As part of the changes wrought by the SEC’s securities offering reform in 2005, some companies now need to refile some shelf registration statements at least once every three years. As a result some shelf registration statements will begin to expire on December 1st – the three year anniversary of the reform rules’ effectiveness. In this memo, Goodwin Procter lays out which companies should begin taking action to avoid potential timing problems that may affect their ongoing market access – and what specific planning steps there are to keep shelfs up and running.
Corp Fin Goes “Live” with Shareholder Proposal No-Action Letters
Yesterday, Corp Fin posted the no-action letters relating to Rule 14a-8 that it processed during the recent proxy season. These letters include any responses provided by the Staff after January 1st of this year (and incoming request going back as far as October ’07). We should expect to see new 14a-8 no-action letters posted going forward – although not likely on a real-time basis during the proxy season given the burden involved in doing so when they get bunched up like they do…
Nasdaq’s Index of Listing Council Decisions
Yesterday, Nasdaq posted a new master index for all of the decisions of the Nasdaq Listing and Hearing Review Council. This is the appellate body that hears appeals of decisions by the Listing Qualifications Hearings Panels to delist or deny listing to a company. The decisions from 2002 forward are summarized on the website.
Everyone has been anxiously awaiting a redlined version of the SEC Staff’s new Regulation S-K Compliance and Disclosure Interpretations. This is no easy feat as there are no fewer than nine source documents. Thanks to Dan Adams of Goodwin Procter, we have posted this redlined version, with a heap full of caveats and qualifiers. In fact, all of these caveats can be lumped into one – the complexity of the task and the limitations of redlining software mean that you should proceed at your own risk when using it.
It’s just too big a job without the payoff required for volunteer labor to do it justice, but Dan did a great job in a short period of time. So consider it “bootleg” and just be happy to have it as a secondary source to your own eyeballing…
A “Wow” Moment: The SEC’s Emergency Freeze on Naked Short-Selling
During his testimony yesterday before the US Senate Banking Committee, SEC Chairman Cox revealed an emergency action aimed at reducing short-selling in the shares of Fannie Mae, Freddie Mac and 17 other financial firms, as the SEC will immediately begin considering new rules to extend those trading limits to the rest of the market. This comes on the heels of a SEC press release from Sunday – yes, Sunday (see Floyd Norris’ thoughts on that move) – that seeks to stem rumor mongering. We have posted memos on that announcement in our “SEC Enforcement” Practice Area. Here is the SEC’s press release regarding the emergency action, which is expected to go into effect on Monday.
As this WSJ article notes, the SEC’s plan is controversial. Here is a paragraph from that article: “It’s far from clear whether the move, which sparked a barrage of criticism, will curb the activity of short sellers. While its aim is to curb abuses, it also would add an additional layer of bureaucracy to legitimate transactions.” In fact, one member e-mailed me this thought: “This is a pretty drastic move. So much for the free market.”
Nasdaq Speaks ’08: Latest Developments and Interpretations
We have just posted the transcript from our webcast: “Nasdaq Speaks ’08: Latest Developments and Interpretations.”
There are gonna many good things that come along with XBRL. But there also will be a learning curve – just like anything else that is new – and that’s what scares me about implementing it next year for larger companies (whose XBRL tagging projects will be more complex than for smaller companies). Unlike Edgar, I believe your XBRL process will need to include someone who is familiar with XBRL – for things like error checking, to be sure the data is tagged correctly, that the taxonomy “builds” correctly (particularly with an extension taxonomy), etc. – even if you outsource tagging to a third-party or use a tagging tool to automate the process.
Here is a case in point: what to do about “bad” tagging that may be invisible when looked at through a viewer or other rendering tool, but can create errors when end-users try to slice and dice the data?
It’s possible that your financials can be tagged and everything will seem okay when you look at it, but there might be “hidden” errors. In other words, the human readable view may look correct, but the machine readable version may not be. I’m not sure how to fix that – but picking a reliable service provider or tool obviously will be important. Maybe the SEC’s proposed validation software – discussed on page 57 of the proposing release – will help here?
Or the SEC may rely on the market to self-correct this potential problem – that is, software would be available that enables users to catch tagging errors as market pressure forces companies to tag correctly because of the fear of reputational harm. Once again, this points to third-party assurance as the big issue for XBRL.
