Monthly Archives: November 2008

November 26, 2008

Another One Bites the Dust: SEC’s Chief Accountant to Leave

Yesterday, SEC Chief Accountant Conrad Hewitt announced that he will leave the SEC in January. This is a day after Alexander Cohen announced he would leave as Deputy Chief of Staff. And a week after General Counsel Brian Cartwright announced his departure plans – and two weeks from Corp Fin John White’s announcement.

While it’s not unusual for these positions to be filled by a new Chairman (other than the Corp Fin Director, who typically doesn’t “rotate” with a new Administration), it’s a little unusual for these departure announcements to come so close to each other. Looks like President-elect Obama will need to pick a new SEC Chair soon, so that these positions can be filled in short-order during these trying times.

Why is SEC Chairman Cox a Short-Timer?

It’s been widely reported that SEC Chairman Chris Cox will leave office soon himself, even though his five-year term doesn’t expire until June 2010. Some members have asked: “What if Cox didn’t want to leave office? Does the President have the authority to fire an SEC chair?”

The answer is “no.” The law with respect to independent – so-called “alphabet” – agencies is that the SEC Commissioners including the Chair are appointed for a specific term and can only be removed “for cause.” However, the President can tap someone else as Chair – and have an existing Chair serve as a “mere” Commissioner instead. This setup is supposed to insulate those agencies from political pressure. Historically though, the SEC Chair has tendered a resignation when a new party comes into power.

CFIUS Issues Final Regulations

Last week, the Department of the Treasury’s Committee on Foreign Investment in the United States (known as “CFIUS”) issued final regulations governing national security reviews of foreign investments in US companies. The new regulations – issued to implement amendments adopted by the “Foreign Investment and National Security Act of 2007” – largely track the proposed regulations issued in April – and are the most significant changes to the CFIUS rules since their adoption in ‘91.

The new rules encourage parties to consult with CFIUS in advance of filing formal notification (an existing CFIUS “best practice”). Significantly, the new rules do not define “national security,” or what constitutes “control” by a foreign investor; nor do they provide special rules for sovereign wealth funds. CFIUS retains the flexibility to review each transaction on a case-by-case basis.

We have posted memos analyzing the new regulations in our “National Security” Practice Area.

– Broc Romanek

November 25, 2008

Issues to Consider: Special Meetings to Authorize TARP Preferred Stock

As predicted by 59% of members taking our recent poll, it appears that over 100 companies have applied to participate in Treasury’s Capital Purchase Program. While participation in the CPP doesn’t require shareholder approval, most of these companies don’t have the authority to issue preferred shares under their charter and they are now scrambling to file preliminary proxy materials for a special meeting to obtain shareholder approval. Here are a few issues to consider:

1. Corp Fin Review – Yesterday, the Corp Fin Staff posted this guidance – complete with typical comments and pro forma analysis – for companies filing special meeting proxy statements (at this weekend’s ABA Fall meeting, John White mentioned that several of these bulletins on a variety of topics would be forthcoming soon – more on the ABA meeting next week).

I believe the Corp Fin Staff is selecting most (if not all) of these preliminary proxy statements for review. And I have heard that although expedited treatment isn’t being promised by the Staff, the Staff is aware of the time pressures caused by the Treasury’s timeline – and that comments are often issued faster than the typical 30-day period.

2. ISS Review – Many of the CPP companies likely will request “blank check” preferred stock, which gives a company’s board the power to issue preferred stock at its discretion, with voting, conversion, distribution and other rights to be determined by the board at the time of issue. However, issuances of “blank check” shares typically raise a concern for ISS that they could be used as a takeover defense if they are placed with parties friendly to management. To address this concern, companies can create “declawed” preferred stock, which can’t be used as a takeover device. Here is more information as to how RiskMetrics Group will assess such requests.

