Monthly Archives: August 2008

August 14, 2008

What’s Next for Short Sellers?

Earlier this week, the SEC’s emergency order (as amended) targeting naked short selling in the stocks of 19 financial institutions expired. In the coming weeks, the SEC is likely to propose rule changes that could extend the requirement to borrow or arrange to borrow securities prior to effecting a short sale to a broader range of companies, or to the market as a whole. In addition, last month the SEC reopened the comment period on proposed amendments to Regulation SHO (the SEC rules governing short sales). These developments set the stage for some revamping of the short sale rules this Fall, although it remains unclear just how much can actually be accomplished on this controversial topic as the election approaches.

Whether the emergency order helped or hurt Fannie Mae, Freddie Mac and the seventeen primary dealers that were covered by the order is the subject of some debate. In this New York Times piece, Floyd Norris notes mixed results. A recent WSJ article indicated that a majority of stocks covered by the emergency order saw fewer shares shorted in the latter half of July, although it is unclear how much of that is attributable to the actual (or psychological) effects of the order, or to broader market trends. A study released by Professor Arturo Bris at IMD in Switzerland notes that market quality deteriorated for the shares of the 19 companies covered by the order. Professor Bris states “Our preliminary findings show that the impetus for the SEC’s emergency order – that short selling was adversely affecting the performance of the 19 financial stocks – is groundless.” The study goes on to note that between July 21 and August 4, the shares of the 19 companies that were the subject of the order lost 3.83% of their value, or $60 billion.

So far, over 460 comment letters have been submitted in response to a comment request included in the Staff’s guidance on the emergency order, with a vast majority of those comments coming from individuals. This is a pretty amazing number of comments, given that the order was effective for only 23 days and the comments don’t appear to reflect any sort of form letter campaign (although a few commenters were apparently inspired to write in by CNBC’s Jim Kramer).

One thing is for certain when looking through these comment letters: short selling – and in particular naked short selling – inspires a great deal of investor anger and frustration. Many commenters expressed concern that the SEC has not adequately enforced the existing short sale rules, and many call for extending the emergency order to all stocks. Naked short selling has been a “populist” cause for some time now among smaller companies (and their investors), who have felt that they have been unfairly targeted – and in some cases destroyed – by naked short sellers while the SEC has done little to stop the practice. It now appears that the emergency order has raised the issue’s profile, grabbing the attention of a much broader cross-section of investors.

I think the SEC’s internet comment form has been a great innovation for soliciting comments from a broader range of interested persons, but the comments on the emergency order sometimes seem like they are better suited for a Yahoo Finance Message Board. One commenter remarks “[p]ersonally, I think that the entire SEC should be tarred and feathered for the job they have done over the years,” while this comment letter can be best described as a tirade and ends with the question: “And what’s the deal with not allowing exclamation points to be used in these comments??”

Nostalgia for the Uptick Rule

Many of those submitting comments on the naked short selling emergency order asked the SEC to bring back the “uptick” rule, which was eliminated last summer after a 70-year run. The rule was originally adopted out of concern about “bear raids” and their contribution to the 1937 market break (sound familiar?). While perhaps more of a symbolic gesture than an actual means of deterring short selling abuses, Rule 10a-1 had provided that, subject to some exceptions, a listed security could only be sold short at a price above the price at which the immediately preceding sale was effected (a plus-tick) or at the last sale price if it was higher than the last different price (a zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to some limited exceptions. (Nasdaq had adopted similar restrictions via a bid test, since it was not an exchange at the time.)

Of course, last summer, when the uptick rule was abandoned, times were good – you could still get a mortgage without any income and you could fill up your SUV for under $3.00 per gallon – and the possibility of a prolonged bear market seemed remote. At the time, the SEC had concluded that the uptick test had modestly reduced market liquidity and did not appear to be necessary to prevent manipulation.

