Monthly Archives: December 2008

December 11, 2008

Renewal Time

Since all our memberships expire at the end of this month, please renew today at our “Renewal Center” for:
The Corporate Counsel print newsletter
The Corporate Executive print newsletter
Section 16 Annual Service
Romeo & Dye’s Section 16 Filer
Compensation Standards print newsletter
Deal Lawyers M&A print newsletter

Comprehensive Price List: Here is a PDF that is a universal order form with the 2009 prices for all of our publications and web sites.

Registered Direct Offerings: An Alternative to Underwritten Deals

As noted in this article, the unprecedented turmoil in the capital markets have caused many companies to consider alternatives to traditional underwritten public offerings. In this podcast, Lora Blum of Jones Day discusses registered direct offerings, including:

– What is a registered direct offering, and how is it different from a PIPE?
– Do you need an underwriter or placement agent to do a registered direct offering?
– Why might a company consider doing a registered direct offering?
– What kind of company could benefit from doing a registered direct offering, and what are the pitfalls a company considering such an offering should be aware of?

Delaware Court of Chancery Disapproves Class and Derivative Settlement

From Travis Laster: Opinions disapproving settlements are usually worth noting, since no one wants to work out a deal and then have it fail to pass muster. In a recent decisionOff v. Ross (Del. Ch. Ct.; 11/26/08) – Vice Chancellor Parsons disapproved a class and derivative settlement. Several factors led to settlement disapproval:

1. Timing – The case settled four days after the plaintiff moved for expedited proceedings. A blindingly fast settlement often raises questions. I once had a case that settled in a week, and it took us 3 hearings to get it approved.

2. Lack of confirmatory discovery – The plaintiffs did not take any discovery pre-settlement and, amazingly, did not take any confirmatory discovery after settling. In my experience, defendants are sometimes pleased when plaintiffs are willing to forgo confirmatory discovery, particularly the standard 1 or 2 confirmatory discovery depositions. This is penny wise and pound foolish, as it contributes significantly to the risk of disapproval.

3. Minimal consideration for seemingly strong claims – The plaintiffs settled claims that arguably invoked the entire fairness standard in return for an agreement that the company would proceed with a rights offering that the record strongly suggested was what the company planned to do all along. In other words, the value of the settlement was suspiciously weak. This is a recurring issue with disclosure-only settlements, when it’s best to think at least twice.

4. Objectors to the settlement and a competing action in another jurisdiction — The weaknesses of the settlement were laid bare by two objectors to the settlement, one of whom was a plaintiff in a competing action in another jurisdiction. Although the parties tried to carve out the other action from the release, the defendants reserved the right to seek dismissal of the action based on the settlement. The existence of motivated objectors always heightens the risk that a settlement will not be approved.

5. A significant attorneys fee of $800,000.

With this confluence of factors, this was a high risk settlement to present.

– Broc Romanek

December 10, 2008

Corp Fin Releases Updated Accounting Manual

Yesterday, the Staff of Corp Fin’s Office of Chief Accountant posted an updated version of the Accounting Disclosure Rules and Practices Manual, now renamed the Financial Reporting Manual. The Manual was last updated in 2000, so this has been a monumental effort on the part of the Staff. Even though the Manual is posted on the SEC’s website, it still bears that legend “For Division of Corporation Finance Staff Use Only” and includes a disclaimer about its informal nature as guidance.

Those who follow the Q&A Forum know that I have cited to the Manual often, because it has always been a great resource for understanding Staff positions on filing and financial statement matters. It might be a good idea to keep your old copy of the Staff Manual, because the new manual does not cover all of the same topics as the old one.

What is Your Auditor Thinking About This Year?

The current economic environment will not only influence disclosure decisions for your upcoming 10-K (as we discussed in the September-October 2008 issue of The Corporate Counsel), it will also influence auditors and how they look at companies during 2008 financial statement audits. If you want to get into the mind of your auditor for the upcoming audit season, check out the PCAOB’s recent Staff Audit Practice Alert on Audit Considerations In the Current Economic Environment. The Alert does a nice job of highlighting the most significant accounting and auditing issues that companies are now facing in light of the recession and the credit crisis, including:

– Overall audit considerations
– Auditing fair value measurements
– Auditing accounting estimates
– Auditing the adequacy of disclosures
– Auditor’s consideration of a company’s ability to continue as a going concern
– Additional audit considerations for selected reporting areas

The Audit Practice Alert points out that in planning and performing the audit, auditors need to be particularly sensitive to fraud risk considerations, which may include increased pressure to meet targets or other expectations of third parties, and even the extent to which the personal financial situations of members of management or the board are threatened by their companies’ performance. This may be an area that will receive more focus this year as compared to recent audits in periods of an economic upswing.

