Monthly Archives: July 2009

July 17, 2009

Treasury Announces Two Executive Compensation Bills

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Yesterday, Treasury announced that it has drafted two different pieces of executive compensation legislation – one related to say-on-pay and the other regarding compensation committee independence – that they’ve sent to
Congress as part of the “Investor Protection Act of 2009.” Last week, Treasury began issuing other parts of “The Investor Protection Act of 2009” and more sections are forthcoming. These draft bills are consistent with the Obama Administration’s White Paper that was released last month. Here is the say-on-pay press release and bill language – and here is the committee independence press release and bill language.

Rep. Barney Frank issued a statement yesterday promising quick action in the House, specifically that the “Financial Services Committee will be marking up legislation next week.” It’s unknown what the timetable for consideration in the US Senate will be.

Below is a summary of the two pieces of proposed
legislation, both of which would be implemented through SEC rulemaking:

1. Say-on-pay vote on executive compensation disclosures:

  Annual meetings after 12/15/09 will be required to
include a non-binding shareholder vote on the compensation disclosed in proxy

  The proxy or consent solicitation for any meeting after
12/15/09 involving an M&A transaction or sale of assets must include tabular
disclosure of golden parachute payments, and provide for a non-binding
shareholder vote to approve these payments.

2. Compensation committee independence:

Compensation committee members would be subject to the
same additional independence standards as audit committees members under Rule
10A-3 (no consulting or advisory fees and cannot be an

  Compensation consultants, legal counsel and other
advisors to the committee shall meet independence standards to be promulgated by
the SEC.

The compensation committee has the authority to retain
independent consultants and is directly responsible for their appointment,
compensation and oversight (copied from the audit committee oversight of

 –  Proxy statements must disclose whether the compensation
committee has retained an independent consultant, and if not, why

 –  The compensation committee has the authority to retain
legal counsel and is directly responsible for their appointment, compensation
and oversight (copied from the audit committee oversight of auditors).  There is
no requirement that proxy disclosure be made as to whether the committee
retained such legal counsel. 

 –  Companies must provide funding for the hiring of
independent consultants and legal counsel by the committee.

 –  The SEC is required to study the use of compensation
consultants and report to Congress in two years.

The SEC’s “Wish List”: 42 More Changes!?!

For those that don’t think that there have been enough regulatory changes proposed so far this year – or this decade for that matter – you’ll be happy to see this list of 42 desired changes that are reported to have been sent by the SEC to Congress. The 42 changes would impact quite a few areas of the federal securities laws – and are unlikely to be grouped together into a single bill. Rather, parts may be embedded into other legislation, etc.

July-August Issue: Deal Lawyers Print Newsletter

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

– Threshold Issues in Cross-Border Merger-of-Equals Transactions
– The Role of the Board in Turbulent Times: How to Avoid Shareholder Activism
– Private Equity in 2009: “Back to Basics” Practice Tips: Part II
– A “Sleeper”: Delaware Court Stresses Importance of Employment/Non-Competition Agreements with Target Employees

If you’re not yet a subscriber, try a “half-price for rest of ’09” no-risk trial to get a non-blurred version of this issue for free.

– Broc Romanek

July 16, 2009

Rating Agency Regulation: Lawsuits as Another Hammer?

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As noted in this WSJ article and NY Times article yesterday, the big California public pension plan – CalPERS – sued the S&P, Moody’s and Fitch rating agencies
for “wildly inaccurate and unreasonably high” ratings on structured investment

While the ratings agencies face
other lawsuits for losses, the CalPERS’ complaint attacks the way in which the ratings
agencies do business.  In particular, it alleges that the agencies went beyond
being passive “raters” of structured investment products, and became an integral
part of the issuance of these products (Item 47 of the complaint, at page

Even though the SEC seems likely to propose more regulation of the credit rating agencies right now – see this Directorship blog – although it already has done quite a bit over the past six months (this and this), it
may be that lawsuits like this one become an additional driver for more changes to
the rating industry. 

Gearing Up for the Fall: Financial Crisis Inquiry Commission

Yesterday, as noted in this Bloomberg article, Congress appointed the Commissioners for its Financial Crisis Inquiry Commission and the Commission is expected to start its investigations in September regarding 22 enumerated possible causes of the financial crisis (as well as the causes of the failure of major financial institutions). It’s a pretty broad dictate – so the witch hunt begins!