Today, a groundswell of support for bringing back the uptick test seems to be developing. Last month, Representative Gary Ackerman (D-NY), a member of the House Financial Services Committee, introduced legislation that would reinstate the uptick rule. Further, Chairman Cox has talked about the possibility of revisiting the rule. While bringing back the uptick rule is not part of the package of proposed amendments to Regulation SHO for which the comment period was recently reopened, the SEC will no doubt feel pressure to take another look at its decision on Rule 10a-1 as it delves into broader short selling issues over the next few months.

Are Covered Bonds the Answer to Mortgage Financing Woes?

Recently, Treasury Secretary Paulson stated that covered bonds “have the potential to increase mortgage financing, improve underwriting standards, and strengthen U.S. financial institutions by providing a new funding source that will diversify their overall portfolio.” Covered bonds are a special category of debt instruments that provide for recourse to the issuer or a “cover pool” of collateral that is segregated from the issuer’s assets. Covered bonds make up a $3 trillion market in Europe, and are now being looked out as a major financing alternative in the US.

In this podcast, Anna Pinedo of Morrison & Foerster discusses covered bonds, including:

– What is a covered bond?
– Why has the covered bond market in the United States lagged behind other markets?
– How do covered bonds differ from securitizations?
– What assets can be used to constitute a cover pool?
– What are the latest regulatory changes in the United States regarding covered bonds?
– What does the FDIC Policy Statement on Covered Bonds do for the market? What about the Treasury Best Practices?
– How have the covered bond markets responded to these regulatory changes?

– Dave Lynn

August 13, 2008

Rush for the Exits: Why Foreign Firms Leave the US

In a new study, G. Andrew Karolyi and René Stulz of Ohio State and Craig Doidge of the University of Toronto looked at 59 companies that took advantage of Exchange Act Rule 12h-6 (adopted in March 2007) to deregister and leave the US market. This study appears to be the first look at the hard data following the SEC’s efforts to ease deregistration for foreign firms, and offers some glimpses into the arguments about US competitiveness in the capital markets.

The authors found that the firms deregistering in the first six months after Rule 12h-6 was adopted generally exhibited poor growth opportunities, come from more economically developed countries and experienced poor stock price performance in the years prior to deregistration. Of the 59 firms studied, 19% were from Europe, 12% were from Australia and 10% were from Canada.

Upon announcing their delisting, the firms experienced either no or a negative stock price reaction, although those firms with greater growth opportunities experienced a significantly worse stock price reaction. The authors of the study were not able to definitively establish the extent to which the Sarbanes-Oxley Act adversely affected the firms that deregistered.

The authors admit that some of the tests performed may have been limited by the small sample size of only 59 firms. Perhaps it may be too early to tell what the long term effects of Rule 12h-6 will be, but certainly the study supports the notion that no great “pop” can be expected in a firm’s value from leaving the US. Further, with the movement toward global accounting standards and mutual recognition occuring in the US while other developed countries implement Sarbanes-Oxley-like reforms, it could be expected that any loss of competitiveness arguments (and perceived benefits of dropping a US listing) will continue to lose steam.

For more on Rule 12h-6 and foreign issuer deregistration, check out our “Deregistration & Modified Reporting” Practice Area.

Auction Rate Settlements (In Principle)

Last week, the Division of Enforcement announced preliminary settlements in principle with Citigroup and UBS in cases arising from the collapse of the auction rate securities market, and more such settlements are likely on the way. Merrill Lynch announced that it was voluntarily buying back auction rate securities from retail customers beginning in January 2009.

The Citigroup and UBS settlements, if ultimately approved by the SEC, would provide for the extreme result of obligating the firms to repurchase the securities at par from smaller investors and making those investors whole in some instances, while liquidating auction rate securities from institutional investor accounts by the end of next year. The firms would be prohibited from selling their own inventory of these securities before the customers’ holdings are liquidated. The firms also would be obligated to provide no-cost loans to customers that will remain outstanding until all auction rate securities are repurchased. The firms face the possibility of penalties, depending on whether they adequately perform on their obligations under the terms of the settlement.

