Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.
Act Now: As all memberships are on a calendar-year basis, you will not be able to access these webcasts if you haven’t renewed for ’09 – so please renew today. If you aren’t a member, try a no-risk trial for ’09.
Ed Durkin on CD&A Reviews
Recently, I caught up with Ed Durkin, Director of Corporate Affairs at the United Brotherhood of Carpenters Pension, to conduct this podcast on CompensationStandards.com. In the podcast, Ed explains how the Carpenters Union reviews CD&As (here is a sample evaluation form that will help you understand the Union’s analysis process), including:
– How many CD&As does the Carpenters Union look at?
– What does the Union look for in a CD&A?
– How does the Carpenters engage with companies on their CD&A?
Forecast for 2009 Proxy Season: Wild and Woolly
We have posted the transcript from Pat McGurn’s popular webcast: “Forecast for 2009 Proxy Season: Wild and Woolly.” As all memberships are on a calendar-year basis, renew today if you haven’t so far…
Wow! Blessed to Have So Many New LinkedIn Friends!
Well, I threw down the LinkedIn gauntlet yesterday and thanks to the “oh so many” of you that are now connected with me – and even more thanks to the very kind words that folks inserted into their invites. I was geniunely touched (sitting in my pajamas all day over here – and not much in the way of face-to-face – can get lonely). I’m happy to report the power of blogging translated into over 100 new connections! Keep ’em coming by inviting me.
As promised, here are the first ten folks that responded to my “invite” request:
Recently, General Electric launched a new blog – GEReports.com – that is creating quite a stir. As part of this effort, a companion YouTube channel was launched.
Launched by GE’s Communications team, GE intends for the blog to be a way of providing investors with additional information, not to replace other modes of disclosure. I really applaud GE’s efforts – and in talking to my in-house colleagues, it seems to have done the trick in opening other company’s eyes to the potential of blogging. Between this new blog and Dell’s IR blog – which is now over a year old – IROs and communications officers can get a good idea about the types of topics that are fodder for blogging.
The only thing I get worried about is that GE seems like it’s using its blog to respond to rumors. For example, GE has used the blog to say it’s not seeking equity investments from sovereign wealth funds and that it will not cut the dividend through the end of ’09.
Most companies have a policy against responding to rumors to avoid any duty to update – and because if you do respond to rumors and then say “no comment” to one, folks will assume the rumor is true because otherwise you would have denied it! However, with rumors being used by short-sellers to drive down stock prices these days, it may be time for companies to rethink those “don’t respond to rumor” policies.
I can’t help but note the insipid quote from a Professor in this Reuters article that wonders if the information in GE’s blog will be valid or whether the blog is part of an “agenda.”
The purpose of blogging is to build trust, so it would be silly for GE to post inaccurate information (not to mention the basis for potential litigation). And yes, GE has an “agenda” – to inform shareholders, which in turn will build trust and support the stock price.
A Special LinkedIn Request
To help me fulfill one of my New Years’ resolutions, if you’re on LinkedIn, please become one of my “networking friends.” To do so, just email me and I’ll invite you – or just “invite me” thru my LinkedIn profile. The first ten to invite me today get their names in the blog tomorrow if they want (if you don’t want that, no big deal – I’ll label you as an anonymous donor). And if you’re a SEC alumni, feel free to join this new group, “SEC Staff Alumni.”
If you’re not on LinkedIn but curious about what it is, you can email me and I’ll explain. But the gist is that it’s not like Facebook (which is more of a social site with plenty of inane chatter) – rather, LinkedIn is filled with professionals. So far, there is not much activity on LinkedIn other than folks asking each other to be “connected.” But that typically is the groundwork for some serious networking that may take place later. I really can’t see any harm in placing yourself up there, even if you don’t intend to ever use it (because someday you may change your mind and you’ll already have gathered some networking contacts through the site). The key is LinkedIn will not require you to spend time maintaining your page, etc.
Twitter, Yammer? What Does This Mean For Me?
More and more is being written about Twitter. Called a “microblog,” Twitter allows one to send a message up to 140 characters (roughly a short sentence) to all those that “follow” the person sending the message. So far, it’s mainly being used in the business world by journalists to get leads on potential stories – so corporate communications clearly should be using this tool.