Auditors may also be paying more attention to disclosures this year, particularly the discussion in MD&A of liquidity, capital resources, results of operations, off-balance sheet arrangements and contractual obligations. The Staff Practice Alert notes that auditors need to read this and other information in the report and consider whether the information, or the manner of its presentation, is materially consistent with information, or the manner of presentation of information, appearing in the financial statements.

Inspection Retrospective

While on the topic of the PCAOB, it is hard to believe that the Board has been around so long that it is already putting out its “greatest hits.” Last week, the PCAOB published its Report on the PCAOB’s 2004, 2005, 2006, and 2007 Inspections of Domestic Annually Inspected Firms. This report summarizes the inspection findings of the eight domestic accounting firms that were subject to annual inspections over the past four years (i.e., the biggest firms).

The press release announcing the report notes:

“The report describes deficiencies observed in these areas, as well as deficiencies in the following additional audit areas: identifying departures from generally accepted accounting principles (GAAP), auditing of management’s estimates, income taxes, and internal control, performing analytical procedures and audit sampling, using the work of specialists, and assessing materiality, audit scope and audit differences.

The report also includes information on changes in the quality control systems that firms have described in remediation plans submitted in response to the first years of inspection reports. These include changes to their structure, partner evaluation processes, internal inspection programs, procedures for using the work of foreign affiliates, and processes for compliance with independence requirements.”

Last month, the PCAOB proposed its 2009 budget, seeking a modest increase in spending with a budget of $157.6 million, compared to a budget of $144.6 million for 2008.

– Dave Lynn

December 9, 2008

SEC Tweaks Rules on Credit Ratings

Last week, the SEC adopted a number of changes to its credit rating rules that were originally proposed back in June. Here is the press release and Chairman Cox’s remarks.

This latest round of changes largely originated out of the SEC’s examination of the NRSRO rating practices for structured finance deals. At the open meeting last Wednesday, the SEC did not consider any of the proposed changes to its rules targeted at eliminating references to credit ratings, and it remains unclear whether those rule proposals will move forward. The SEC did not move forward on proposals to require a change in the symbols used by NRSROs for rating structured finance products.

The SEC adopted a number of new prohibited conflicts of interest for NRSROs and their personnel including: (1) making recommendations to an issuer about obtaining a credit rating; (2) having the same personnel discuss fees and ratings; (3) gifts from rated issuers in excess of $25. The rule changes also call for internet disclosure of ratings history when the NRSO follows an “issuer pays” model, and enhanced disclosure of performance measures, verification procedures and credit surveillance policies. Enhanced documentation will be required for model deviations, and credit rating agencies will need to retain complaints about credit analysts.

The SEC also reproposed rules concerning additional internet disclosure for “issuer pays” NRSROs and public disclosure of data underlying structured finance ratings.

From the AICPA Conference: Cox on the SEC’s Fair Value Study

The AICPA’s “National Conference on Current SEC and PCAOB Developments” kicked off in Washington yesterday, and Chairman Cox delivered a speech that covered a number of current accounting concerns at the SEC.

Among the things covered in Cox’s speech were some insights into the SEC’s EESA-mandated study on fair value accounting. His preliminary observations seemed to confirm what was reported in an article in yesterday’s WSJ, which noted that sources indicate that the SEC plans to keep fair value accounting in place, while seeking to refine its application.

Cox noted these preliminary findings from the study:

“First, for many financial institutions, investments marked-to-market through earnings on a quarterly basis represent a minority of their total investment portfolio. A larger portion of investment portfolios consists of available-for-sale securities or loans. As you know, investments in loans and available-for-sale securities are not marked-to-market through earnings each period. Rather, these securities are subject to (in some cases, difficult) judgments on other-than-temporary impairments.

Second, most investors, and many others, agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes. Financial reporting is intended to meet the needs of investors. While financial reporting may serve as a starting point for other users, such as prudential regulators, the information content provided to investors should not be compromised to meet other needs.

Third, accounting standards have served our capital markets well, but we must endeavor to continue to develop robust best practice guidance for auditors and preparers — particularly for fair value measurements of securities traded in inactive or illiquid markets. Education efforts and the development of application guidance must provide a path for auditors and preparers to reach a common ground on these difficult issues.”