I have spoken with a number of people harmed in the auction rate securities meltdown, and I am encouraged to see that these settlements focus on very direct ways at helping investors, particularly the smaller investors that suffered the most as a result of the collapse of liquidity in the market.

It remains to be seen what relief – if any – these firms will get from the tender offer rules or other requirements when complying with the terms of the settlement, although there is some talk that relief might be forthcoming.

It is pretty rare to see the Staff announce a settlement agreement in principle (that is to say, still subject to Commission approval) in an Enforcement investigation. The last time I can recall it happening was with the global settlement in the research analyst cases, which like these auction rate cases involved joint settlements with state regulators. I suspect that the Commissioners may have been involved in the formulation of these auction rate securities settlements, given the enormity of this matter, and perhaps now there is less hostility at the Commission level to the Staff negotiating and reaching settlements that are subject to Commission approval.

Marty Dunn’s Second “Pro or Troll” on Shareholder Proposals

Test your skills with our new game courtesy of Marty Dunn of O’Melveny & Myers – “Pro or Troll #10: Shareholder Proposal Subject Matter.” This game delves into the Staff’s positions on several notable shareholder proposals.

– Dave Lynn

August 12, 2008

Midyear Corp Fin Update

Yesterday, at the ABA meeting in New York, John White provided his mid-year update on Corp Fin’s 2008 activities and priorities. There is no doubt from his speech that Corp Fin will remain very busy well into 2009, with projects spanning a wide range of topics. Here is the complete text of the speech, which includes details on all of Corp Fin’s big projects and comments on the shareholder proposal season.

With respect to accounting and financial reporting, Corp Fin will be working to implement some of the final recommendations of the Advisory Committee on Improvements to Financial Reporting. With the guidance on use of company websites already done, the Staff is working on Commission-level guidance concerning other issues raised by the Committee, such as materiality and the correction of errors. In addition, the Committee’s recommendation to require an executive summary in Exchange Act reports is under serious consideration, given how such an approach could tie into the SEC’s website guidance, the 21st century disclosure initiative, and XBRL. IFRS continues to be a high priority, with a recommendation expected soon on the anticipated roadmap for IFRS implementation, which will ultimately be in the form of some Commission action. Finally, accounting guidance from Corp Fin’s Chief Accountant’s Office – in a format that is comparable to the new Compliance and Disclosure Interpretations – is expected by the end of the summer.

On the international front, the Staff is considering the comments received on the proposals dealing with foreign issuer registration and reporting, as well as the cross-border tender offer rules.

Obviously XBRL remains on the front burner, and John indicated a high likelihood of completion of the first steps in implementing XBRL. The Staff is considering all of the comments (76 comment letters have been submitted so far), including those comments seeking to delay the effective dates.

In terms of other projects, John noted that the much-anticipated Regulation D amendments are still on his list, and that he hopes to see something coming out on those proposals. The proposals dealing with NRSRO references in SEC rules will clearly get done this year in John’s view, given the urgency associated with those proposals. John also indicated that there is a Commission-wide effort to look at adjusting dollar amount thresholds in the SEC’s rules for inflation, both now and in the future. (See the July-August issue of The Corporate Counsel for a discussion of how the SEC backed off of a proposed inflation adjustment provision in the smaller reporting company rules.) On the e-proxy front, the Staff has been monitoring all of the issues that have come to light with the first year of implementation, and is considering ways to address them. John indicated a preference to do some sort of clean-up rulemaking this Fall to have in place for next proxy season – but if that timing does not work out, then something would be done next year.

In terms of longer-term projects, John referenced the 21st century disclosure initiative, which he described as a refinement of integrated disclosure while factoring in current technology. The goal for this project remains to have blueprint developed by the end of this year, followed by the formation of an advisory committee. Further, the Staff intends to take up a project looking at beneficial ownership reporting.

Apparently among the things not on the list of priorities are (1) the previously discussed possibility of voluntary filer guidance, and (2) any effort to address the uncertainty created by the three federal district courts that have dismissed Section 5 actions against investors that shorted PIPE shares.