But it’s starting to be used elsewhere in the business world. For example, a GE spokesperson used Twitter to respond to a question about its promise to not cut its dividend (scroll down here to find this reply)- so it’s importance for investor relations officers is growing. And the SEC has been using Twitter as a way to push out its press releases, etc. for some time.
Now, I’ve had my own Twitter Feed for well over a year (my personal one is much older than this business one) – but I only recently began to use it on a daily basis. So far, I haven’t seen a dramatic change in my life, but I will let you know. For those of you on Twitter, please follow me to get all the latest.
In his “Delaware Litigation” Blog, Francis Pileggi recently explained why business litigation lawyers might consider Twitter. And in his “Securities Docket,” Bruce Carton provides a running list of Twitter Feeds for securities counsel.
And if the pace of change doesn’t frustrate you enough already, consider that a new service – Yammer – is already being touted as the “new Twitter.”
FINRA Proposes Rule on Rumor Circulation
A few weeks ago, FINSA proposed a rule relating to the circulation of rumors. The proposed rule is based on FINRA Rule 6140 and NYSE Rule 435(5). We have posted memos on this proposal in our “Securities Enforcement” Practice Area.
New SEC Relief for Companies That May Lose WKSI Status
Given the down market, I’ve blogged about companies potentially losing their WKSI status recently. Richard Sandler of Davis Polk reports that the SEC Staff has taken a position that may provide relief for some companies in this situation:
Due to continuing equity market turmoil, many companies are at risk of losing the ability to issue securities off of an automatic shelf registration statement. When a company files its annual report on Form 10-K or Form 20-F, a new determination date for well-known seasoned issuer (WKSI) status is triggered. To remain eligible to use an existing automatic shelf, the company’s worldwide equity float must equal or exceed $700 million, excluding shares held by affiliates, at a point during the preceding 60 days.
After discussions with the SEC Staff, the staff provided us with guidance on the following steps that such a company can take in order to preserve its ability to access the U.S. public capital markets (provided it remains eligible to use a non-automatic shelf registration statement):
1. Prior to filing its annual report, the company must file a post-effective amendment to its automatic shelf (which will become automatically effective), which conforms the automatic shelf in all respects to the requirements of a non-automatic shelf registration statement filed by a seasoned issuer that is not a WKSI.
2. Promptly after filing its annual report, the company must file either: a new non-automatic shelf registration statement on Form S-3 or Form F-3, or a second post-effective amendment to its existing shelf. Either filing would be subject to SEC review before being declared effective, and would presumably be largely the same as the post-effective amendment referred to in step 1.
According to the SEC Staff, a company that complies with these steps may continue to sell securities under its automatic shelf registration statement, until the new shelf registration statement (or second post-effective amendment) is declared effective. We expect the SEC Staff to confirm this guidance in writing.
My colleague, Julie Hoffman, recently caught up with Dave Johnson, Executive Compensation Practice Leader at Ernst & Young, in this CompensationStandards.com podcast to discuss putting IFRS’ impact on compensation on HR and Finance’s radars, including:
– How might IFRS impact executive compensation arrangements?
– As a result, who (besides the accounting/finance teams) needs to be conversant with IFRS at a company?
– What should companies be doing to prepare now for IFRS’ impact on compensation?
I’m also excited to announce our new “Proxy Season Blog,” where we will post practical guidance on a daily basis regarding latest developments regarding the proxy season as well as guidance on issues that commonly arise season after season. This members-only blog will include contributions from our own crack-team as well as those experts in our community (if you wish to contribute, please contact me.
Renew Today: Since all memberships are on a calendar-year basis, if you don’t renew today, you will be unable to access Pat McGurn’s webcast. Renew now for ’09! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
Inauguration Day: Will Edgar..umm “IDEA”..Be Open?
A number of members have asked whether the SEC’s Edgar (which is now called “IDEA”) will be open for filings on Inauguration Day since it’s not considered a national holiday (per this list, it’s just a “holiday” for those working in DC). The short answer from SEC on this question is “yes,” per this press release.