I’ll have more from the AICPA conference later this week.

TARP Update: Is There Progress?

Yesterday, Interim Assistant Secretary for Financial Stability Neel Kashkari delivered remarks at the OTS Annual National Housing Forum. In assessing the progress to date of the TARP program, Kashkari stated:

“People often ask: how do we know our program is working? First, we did not allow the financial system to collapse. That is the most direct, important information. Second, the system is fundamentally more stable than it was when Congress passed the legislation. While it is difficult to isolate one program’s effects given policymakers’ numerous actions, one indicator that points to reduced risk of default among financial institutions is the average credit default swap spread for the eight largest U.S. banks, which has declined more than 200 basis points since before Congress passed the EESA. Another key indicator of perceived risk is the spread between LIBOR and OIS: one-month and three-month LIBOR-OIS spreads have each declined about 100 basis points since the law was signed and about 180 basis points from their peak levels before the CPP was announced.“

I guess there is some good news in there.

– Dave Lynn

December 8, 2008

Action Items: Fall Issue of Compensation Standards Print Newsletter

With so many important action items impacting your proxy disclosures right now, you will want to read the Fall 2008 Issue of the Compensation Standards print newsletter that covers some key issues regarding proxy disclosures to consider now.

As a bonus, the issue includes a feature entitled “The Box” that provides an important “heads-up” regarding insiders’ margin accounts and a related D&O questionnaire pointer – which alone are examples of the invaluable, timely preventive guidance that this newsletter provides.

Since members of get a free subscription to the Compensation Standards print newsletter, we have posted the Fall issue online. If you’re not a member, try a ’09 no-risk trial and get this issue rushed to you today.

And since all memberships are on a calendar-year basis, members should renew for ’09 today to continue getting this guidance.

Smaller Company Governance

Man, I’ve never seen so many good people get laid off in our field. One of them is Steve Shapiro, who has been in-house counsel for four companies. I recently caught up with Steve in this podcast to learn the corporate governance challenges that smaller companies face, including:

– What are the particular challenges of being a GC/CS at a smaller company?
– What could be easier?
– What resources are helpful?
– Are there differences in dealing with other executives? Boards? Outside advisors like accountants and counselors?

FINRA Issues Guidance on Broker/Dealer Obligations regarding SPACs

Recently, FINRA issued Regulatory Notice 08-54, which provides guidance on the structure, trends and broker/dealer conflicts of interest associated with SPACs. The Notice discusses broker/dealer suitability and disclosure obligations in connection with a SPACs’ IPO, after-market trading and any subsequent acquisitions. The Notice also refers to compliance with NASD Rule 2720, the NASD conflict-of-interest rule, in connection with an acquisition by a SPAC.

– Broc Romanek

December 5, 2008

The SEC’s Big Move: The “Restacking Project”

As noted in this recent Washington Post article, the SEC will be spending the next six months reshuffling the offices in its new building (price tag = $4.1 million). When the SEC moved into its new building a few years ago, someone in charge of such things had a not-so-brilliant idea – mix up Staffers from the various Divisions on each floor rather than maintain the Divisions on their own floors. End result of that: folks from the same Division communicated far less with each other because they rarely saw each other (and communication already had been reduced due to the popularity of working from home).

Some of the Corp Fin Operation groups are already moving – and this project likely will change the Mail Stops for some of them in the near future. This “restacking” is a great idea, but the timing of it puzzles me given that there is some likelihood of the SEC merging with the CFTC (or other agencies), but I’m sure they have their reasons.

The Latest Anti-Bribery/Anti-Corruption Trends

In this podcast, Mike Schwartz of KPMG discusses his firm’s new “2008 Anti-Bribery and Anti-Corruption Survey,” including:

– Why was this survey undertaken?
– What were the major findings of the Survey?
– Were any findings surprising?
– What advice do you have for companies in the wake of the Survey?

Nasdaq’s New Process for SEC Filing Deficiencies

Recently, Nasdaq filed a proposed rule change which would provide more lenient treatment for companies that are delinquent in making periodic filings to the SEC. Under current Nasdaq rules, companies receive a delisting letter immediately upon missing a filing due date. Late filers are not given a compliance period in which to make a late filing – nor is the Nasdaq staff permitted to grant the delinquent companies additional time to comply with the filing requirements. Although the rule change has been filed as a proposed rule, Nasdaq has asked the SEC to waive the normal 30-day waiting period and approve the rule change to go effective immediately.