Lawyers in the Crosshairs in Subprime Cases?

More from the ABA Meeting this past weekend: In a panel discussion of SEC Enforcement activities, the possibility was raised that lawyers could be targeted for their role in the subprime fiasco. This article from the ABA Journal notes:

“This time the Securities and Exchange Commission may be the plaintiff in civil complaints that target lawyers for their role advising lenders and securitizing loans for sale to investors.

Reid Muoio, assistant director of the SEC’s division of enforcement, isn’t foreclosing the possibility. While private securities plaintiffs aren’t permitted to bring aiding and abetting claims, the SEC has congressional authorization to do so.

‘It can be expected that if we can identify problems, we will then ask, Where were the lawyers?’ he said in an interview after the discussion. A typical aiding-and-abetting scenario might be a law firm that aids misrepresentation in a prospectus for a mortgage-backed security, he said. He cautioned that he was speaking for himself and not the SEC.

During the panel discussion, Muoio said the SEC has opened 48 investigations in the subprime mortgage mess and assigned more than 100 lawyers to the cases. The possibility of aiding-and-abetting actions – against lawyers and others – won’t be considered until the probes are further along, he said.”

Corruption or Compliance: Ernst & Young’s Global Fraud Survey

The DOJ and SEC have significantly stepped up FCPA enforcement efforts, focusing attention on the fact that corruption remains pervasive around the world. In this podcast, Brian Loughman discusses Ernst & Young’s 10th Global Fraud Survey, which focuses on anti-corruption efforts and compliance, including:

– What is the background of E&Y’s Global Fraud Survey?
– What were the major findings of this year’s Survey?
– Were any findings surprising?
– What advice do you have for companies in light of the Survey findings?

– Dave Lynn

August 11, 2008

The FAS 5 Proposal Controversy

One of the hot topics at this weekend’s ABA Annual Meeting was the early June proposal by the FASB that would require companies to disclosure more about their litigation risks (here is Dave’s blog outlining the proposal). Here is the ABA’s comment letter that was just submitted; comments are due now. Here are the rest of the comment letters.

One member called the proposal a “Summertime Submarine” as many lawyers feel that the accountants are mounting a major attack on the attorney-client privilege and a disturbance on the ABA’s Accord regarding lawyers’ responses to auditor inquiries adopted back in 1975. Many lawyers also see that the proposal’s change in FAS 5’s disclosure requirements as inevitably increasing auditor demands for information and that auditors also will seek greater justification for what is disclosed. I don’t remember seeing such strong opinions expressed by law firms in their client memos on any other topic – see these memos posted in our “Contingencies” Practice Area.

California Court of Appeal: Coerced Disclosure Doesn’t Waive Privilege

From Keith Bishop: Here is a significant decisionUC Regents v. Superior Court – issued a few weeks ago by the California Court of Appeal. I think the following quotation from the case pretty much sums up the holding:

“Although no California cases have considered this issue directly, the cases which have discussed waiver of the privileges have found that the holder of a privilege need only take “reasonable steps” to protect privileged communications. No case has required that the holder of a privilege take extraordinary or heroic measures to preserve the confidentiality of such communications. Here, the threat of regulatory action and indictment posed the risk of significant costs and consequences to the corporations such that they could cooperate with the Department of Justice’s investigation without waiving the privilege.”

While this holding may seem protective of the privilege, I think that it may well have the effect of eroding it. Ultimately the attorney-client privilege may be weakened by allowing selective disclosure without waiver. Another thing to keep in mind is that this decision relates to the California Evidence Code. I always tell my clients that there is no one attorney-client privilege as it depends upon the court in which the question arises.

More Fraud Reported Through Tips Than Audits

This SmartPros article – that contains stats from a survey – about how more fraud is caught through tips than the auditing process caught my eye. It’s interesting that despite increased focus on anti-fraud controls in the wake of Sarbanes-Oxley – and mandated consideration of fraud in financial audits due to SAS 99 – the latest data shows that occupational frauds are much more likely to be detected by a tip than by audits, controls or any other means.