3. Samples – At least 58 companies already have filed preliminary proxy statements with the SEC. In our “Credit Crunch” Practice Area, we have posted a few of these proxy statements (although we can’t vouch for whether they have cleared Corp Fin’s review process) – as well as sample risk factor disclosures regarding the credit crunch.

More on “Breaking the Buck” for Listed Companies

Last week, Dave blogged about “breaking the buck” for listed companies. A few members e-mailed some thoughts and confirmed most of what the NYSE Staff said during our webcast. In other words, the NYSE Staff has told them that they are – at least for now – maintaining the $1 requirement and the NYSE is giving companies the longer of six months or the next annual meeting to fix the problem through a reverse stock split, etc. (with the alternative of moving the listing; apparently the pink sheets are becoming more popular).

New York Revises its Plan to Regulate Credit Default Swaps

From Davis Polk: “The New York State Department of Insurance will delay indefinitely its previously outlined plan to regulate credit default swaps, while remaining on active surveillance of the various federal plans and options, according to the testimony of NYS Department of Insurance Superintendent Eric Dinallo before the United States House of Representatives Committee on Agriculture last week.

The decision, as officially announced in the ‘First Supplement to Circular Letter 19‘ published last week, results from “the progress made toward comprehensive federal regulation.” In his testimony, Mr. Dinallo specifically referred to SEC Chairman Christopher Cox’s request for power to regulate the credit default swap market, subsequent actions by the President’s Working Group (in particular, its initiative to develop central counterparties for credit default swaps) and his discussions with members of the United States Congress. Mr. Dinallo asserted that while the NYS Department of Insurance continues to have the jurisdiction to regulate credit default swaps where the buyer holds, or is expected to hold, a material interest in the referenced obligation, the NYS Department of Insurance believes that “the best option is a holistic solution for the entire credit default swap market” and that “it would not be effective or efficient for New York to regulate some transactions” while others are regulated under another scheme or not at all.

Mr. Dinallo stated that the NYS Department of Insurance will be actively following and assisting with regulatory efforts made by federal agencies and Congress. He suggested that, in his view, federal regulation should contain the following elements:

– requirements that all sellers maintain adequate capital and post sufficient trading margins to minimize counterparty risk;
– a guaranty fund that ensures that a failure of one seller will not create a cascade of failures in the market;
– clear and inclusive dispute resolution mechanisms;
– mechanisms for collecting comprehensive market data and making it available to regulatory authorities; and
– comprehensive regulatory oversight, such that regulation is not voluntary.

Once appropriate regulations have been put in place, Mr. Dinallo concluded, New York will consider changes in state law to prevent problems that could arise from some swaps being categorized as insurance. On the other hand, if New York finds the federal government is not acting decisively enough, the implication is that the NYS Insurance Department may again decide to act as a regulator of credit default swaps.”

– Broc Romanek

November 24, 2008

Corp Fin Issues Last-Minute Guidance on Expiring Shelf Registration Statements

On Friday, the Corp Fin Staff put out some much needed guidance on dealing with the upcoming expiration of registration statements under the 3-year shelf sunset provision in Securities Act Rule 415(a)(5). The guidance confirms that for all of those “grandfathered” shelf registration statements out there – i.e., those registration statements that were effective prior to the December 1, 2005 effective date of the Securities Offering Reform amendments – the deadline for filing a new registration statement to replace an expiring shelf is this Friday, November 28th. This deadline is critical for any companies (particularly non-WKSIs) that want to maintain the flexibility to stay in the market with their expiring shelf for up to six months while the replacement registration statement is pending.

The guidance provides some important tips on dealing with the process for carrying over unsold securities from the expiring shelf to the replacement shelf, including that only the same class of securities can be carried over from the expiring shelf to the replacement shelf. If any amounts are sold off of the expiring shelf while the replacement shelf is pending, the company must file a pre-effective amendment to the replacement shelf reflecting the reduced amount of securities carried forward.

