

So what we need to do is restore balance to our economy and put in place rules of the road to make competition fair, and open, and honest. One place we can start is by restoring common sense to executive pay.

That’s why last year, I proposed legislation that would give shareholders a say on what CEOs are getting paid, and help ensure that companies are disclosing the rationale for the salary and benefits that CEOs are getting. This isn’t just about expressing outrage. It’s about changing a system where bad behavior is rewarded – so that we can hold CEOs accountable, and make sure they’re acting in a way that’s good for their company, good for our economy, and good for America, not just good for themselves.

We’ve seen what happens when CEOs are paid for doing a job no matter how bad a job they’re doing. We can’t afford to postpone reform any longer. That’s why Washington needs to act immediately to pass this legislation.

And here are some tidbits from the WSJ article:

– Obama on his “say on pay” bill: “Washington needs to act immediately to pass this legislation” and change “a system where bad behavior is rewarded.”

– If the “say-on-pay” bill doesn’t pass this year, it “will be a priority for Sen. Obama as president,” campaign policy director Heather Higginbottom says. A spokesman for New York Sen. Clinton’s Senate office says she also favors additional federal rules on executive-pay disclosures.

– Sen. McCain hasn’t taken a stance on the say-on-pay bill, and opposes legislative or regulatory cures for executive-pay problems, says senior policy adviser Douglas Holtz-Eakin.

– In a campaign appearance Friday, Sen. McCain said he strongly endorsed Aflac Inc.’s voluntary decision to become the first public U.S. company to give investors a say on pay; the vote is to occur at Aflac’s May 5 annual meeting.

– An Obama commercial that has aired in 14 states assails chief executives “who are making more in 10 minutes than ordinary workers are making in a year.”

– Sen. McCain recently blasted what he called the “outrageous” and “unconscionable” rewards received by leaders of Bear Stearns Cos. and Countrywide Financial Corp. despite the credit crisis

My Ten Cents: Say on Pay

For what its worth, here is my current thinking on “say on pay.” And maybe it’s a cop-out, but I would say that I’m torn at this moment in time. On the one hand, I find the arguments that it’s a slippery slope to have shareholders vote on a matter that is supposed to be a board task (ie. that shareholders will eventually be voting on all sorts of board tasks) and that shareholders won’t have the requisite knowledge to vote on a complex pay package convincing.

On the last point, I worry that say on pay will provide RiskMetrics with even more clout given that most investors will need help deciphering 30 pages of pay disclosure across the many companies in which they invest (although a partial fix for this is for boards to simplify their pay packages so that CEOs aren’t getting paid in a dozen different ways – why is there a need for such complex pay packages?).

I also worry that most shareholders will blindly vote in favor of pay packages, thereby arguably providing directors a shield from liability for the poorly designed pay packages they give a CEO (a theory espoused by the wise Professor Charles Elson, who points out how ironic it is that most directors oppose say on pay). And there are more convincing arguments, including those espoused by some investors who would rather just vote against/withhold directors than participate in a non-binding vote. Or those who say a simple “thumbs down” doesn’t help the board understand which aspects of a pay package are objectionable.

On the other hand, I am at my wit’s end to understand why CEO pay packages aren’t changing. I hear a lot about how the behavior of directors has dramatically changed in the boardroom over the past five years. But I really don’t see much evidence of that when reviewing proxy disclosures. Some commentators claim that the stories in the mainstream media about CEOs getting paid for non-performance are only outliers – but then I look for a CEO whose compensation I can point to as a model and I come up fairly empty.

So maybe “say on pay” is necessary to shake up the boardrooms of this country so that directors truly understand that the excesses of the past need to be reversed. That the 15 years of being paid in the top quartile have added up to a batch of inflated data in peer group benchmarks – and the sole cure is to wind back the clock and take a huge pay cut. Boards may need to be pushed by “say on pay” to see daylight on this issue, because nothing else seems to work.