I’m a little surprised, although I guess I shouldn’t be – Section 16 is probably the best enforced provision of the securities laws and it’s mainly due to the enforcement mechanism is driven by greed…

– Broc Romanek

August 8, 2008

Impact of Executive Compensation Disclosures on Creditors

In this podcast, Chris Plath of Moody’s Investors Service discusses Moody’s new report entitled “Expanded Disclosure On U.S. Executive Compensation Offers New Clues For Creditors,” including:

– Why has Moody’s issued this new report?
– How can better disclosure of performance metrics targets enhance a creditworthiness evaluation?
– What type of peer group benchmarking disclosure is Moody’s looking for?
– How about for payments following a change in control?

SEC Amends Definition of “Eligible Portfolio Company” Under the ’40 Act

A while back, the SEC adopted amendments to the rule under the Investment Company Act of 1940 to more closely align the definition of eligible portfolio company – and the investment activities of business development companies – with the purpose that Congress intended by expanding the definition to include certain companies that list their securities on a national securities exchange, among other things. Here is the SEC’s press release. And here is an interview with Harry Pangas of Sutherland Asbill about business development companies in a nutshell…

Gatekeepers: The Professions and Corporate Governance

I haven’t done much in the way of book reviews, so I thought’s Jim McRitchie’s review of the new book – “Gatekeepers: The Professions and Corporate Governance” – by well-known Columbia Professor John Coffee was worth repeating below given all the reforms currently on the table:

Although the book was written in the wake of Enron and WorldCom, it is equally applicable to the subprime debacle in its analysis of “gatekeeper failure.” In a personal note to me, Professor Coffee laments, “perhaps I should have waited a year longer to write this book.” Better he should have written it a couple of years earlier, with copies to Alan Greenspan and others charged with regulating and rating the mortgage industry.

However, the book’s timing could hardly be better, since substantive reform only seems to occur with a crisis. Implosion of the savings and Loan Industry brought us the Federal Institutions Reform, Recovery and Enforcement Act of 1989. Accounting scandals at Enron, WorldCom, etc. brought us the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes Oxley). The subprime debacle is likely to bring significant reform as well.

It would be great if those advising Presidential candidates would consult Gatekeepers in preparing such proposals. Coffee focuses on auditors, attorneys, securities analysts and credit-rating agencies who inform and advise corporate managers, boards and shareholders. After a brief introduction explaining the failure of gatekeepers and a comparative overview of their roles internationally, Coffee devotes a chapter to each of the four groups. He typically provides an informative history, a review of current issues such as conflicts of interests, and an evaluation. He wraps up the book with a thematic discussion of what’s gone wrong and how it might be fixed.

In general, gatekeepers act as “reputational intermediaries” by verifying corporate statements to investors. When trusted and successful, this lowers the cost of capital. However, as Coffee notes, “Watchdogs hired by those they are to watch typically turn into pets, not guardians,” especially in the euphoric environment typified by stock or housing bubbles, when the public is typically lulled into complacency.

As management incentives were aligned with shareholders through options, income smoothing gave way to robbing the future for earnings that could be recognized immediately. Coffee explains how Enron’s audit committee was blinded by professional advisers who fed it only the information senior management wanted them to have. Auditors were retrained and incentivized to sell consulting services. He explains why fund managers and gatekeepers tend to herd and why, until four days before Enron declared bankruptcy, its debt was rated “investment grade.’ Only those with a financial self-interest, the short-sellers, searched beyond the surface and predicted Enron’s accounting restatements. At WorldCom, “the limited due diligence that was conducted appears to have been constrained by the need not to offend the client” and the actual fraud was detected by the firm’s internal auditors.

Coffee helps the reader see from a different perspective. For example, while some studies have found that audit firms with high consulting revenues were more likely to acquiesce to questionable earnings management, others found no such correlation. Coffee points out that instead of looking what is already in hand, we should look to possibilities. “The real conflict lies not in the actual receipt of high fees, but in their expected receipt.” That explains why audits became a “loss leader” to obtain consulting services.