As noted in the guidance, filing fees can be tricky when filing a replacement shelf, because the EDGAR system won’t accept a Securities Act registration statement (other than an automatic shelf registration statement relying on “pay-as-you go”) unless some amount is included in the “Proposed Maximum Aggregate Offering Price” header tag. The Staff says that an issuer relying on Rule 415(a)(6) to carry over unused securities should specify “$1.00” in the “Proposed Maximum Aggregate Offering Price” header tag and “$0” as the fee paid. This problem goes away if the company is registering new securities transactions on the replacement shelf, in which case only the amount of the new securities need be included in the “Proposed Maximum Aggregate Offering Price” header tag and the fee due on those additional securities must be paid.

The Staff’s guidance points out the perils of seeking to rely on Rule 457(p) instead of Rule 415(a)(6) when carrying over fees. The Staff notes that if Rule 457(p) is used instead of Rule 415(a)(6) to pull forward fees from an expiring registration statement, the securities from the expiring registration statement will be deemed deregistered upon the filing of the replacement shelf, and thus can’t be sold while the replacement shelf is pending.

As we noted in the September-October issue of The Corporate Counsel, some issuers are finding themselves coming up to the 3-year shelf sunset deadline without their WKSI status. The Staff notes that a company can continue to use an expiring ASR and available WKSI exemptions even if the company is forced to file a non-automatic replacement shelf because it no longer qualifies as a WKSI, at least until the company’s Section 10(a)(3) update comes around. Thanks to Dave for writing this analysis!

Changing from Lawyer to Proxy Solicitor

In this podcast, Rhonda Brauer of Georgeson discusses her new gig at Georgeson, which she joined several months ago after a lengthy stint as an in-house lawyer at the NY Times, including:

– How do you like your new job so far?
– How did Georgeson find you?
– What tasks are you performing so far?
– How will that evolve?

More Conference Performance Art

I spoke a number of times last week – and took the opportunity to tape a few more works of art. Thanks to Dick Johnson for blogging about my Kansas City presentation.

Falling Down in Chicago (A True Dork)

Live from Kansas City! (“Saturday Night Live” Parody)

– Broc Romanek

November 21, 2008

“Breaking the Buck” for Listed Companies

A few weeks ago, I noted how Nasdaq had made a rule filing with the SEC seeking to temporarily suspend the exchange’s bid price and market value of publicly held securities continued listing requirements until January 16, 2009. The SEC waived the 30 day wait for effectiveness of those rule changes, thereby giving some Nasdaq issuers immediate relief from delisting.

Some members have asked whether the NYSE has taken similar steps or is contemplating similar action with respect to its analogous listing standards. To date, no action has been taken by the NYSE to suspend the application of its minimum price and market value listing standards. The NYSE’s standards require that the average closing price of any listed security not fall below $1.00 per share for any consecutive 30 trading-day period and that a listed issuer maintain a minimum level of average global market capitalization of $25 million over a consecutive 30 trading-day period.

During our recent webcast – “The NYSE Speaks ’08: Latest Developments and Interpretations” – the NYSE Staff indicated that they had given the issue some consideration but had decided not to take any action. The NYSE Staff noted that while there had been an uptick in the number of listed companies falling below the $1 threshold, that number still a represented a very small proportion of the overall number of NYSE-listed companies. I suspect that the NYSE Staff will continue to monitor events to see if any action on this front is warranted.

With this week’s market action and perhaps more share price declines to come, some big listed companies may need to start thinking about how to avoid running into a delisting problem. For instance, venerable Ford Motor Company’s 52-week low was $1.01, closing yesterday at $1.39. General Motors has previously hit a 52-week low of $1.70, but closed yesterday at $2.88. It may be time for these and other companies to start looking into reverse stock splits, repurchases or any other potential alternatives to keep from breaking the buck.

What Happened to the Credit Rating Proposals?