Under the modified rules, late filers would have 60 calendar days after receiving a Nasdaq notice of delinquency to submit a plan to regain compliance. The plan would have to address the reasons for the late filing, the likelihood of making the filing within the exception period, the company’s past compliance history, corporate events that might occur within the exception period, and disclosures to the market. After reviewing this (and other relevant information), the Nasdaq Staff may grant the company up to 180 calendar days from the date of the first missed filing to fulfill the filing requirement and regain compliance.

Nasdaq’s rationale for the proposed change is a recognition of the fact that, when a company delays a filing, the formal procedures required to investigate the underlying issues causing the delay and, if necessary, to restate its financial statements, can be a laborious time-consuming process. In these situations, companies often publish whatever financial information they can and inform investors of the reasons for the delay. Nasdaq believes that delisting a company that is taking all appropriate steps to regain compliance and file financial statements – while keeping the public informed – is not in the best interest of the company or its investors.

– Broc Romanek

December 4, 2008

Issuing FDIC-Guaranteed Debt under the TLGP

About ten days ago, the FDIC issued its Final Rule regarding its Temporary Liquidity Guarantee Program (known as “TLGP”), which includes the debt guarantee program under which the FDIC is guaranteeing the unsecured senior debt of eligible entities. The TLGP is an opt-out program with an opt-out deadline of December 5th.

In connection with the FDIC’s final rule, Corp Fin has issued an interpretive letter clarifying that offerings of TLGP-guaranteed debt don’t need to be registered under the ’33 Act (since the guaranteed debt will be exempt under Section 3(a)(2)). We have posted memos regarding TLGP in our “Debt Financings” Practice Area.

The first offerings of debt guaranteed under the program have already been launched – and it has been estimated that as much as $300 billion of debt may ultimately be issued under the TLGP. To help you prepare for this wave, we have just announced a new webcast – “How to Issue FDIC-Guaranteed Debt under the TLGP” – to be held on December 17th. With all the big issues being hashed out right now, our panel of Wall Street lawyers will be able to give you the latest developments. This is a “biggie.”

If you’re not a member of, try a ’09 no-risk trial to access this webcast for free. If you are a member, please renew your membership today since all memberships are on a calendar-year basis.

Yesterday, Mark Borges blogged about the GAO’s preliminary assessment of the compliance with TARP so far, particularly as it relates to executive compensation. It’s a great blog entry.

The NYSE Speaks ’08: Latest Developments and Interpretations

We have posted the transcript from our recent webcast: “The NYSE Speaks ’08: Latest Developments and Interpretations.”

Financial Viability Exception: Nasdaq Issues New Staff Interpretive Letters

Recently, Nasdaq posted three new letters (2008-18, -19 and -20) written to companies seeking to utilize the financial viability exception in Rule 4350(i)(2), the rule that provides an exception to the shareholder approval rules for companies in financial distress. A company may not use this exception without obtaining specific approval from Nasdaq; the company must also comply with certain other requirements. But these new letters – and this series of FAQs on the financial viability exception – may help companies thinking about requesting the exception to understand the factors Nasdaq will consider in deciding whether to approve it.

– Broc Romanek

December 3, 2008

A Coming Wave of New-Age Repricings?

I know that a lot of companies are rethinking their executive compensation arrangements right now. We just sent the Nov-Dec ‘08 issue of The Corporate Executive to the printer. This issue contains the definitive guidance on repricings (and related compensation restructuring issues) and how to implement hold-through-retirement provisions that will help comply with Treasury’s “excessive risk” limitations.

Act Now: To receive a non-blurred version of this issue right away (and on a complimentary basis), enter a No-Risk Trial for ‘09 today.

Note that last week, the Council of Institutional Investors issued a statement warning companies not to reset the bar for CEO pay because of the market meltdown. We have posted this statement – and other memos regarding underwater options – in’s “Stock Options” Practice Area. In addition, we have posted other memos about executive compensation restructuring in our “Rolling Back Compensation” Practice Area.

Believe It or Not: Sarbanes-Oxley Lawsuit Marches On

With the markets collapsing and a new appetite for regulatory reform, it was surprising to see this article that reports that the Free Enterprise Fund was dealt another setback in its attempt to find the Sarbanes-Oxley Act unconstitutional. By a 5-4 decision, the US Court of Appeals for Washington DC voted not to review the case recently. Apparently, the plaintiffs now plan to appeal to the US Supreme Court.