However, the SEC’s press release doesn’t directly answer the question as to whether Inauguration Day is considered a normal “business day” for EDGAR filing date purposes (e.g. counting days towards due dates). On that, I believe that the answer will be like last time – that it is considered a “business day” Interestingly, the SEC directly answered that question in its press release related to the 2005 press release.
In comparison, Martin Luther King Day is a national holiday – and thus Edgar is closed and that day isn’t treated as a “business day.”
It promises to be bedlam down here in DC for Inauguration Day. If you are down here to take part in the festivities, I recommend taking the bus. Here is a bus schedule for that day.
Coming Soon: Mary Schapiro’s Confirmation
The US Senate has scheduled Mary Schapiro’s confirmation hearings for this Thursday, January 15th, ahead of President-elect Obama’s Inauguration. Some members have asked how can that be? [The WSJ reports that Mary may receive tough questioning (particularly about the lawsuits mentioned in today’s NY Times’ article) – that likely will be the case given the public’s interest in the markets these days, but I would be surprised if she wasn’t confirmed.]
It can be. In fact, Obama’s Cabinet confirmation hearings already started up last week. Once the Senate confirms that Obama was the winner by tallying all of the electoral votes, his selections can start being confirmed.
A more provocative question is when was the selection of a SEC Chair so important that confirmation hearings took place before a President was inaugurated? A look at the timeline for SEC Chair appointments reveals that this is a “first.” Often, there is a few months lag between Inauguration Day and the naming of a new SEC Chair – and it hasn’t been uncommon for the lag to stretch even longer…
In this past Sunday’s NY Times, an economist – Robert Frank – wrote an essay about whether Congress should limit executive pay. Although Frank makes some accurate observations, the piece is typical of most written by academics and others who are not familiar with the processes by which executive pay is set (Frank’s lack of knowledge is evident when he states that “salaries” drive job choices – not true since salaries are just a nominal part of CEO pay packages, at least at larger companies). Frank cites the two primary reasons for heightened pay over the past few decades is that market caps for companies have grown and that executives are more likely to change jobs these days.
Although I agree that those two factors have contributed to escalating pay, they are not the major factors. As I wrote several years ago in my “Open Letter to All Journalists,” you need to understand what is happening in the boardroom – particularly compensation committee meetings – to really understand why executive pay has risen. It’s these board processes (eg. peer group benchmarking; severance/COC arrangements because “everyone else is doing it”; annual option mega-grants) that continue to be broken and have inadvertently led to excessive pay. Fixing these processes is critical, including the very difficult task of unwinding past arrangements.
I continue to contend that Congress shouldn’t force boards to fix their processes – boards should be doing that themselves. But if boards don’t soon – and they sure have been slow to figure out their role in fixing the problems of executive pay – it seems inevitable that Congress will act.
And unfortunately, I believe any new Congressional action won’t solve our pay problems because boards (with the help – and even prodding – of errant advisors who forget their represent the company, not the top managers) always seem to find a way around artifical limits, thereby “creating” unintended consequences.
Boards must be accountable and need to take a leadership role here. I remain stunned as most boards still don’t seem to have figured this all out yet…as I’ve blogged before, the few companies taking responsible pay actions appear to have the CEO leading the charge rather than the directors.
“Say-on-Pay” in Action: 38% Vote “No” at Jackson-Hewitt’s Annual Meeting
To get a window on what may happen if say-on-pay legislation is enacted in the US, look no further to the results from the recent annual shareholder meeting for Jackson-Hewitt Tax Services. As noted in the company’s Form 10-Q filed last month, 37.5% of the votes cast were voted against the company’s pay package (see Proposal III) – the highest level of opposition so far for an advisory vote in the U.S. market. This is only the fifth company in the US to allow say-on-pay on the ballot – once more companies allow it, I imagine the levels of opposition will grow given the environment out there today.