Here are the appointments (as excerpted from this Gibson Dunn memo):

Importantly, the Chairperson and Vice Chairperson will jointly select the
staff director and other staff of the Commission.

House and Senate Democratic Leaders also appointed the following

House and Senate Republican Leaders also appointed the following

How to Plan for CEO (and Other Senior Manager) Succession

We have posted the transcript for our recent webcast: “How to Plan for CEO (and Other Senior Manager) Succession.”

– Broc Romanek

July 15, 2009

Delving into the SEC’s Investigation of Madoff

Recently, I noted a blockbuster front-page article in the Washington Post which delved pretty deeply into the SEC’s investigation of Bernie Madoff and how some earlier warning signs may have possibly been ignored – including the possibility of interference by a SEC official who would soon become related to Madoff. Amazingly, the other mass media outlets don’t seem to have caught up to the WaPo reporter’s research into this story despite its obvious public appeal.

In this podcast, I caught up with the reporter who wrote the story – Zach Goldfarb – to ask a few questions about this story, including:

– What is the essence of your article?
– How long did it take for you to research it?
– When did you find out it would be on the front page?
– What type of reactions have you heard since it ran?

Beware the “Dark Pools”: SEC Chair Speaks Out

During her testimony before the House’s Capital Markets Subcommittee of yesterday regarding oversight of her agency, SEC Chair Schapiro raised concerns over “dark pools,” an area where I predict the *#i% will hit the fan one day. Here is an excerpt from her testimony:

In addition, our staff has begun exploring transparency issues related to markets known as dark pools. Dark pools are defined in various ways, but generally refer to automated trading systems that do not display quotes in the public quote stream.

We have heard concerns that dark pools may lead to a lack of transparency, may result in the development of significant private markets that exclude public investors (through the use of “indications-of-interest” that function similar to public quotes except with implicit pricing), and may potentially impair the public price discovery function if they divert a significant amount of marketable order flow away from the more traditional and transparent markets.

Given the potential risks posed by dark pools, the Commission will take a serious look at what regulatory actions may be warranted to respond to the potential investor protection and market integrity concerns that dark pools may raise.

Great Sleuthing and Drafting: “On Dead Frogs in SEC Filings…”

Congrats to Michelle Leder of for uncovering (in this blog entry) this Form 8-K filed by Expeditors International, in which the company hilariously addresses some legal expenses related to a DOJ investigation first disclosed nearly two years ago. Both Michelle and the drafters of the following disclosure should win some type of award:

When you come from a frame of reference, as we do, where $0 spent on legal expense would be the most preferred alternative, having to predict anything beyond that, by its nature, would become inherently and incredibly biased towards our own wants, desires and expectations. To us, this is somewhat akin to being asked to predict how many minutes after being force fed a dead frog we would throw-up…and the operative word is “force,” as we’d never elect to do either on our own. In both cases (the legal fees or swallowing the dead frog) we’re certain we would eventually throw up.

In neither case do we know exactly how much money or how much time would pass before we did. In both cases, however, our gut check, no pun intended, is not very much and not very long! It should go without saying that given our druthers, we’d rather not spend the legal fees or eat the dead frog in the first place. Sometimes you don’t get the luxury of deciding what you have to eat. When you do, and it’s unpalatable, it should be obvious that you would eat as little as possible. What we are certain of is that if we were talking about being force fed dead frogs and not incurring excessive legal fees, people would be content accepting at face value that it would be as little as possible.

This stuff is right up there with the recent theories thrown out there about finger size and traders’ earning power, as noted by this article.

– Broc Romanek

July 14, 2009

Early Problems for XBRL? A Mismatch with FASB’s GAAP Codification

With mandatory XBRL now upon us for larger companies, it’s troublesome that – as noted in this recent article – the FASB’s new codification of accounting standards that was launched on July 1st (and becomes effective on September 15th) has created a mismatch since all of the mandated XBRL standards apply to the FASB’s now-superseded standards. Thanks to Neal Hannon of The Gilbane Group, who started the sleuthing on this issue (eg. see his blog about whether the SEC can handle XBRL filings).

A new XBRL taxonomy is scheduled to be released in early ’10 to solve this problem – but there needs to be a solution to cover the period between the codification’s 9/15 effective date and when the new taxonomy is available next year. To tackle this, I hear that the FASB is working with XBRL US to produce an extension taxonomy that is supposed to bridge the GAAP between the old references and the codification – but we don’t yet know when that will be released.