So I’m personally at a crossroads regarding this issue. There was a “Say on Pay Roundtable” organized by the Working Group on Advisory Votes on Compensation last week; Carol Bowie of RiskMetrics reports on what happened there in this article (scroll down) – and check out the many resources we have on this topic posted in our “Say on Pay” Practice Area on And then there is this hopeful article from yesterday’s WSJ. Maybe this information can help you make up your own mind. It’s a challenging issue and an important one that needs to be addressed before it’s legislated for us…

Judging the Judge

Here is a recent entry from Mark Borges’ “Compensation Disclosure Blog” on

Last Tuesday, I attended a roundtable in New York City on the advisory vote on executive compensation (otherwise known as “Say on Pay”). I was sitting through a panel discussion featuring representatives of the various proxy advisory firms, listening to them talk about the criteria that they would use to analyze a Compensation Discussion and Analysis when formulating a voting recommendation on a Say on Pay proposal when it occurred to me that one of them, RiskMetrics Group (which acquired ISS last year), is itself a reporting company that has to comply with Item 402. I was immediately curious about what was in its executive compensation disclosure.

So yesterday, I took a look at the RiskMetrics’ information. Although the company just filed its first annual report on Form 10-K, it won’t file its first proxy statement until later this month. Consequently, I had to go back to the Form S-1 registration statement from its initial public offering earlier this year.

Like many other newly public companies, the Form S-1 disclosure is on the light side. At 10 pages, it features a Compensation Discussion and Analysis (which clocks in at 2,871 words), a Summary Compensation Table, and four of the other required disclosure tables (a Grants of Plan-Based Awards Table, an Outstanding Equity Awards at Fiscal Year-End Table, an Option Exercises and Stock Vested Table, and a Director Compensation Table).There’s no Pension Benefits Table or Nonqualified Deferred Compensation Table, which isn’t too surprising, and no severance and change in control disclosure (it doesn’t appear that the company has any such arrangements in place).

I noted two interesting features in the disclosure. First, in the CD&A (which starts on page 105) the company describes the five corporate objectives used in determining its 2007 bonus compensation, but doesn’t give the performance target levels. Instead, the company provides the following statement:

“Our corporate objectives for 2007, particularly the specific financial targets for revenues, EBITDA and cash flow, which we used for purposes of determining our 2007 bonus and equity compensation for our executive officers, were set at levels which our board of directors intended to be challenging and which provided an incentive for our executive officers to meet our corporate objectives, including increasing our revenues, earnings and cash flow. However, our corporate objectives were (and are) also intended to be attainable if we have what we considered to be a successful year. We believe that a senior management team that is providing strong performance should be able to achieve our corporate objectives in most, but not all, years.”

I interpret this as a “degree of difficulty” statement as specified by Instruction 4 to Item 402(b). It’s a statement that may come in handy if you run into an issue with this type of disclosure down the road.

Also, the company provides an alternative summary compensation table (at page 114), which adds the anticipated grant date fair value of the equity awards it intended to grant to its named executive officers for fiscal 2007 to the other compensation elements reported in the required Summary Compensation Table (these awards had not been granted at the time of the IPO). I guess this is a pretty strong endorsement of these alternative tables and another not-so-subtle criticism of the current equity award reporting requirements.

RiskMetrics status as a reporting company puts the ISS business in a unique position. Its executive pay disclosure is going to be closely scrutinized each year; particularly given its new policy on evaluating executive pay disclosures to make voting recommendations on Say on Pay proposals. (By the way, RiskMetrics has announced that it intends to give its shareholders an annual advisory vote at each annual meeting to approve its executive compensation policies and practices.) I’m probably not the only one who is looking forward to taking a look at its proxy statement in a couple of weeks.

The Section 162(m) Workshop

We have posted the transcript from our recent webcast: “The Section 162(m) Workshop.”

– Broc Romanek

April 14, 2008

NYCERS v. Apache Corp: Remember Cracker Barrel?

Ah, Cracker Barrel. A decade ago, the biggest Corp Fin-related controversy was the shareholder proposal’s “ordinary business” exclusion basis and the SEC Staff’s Cracker Barrel no-action letter under Rule 14a-8(c)(7) (the basis has since been renumbered to 14a-8(i)(7)). Those were much simpler times. Back then, the SEC’s dealings in corporate governance matters were pretty much limited to the shareholder proposal rule.