Congrats to Dave for getting quoted in this front-page article recently in the Washington Post. The article is entitled “Executive Pay Limits May Prove Toothless.” And more importantly, the article mentions our new treatise! I find it hard to believe, but someone told me they heard Alex Bennett review the treatise during his Sirius radio show…
“Say on Pay” and Preliminary Proxy Statements
Brink Dickerson of Troutman Sanders reports that a preliminary filing of a proxy statement under Rule 14a-6(a) is required in connection with management say-on-pay proposals. While Rule 14a-6(a)(4) eliminates the filing requirement for the “approval or ratification of a [compensation] plan…or amendment to such plan,” Interpretation N.10 from the Manual of Publicly Available Telephone Interpretations makes it clear that this is a narrow exclusion and does not apply to after-the-fact approval of specific compensation (note that this set of interps may be updated any day now, per statements of Corp Fin Staff). In addition, the Corp Fin Staff confirmed for one of Brink’s colleagues that a management say-on-pay proposal would not fall within the Rule 14a-6(a)(4) exception.
A number of the companies with management say-on-pay proposals (egs. AFLAC, Littlefield and H&R Block) have filed preliminary proxy statements, but they had other proposals that would have triggered a preliminary filing in any event. Other companies appear to have overlooked this requirement.
Below is a response that I received from a member in response when this same blurb from Brink was posted a few days ago on “The Advisors’ Blog“: Whether right or wrong, I believe common practice is that companies do not file preliminary proxy statements even when awards to employees are made subject to the approval by shareholders of a new plan or an amendment to an existing plan. And don’t forget this additional important nuance from NYSE and Nasdaq FAQs on Equity Compensation Plans – here is NYSE FAQ F-2 (2/18/04):
If shareholder approval of a new equity compensation plan is required, may grants be made before the approval is obtained, so long as the grants are forfeited if the shareholder approval is not in fact obtained?
No shares may be issued until the approval is obtained. This is because the Exchange requires that a supplemental listing application (“SLAP”) be filed before the shares are issued, and the SLAP will not be accepted unless any required shareholder approval has already been obtained. Grants may be made before shareholder approval, provided that no shares can actually be issued pursuant to the grants until it is obtained. For example, a listed company could grant stock options that would not become exercisable until after shareholder approval is obtained. On the other hand, restricted stock could not be issued before shareholder approval, because restricted stock is issued upon grant. Note, however, that the company could promise to issue restricted stock at a future date after shareholder approval is obtained.
Study Finds Emergency Short-Selling Restrictions Had No Impact
Linda DeMelis notes: According to a recent study, the emergency restrictions on short selling imposed by the US, the UK and other European countries last fall had no significant impact on stock price behavior. Their research suggests that the restrictions were not effective in reducing the probability of large stock price drops, which was a principal reason the restrictions were imposed.
There has been scant research published on the impact of the hurriedly-imposed short-selling restrictions. Once the new Obama Administration gets going, I suspect we are going to see a lot of proposals to reform various regulations, including the short-sale rules, and studies like this are going to get more attention. We have posted the study in our “Short Sales” Practice Area.
How to Issue FDIC-Guaranteed Debt under the TLGP
We have posted the transcript from our popular webcast: “How to Issue FDIC-Guaranteed Debt under the TLGP.”
Delaware Chancellor Weighs in on Drafting LLC Agreements
Given the increasing popularity of limited liability companies and the ability of parties to define the scope of fiduciary duties in the governing agreements of these entities, the attached decision by Chancellor Chandler recently in Kahn v. Portnoy (C.A. No. 3515-CC) denying a motion to dismiss a breach of fiduciary action involving an LLC dispute warrants noting and review – particularly for people involved in the drafting of LLC agreements.
The plaintiff, a shareholder of TravelCenters of America, LLC, alleged that the director defendants of TA breached their fiduciary duties by approving a self-dealing transaction allegedly designed to benefit a TA director at the expense of the company. Given TA’s status as an LLC, the fiduciary duties of TA’s directors are interpreted by reference to the entity’s LLC agreement. As explained by the Chancellor, “[t]he well settled policy of the Delaware Limited Liability Company Act is to give maximum effect to the principle of freedom of contract” and “all fiduciary duties, except the implied contractual covenant of good faith and fair dealing, can be waived in an LLC Agreement.”
The terms of TA’s governing LLC agreement provided that the “‘authority, powers, functions and duties (including fiduciary duties)’ of the board of directors will be identical to those of a board of directors of a business corporation organized under the . . . DGCL, unless otherwise specifically provided for in the LLC Agreement.” Another section of the Agreement (Section 7.5(a)) dealt specifically with conflict of interest transactions and provided, among other things, that a challenger of board action “shall have the burden of overcoming [a presumption that the board acted properly and in accordance with its duties (including fiduciary duties)] by clear and convincing evidence.”