On Wednesday, I mentioned that the SEC was going to consider adoption of proposed rules regarding regulation of credit rating agencies, but that item was deleted from the agenda right before the open meeting. Now, the SEC plans to take up that rule proposal as well as the package of other rule proposals regarding credit ratings at an open meeting on December 3rd. Presumably that will include proposals to replace the investment grade non-convertible debt securities transaction requirements in General Instruction I.B.2 of Form S-3 with essentially the WKSI debt issuer standard.

Now, as the “twilight” rulemaking of the Administration is starting to draw to a close, we still don’t know the fate of some other proposals remaining out there – such as XBRL and proposed Rule 507 of Regulation D.

SEC General Counsel Brian Cartwright, has announced that he is leaving the SEC to return to the private sector. He plans to stay on for an unspecified period of time for “continuity” purposes.

Perks Gone Awry

Who would have thought planes would have helped to potentially push the auto industry off the edge? As noted in this Washington Post article, the CEOs of the Big Three automakers got an earful from members of Congress about their use of company planes to get to this week’s hearings in Washington, DC. The funny thing is that the CEOs weren’t using the company planes as perks, because clearly their trips to DC were integrally and directly related to a business purpose – saving their companies from the brink of disaster. If anything, the fiasco demonstrates why perks disclosure gets so much attention these days, even though the numbers involved are relatively small.

Online Surveys & Market Research

– Dave Lynn

November 20, 2008

Your Upcoming Proxy Disclosures – The EESA Effect

We have just posted the first issue of our quarterly “Proxy Disclosure Updates” Newsletter, which is free for all those that try a no-risk trial to Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide.” We are pleased to announce that Mark Borges has agreed to keep us all updated on the newest best practices and guidance through our new Disclosure Updates newsletter.

Subscribers to the Treatise will receive this quarterly Updates newsletter (as part of the Annual Service that accompanies the Treatise at no charge), in which Mark and I will keep you abreast of all the latest guidance that you need to know.

This first issue focuses on key new disclosures all companies will need to address in the wake of EESA and other regulatory responses to the crisis. Subscribers will receive the second issue of Updates in early January, with plenty of last-minute critical pointers for your proxy disclosures.

Act Now: To receive a non-blurred copy today, try a No-Risk Trial to the Annual Service today. Subscribers can access the full issue here.

Here Come the EESA-related Shareholder Proposals

Ted Allen of RiskMetrics Group recently noted on the RiskMetrics Risk & Governance Blog that shareholder proposals seeking compensation reforms are being submitted to financial institutions participating in the Treasury’s bailout program. The proponents are the Laborer’s International Union and the International Brotherhood of Teamsters. Ted’s blog indicates that the proponents expect that some institutions will seek to exclude the proposal on a “substantially implemented” argument, but the unions will fight any such efforts at the SEC.

Ted notes: “The proposal calls for directors to adopt the following reforms:

– Limit annual incentive compensation to an amount not exceeding one times the senior executive’s annual salary;

– Require that a majority of long-term compensation be awarded in the form of performance-vested equity instruments;

– Freeze new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;

– Require senior executives to hold for the full term of their employment at least 75 percent of the shares of stock obtained through equity awards;

– Prohibit accelerated vesting for all unvested equity awards held by senior executives;

– Limit all senior executive severance payments to an amount no greater than one times the executive’s annual salary; and

– Freeze the accrual of retirement benefits under any supplemental executive retirement plan (SERP) for senior executives.

The labor unions urge directors to adopt all of these reforms unless barred by existing executive employment agreements. ‘At this critically important time for the Company and our nation’s economy, the benefits afforded the Company from participation in the TARP justify these more demanding executive compensation reforms,’ the funds argue in their supporting statement.”