The Cracker Barrel saga arose due to a ’92 no-action letter under which Corp Fin allowed that company to exclude a anti-sexual orientation discrimination proposal by stating that all employment-related proposals raising social issues were excludable. Enough fuss was raised so that the Commission specifically overruled its Staff’s position in a ’98 rulemaking and returned the agency’s position on social issues to a “case-by-case analytical approach.” Corp Fin has been making this case-by-case determination when deliberating on social proposals ever since.

Now, a similar case has been brought in the US District Court, Southern District of Texas, by Apache Corporation, which is seeking a declaratory judgment supporting its exclusion of a shareholder proposal submitted by the New York City Employees’ Retirement System. This case seeks to enjoin a lawsuit brought by NYCERS in the Southern District of New York. The facts are as follows:

– For the last two years, NYCERS has submitted proposals to companies in a campaign designed to fight discrimination against gays/lesbians and transgendered people (eg. asking companies to amend their EEO statements a la Cracker Barrel).

– This proxy season, NYCERS submits a proposal to Apache asking for the implementation of a program based on “equality principles” that include additional steps to avoid discrimination against this group of people.

– On March 5th, Corp Fin provides no-action relief allowing Apache to omit the proposal on ordinary business grounds, noting that some of the principles in the proposal relate to ordinary business.

– On April 8th, Apache filed for a temporary restraining order to try to prevent NYCERS from delaying its annual meeting and mailing supplemental materials.

– On April 9th, NYCERS files a lawsuit in SDNY, arguing – among other things – that Corp Fin had denied no-action relief for similar proposals in the past (specifically citing these no-action responses: Armor Holdings ((i)(7) denied on burden grounds) (4/3/07) and Aquila ((i)(10) denied)(3/2/06)) and that the Court doesn’t owe deference to Corp Fin’s positions anyways.

– After it filed its lawsuit, NYCERS subsequently filed for a temporary restraining order, but then quickly changed its request to an affirmative/mandatory injunction to force Apache to deliver supplemental proxy materials ahead of its May 8th annual meeting.

This is where this battle stands today, although it promises to move quickly. We have posted all of the documents filed in the SDTX and SDNY so far in our “Shareholder Proposals” Practice Area.

Corp Fin Tweaks Form 8-K Interps Again

For the second time since their issuance, Corp Fin has tweaked its new Form 8-K Interps to fix a conflict. As had been addressed in our “Q&A Forum” last week, new Interp 202.01 seemingly conflicted with Item 601 of Regulation S-K – with the Staff’s fix, that is no longer so.

John Newell has updated his three sets of redlined 8-K Interps against the old guidance that the Interps updated. John has also provided this redlined version of the new Form 8-K Interps against what the Staff originally issued on April 2nd – which will help those of you that printed them out back then to see what was changed on April 3rd and April 10th.

Closing Time: When the Founder is Ready to Sell

Tomorrow, catch the webcast – “Closing Time: When the Founder is Ready to Sell” – to hear about the special issues that come into play when the founders of a privately-held company want to sell out to a private equity firm or a professional roll-up operator. Join these experts:

– Brad Finkelstein, Partner, Wilson Sonsoni Goodrich & Rosati LLP
– Don Harrison, Senior Counsel, Google
– Armand Della Monica, Partner, Kirkland & Ellis LLP
– Geoffrey Parnass, Partner, Parnass Law
– Sam Valenzisi, Vice President, Lincoln International LLC

SEC Tweaks Form S-11 to Permit Incorporation By Reference

Last week, the SEC issued this adopting release indicating it had adopted the amendments to Form S-11 to permit companies using this form to incorporate by reference previously filed ’34 Act reports.

– Broc Romanek

April 11, 2008

Delaware Chancery Court Doesn’t Meddle in Bear Stearns Deal (In Favor of New York Proceeding)

From Travis Laster: On Wednesday, Vice Chancellor Parsons of the Delaware Court of Chancery stayed an action filed in Delaware to enjoin the Bear Stearns-JPMorgan Chase merger, deferring to a parallel action in New York. Here is VC Parsons’ opinion.