Even more surprising is the occasional mention in the process of Paulson’s ’07 “blueprint” to modernize the financial markets as a possible stepping stone for regulatory change. As you may recall, that was a blueprint to deregulate, not re-regulate. We’ll be posting reform proposals in our “Regulatory Reform” Practice Area.

SEC’s “IDEA” Not a Great Idea? Accusations of Trademark Infringement

As noted by Dominic Jones in his “IR Web Report” a while back, the SEC’s plan to launch a new online database (dubbed “IDEA”) may have hit a wall when a Canadian tech company – CaseWare International – claimed it already had been using the name for 20 years. The SEC filed a trademark application back in May with the US Patent and Trademark Office, while CaseWare claims it registered its trademark with the US PTO back in 2001. It will be interesting to see how this plays out…

– Broc Romanek

December 2, 2008

Doings at the ABA’s Federal Regulation of Securities Committee Fall Meeting

Last week, Corp Fin updated its “’33 Act Sections” CD&Is. I’m sure that this is welcome news to Corp Fin Director John White, who had Chief Counsel Tom Kim and Deputy Director Brian Breheny stand up and affirm their intent to update the portions of the old Telephone Manual into CD&Is by the end of the year during the recent ABA Fall meeting of the Federal Regulation of Securities Committee.

During his last remarks as Corp Fin Director, John reviewed the numerous changes during his two-plus year tenure – including noting that now over 20,000 of the Staff’s comment letters have been posted – and he identified big rulemakings that have been tee’d up for the near future, including:

– IFRS roadmap now proposed, along with proposed timetable
– Further implementation of certain CIFiR recommendations
– Proxy matters, including a reconsideration of shareholder access
– Technology, including XBRL and the “21st Century Disclosure Initiative”
– Beneficial ownership reporting regime, in the wake of the CSX decision and the SEC’s short-selling efforts

In our “Conference Notes” Practice Area, we have posted notes from PLI’s recent Securities Law Institute.

Mandatory XBRL Likely to Come Soon

Recently, I wondered in this blog whether SEC Chairman Cox would get across the finish line with mandatory XBRL before he left. Listening to John’s remarks, I got the sense that the SEC would adopt mandatory XBRL before Cox departed (although John didn’t mention what type of transitionary timetable would be adopted). Bolstering this effort, XBRL US announced last week that they have completed a new draft of the XBRL US GAAP Taxonomies – as well as the initiation of a public review.

Recently, I blogged that Broadridge was leading the way on proxy statement XBRL taxonomies. This changed last month when Broadridge donated its draft proxy taxonomies to XBRL US. However, XBRL US’s new draft taxonomy doesn’t include tags for proxy statements – thus making it highly unlikely the SEC would include executive compensation data in its initial adoption of mandatory XBRL.

Our December Eminders is Posted!

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

– Broc Romanek

December 1, 2008

RiskMetrics Issues ’09 Proxy Season Policies

In our “Proxy Advisors” Practice Area, we have posted RiskMetrics’ new set of 2009 policies, which were released in the middle of last week. Tune in next month to hear Pat McGurn of RiskMetrics’ ISS Division to discuss these new policies in this webcast: “Forecast for 2009 Proxy Season: Wild and Woolly.”

RiskMetrics to Change CGQ?

Speaking of RiskMetrics, I have heard that they are contemplating an overhaul of their corporate rating service, the “Corporate Governance Quotient” (known as “CGQ”). Although their plans could change, I understand that there will not be a single numerical score as there is today. [You may recall that today, each company’s CGQ score is available from their Yahoo! Finance page, among other places.]

Instead, there would be multiple scores for each company, each score dependent on a major area of governance (egs. board independence, board structure, compensation, auditing and financial integrity). The idea is to make the results less “black-and-white” and allow users to reach their own conclusions more readily.

I’m not sure if a change in methodology will make the CGQ more popular with investors – studies have shown they are not considered particularly relevant for investment decisions today – but I imagine some companies will welcome this development (particularly corporate secretaries who have directors that closely follow the scores – although I believe the number of those have dwindled over the years).

Bebchuk v. Electronic Arts: Transcript Posted

Recently, I blogged how 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). I mentioned that once we find a copy of the decision, we’d post it in our “Shareholder Proposals” Practice Area.

Apparently, the Judge didn’t feel like writing a decision because he figured that the 2nd Circuit would handle that upon appeal – so we’ve posted his 1-page order as well as the transcript from the hearing.

– Broc Romanek