It’s Not Too Late

There is still time for all companies – and not just financial institutions – to take another look at their compensation programs in light of recent events. With a great deal of attention focused on the CD&A in next year’s proxy statement, now is the time to consider comparing existing compensation policies and practices with the emerging standards coming out of the EESA and the fallout from the financial crisis. While it is likely that many companies will already have appropriate policies and practices in place, it may be necessary now to revisit things like the company’s clawback policy or whether a hold-through-retirement policy should be adopted or amended.

Further, in light of the most recent economic events, including significant layoffs, cost-cutting and an increasing trend toward CEOs foregoing bonuses, it may be necessary to pay close attention to bonus decisions that have already been made – as well as upcoming bonus decisions – for senior executive officers. Justification for why bonuses are warranted (and the level of bonuses) in light of a company’s financial situation will likely be a principal focus of investors in upcoming CD&As.

All of these actions should be considered in the coming weeks, so that any changes can be implemented in time to be disclosed in the upcoming CD&A. You can find out more about these critical considerations in the inaugural issue of “Proxy Disclosure Updates” Newsletter Fall 2008.

– Dave Lynn

November 19, 2008

The G-20 and Executive Compensation

The fact that executive compensation has emerged as a key concern coming out of the financial crisis was confirmed this past weekend at the meeting of the G-20 nations in Washington DC. As noted in this White House Fact Sheet, the G-20 leaders came together to “discuss efforts to strengthen economic growth, deal with the financial crisis, and to lay the foundation for reform to help to ensure that a similar crisis does not happen again.” The leaders pledged to take a more coordinated effort in dealing with reforms for the financial system, while also seeking to promote global economic growth.

Coming out of the talks was a “Declaration of the Summit on Financial Markets and the World Economy,” which lays out the collective findings of the group on the causes of the financial crisis and the actions that are pledged to be taken. Among the immediate actions that the countries pledged to address by March 31, 2009 was that “[f]inancial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking.”

This concept of addressing compensation arrangements that encourage excessive risk taking closely parallels the recently enacted provisions of the Emergency Economic Stabilization Act of 2008 (EESA) and the implementing regulations, which specify that any institution participating in the EESA programs must structure its executive compensation program to exclude incentives for its senior executive officers to take unnecessary and excessive risks that threaten the value of the institution.

Since the EESA and the Treasury’s regulations only apply to financial institutions taking bailout money, this new G-20 pledge may compel the US government to take further action to impose similar requirements on all financial institutions over the coming months. The pledge does seem to leave some room for approaches short of new regulation, since it refers to “voluntary” efforts in addition to regulatory action. One issue that will inevitably come up if Congress takes action on this matter is whether the policy bias against compensatory arrangements that encourage excessive risk taking will be broadened outside of the realm of financial institutions, particularly in light of the dire straights faced by other industries seeking government assistance.

This morning, the SEC will consider adopting final rules in another area that was a focus in the G-20 talks – strong oversight over credit rating agencies. The SEC will consider rules, proposed earlier this year, that would impose additional substantive requirements on NRSROs that seek to address significant concerns about the integrity of credit rating procedures and methodologies.

Moving Toward a CDS Clearinghouse

Another one of the near term goals of the G-20 was to speed efforts to reduce systemic risk arising from credit default swaps (CDS). US financial regulators have been moving very quickly on that front, recently announcing a Memorandum of Understanding among the SEC, the Federal Reserve Board and the CFTC dealing with central counterparties for over-the-counter credit default swaps.

The President’s Working Group on Financial Markets has been actively nudging market participants to establish central clearinghouses for CDS (which conceivably could ultimately be used for other types of OTC derivatives). The PWG believes that “[a] well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures. It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS.” The MOU paves the way for the regulators to quickly approve these new central counterparties and get them up and running soon.

TARP: Private Institutions Documents Released

Earlier this week, the Treasury released the term sheet and Q&A for private financial institutions participating in the Capital Purchase Program. The deadline for applications is December 8, 2008.