The following quote says it all: “I have decided in the exercise of my discretion and for reasons of comity and the orderly and efficient administration of justice, not to entertain a second preliminary injunction motion on an expedited basis and thereby risk creating uncertainty in a delicate matter of great national importance.” There are references throughout the opinion to the involvement of the Federal Reserve and the Treasury Department in the deal.

The opinion does not shed any meaningful light on how the Court would view the exceptional lock-ups that are part of the deal package. The opinion does say that “the claims asserted in the Complaint only require the application of well-settled principles of Delaware law to evaluate the deal protections in the merger and the alleged breaches of fiduciary duty” (14). The Court then described the factual situation as sui generis (16). The Court concluded that the involvement of the federal players rendered the situation rare and unlikely to repeat – and therefore not one in which Delaware had a paramount interest.

On April 29th, join for the webcast – “JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues” – as Professors Elson, Davidoff and Cunningham analyze a host of novel provisions in the JPMorgan Chase/Bear Stearns merger agreement (as well as this – and any other – court opinion).

Proposed: California’s Climate Change Disclosure

Lately, more and more investors are clamoring for the SEC to enhance its disclosure requirements related to climate change (eg. see this rulemaking petition). Keith Bishop notes: As you know, California has for several years imposed special disclosure requirements on publicly traded corporations (including corporations incorporated in other states that are qualified to transact business in California). Last month, a California legislator introduced a new bill that would require disclosure of climate risk and opportunities.

Specifically, this bill would require the California Secretary of State to develop a climate change disclosure standard for use by “listed companies” doing business in California. The standard would provide guidance on disclosure of climate change risks and opportunities and would, at a minimum, need to address six different factors (i.e. emissions, the company’s position on climate change, significant action by the company to minimize risk and maximize opportunity associated with climate change, corporate governance actions, assessment of physical risks, and an analysis of regulatory risks).

As introduced, the bill specifically states that no listed company is required to meet the standard created by the Secretary of State. Thus, it is unclear what the legal impact of the standard would be. Another interesting aspect of the bill is the fact that it includes a legislative finding that cites a law firm “opinion.” While technically not an opinion, I believe that the bill is referring to a study prepared by Freshfields for the United Nations Environment Programme Initiative.

Board Portal Developments

In this podcast, Joe Ruck, CEO of BoardVantage, explains how the board portal processes have changed to make them more effective, including:

– How many boards now use board portals?
– Have you been surprised in some ways that they are used?
– How are your offerings different than competing providers?
– How do you address the challenges of discoverability?
– What are the latest trends in the board portal space?
– Besides online access, what are the other benefits of a board portal?
– What is the role of portal technology in the area of corporate governance?

– Broc Romanek

April 10, 2008

Aligning Shareholder Interests: Amending By-Laws to Help Spot “Short-Timers”

As noted in this article, Sara Lee and Coach recently amended their by-laws so that a shareholder who nominates a director or submits a proposal must also disclose if it has “hedged its ownership” or has “any short position” in the stock. These revised bylaws should enable other shareholders to make better informed decisions as the interests of a shareholder who has hedged its ownership may not align with the interests of other shareholders.

For example, a shareholder can eliminate or reduce its economic risk through hedging or other derivatives – or be motivated to focus on short term gains at the expense of long-term wealth creation. Alternatively, a shareholder may have a much greater economic interest in the company than is evident from its SEC filings (in my opinion, an area that the SEC should be tackling). The revised by-laws should provide increased transparency – but of course, may still not deter a shareholder from making a nomination or submitting a proposal.

Interestingly, both Sara Lee and Coach are incorporated in Maryland – but they are not the first to take this action. A fund family did it for 11 funds back in December and these did it within the past month: Five Star Quality Care; Redwood Trust; and HRPT Properties Trust. Here is a Form 8-K filed by Sara Lee – and the Form 8-K filed by Coach – with their amended by-laws.