– 634 companies have used voluntary e-proxy so far (this pretty much is the head count for this proxy season)
– Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 32% had less than 10,000 shareholders)
– Bifurcation is being used more as the proxy season progresses (but still not all that much); of all shareholders for the companies using e-proxy, now over 10% received paper initially instead of the “notice only” (up from 5% a few months ago)
– 1.0% of shareholders requested paper after receiving a notice; this average is about double what the trend was a few months ago
– 57% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 12% had non-routine matters proposed by shareholders. None were contested elections.
– Retail vote goes down dramatically using e-proxy (based on 468 meeting results); number of retail accounts voting drops from 21.2% to 5.7% (over a 70% drop) and number of retail shares voting drops from 31.3% to 16.4% (a 48% drop)
On Wednesday, the US Senate’s Judiciary Committee held an oversight hearing of the U.S. Department of Justice at which Attorney General Michael Mukasey was the witness. In response to questions from Senator Arlen Specter (the sponsor of S. 186, which was reborn recently as I blogged about last week), the Attorney General promised that a letter would be sent that would be sent “within a day or so” that would contain “real, significant” improvements to the process.
When pressed by Senator Specter, the Attorney General allowed that the letter could be the basis for a new Justice Department memorandum that would supercede the McNulty Memo. He said that there are “adjustments” that can – and will – be made. In particular, he noted that cooperation would no longer be measured by waiver. The Attorney General said that the memorandum could be prepared “in short order.” Senator Specter responded “the shorter the order the better.”
It appears that the Justice Department is still dedicated to an incrementalist approach to waiver policy in an effort to forestall Congressional action. Here is a WSJ article on this development. We are posting memos regarding this development in our “Sentencing Guidelines” Practice Area. And thanks to Keith Bishop, who starts a new gig at Allen Matkins on Monday!
The SEC’s Credit Rating Proposals
In this podcast, Joe Hall, Partner of Davis Polk & Wardwell and former Managing Executive for Policy for SEC Chairman William Donaldson, discusses the SEC’s recent credit rating proposals, including:
– What has the SEC proposed to change regarding credit rating agencies?
– What sleepers exist in the proposal that might impact public companies?
– What concerns do you have about the SEC’s proposal?
Activists, Swaps & the SEC: A CSX Update
In this DealLawyers.com podcast, Ron Orol, Senior Writer for The Daily Deal, discusses activists, swaps and the SEC in light of the CSX decision, including:
– Can you explain how activist fund managers are attempting to use cash settled swaps to evade SEC reporting?
– How did The Children’s Investment Fund use swaps with respect to CSX and what was the impact?
– Do you expect the CSX decision to have any effect on the SEC’s rules or interpretations?
By the way, Gibson Dunn recently held a webcast on the CSX decision and has posted this archive.
With a hearty thanks to J.W. Verret, our man on the ground during yesterday’s Delaware Supreme Court hearing about the important issue certified from the SEC regarding AFSCME’s “reimbursement of expenses” binding bylaw proposal. J.W. is a rising star and Assistant Professor at George Mason University School of Law. Here is J.W.’s report:
The American Federation of State, County, and Municipal (“AFSCME”) Employees Pension Plan submitted a shareholder proposal for inclusion in CA’s (formerly known as Computer Associates) proxy materials for their annual meeting scheduled to be held on September 9, 2008. That proposal sought to amend CA’s bylaws to require that the company reimburse the reasonable expenses incurred by a dissident nominating a rival slate of directors, provided that at least one nominee from the dissident slate was victorious. CA sought no-action relief from the SEC permitting it to exclude that proposal under Rule 14a-8 as illegal under Delaware law, and the SEC certified the question to the Delaware Supreme Court a few weeks ago (here is Broc’s blog on that development).
Part of the SEC’s submission read ominously: “[N]o-action requests regarding substantially similar proposals have been submitted in the past….The extent to which the Division can expect to receive future requests to exclude proposals similar to the AFSCME Proposal will necessarily be affected by the outcome (of these proceedings).”
Anticipating that the opinion in this difficult case might make use of dicta guidance, see also my article with Chief Justice Steele on the “Delaware Guidance Function.” Also, a shorter posting on this case is available here.