– Dave Lynn

November 18, 2008

DOL Requires Investments for Financial Security, Not Social Agendas

Recently, the Department of Labor issued guidance on fund managers’ ERISA fiduciary duties when considering investments for social or political purposes. The guidance is applicable to labor funds and single employer pension plans – and is in response to the Chamber of Commerce, which previously asserted that pension plan managers have put political agendas ahead of the funds’ best interests.

The DOL’s guidance states that pension plan fiduciaries may not consider “factors outside the economic interests of the plan” in making investment choices unless they can provide an economic analysis that shows that the “investment alternatives were of equal value.” For example, a plan manager who adopts a policy to favor investments in “green” companies may not consider only “green” firms, but “must consider all investments that meet the plan’s prudent financial criteria.”

The guidance appears to be a “win” for the Chamber of Commerce, although some labor fund officials claim that it has not really changed the fiduciary obligations. For more on funds’ fiduciary best practices, see the “ERISA Securities Litigation” Practice Area.

Last Call for 409A Amendments

As many of you are aware, the deadline to be in compliance with Section 409A is fast approaching. Effective January 1, 2009, all things that are (or are considered to be) deferred compensation arrangements for employees, directors and other service providers must be in compliance. Many continue to push for another extension of the deadline (the last extension was granted in October ’07) – see the various commentaries on “The Advisors’ Blog” – but it doesn’t look likely at this point. The penalty for non-compliance falls mostly on the employee, who becomes subject to immediate income tax and hefty penalties.

On the other hand, there has been a more much visible pushback against another deadline that is fast approaching (i.e., December 31st) – the beginning of the transition to the Pension Protection Act of 2006’s funding provisions. The PPA is intended to ensure that company pensions are adequately funded to meet the promised payouts. It requires companies to bring their pensions up to “full” funding over the next seven years.

Those companies that fall short will be forced to take steps such as freezing the accrual of new benefits for current plan members. Last week, a group of 300 companies sent a letter to Congress urging a “softer” transition from the old rules to the new ones.

More on Corp Fin Comments on REIT 10-Ks

A while back, we blogged about Corp Fin’s guidance for drafting REIT 10-Ks. In this new memo, Goodwin Procter reviews the most recent batch of REIT 10-K comment letters and notes these top six (non-accounting) areas of Staff comment:

– Lease expirations
– Occupancy rates and annual rents
– Dividends and distributions in excess of FFO/cash flows
– FFO presentation
– Non-GAAP measures
– Trends or uncertainties

Most of these comments were “futures” and did not seek amendment of the 10-K. For more on REITs, check out our “REITs” Practice Area.

– Julie Hoffman

November 17, 2008

SEC Issues Proposed IFRS Roadmap

As expected for the G-20 summit this weekend, the SEC released its proposed IFRS roadmap on Friday. The 165-page proposal includes this timeline:

Mandatory – Several milestones that, if achieved, could lead to the required use of IFRS by US companies in 2014
Voluntary – Only companies whose industry uses IFRS as the basis of financial reporting more than another set of standards would be eligible to voluntarily elect to use IFRS beginning in 2010

US District Court Rules Against Bebchuk’s “Shareholder Access” Proposal

Last week, Judge Hellerstein of US District Court (SDNY) dismissed Bebchuk v. Electronic Arts, Inc., which involves Professor Lucian Bebchuk’s attempt to use Rule 14a-8 to establish new “shareholder access” procedures. We have been following the developments of this important case in recent issues of The Corporate Counsel. If the case is appealed to the 2nd Circuit as expected, it is likely that a number of companies will receive similar proposals during this proxy season. Once we find a copy of the decision, we’ll post it in our “Shareholder Proposals” Practice Area.

Fundamentals of Investing in Public Companies

Tune in Wednesday for this half-day video webconference: “Fundamentals of Investing in Public Companies.” Thanks to Kirkland & Ellis, we are providing this conference to members so that they can learn the basics – as well as some advanced – practice pointers about investing in public companies.