Delaware Chancery Court: Denial to Dismiss a Bullet-Dodging Case

One of these senior moments – didn’t I already blog about this case? I thought so, but apparently not. Here is a recent Delaware decisionWeiss v. Swanson – from Delaware Vice Chancellor Lamb that held that directors who approved spring loaded and bullet dodged stock option grants may have breached their fiduciary duty and forfeited the protection of the business judgment rule since the spring-loading and bullet-dodging practices constituted material information that should have been disclosed to the shareholders. VC Lamb also ruled that the alleged stock manipulation supported a claim of corporate waste.

Company Communications with Investors During the Proxy Season

Thanks to Kris Veaco of the Veaco Group, we have posted a new game: “Pro or Troll #7: Company Communications with Investors During Proxy Season.” Give it a whirl and see how ya do…

Dave and I are off to Dallas to attend the ABA’s Business Law Section Spring Meeting (with a pitstop before the Dallas Chapter of the Society of Corporate Secretaries) for the next two days. Look for an old dude wearing a mullet…

– Broc Romanek

April 9, 2008

Survey Results: More on Blackout Periods

Every few years, we survey the practices relating to blackout and window periods (there are results from five others in our “Blackout Periods” Practice Area). Here is the latest survey results, which are repeated below:

1. Does your company ever impose a “blanket blackout period” for all or a large group of employees?
– Regularly before, at, and right after the end of each quarter – 74.1%
– Only in rare circumstances – 17.2%
– Never – 8.6%

2. Our company’s insider trading policy defines those employees subject to a blackout period by roughly:
– Stating that all Section 16 officers are subject to blackout – 6.8%
– Stating that all Section 16 officers “and those employees privy to financial information” are subject to blackout – 5.1%
– Stating that all Section 16 officers “and others as designated by the company” are subject to blackout – 18.6%
– Stating that all Section 16 officers “and those employees privy to financial information and others as designated by the company” are subject to blackout -47.5%
– All employees – 5.1%
– Some other definition – 16.9%
– Our company doesn’t have an insider trading policy -0.0%

3. Does your company allow employees (that are subject to blackout) to gift stock to a charitable, educational or similar institution during a blackout period?
– Yes, but they must preclear the gift first – 52.5%
– Yes, and they don’t need to preclear the gift – 8.5%
– No – 20.3%
– Not sure, it hasn’t come up and it’s not addressed in our insider trading policy – 18.6%

4. Does your company allow employees (that are subject to blackout) to gift stock to a family member during a blackout period?
– Yes, but they must preclear the gift first – 39.7%
– Yes, and they don’t need to preclear the gift – 8.6%
– No – 24.1%
– Not sure, it hasn’t come up and it’s not addressed in our insider trading policy – 27.6%

5. Are your company’s outside directors covered by blackout or window periods and preclearance requirements?
– Yes – 98.3%
– No – 1.7%

Don’t forget that we have posted a new “Quick Survey on Rule 144 Practices.” Please take a moment to weigh in!

Being In-House

In this podcast, Mike Cahn, a former Senior Associate General Counsel of Securities at Textron, talks about what’s it like to be in-house and how that role has changed over the years, including:

– When did you start and what were your duties as they evolved over time?
– Over time, how much more did you need to rely on outside counsel?
– Did you work more hours as the regulatory environment became more complex?
– What advice would you give to someone going in-house today?

Citigroup’s Director Search: A New Recruiting Method?

As noted in this WSJ article, Citigroup’s lead director posted this statement on the company’s website, noting that the board seeks new finance-savvy directors. The statement appears to be from the company’s Chair of the “Nomination and Governance Committee,” who also serves as the board’s lead director.

I was quite surprised by the statement for several reasons. First was just the novelty of it – one of the largest companies in the world recruiting publicly? I can’t recall that happening before. However, the purpose of this statement likely was not to recruit; rather it was likely posted to assure the market that the company knows changes on the board are necessary (on the same day, a management shake-up was announced). Even if boards generally are increasingly having trouble finding willing – and capable – candidates, I would never imagine Citigroup to be in that boat.

Another striking item though is that the statement – at least, implicitly – comes from a member of the board. It is rare to have broad communications addressed to investors from a director. Most companies shy away from having directors as authorized spokespersons (except from the Chair in limited circumstances).