The Overriding Question
Section 109 of the Delaware General Corporation Law grants shareholders the right to adopt bylaws. Section 141(a) reads that “the business and affairs of every corporation…shall be managed by…a board of directors.” To what extent do shareholder-adopted bylaws conflict with the Board’s discretion under 141? And to what extent does this election bylaw limit that discretion? Indeed, is it really an election bylaw at all?
CA argues that:
1. This bylaw mandates a payment of expenses, rather than relates to an election, and control over corporate expenditures is part of the business and affairs of the corporation described in Section 141 and Paramount v. QVC and JANA v. CNET;
2. Any limits on the board’s authority under 141 must be contained in the Certificate of Incorporation. A bylaw in conflict with the certificate of incorporation is a nullity. Since CA has a provision in its Certificate of Incorporation that mirrors 141, a bylaw in conflict with 141 would therefore be a nullity. The practical result of this argument is that, since CA’s certificate of incorporation provides that it may only be amended by the Board, a common provision, the shareholders have no way to mandate proxy reimbursement;
3. CA distinguishes bylaws that regulate the process by which Boards act, which they argue describe the majority of bylaws constraining directors which the Delaware Courts have upheld, from bylaws mandating a specific policy, which CA argues describes the bylaw at issue;
4. CA argues that since Delaware law permits reimbursement of proxy expenses only where contests benefit all shareholders, rather than a mere subset, mandatory reimbursement may cause directors to violate Delaware law and their fiduciary duties. This is especially likely in short slates, because of their assumption that minority interests would be the only aim of the dissident slate, and thus the Board may be constrained from preventing this threat to the other shareholders;
5. An affirmative decision in this case would lead to a host of new contests, and could lead to corporate waste of assets causing directors to violate their fiduciary duties;
6. CA distinguishes cases cited by AFSCME, such as Unisuper, relating to board-approved limitations on board authority as permitting shareholder limitations, by arguing that contractual and equity principles were applied to board action to justify those self-imposed limitations that make them irrelevant to a determination of whether shareholder approved limitations are permissible.
1. In response to CA, AFSCME argues that the language in 109 which permits shareholder bylaws “not inconsistent with law” would be a redundant phrase if the legislature’s intent were to only permit bylaws authorized by other statutory provisions;
2. The validity of bylaws are not judged based on who adopted them;
3. In response to claims that mandating expenditure of funds would interfere with Director’s authority under Section 141, or may leave the corporation open to payments that flow from fiduciary violations, AFSCME points to prior cases upholding the validity of bylaws requiring indemnification of directors despite the Board’s wish to withhold indemnification. Further, they argue that the mandated payment does not implicate fiduciary concerns precisely because the payment would be mandatory, and thus could not be based on a director or manager’s self-dealing motives;
4. The Blasius, Unitrin, and MM Companies cases also evidence a dim view of attempts to thwart the shareholder franchise, which is the underpinning of the business judgment rule. Also, Harrah’s v. JCC provides that the shareholder franchise includes a meaningful right to nominate an opposing slate, and not simply vote in an election. Thus, AFSCME essentially argues that this amounts to a heightened standard of review, or a presumption in favor of the shareholder, in cases resolving shareholder bylaw validity;
5. AFSCME skillfully leaves a trail for the Court to limit its holding, arguing that even if there is a tension between 141 and 109, and 141 limits the types of bylaws shareholders may adopt (this is the area in which poison pill bylaw fights would come up), that limitation does not extend to election bylaws;
6. They respond to a number of CA’s examples of specific bylaws determined to be inconsistent with the DGCL as irrelevant, because all of them related to Board bylaws, also noting that the Court has never struck down a shareholder adopted bylaw for being inconsistent with the DGCL or restricting the Board’s ability to fulfill their fiduciary duties.
Arguing on behalf of Computer Associates was Robert Guiffra of Sullivan & Cromwell. Arguing on behalf of AFSCME was Michael Barry of Grant & Eisenhofer. The issues from the briefs central to the oral argument were whether this bylaw relates to an election, or control over the corporate treasury, and then whether a mandatory reimbursement requirement could cause directors to violate their fiduciary duties to the company. The mix of questions from the Court during oral argument make any predictions difficult.