Kirkland spends a lot of time preparing for this conference and it’s a “high value” proposition. You’ll want to print the slides/course materials for each panel before you watch.

Act Now: Try a no-risk trial for 2009 and get access to for the “rest of ‘08” at no charge. Or since all memberships are on a calendar-year basis, renew for ’09 today.

Congrats to my pal Doug Chia and all those that won awards last week at the “Corporate Secretary Magazine Awards” dinner. Maybe I’ll have a shot at an award next year if they create a new category: “Most Likely to Drool on Himself While Working.”

– Broc Romanek

November 14, 2008

Corp Fin’s New Bag of Tricks: E-mail Your Questions!

Yesterday, Corp Fin posted this overview of its policy offices, including some organization chart information. My guess is the SEC will have trouble keeping their org chart updated, as we have found maintaining our own “Corp Fin Org Chart” challenging given the surprising number of moves over time – but we do keep it updated.

The big news is that these policy offices – including all your favorites like Chief Counsel’s, OMA, International and Chief Accountant’s – will now accept interpretive queries in writing via this online form.

Wow! It will be interesting to see if the volume of queries changes at all – my guess is it will go up, which will be a bummer for the Staff. But on the plus side from the Staff’s perspective, the queries will likely be couched more clearly when reduced to writing. Having worked myself in Chief Counsel’s office, it can be difficult to try to answer a question posed over the phone, particularly if the questioner is strangely vague or inexperienced (or drunk, but that’s a long story).

Then again, one may have the jaundiced view expressed by a member yesterday: “The chances of getting email questions answered by Corp Fin are about as good as getting phone calls answered these days – slim to none.”

November-December Issue: Deal Lawyers Print Newsletter

This November-December issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

– Responding to Liquidity/Capital Constraints: The Joint Venture Decision Tree
– Breaking Up is Hard to Do – and Must Be Done Carefully
– Lessons from the Meltdown: Reverse Termination Fees
– Getting Engaged: When Hiring an M&A Financial Advisor, It’s All About the Contract
– Leveraging a Dealroom: A “How To” Guide
– Expanded Liability for Representations and Warranties: Limiting Survival Provisions
– Liquidity Facilities: The SEC Moves Towards Less Tender Offer Regulation

As all subscriptions are on a calendar-year basis, please renew now to receive the next issue. If you’re not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue (and the rest of ’08) for free.

FINRA Proposes Changes to Research Quiet Period

Recently, Margaret Tahyar of Davis Polk noted the following from Harvard Law’s “Corporate Governance” Blog:

FINRA proposed new “Research Registration and Conflict of Interest Rules.” The proposed rules would replace the existing NYSE and NASD Rules governing research analyst conflicts of interest and would also supersede the proposed changes to those rules published by the SEC in January 2007.

Significantly, the proposed rules would shorten, and in some cases eliminate, the “quiet period” during which a member firm participating in an offering cannot publish or distribute research reports about the issuer, and the firm’s research analyst cannot make public appearances relating to the issuer.

Under current rules, the quiet period is:

– 40 days following the date of the initial public offering for lead underwriters and 25 days after the offering for other underwriters or dealers;

– 10 days following a follow-on offering; and

– 15 days before and after expiration, waiver or termination of a lock-up agreement.

Under the proposed rules, the quiet period would be limited to a single 10-day period following an IPO. Follow-on offerings and lock-up expirations, waivers and terminations would no longer trigger a quiet period. Note that the 25-day prospectus delivery period for an IPO may lead to all underwriters continuing to maintain a 25-day quiet period.

FINRA is requesting comment on the proposed rules by November 14, 2008. If, after receiving comment, FINRA determines to proceed with the proposed rules, it would need to file them with the SEC for approval. The SEC would publish the proposed rules in the Federal Register and subject them to an additional public comment period. The period for comment ends today.