Similarly, disclosure of conflicts of interests often does not lead to expected results. Social psychologists find those on the receiving end often let down their guard, thinking because conflicts were disclosed they are being dealt with fairly. However, the conflicted party often feels that, having made the disclosure, they are now free to pursue their own interests aggressively. Gatekeepers is filled with such insights.

The major problem is that gatekeepers have come to view corporate managers, not shareowners, as their principals. Their livelihood depends on being viewed as flexible, problem-solving and cooperative, rather than rigorous or principled. “If left to their own devices and subjected to a significant threat of private litigation, professionals will respond by defining GAAP and auditing standards in their own interest, rather than that of investors.” “Absent a litigation threat, professionals acquiesce in dubious and risky practices that their ‘client’ wants; but once subjected to an adequate litigation threat, professionals insist upon narrow duties, hopelessly specific safe harbors and a rule-base system that often seems devoid of meaningful principles.”

According to Coffee, “The challenge for the regulator is not to take discretion out of the system, but to preserve and expand it. But discretion must be accorded to the gatekeeper, not the client (whereas present-day GAAP does the reverse).” The gatekeeper must assess not simply whether GAAP contains a rule authorizing a given treatment, but whether discretion so exercised is reasonable. Pressure to reform must come from regulators, investors and the young that the profession hopes to recruit who would find that greater discretion enhances the professions’ image in their own eyes and those of the public.

Some of Coffee’s more interesting recommendations, at least as I read them:

– Break-up the major accounting firms to provide more competition.
– Establish an intermediary that receives payment from the issuer but then selects the analyst based on objective criteria, such as their record of predictions.
– Restore “aiding and abetting” liability for professionals instead of de facto immunity for knowingly or recklessly participating in fraud.
– Formalize the role of “disclosure counsel” by requiring audit committees to retain them to investigate and test corporate disclosures on an on-going basis.

– Broc Romanek

August 7, 2008

More on Steve Jobs and Disclosure of Health Issues

I got quite a few responses to my blog on whether Apple should have handled its disclosure issues related to CEO’s Steve Jobs differently. In fact, NY Times’ reporter Joe Nocera wrote a great column on the topic the day after my blog.

Here are excerpts from several responses from members:

– The Jobs situation is a good illustration of the affirmative-duty-to-disclose question, which a lot of junior lawyers have a hard time grasping,

– Interestingly, some companies create problems for themselves when they throw in a risk factor about dependence on key management personnel, largely to stroke the ego of their CEO who could be replaced without much difficulty.

– The health disclosure question comes to a head when the CEO/CFO certifications must be filed. At what point is someone else effectively functioning as PEO or PFO? Let’s imagine a PEO/PFO is in a car accident or a coma, or just “out of sorts” for a couple weeks. Should companies start thinking about implementing procedures like the 25th Amendment to the US Constitution? That would be the logical extension of the Form 8-K Item 5.02 and certification issue.

I’ve done the analysis about whether a company could have an obligation to disclose health problems of its CEO and I normally would have agreed with your suggestion that Item 5.02(b) (retirement, resignation or termination) might be triggered if a CEO became so debilitated that he wasn’t truly functioning in that position. However, I keep coming back to the recent SEC Staff guidance that Item 5.02(b) is not even triggered when the CEO dies in office (see Interpretation 217.04 of Form 8-K CDIs)! How bizarre is that!

– One might consider whether information concerning Steve Jobs’ health something that a reasonable investor would want to know in making a buy/sell decision regarding Apple stock (and thus would be considered “material” under a TSC v. Northway analysis) as contrasted with mere intrigue surrounding a celebrity CEO (which is not particularly relevant to investors). If the former, one would think it is difficult for Apple not to disclose in connection with, say, a Form 10-K or 10-Q filing because its contains MD&A, which has broad materiality-based disclosure requirements. If the latter, there should be no disclosure obligation.