But clearly it needs to be well before the Codification’s 9/15 effective date because all the XBRL providers need as much time as they can get to incorporate the changes into their software. In other words, we needed that yesterday since the Codification’s effective date is only two months away. I’ll continue to follow this story – but this looks like a real mess.

More on “FASB Charging for ‘Souped-Up Version’ of Accounting Standards”

Recently, I criticized the FASB for charging for a premium version of their new GAAP codification. I received a number of emails from members agreeing with me, including this one:

The FASB is going to catch a lot of heat for charging for a user friendly version. That is such bad business. Why pay FASB $850 when you can get even more from other service providers for an additional nominal amount? And any CPA who already has one of those services will continue with those other services. I don’t have a service now because I don’t feel it’s necessary at this point in my level of understanding of GAAP.

And I refuse to pay the FASB to do something they decided to do and to access what they insist we must use going forward. I would be happy to continue to use my hard copy standards but they’ve been touting that doing so will be unacceptable and referencing anything but the Codification incorrect. I think that messaging is just propoganda to get people to fork over the $850 annually. The FASB needs to think about what their mission is and hiding information from users is not going to help satisfy their mission – even if it is just bells and whistles. That was the big hook for the Codification – it will make your searching easier. Bunk if I have to pay for that.

By the way, one member noted that I was correct and that the FASB used to charge for access to their full standards. Then, Sarbanes-Oxley changed that by giving them (sort of) independent funding, and the FASB no longer charged for their standards. Selling their standards was a means of sustenance in the old days, apart from hat-in-hand to constituents. Based on the angry reactions I’ve heard, I think FASB needs to publicly explain why it’s charging for the new Codification’s bells & whistles – people are pretty miffed but they also are afraid to speak out…

The SEC’s “IDEA” Becomes “Next-Generation EDGAR”

Without much fanfare – which is understandable because it was forced to by a lawsuit – it seems as though the SEC has renamed “IDEA” as “Next Generation Edgar,” as evidenced by this search page. Personally, I would stick with old-fashioned “Edgar” as any technology tool is constantly evolving and labeling it as “next generation” just takes away from Edgar’s important branding and doesn’t really add anything.

Note that the URL for the SEC’s search page still has “Idea” lodged within it…

– Broc Romanek

July 13, 2009

Obama/Treasury Propose New Regulatory Reform Legislation: A Few Oddities

On Friday, the White House and the Treasury Department released proposed legislation – the “Investor Protection Act of 2009” – to effectuate some of the regulatory reforms that had been mentioned in their White Paper last month. Here is the proposed legislation and the related fact sheet. We’ll be posting memos analyzing this proposed legislation in our “Regulatory Reform” Practice Area.

These proposals seem to focus on the “consumer protection” part of the reforms noted in the White Paper – although the various provisions are essentially a hodge-podge of proposals, including the SEC obtaining the power to review and ban compensation arrangements at brokers, dealers and investment advisers.

Here is my take on what I consider a few oddities in the legislation:

Consumer Testing of Disclosures and Rules: One part of the proposal would bolster the “SEC’s authority to conduct consumer testing.” Consumers? I think they mean investors? The SEC’s stated mission is investor protection and I don’t recall the term “consumer” being mentioned in any of the existing statutes that give the SEC some sort of authority nor any of the agency’s rules and regulations.

Expand Protections for Whistleblowers: Under the proposed legislation, the SEC would gain authority to establish a fund to pay whistleblowers. Although perhaps inviting in concept, this could be tricky to implement. If the SEC Staff dislikes being a referee in the shareholder proposal process, how will they enjoy a process that involves them potentially taking sides more clearly against companies and actually having to dispense money? If adopted, I would consider becoming a bounty hunter because I’ve always wanted to wear big hats…

Establish a Permanent Investor Advisory Committee: How many federal agencies have permanent advisory committees? This could set a bad precedent – and even though investors may have been under-represented by those that regularly approach the SEC in the past, the SEC has heard plenty from investors over the past few years. The creation of a permanent committee may swing the pendulum the other way so that the investor perspective dominates the SEC’s view of the world.

In the long run, the much more likely result is that regularly meeting with an advisory committee would simply be a waste of time. I like the idea of roundtables on specific issues where all sides are represented – as well as the normal comment process on rule proposals – for the SEC to obtain all the outside input it needs. I’m not a big believer in conducting more meetings as a way to find solutions to problems.