While the allegations in the complaint were sufficient to state a claim under general Delaware fiduciary duty case law, defendants argued that Section 7.5(a) of the Agreement altered the applicable pleading standard and mandated dismissal. The Court disagreed, finding that, at the pleading stage, the above language was arguably limited by preceding language in the Agreement suggesting that the clause “would only create a presumption for transactions in which there is a conflict between a shareholder and the board or a shareholder and the Company, but not where there is a conflict between a director and the company.” The Chancellor accordingly denied defendants’ motion to dismiss given that he only needed to “determine whether plaintiff would be entitled to relief under any reasonable interpretation of the facts alleged” and not by “apply[ing] a standard of proof” at the pleading stage.
Portnoy therefore illustrates the importance of clear language in contractual limitations of fiduciary duties in LLC agreements and provides insight into the manner in which courts analyze these provisions. Indeed, the founders (and directors) of TA most likely intended – and believed – that the above quoted language protected the directors in all conflict of interest transactions. The Court did not necessarily disagree; rather, it merely found that the above ambiguity gave way to more than one reasonable interpretation and thus precluded dismissal. As a result, the litigation will proceed to discovery before the defendants will again have the opportunity of attempting to reap the benefits of the above provision. The decision thus warrants careful review by practitioners drafting (or litigating) such provisions.
Also note that the opinion contains helpful primers on a multitude of other corporate fiduciary concepts, including succinct summaries on the meaning of “good faith” (See Op. at 18) and the concepts of “independence” and “disinterestedness” for purposes of demand futility (See Op. at 26).
In today’s Washington Post, Steven Pearlstein writes a column arguing that Mary Schapiro would be a great choice as SEC Chair at any other time but now. I often agree with Pearlstein’s thoughts, but I contend that Mary indeed is a great choice – and now is the most when we need someone with her incredible experience and willingness to act independently. Here are a few specific points:
1. Experience to Spare – No one can come close to Mary’s experience – a SEC Commissioner at a young age when most lawyers are still learning the rudimentary basics; a former Chair of the CFTC (an agency with a different culture and mission, which may soon be merged with the SEC) and in leadership positions at FINRA (and its predecessor, the NASD) for the past decade. She is the best person to parse the issues related to reforming the derivative disaster, which is some complicated stuff. And if I remember correctly, she was appointed to the Commission back in 1988 as an “Independent,” long before that became fashionable. I dare say there has never been anyone with this breadth of experience…ever.
2. Need Level-Headed Drastic Measures – I agree with Pearlstein that drastic measures have to be taken to shake up Wall Street culture. As Pearlstein admits, Mary is a reformer committed to protecting investors. He even admits that he knows Mary comprehends the fundamental problem with Wall Street’s culture. Pearlstein rests his argument on his belief that Mary won’t launch a brutal assault on Wall Street.
I disagree that Mary is not up to the task. When the coming regulatory reform is here, we need someone capable of knowing what is “baby” and what is “bathwater.” As someone who has worked inside the SEC twice, I can tell you that this is harder than it seems. I would have little confidence in someone without a regulatory background being able to keep level-headed.
Let’s face it. The market already has kicked off the drastic measures to clean up Wall Street. A massive correction has begun as all the investment banks have laid off thousands and none of the major ones remain on a stand-alone basis. I don’t know Mary personally, but I do know many that do – and they all say she is an independent thinker and has the utmost integrity. I believe she will be able to figure what the nature of the “assault” that Wall Street needs, without overreaching and hurting our financial system more than necessary.
3. No Confidence in a “Joe Kennedy” – From the opening of Pearlstein’s column, I guess he is wishing someone that created this crisis was tapped as the next SEC Chair, which is what FDR did when he hired Joe Kennedy as the first SEC Chair. Who is he looking for, Hank Paulson?
I can’t imagine a bigger mistake than picking someone from Wall Street to untangle this mess – and I surely doubt that type of pick would inspire confidence among the investing public. I would argue that Kennedy was picked in an era when no viable candidates were available since no real regulators existed.