As a policy matter, query whether the investing public is better served by all companies including a risk factor stating that from time to time key personnel may have illnesses, which could be serious, might interrupt service to the company and that the interruption might be permanent. Further consider if anyone is served by a disclaimer of any duty to update info about the health of key personnel to the extent disclosure occurs.

Your Take: What Should Have Apple Done?

Here is a poll where you can anonymously provide your legal analysis:

Online Surveys & Market Research

– Broc Romanek

August 6, 2008

I Love New York (Companies)

Most large US public companies are incorporated in Delaware, but not all. You may ask: why did some blue chip companies choose to incorporate in New York rather than Delaware, which has long been favored because of its efficient corporate law structure and renowned courts whose justices are business savvy? Because these companies were formed long before Delaware earned its well-deserved reputation. Long-standing New York companies include General Electric (1892), International Paper (predecessor company incorporated in 1898), Xerox (1906) and IBM (1911).

In many areas, New York law and Delaware law are similar. In fact, New York recently passed two amendments to its business corporations law (signed into law by Gov. Patterson on July 22nd) that will put New York companies on equal footing with their Delaware counterparts in certain areas.

The first amendment – S.7350 / A.10824 – allows companies to move from the default plurality standard for director elections to majority election via a bylaws amendment. Until now, New York companies could only change from a plurality to a majority standard by amending their charters, which requires shareholder approval (and under the SEC’s rules, the filing of preliminary proxy materials). Delaware companies have always been able to easily make this change through a bylaws amendment, which does not require shareholder approval.

The other amendment – S.7349 / A.10825 – allows New York companies to pay dividends out of either surplus or net profits, which is consistent with Delaware law. Previously, New York companies could only pay dividends out of surplus.

I imagine that New York companies are happy that their state legislature is staying on top of issues like this – and these moves are seen as friendly to both companies and their shareholders.

Now Available: RiskMetrics’ Annual Policy Survey

RiskMetrics has opened its annual policy survey to corporate issuers in the United States as well as global institutional investor clients. This year, they desire to gather corporate views earlier in the policy formulation process. The survey questions are nearly identical for both the institutional and issuer surveys – both seeking a broad perspective on the policy topics they’re investigating for the 2009 proxy season, including compensation, board elections, director independence and more.

As in recent years, RiskMetrics will also hold an open comment period in the Fall to solicit specific feedback on their proposed policy changes.

How to Handle Hedge Fund Activism

On, we have posted the transcript from our recent popular webcast: “How to Handle Hedge Fund Activism.”

When Will Michael Phelps Be Swimming for His Eight Medals?

Both my boys are competitive swimmers (and my wife used to be) and Kate Ziegler grew up swimming in our neighborhood, so we’re pretty excited about Michael Phelps and Katie Hoff’s upcoming events at the 2008 Beijing Olympics.

However, I had a hard time figuring out when Michael would be swimming when we are on vacation next week – here is what I figured out from this complex NBC Olympic schedule (all gold medal swimming events will be shown live and at night Eastern Time; but it’s unknown when at night they will be swimming):

1. 400 IM – Saturday, 8/9

2. 100 Free Relay – Sunday, 8/10

3. 200 Free – Monday, 8/11

4. 200 Fly – Tuesday, 8/12

5. 200 Free Relay – Tuesday, 8/12

6. 200 IM – Thursday, 8/14

7. 100 Fly – Friday, 8/15

8. 100 Medley Relay – Saturday, 8/16

– Broc Romanek

August 5, 2008

Broadridge’s “Final” E-Proxy Stats for the Proxy Season

In our “E-Proxy” Practice Area, we have posted the latest e-proxy statistics from Broadridge. As of June 30th:

– 653 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)

– 1.1% 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 31% 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 586 meeting results); number of retail accounts voting drops from 20.6% to 5.5% (over a 73% drop) and number of retail shares voting drops from 34.8% to 16.7% (a 52% drop)

A Note on Bifurcation

A number of members whose companies bifurcated have told me that a primary reason they did so was because Broadridge maintains a database of investors who prefer paper. So far 2.5 million investors have asked to be in this database.