Posted: SEC’s Executive Compensation/Corporate Governance Proposing Release

On Friday, the SEC posted a 137-page proposing release regarding changes in its executive compensation rules and other corporate governance enhancements. In his “Proxy Disclosure Blog,” Mark Borges already has blogged some analysis of the compensation proposals.

While we were tickled to see our March-April issue of The Corporate Counsel cited in footnote 44 of the release, we were even more excited that the SEC is soliciting comments on a number of important areas of the executive compensation rules, such as whether boards consider internal pay equity when they set the amounts of executive compensation. Here is a discussion of this fix – and others – that we urge you to consider when drafting your comment letters for the SEC on the executive compensation proposals.

Our “4th Annual Proxy Disclosure Conference“: Now that the SEC’s proposals are out – and broker nonvotes are gone – you need to register now to attend our popular conferences and get prepared for a wild proxy season:
4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference.” You automatically get to attend both Conferences for the price of one; they will be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference. Register now.

Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?

Tune in tomorrow for this webcast – “Alternative Fee Arrangements for Deals: Little Less Talk and Lot More Action?” – to hear Wilson Chu of K&L Gates; Scott Depta of Dell and Lance Jones of Trilogy talk about how the ways that deal fees are being restructured, a trend hastened by a down economy.

– Broc Romanek

July 10, 2009

A Recap of Thoughts on Apple and Illness Disclosures

With the latest news from this Bloomberg article that the lack of disclosure over Apple’s CEO Steve Jobs illness is being investigated by the SEC, it seems appropriate to recap some of my prior thoughts about duties a company may – or may not – have when it comes to disclosing illnesses of its senior management team.

Since my legal analysis hasn’t changed – even though the disclosure challenges that Apple faces has – my “recap” consists simply of linking to my two prior posts on this topic:

More on Steve Jobs and Disclosure of Health Issues

A Delicate Disclosure Issue: Steve Jobs’ Health

Here are some thoughts from other folks worth noting:

Steve Jobs and Apple: Here We Go Again

Experts: Apple Disclosure ‘Falls Short’

Warren Buffet Piles On Steve Jobs About Secret Transplant

Apple Broke the Law By Lying About Steve Jobs Health

Was Apple ‘Adequate but Late’ on Jobs?

The Steve Jobs Health Factor & the Law: Gauging Materiality

Apple Succession Plan: Nobody’s Business?

Governance Expert: Apple’s Jobs’ Disclosure “Dismissive,” Insufficient

Poll Results: What You Said Apple Should Have Done

Last August, I posted a poll in this blog about what Apple should have disclosed. Here are the results from that poll (note more than one answer was permitted per respondent):

– 31.1% – Should have disclosed Jobs’ condition because company had duty to update due to “common bug” comment

– 6.7% – Should have disclosed Jobs’ condition because he had history of health concerns

– 37.8% – Should have disclosed Jobs’ condition because he’s so important to the company

– 23.7% – Need not have disclosured Jobs’ condition because company doesn’t need to respond to rumors

– 14.1% – Need not have disclosed Jobs’ condition because he has right to privacy

SEC Weighs In: California IOUs as “Securities”

Yesterday morning, I blogged about “Trading California IOUs on the Web” and gave some thoughts about whether the California IOUs were eligible for an exclusion from the definition of “security” under the ’34 Act, as well as how California securities law might apply to the IOUs.

Last night, the SEC weighed in by releasing a statement that provides the Staff’s position that the IOUs are “securities” (but that they are not registered with the SEC since they are municipal securities) and that intermediaries may need to register as brokers or alternative trading systems, etc. The SEC also issued this related “investor alert.” As noted in this LA Times article, the SEC is worried about investors being defrauded when being talked into reselling these things…

– Broc Romanek

July 9, 2009

Trading California IOUs on the Web

This recent story about trading of California’s registered warrants on eBay caught my eye. My understanding is that the warrants are IOUs issued by the state and have a maturity date of October 2, 2009.

Thinking out loud, the warrants may fall within the ’34 Act exclusion from the definition of a “security” in Section 3(a)(10) for a “note, draft, bill of exchange or banker’s acceptance, which has a maturity date at the time of issuance not exceeding nine months.” This assumes that a California registered warrant fits within Section 3(a)(10)’s terms (e.g. maturity date of 9 months or less, etc.).

Interestingly, I understand that California’s definition of the term “security” doesn’t have the same 9-month exclusion. Therefore, someone who is engaged in the business of effecting transactions in these warrants might be subject to licensing as a broker-dealer. Further, offers and sales could be subject to California’s antifraud statutes. For example, a state official with material, non-public information about the state who negotiates a warrant could be subject to California’s insider trading statute.