The Justices pushed counsel for CA over whether the prospect of reimbursement was inextricably linked to the success of an election, and whether the bylaw would be legal if adopted by the board. The Justices pushed counsel for AFSCME over whether there might be any circumstances under which a bylaw could force inequitable reimbursement and whether the board’s authority to adopt bylaws was co-extensive with that of shareholders.
Interestingly, Justice Berger, when she served as a Vice Chancellor on the Court of Chancery, suggested in dicta that stockholders create a bylaw limiting the board’s power to amend a stockholder adopted by-law in American Int’l Rent a Car, an opinion from 1984, which may indicate her view on whether the right to adopt bylaws is co-extensive. The Court also questioned whether the “reasonable” qualifier in this bylaw left enough room for board discretion not to reimburse wasteful expenses.
One open thread that may not be resolved: If this bylaw is included in the corporation’s proxy, and if it passes, can the board simply amend that bylaw? Meaning the Court could conceivably rule that the bylaw was legal, and thus the SEC would have no basis to allow the company to exclude it, but in a subsequent challenge to the board’s decision to amend the shareholder bylaw would the company get business judgment protection?
This is a particularly controversial and intricate case, and the Delaware Supreme Court has only a week and a half to craft a decision. It is probably best to save substantive practice advice until the opinion is issued. See you then…
SEC Releases Credit Rating Agency Study
Two days ago, the SEC issued this study that summarizes issues identified during the Staff’s examinations of credit rating agencies. Not good news for the rating agencies (here is a WSJ article). Here is the related press release – and a statement from SEC Chairman Cox.
The “Swearing In” Press Release
I’m excited about Elisse Walter being named as a SEC Commissioner, but I can’t help but note that yesterday’s press release about her being sworn in is a “first.” It contains the nitty-gritty about who attended.
I know I’ve said it before, but it seems the SEC does a press release at the drop of a hat now. It’s probably to show that a Democrat is now on the job at the SEC, but we already had the press release about Elisse and the other new Commissioners being confirmed by the US Senate. Anyways, I’m looking forward to the details of who attends the swearing in of the other two new Commissioners…
In this CompensationStandards.com podcast, James Williams, General Counsel of Liquidity Services, provides insights into the role of in-house counsel in the executive compensation setting process, including:
– How much of your time do you spend on compensation-related issues?
– What is your role in scheduling, attending and preparing for compensation committee meetings?
– Where do you think you add the most value in the process?
– How do you handle the tricky issues of supporting the board as well as supporting senior management?
Thirty Now Blogging: “The Advisor’s Blog”
I just added ten executive compensation lawyers to the mix of the new – and popular – “The Consultant’s Blog” on CompensationStandards.com. With the group of bloggers now comprising of twenty compensation consultants and these ten lawyers, I have renamed it: “The Advisor’s Blog.” For those who haven’t, members should input their email addresses on the left side of that blog so they can be alerted when a new entry is made (nearly one entry per day has been the average and that should continue with the influx of new talent).
Mark Borges struck “Gold, Jerry, Gold” in his analysis recently of the new Item 402 interps in his “Proxy Disclosure Blog.” Meanwhile, Mike Melbinger continues to deliver on his “Melbinger’s Compensation Blog,” last week covering a new IRS revenue ruling on Section 162(m).
The Latest Compensation Disclosures: A Proxy Season Post-Mortem
We have posted the transcript from the popular CompensationStandards.com webcast: “The Latest Compensation Disclosures: A Proxy Season Post-Mortem.”
With a decision in the Free Enterprise v. PCAOB lawsuit expected soon – and some rumblings that the DC Circuit Judges could strike SOX based on the discussions during an April hearing – it’s probably time to start thinking “what if” the court does indeed kill Sarbanes-Oxley. Here’s an analyst report that goes down that road – and here is a transcript from the hearing. Both are posted in our “Sarbanes-Oxley Reform” Practice Area.
Survey Results: Audit Committees and Earnings Releases
We have posted our survey results on audit committees and earnings releases, repeated below:
1. Does your Audit Committee review your company’s earnings releases prior to their release to the media?
– Yes – 92.1%
– No – 7.9%
2. If the answer to #1 is “Yes,” how many days prior to public issuance of the earnings release is a draft typically sent to the Audit Committee?