I do recognize that Citigroup has novel circumstances, with a major crisis at hand – but I’m still surprised by the statement for a third reason. From a litigator’s perspective, the call for “finance-savvy” directors seems a tacit admission that the current board was ill-equipped to oversee the type of operations that the company is engaged in.

The bottom line is that I chalk up the statement to “things you are willing to do when shareholders threaten to withhold or vote against your director nominees.”

As an aside, here is an article criticizing the notion of a board packed with financial-savvy people.

– Broc Romanek

April 8, 2008

“Net Exercises”: The New Cashless Exercise

In the March-April ’08 issue of The Corporate Executive – that was just mailed – there is extensive analysis of why every company should now be switching from cashless exercises to “net exercises.” This important issue provides guidance – and explains all the benefits of implementing “net exercises” now.

Every detail of what you will need to implement “net exercises” is addressed, including how to review outstanding plans and agreements and (where necessary) how to modify them to permit net exercises. Every in-house and outside lawyer (and stock plan administrator, CFO, etc.) needs this March-April issue to be on top of the details necessary to understand and implement this important new development.

Here is a blurred version of the issue to give you a sense of the substance if you aren’t a subscriber. Try a no-risk trial to get the March-April issue rushed to you today.

Lesson Learned: Avoid California

One of our in-house members recently listened to Keith Bishop’s podcast on “E-Proxy and California Law” from a while back and came up with this takeaway: If possible, non-California companies should avoid holding any board meetings in California since Cal. Corp. Code Sections 1600 and 1602 expressly extend shareholder and director inspection rights to foreign corporations that “customarily” hold board meetings there.

Even assuming the e-proxy stuff gets worked out in California (which it sounds like it will per this blog; it’s not a “done” deal yet as first hearing on the “urgency” bill isn’t until next week), if holding board meetings in California provides any sort of a “hook” for California law to apply to non-California companies, you might consider avoiding holding board meetings there in the first place…

Where Art Thou “Billy Broc” and “Dave the Animal”?

After a six-month hiatus, “Billy Broc” and “Dave the Animal” are back by popular demand in this video: “Dave’s Going Through Some Changes.” Too early for Academy Award consideration?

– Broc Romanek

April 7, 2008

Form 8-K Interps: And Even More Redlined Versions…

On Friday, I blogged about a redlined version of Corp Fin’s new Form 8-K Interps and noted that to do the new interps justice, they really needed to be redlined against the three old sources of interps. Well, John Newell of Goodwin Procter has saved the day and provided us with just that – here are his redlined versions as compared against the ’97 Phone Interps; ’03 Non-GAAP FAQs and the ’04 8-K Interps. These gems – along with Howard Dicker’s redline against the ’04 FAQs – are posted in our “Form 8-K” Practice Area.

Quite a task, two words come to mind: “dissect” and “autopsy.” Lawyers playing doctors…

New Quick Survey: Rule 144 Trends

A member recently asked to pick our brain as to what we’re seeing in the market under new Rule 144 regarding the practice of law firms giving legend removal opinions for securities of reporting issuers held more than six months – but less than twelve months – after issuance. In other words, they were curious how firms are dealing with the obligation to report on a timely basis for twelve months with respect to opinions rendered prior to the end of the twelve month period.

We haven’t heard of a settled practice. There is a footnote in the adopting release that could support waiting to the end of the one year period, but it isn’t entirely clear if that is black letter law as the SEC also said the issue is one to be resolved by contract and state law.

We have posted a new “Quick Survey on Rule 144 Practices” to ask your anonymous views on this issue, as well as another one on registration rights. Please take a moment to weigh in!

The New Business Combination Accounting

On, we recently posted the transcript from the webcast: “The New Business Combination Accounting.”

– Broc Romanek

April 4, 2008

Corp Fin Revises Its New Form 8-K Interps – And a Redlined Version

Yesterday, Corp Fin posted a revised version of its spanking new “Form 8-K Compliance and Disclosure Interpretations,” so be sure to print out this revised version dated April 3rd. It looks like the Staff eliminated Intepretation 206.02, which conflicted with Question 106.04 (carrying over Question 25 of the ’03 Non-GAAP Measures FAQs).