4. Don’t “Clean House” at the SEC – Pearlstein basically makes two arguments against Shapiro – the first is that she won’t assault Wall Street, which I address above. And the second is that she won’t “clean house” at the SEC. I’m not sure what Pearlstein means by “cleaning house” but it scares me.
I do agree that the SEC needs an overhaul to perform more efficiently – but one thing that surely doesn’t need change is the Staff itself. Most of the people there truly believe in the mission of investor protection – and they work for little pay. When a new Chair comes in, there often are changes in key personnel (eg. General Counsel, Chief Accountant) and these changes are already underway. But beyond that, there often is little change and that is a good thing.
In fact, I would argue the converse – there has been too much “brain drain” over the past decade as some of the SEC’s finest Staffers have left to either seek more money or escape a poorly-run SEC during the current Chair’s tenure. With a better “tone at the top,” I expect we shall see an invigorated SEC that will help restore its reputation as one of the finest federal government agencies in town.
The bottom line is that we should be grateful that Mary is willing to take a large pay cut to serve as SEC Chair (from $2 million/yr. as FINRA head to $158k as SEC Chair) – and we should give her all the support she will need. Clearly, the SEC will face the biggest challenges in its history over the next few years. Here is one guy who agrees with me…
Proxy Season Items and More Meltdown Stuff (and Don’t Forget to Renew)
Since all memberships are on a calendar-year basis, please note that today is the end of the “grace period” for TheCorporateCounsel.net – meaning that if you don’t renew today, you will be unable to access Pat McGurn’s webcast on Monday: “Forecast for 2009 Proxy Season: Wild and Woolly.” Renew now for ’09! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
We recently sent the Nov-Dec issue of The Corporate Counsel to the printers. This issue includes pieces on:
– Proxy Season Items and More Meltdown Stuff
– Former Executive Officers and Former Directors—Proxy Disclosure Checklist
– Item 404(a)—When Does a Law Firm Partner Have a Material Interest in the Firm’s Relationship with the Issuer?
– The Staff’s Rule 14a-3 Relief Authority
– Whatever Happened to the Proposed Amendment of NYSE Rule 452 to Ban Uninstructed Broker Voting of Street-Name Shares in Director Elections?
– Meltdown Accounting Issues
– Rule 14a-8 Practice Update
– A Suggested Alternative to Repricing Melted-Down Stock Options
– Updating Risk Factors—Update
Act Now: Get this issue on a complimentary basis when you try a 2009 no-risk trial today. And for those that already subscribe, don’t forget to renew for ’09 since all subscriptions are on a calendar-year basis.
Relief for Companies with Underfunded Plans: New Pension Bill Enacted
On December 23rd, President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008, which provides relief for companies that contribute to single-employer and multiemployer defined benefit plans, as well as for certain individual taxpayers. We have posted memos regarding the new Act in our “Pension Plans” Practice Area.
Congrats to long-time SEC Staffer Shelley Parratt, who was named Acting Director for the Division of Corporation Finance last week, as John White has officially departed. Shelley will be holding down the fort until Obama’s new SEC Chair is confirmed by the US Senate (ie. Mary Schapiro) – and then the new SEC Chair has to select her new Director. So it may be just a few weeks until a permanent Director is named – or it could drag out for months.
I believe Shelley will be the first non-lawyer to hold the title, at least in modern times. There was a time when the Division was full of financial analysts – and that era could resurface again given the past year’s events. Although she looks much younger, Shelley harkens back to the days when each branch had a number of analysts among the lawyers and accountants. Now there are just a few analysts left in the Division.
Since it’s a short-time position, Shelley won’t be taking that corner office. I was on a panel with Marty Dunn a few weeks ago and asked if he had moved to the corner office when he served as Acting Director during the gap between Alan Beller and John – he didn’t make the move either. Nobody likes moving, not even if it means more windows.
Treasury Responds to Oversight Panel’s First Set of Questions
Last week, the Treasury Department posted its responses to some pointed questions posed in the Congressional Oversight Panel’s first report regarding how well EESA has been implemented.