– Broc Romanek

November 13, 2008

More on “Single Triggers” and TARP

Last week, I blogged about how some financial institutions participating in the Treasury’s TARP Capital Purchase Program might be changing their “double triggers” to single for their change of control arrangements. I clarified that blog right after it got pushed to those that have signed up for that feature (if you want to be added, just input your email address to the left of this blog or send me an email) that no bank has yet disclosed that it has taken such action (at least, as far as I know). Rather, I have been hearing that through the grapevine. So it’s hearsay at this point (a good thing because hopefully anyone thinking about it will now be enlightened).

I have also heard that some advisors are saying that (despite some apparently contradictory guidance in Q-11 of Treasury’s interim final rule release for participants in the CPP) that a move to pure “single triggers” is not required based on Q&A-16 in the IRS notice regarding the Section 162(m) and Section 280G provisions of the EESA and Section 302(e)(C)(i) of EESA itself.

In other words, some advisors are interpreting Q-11 to say that “double triggers” (or severance payments upon terminations after a change of control) may be prohibited parachute payments, even if the Treasury no longer holds any equity or debt in a company it once invested in. So some companies have been thinking that while they would have to ask executives to cut back on their “termination without cause” protection to comply with the Treasury’s program, they could modify their double trigger to make it a single trigger.

The thinking apparently is that if there is no requirement for a “termination of employment” in connection with the change of control payment, then it could never be a prohibited golden parachute. In response, tax lawyers and consultants have been pointing to Q&A-16 and Section 302(e)(C)(i) of EESA to say that a payment that is a parachute payment under the traditional 280G analysis – on account of a change of control without regard to the new Section 280G(e) – is not subject to the new prohibitions in 280G(e) and therefore not prohibited by the CPP. Clear as mud?

Even though Treasury might not particularly care if SEOs get prohibited parachute payments in connection with – and particularly, after – a change of control in which Treasury has been bought out (in the case of equity) or paid off (in the case of debt), I imagine investors certainly will care, as well as those in Congress who approved the $700 billion blank check to Treasury…

The Form 8-Ks: Those Not Participating in Treasury’s Capital Purchase Program

It is widely reported that all but $60 billion of the initial $350 billion allocated by Congress for Treasury to take equity stakes in banks is already spoken for – today is the deadline for applications. Yesterday, Treasury Secretary Paulson announced that the plan to buy distressed securities has been scrapped – and Treasury will instead focus on consumer lending and perhaps launch a second CPP to provide capital to companies that are not banks (see Paulson’s announcement). Thus, these notes from SIFMA’s “TARP Conference” that took place on Monday may already be outdated (here are Neel Kashkari’s official remarks from that Conference).

According to this recent survey by SIFMA and four other industry groups, 91% of respondent financial institutions said that a lack of clarity about the way TARP works made them less willing to participate in it. The banks cited the requirement to grant warrants to the Treasury, and uncertainty about investor perception about a bank’s participation in the TARP, among the factors affecting their willingness to participate. Personally, I think it’s the investor perception that may keep some banks from sticking their hand out – but I have seen media articles that report that numerous banks may participate. So I’d take this survey with a grain of salt until we see the final number of banks willing to take the government’s money (or even new “banks” like American Express).

In our “Credit Crunch” Practice Area, we have tweaked our list of the Form 8-Ks filed regarding the the CPP to break out those banks that have filed 8-Ks to disclose that they have decided not to participate in the CPP.

A New Phase of Credit Crisis Litigation

In his “D&O Diary” Blog, Kevin LaCroix discusses how the credit crisis recently entered a dark new phase that has already produced its own distinctive round of lawsuits. In comparison, see Kevin’s musings in a piece entitled “Are the Subprime Securities Lawsuits Faring Poorly?”

Poll: How Many Will Seek Capital Under TARP’s CPP?

Today is the deadline for financial institutions to apply for a capital infusion. Here is our poll guessing how many will seek it:

Online Surveys & Market Research

– Broc Romanek