Thanks to Howard Dicker of Weil Gotshal, we have posted this Blacklined Version of the new Interps against the ’04 FAQs. Note that it’s “over-blacklined” because the exec comp questions were moved from Item 1.01 to 5.02. It’s still helpful because the Staff tagged every Interp as “new” even though most aren’t (a byproduct of the Staff deeming the Interps as their new brand of informal written guidance: the “Compliance and Disclosure Interpretations”).

Note that to comprehensively understand the changes the Staff made to the 8-K interps, you actually need three redlines: one for the old Phone Interps, one for the ’04 FAQs and one for the ’03 Non-GAAP FAQs.

Broadridge’s Latest E-Proxy Stats

In our “E-Proxy” Practice Area, we have posted the latest e-proxy statistics from Broadridge. As of February 29th:

– 103 companies have used voluntary e-proxy so far

– Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 36% had less than 10,000 shareholders)

– Bifurcation is not being used as much as I would have thought; of all shareholders for the companies using e-proxy, only 5% received paper initially instead of the “notice only”

– 0.70% of shareholders requested paper after receiving a notice

– 60% of companies using e-proxy had routine matters on their meeting agenda; another 32% had non-routine matters proposed by management; and 8% had non-routine matters proposed by shareholders. None were contested elections.

– Retail vote goes down dramatically using e-proxy (based on 80 meeting results); number of retail accounts voting drops from 19.2% to 4.6% (over a 75% drop) and number of retail shares voting drops from 30.1% to 23.3% (a 23% drop)

Our April Eminders is Posted!

We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek

April 3, 2008

Just Announced: Our Big Executive Compensation Conferences

We are excited to announce that our Conferences – “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference” & “5th Annual Executive Compensation Conference” – will take place in New Orleans and via Nationwide Video Webcast on October 21st-22nd. Here are the Conference Agendas.

With Congress, the SEC Staff, investors and the media scrutinizing this year’s disclosures, it is critical to have the best possible guidance for addressing next year’s proxy statement compensation disclosures. This pair of full-day conferences will provide the essential – and practical – implementation guidance that you need going forward.

Like last year’s blockbuster conferences, an archive of the entire video for both conferences will be right there at your desktop to refer to – and refresh your memory – when you are actually grappling with drafting the disclosures or reviewing/approving pay packages. Here are FAQs about the Conferences.

For those choosing to attend by coming to New Orleans, I encourage you to also register for the “16th Annual NASPP Conference,” where over 2000 folks attend 45+ panels. And if you attend the NASPP Conference, you can take advantage of a special reduced rate for the Exec Comp Conferences.

Register by May 20th for Early-Bird Rates: Whether you attend in New Orleans or by video webcast, take advantage of early-bird rates by registering by May 20th. You can register online or use this order form to register by mail/fax.
Note that we have combined both of our popular Conferences – one focusing on proxy disclosures and the other on compensation practices – into one package to simplify registration.

If you have questions or need help registering, please contact our headquarters at or 925.685.5111 (they are on West Coast, open 8 am – 4 pm).

Corp Fin Posts New Form 8-K Interpretations

Yesterday, Corp Fin posted the long-awaited “Form 8-K Compliance and Disclosure Interpretations,” which is a continuation of the Staff updating the Telephone Interpretations Manual and other odds & ends of guidance it has issued over the years. These new interps specifically update the Phone Manual Interps, as well as the Non-Gaap FAQs from ’03 and the 8-K FAQs from ’04. [I say “long-awaited” because the SEC had a note on its site that these were “coming soon” for quite some time.]

REITs and Their Form 10-Ks

I really dig it when law firms write memos with nuggets they heard at conferences. It’s rarely done – but I find them to be very practical. This recent Goodwin Procter memo is no exception, covering a finer point about what REITs need to be doing in their Form 10-Ks as covered by a point raised by the Corp Fin Staff at the NAREIT Law and Accounting Conference. Good stuff (just like these 41 pages of “SEC Speaks” notes from Sidley Austin – 41 pages!)…

My only quibble with the memo is that the Staff’s point about the need to disclose property operating data should not come as a surprise – since the Staff has always considered the operating data material to the business disclosure in a 10-K.

– Broc Romanek