FASB’s New Proposed Fair Value Position Likely on “Fast Track”
Last week, the FASB proposed a new Staff Position – FSP 107-a – which would require companies to provide additional disclosures about financial assets that are not measured at fair value through earnings. The comment period is very short, just until January 15th – and if approved, it could go into immediate effect for periods ending after December 15, 2008 (i.e., it would be effective for calendar year 2008). We have posted memos on the proposal in our “Fair Value Accounting” Practice Area.
Our January Eminders is Posted!
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Tune in later today for a Securities Docket webcast entitled “2008 Year in Review — Securities Litigation and Enforcement.” A number of my favorite bloggers are on the panel, including Francine McKenna and Kevin LaCroix.
Reasons Why Folks Do “Best of” Lists
I was tempted to concoct some type of “best of” list – and then I got sarcastic about it and created this pie chart instead:
Last winter, I noted the continuing saga of whether the typical delivery covenant in an indenture can be used to declare a default when an issuer stops filing its Exchange Act reports, and now we have yet another court weighing in on the topic.
The issue was put in play a few years ago by the New York State Supreme Court decision in The Bank of New York v. BearingPoint, Inc., and has been a source of concern as hedge funds and activist bondholders have sought to use leverage gained with delinquent issuers by declaring a default and seeking “consent fees” or acceleration of the debt. A federal court weighed in for the first time in Cyberonics, Inc. v. Wells Fargo Bank N.A., interpreting the delivery covenant at issue to require that Exchange Act reports be filed with the trustee only after being filed with the SEC, stating that Section 314(a) of the Trust Indenture Act did not independently provide a deadline for filing such reports with the SEC.
Now, in UnitedHealth Group Inc. v. Wilmington Trust Co., the Eight Circuit found that the issuer’s delay in filing its SEC reports (due to an options backdating investigation/restatement) did not violate the indenture covenant, Section 314(a) of the Trust Indenture Act or New York’s implied covenant of good faith and fair dealing. This decision is significant because it is the first federal appellate court ruling to date on this issue, and may serve to quell some of the efforts to exploit this covenant going forward.
In the meantime, issuers are well advised to revisit the covenants in their indentures, in particular any potential triggering of an acceleration by a breach of the delivery covenant. Further, the more restrictive covenant that calls for delivery of SEC filings to the trustee within 15 days after the company is required to file the reports should definitely be avoided, given that it essentially incorporates the Exchange Act’s filing deadlines as part of the issuer’s obligations under the indenture.
‘Tis the season of debt restructuring, and by the looks of things so far, it is going to get ugly. On December 18th, the Delaware Chancery Court granted summary judgment to noteholders of Realogy, who sought to block the company’s efforts to restructure its debt through an exchange offer that would have essentially permitted subordinated noteholders to jump over more senior debt in the company’s capital structure. The case is The Bank of New York Mellon and High River Limited Partnership v. Realogy.
As noted in this Simpson Thacher memo: “Realogy Corporation, an affiliate of Apollo Management, terminated its invitations to holders of its outstanding unsecured high yield notes to exchange those notes for second lien term loans under an available tranche of its senior secured credit facility after Vice Chancellor Lamb of the Delaware Chancery Court found that the second lien term loans did not constitute ‘Permitted Refinancing Indebtedness’ under Realogy’s senior secured credit facility and, consequently, the second liens securing such loans would not constitute ‘Permitted Liens’ under Realogy’s senior notes indentures.”
The court only addressed the contractual claims in the summary judgment order, staying further consideration of fraudulent transfer claims. For more on this development, check out the memos in our “Debt Financing/Loans” Practice Area.
As noted in this Bloomberg article, the Realogy case is a battle of titans in the sense that it pits Carl Icahn (as bondholder) against Leon Black (owner, through Apollo Management, of Realogy). An Icahn representative is quoted as saying: “Private equity cannot just step all over debt in order to save itself.”
SEC Delivers Mark-to-Market Accounting Study
Last week, the SEC delivered the mark-to-market accounting study mandated by Section 133 of the Emergency Economic Stabilization Act of 2008.
As previewed last month at the AICPA conference, the study recommends against suspending fair value accounting standards, and, as noted in this press release, instead recommends improvements to existing practice, “including reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.”