– One day or less – 25.9%
– Two days – 31.0%
– Three days – 20.7%
– Four days or more – 22.4%
3. Does the Audit Committee hold a meeting for the purpose of discussing each earnings release prior to their release to the media?
– Yes, and mostly (or all) by telephone meetings – 80.7%
– Yes, and mostly (or all) by face-to-face meetings – 8.1%
– No – 11.3%
4. If the answer to #3 is “No,” is the Audit Committee informed about issues that will be discussed in the related earnings release?
– Yes, in writing – 16.7%
– Yes, at a meeting – 50.0%
– No – 33.3%
5. Does your Audit Committee hold a single meeting to review both the earnings release and draft Forms 10-Q and 10-K?
– Yes – 50%
– No – 50%
UK Regulator Issues Guidance on Auditor Liability Limitation Agreements
With IFRSs making front page news in Saturday’s NY Times (here is the article) and CIFiR’s final reform recommendations due in August, it’s instructive to see how other jurisdictions are handling similar challenges to reforming the audit industry.
One of the biggest concerns is how auditors will survive being sued (see this CFO.com article, which highlights this CAQ comment letter). A few months back, I blogged about auditor liability caps in the UK. Recently, the United Kingdom’s Financial Reporting Council – the FRC is the UK’s independent regulator for corporate reporting and governance – issued guidance on the use of agreements between companies and their auditors to limit the auditor’s liability, as provided for under the UK’s Companies Act 2006.
– explains what is – and is not – allowed under the 2006 Act
– sets out some of the factors that will be relevant when assessing the case for an agreement
– explains what matters should be covered in an agreement, and provides specimen clauses for inclusion in agreements
– explains the process to be followed for obtaining shareholder approval, and provides specimen wording for inclusion in resolutions and the notice of the general meeting
Anything can happen. As this CFO.com article notes, regulators are talking about a three-year moratorium on new accounting rules if IFRS is adopted.
On Friday, the SEC also finalized its guidance and amended the rules to streamline how the self-regulatory organizations – SROs – conduct their rulemaking, including broadening the circumstances under which SRO rules (and rule changes) become immediately effective.
More on the “B” Corporation: Duties to Constitutiencies Beyond Shareholders
Last month, I blogged about the “B” Corporation and a member asked: Ohio Revised Code Section 1701.59 expressly permits directors to consider the interests of, among others, the community and society, the economy of the state and nation, employees, suppliers and creditors. I guess that makes Ohio a “B” state?
Keith Bishop notes in response: Many states have adopted “other constituencies” statutes. For example, Nevada provides in NRS 78.438(4) that both directors and officers, in exercising their respective powers with a view to the interests of the corporation, may consider the interests of other constituencies (and Florida has this proposal with the SEC to create new Rule 5122, which would require broker-dealers engaged in private placements to make certain disclosures in the private placement memorandum, file the PPM with FINRA and commit at least 85% of the offering proceeds to the business purposes identified in the PPM.
FINRA published an initial version of this rulemaking initiative in NASD Notice to Members 07-27 – the new proposal has not significantly changed from the initial version, but provides additional clarity and extends the list of exemptions.
Last week, Senator Arlen Specter reintroduced his attorney-client legislation in the form of the “Attorney Client Privilege Protection Act of 2008,” whose Senate bill remains S.186 (the ’08 version text of the bill is not yet available; but I believe it’s the same as ’07). Supporting the bill, 36 former federal prosecutors wrote this letter to Senator Leahy.
Already approved by the House, the bill would prohibit federal prosecutors and agencies – including the SEC – from requiring companies to produce privileged documents in exchange for leniency, but companies would still be able to voluntarily waive privilege under the bill. Here is a New York Times article on the bill – and here is a press release from the Association of Corporate Counsel supporting it.
Nasdaq’s Master Index of Interpretative Letters
As mentioned during last week’s “Nasdaq Speaks” webcast, the Nasdaq Staff recently posted a “master index” of their interpretative letters. It should make it easier to search for their letters…
ESOARS in Flux
The battle over ESOARS continues – the latest missives about them from the CII and Zions Bancorp to the FASB’s Emerging Issues Task Force are posted in our “ESOARS” Practice Area. These letters were written because the EITF published guidance in March that seemingly undercuts the SEC’s plan to see how ESOARS fare in the open market.