Many companies have a fair number of their shareholders in this database – often over double digits in terms of percentages – and these companies recognized that it would be challenging to do a notice-only delivery and risk fulfillment issues (egs. not printing enough to meet demand; service provider botching the fulfillment, etc.). For these companies, it was better to bifurcate and keep the number of shareholders who requested paper much lower than it otherwise would have been the case.

In other words, the relative level of shareholders that requested paper would be a bit higher than the 1.1% experienced if these companies had not bifurcated (if I comprehend the Broadridge stats correctly). But this all still begs the question of why so many companies didn’t bother to bifurcate? I imagine they will next year to reap the cost savings available…

The Yahoo Annual Meeting: My, My, How Things Change

I got a chuckle out of the Washington Post’s headline for the Yahoo annual shareholders’ meeting this Saturday: “Shareholders Give Yahoo a Vote of Confidence.” It’s funny because each director received over 75% of the vote – meaning that nearly 25% of shareholders “withheld” their votes from these directors, who ran unopposed and without a major “just vote no” campaign. [You may recall that Carl Icahn had initially challenged management by running an opposing short slate, but he was appeased and placed on the board – so he withdrew his campaign.]

It wasn’t that long ago that directors routinely received 98% of the vote – so I really wouldn’t call 75% a “vote of confidence.” And now a major shareholder is questioning the results and asking for a recount of its votes…

– Broc Romanek

August 4, 2008

Now Available: CIFiR’s Final Report

On Friday, the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR) issued its final 172-page report.

The final report has 25 recommendations for implementation by the SEC, FASB and PCAOB. Although the report is probably most important for accountants, it certainly has implications for lawyers and IROs/corporate communications. And these recommendations are likely to be taken seriously – the SEC already has acted on two of the recommendations: mandatory XBRL and guidance on company websites.

Posted: SEC’s Interpretive Release on Corporate Use of Websites

On Friday, the SEC posted its interpretive release on corporate use of websites. I’m off on vacation soon – and Dave is already floundering on a beach – so it’s gonna be a while before we dribble out some original thoughts…

Last SEC Commissioner Sworn In

On Friday, Troy Paredes was sworn in as a SEC Commissioner. The gang’s all there now – and I imagine the shareholder access debate will resume as Chairman Cox has promised. By my count, there is a total of twelve Commissioners that have served in that capacity during the access debate…

Our August Eminders is Posted!

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

– Broc Romanek

August 1, 2008

Potential Personal Liability for Directors: Selling the Company

Kudos to Francis Pileggi and his “Delaware Corporate and Commercial Litigation Blog” for highlighting a new Delaware Chancery Court case that exposed independent directors of a public company to personal liability in a M&A context; a topic that always gets people’s attention.

In Ryan v. Lyondell Chemical Company, (Del. Ch. Ct., 7/29/08), the Delaware Chancery Court found that at the procedural stage of a summary judgment motion, the issue of whether independent directors should be exposed to personal liability for their role in the sale of the company can proceed to trial – despite selling the company to the only known buyer for a substantial premium. We have posted the opinion in’s “Litigation” Portal.

Here is more from Francis in his blog – and some analysis from Ideoblog and Legal Profession Blog.

SEC Approves Nasdaq’s Revised SPAC Listing Standards

Earlier this week, the SEC approved Nasdaq’s proposal to adopt new listing standards for SPACs. The approved listing standards are slightly different from what was originally proposed including:

– reduced amount of gross proceeds that must be deposited from 100% to 90%
– clarified period in which SPAC must complete one or more business combinations
– required all listed SPACs contain provisions allowing shareholders to convert shares into cash if they vote against a business combination

Another SEC Commissioner Sworn In

Yesterday, Luis Aguilar was sworn in as a SEC Commissioner. Only one more to go…

– Broc Romanek