9 Trade Groups Join to Influence Accounting Standards

As reported by in this article, 9 trade groups representing the financial, insurance, banking, real estate and other industries have united to create a coalition with the goal of influencing accounting standard-setters who are working on revising the rules for financial instruments.

The new coalition – known as the “Financial Instruments Reporting and Convergence Alliance” or “FIRCA” – includes the American Council of Life Insurers, the Commercial Mortgage Securities Association, the Council of Federal Home Loan Banks, the Financial Services Roundtable, the Group of North American Insurance Enterprises, the Mortgage Bankers Association, the Property Casualty Insurance Association of America, the Real Estate Roundtable and the U.S. Chamber of Commerce.”

According to FEI’s “Financial Reporting Blog,” FASB Chair Bob Herz recently gave a speech noting threats to accounting principles include “politicization” by “special interests.”

Compliance Programs under Obama Administration

In this podcast, Jeff Kaplan of Kaplan & Walker discusses corporate compliance in the current environment, including:

– What’s new in the compliance field since last year
– What he expects from the Obama administration in the area of corporate compliance
– The responsibilities of general counsels in this environment
– Some practical guidance for making sure that senior officers understand and are accountable for their compliance responsibilities

– Broc Romanek

July 8, 2009

Nasdaq Speaks ’09: Latest Developments and Interpretations

Tune in tomorrow for the webcast – “Nasdaq Speaks ’09: Latest Developments and Interpretations” – to hear the following experts cover all the latest on the Nasdaq (please print off these “Course Materials” in advance):

– Mike Emen, Senior Vice President, Nasdaq’s Listing Qualifications Department
– Arnold Golub, Vice President, Nasdaq’s Office of General Counsel
– David Compton, Director, Nasdaq’s Listing Qualifications Department
– Randy Genau, Director, Nasdaq’s Listing Qualifications Department
– Suzanne Rothwell, Counsel, Skadden, Arps, Slate, Meagher & Flom LLP

Here are other upcoming webcasts:

– “Venture Capital: Facing a Changing World” (9/15)
– “How to Prepare for a Proxy Access World” (9/17)

Act Now: Try a ‘Rest of 09 for Half-Price’ no-risk trial now to catch these critical webcasts and more.

More Edgar Problems: The Need for Transparency

A few months ago, I blogged about how periodic Edgar outages and how the SEC does a poor job of communicating about them. Unfortunately, I can report that “it’s business as usual” and that outages continue and that the SEC not only doesn’t make the filing community aware of them, it might be said that they are “buried.”

Last Thursday, I understand that Edgar was out for more than an hour in the late afternoon and some fee-bearing filings were tied up starting well before the 5:30 pm eastern same-day filing deadline. In many cases, the SEC’s system did not return an Accession Number (ie. an acknowledging receipt) and the SEC’s Filer Support staff was unable to confirm whether filings had been received. During this time, the SEC’s “Latest Filings Received and Processed” page showed that no filings had been received/disseminated starting at 5:45 pm.

What if a company discloses material information on a filing and it doesn’t show up on the SEC’s site? But even beyond that type of concern, I believe that the SEC has a duty to inform the filing community if it has an outage. There has to be some way that they can do that so that everyone doesn’t stay in the dark…

Here is a query for you: Do you know what the implication would be if an issuer filed pursuant to Rule 462(b) where the issuer can begin selling securities immediately upon acceptance of the filing (even if the filing is made after 5:30 pm)? Such an example is Submission Type S-3 MEF. Similarly, when automatic shelf-registration statements of securities of well-known seasoned issuers are submitted under Rule 462(e), they often plan to start selling securities immediately (though they are limited to pre-17:30 filings in order to go effective the same day).

If the SEC system doesn’t actually accept their filings – as a result of EDGAR system issues – must they wait to begin selling securities….and perhaps miss a window of opportunity? Let me know what you think.

Survey Results: To Whom Does Your General Counsel Report?

Below are some interesting results from a recent poll on this blog – the respondents indicated that their general counsel reports to:

– CEO only – 72%
– CEO and other operational officers – 6%
– CEO and board member – 10%
– Other operational officer(s) but not CEO – 10%
– Board member(s) but not CEO – 2%

– Broc Romanek

July 7, 2009

Broadridge’s E-Proxy Stats for ’09 Proxy Season

Last year, Broadridge was feeding us new statistics about e-proxy during each month of the proxy season. This year, we have their beneficial owner statistics as of the end of the proxy season, which we have posted in our “E-Proxy” Practice Area.

