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