As of May 29th:

– 1312 companies (technically, it’s not companies – it’s “distributions” which is a greater number than the number of companies) used voluntary e-proxy between July ’08 and May ’09 (compared to 653 for the same period in the year prior). And 12% of all distributions used N&A during this ’08-’09 period.

– Size range of companies using e-proxy continued to vary considerably for all shapes and sizes (eg. 28.9% of distributions on jobs between 10,000 and 50,000 shareholders used N&A).

– 5.9% of beneficial positions held in companies using N&A received full package by bifurcation, in addition to the 9.2% that received full packages by prior consent. Note that the 5.9% represents positions, not companies.

– 0.8% of shareholders requested paper after receiving a notice; this average is down 25% from last year’s 1.05%.

– 54% of companies using e-proxy had routine matters on their meeting agenda; another 34% had non-routine matters proposed by management; and 12% had non-routine matters proposed by shareholders. None were contested elections.

– Retail vote continued to slip, although just slightly compared to the same period last year (recall that retail voting was down dramatically last year compared to pre-eproxy days) – the number of retail accounts voting dropped from 26.6% to 24.4% (a 8% drop from the prior year’s period).

Note that the slight drop in retail voting refers to those shareholders who got a Notice only and not a full package through stratification, consent, or fulfillment. The number of retail holders getting full packages increased – and this group votes at a higher rate, which somewhat offset the drop in the retail Notice-only group.

More ’09 Proxy Season Statistics

In addition, Broadridge has posted its statistics for the proxy season more generally. Among the more interesting stats:

– Overall Number of Shares Voted: 85.7% (I wish we could get that rate for our political elections)

– Average Percentage of Broker Nonvotes: 19.1% (backing these out probably lowers the overall voting percentages to what happens in political elections)

– Methods by Which Shares Voted: 9.2% of shares voted by paper; 0.9% by phone; 10.6% online; and 79.3% by ProxyEdge (ie. institutional investors using Broadridge’s proprietary service)

More on “The Mentor Blog”

We continue to post new items daily on our new blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– How to Be a Director: Yahoo’s CEO Speaks Frankly
– Conference Notes: Hot Topics in Corporate Governance –
– The Basics: Insider Trading Penalties
– Advancing Legal Fees: Bank of America Ponies Up
– How to Obtain CLE While in Transition
– Corporate Governance Ratings: Any Future?
– Presenting New Ideas at a Board Meeting
– Sifting Through Job Databases for Lawyers
– What Should I Do With My Life?
– Outside Counsel Take Note: In-House Lawyers Want Predictability

– Broc Romanek

July 6, 2009

ABA Issues Exposure Draft of Shareholder Access Model Bylaw

Recently, the ABA’s Task Force on Shareholder Proposals released an Exposure Draft that proposes a model bylaw – along with commentary – that is designed to assist companies that wish to adopt a bylaw that provides shareholders with proxy access for director nominations. The Exposure Draft doesn’t take the SEC’s proxy access proposal into account and the Task Force seeks comment.

In this podcast, the Task Force’s co-chairs – Todd Lang of Weil Gotshal and Chuck Nathan of Latham & Watkins – discuss the Exposure Draft, including:

– Why did the Task Force embark on this project?
– What are the main principles of the illustrative bylaw?
– Are there any issues in particular that you seek comment on?

“It’s Groundhog Day!” Deciding Whether to Disclose Merger Negotiations

Below are some thoughts from John Jenkins of Calfee Halter & Griswold that I recently posted on the “ Blog“:

Sometimes you can’t blame deal lawyers for feeling like Bill Murray’s character in Groundhog Day – there are just some things that seem to happen over and over again in almost the same way on practically every deal. When it comes to public company deals, having to decide whether or not to disclose pending negotiations is defin itely one of those recurring events.

Assuming you’re not dealing with an auction or some other process where the seller has decided to hang a “for sale” sign on itself, nobody involved in the transaction wants the world to know that talks are going on until the parties are ready to announce a signed deal. Among other issues, premature disclosure may create problems for the buyer and the seller with key constituencies – like their employees, customers and in some cases, shareholders – that they would like to postpone until a later date when they have had time to map out a communications strategy.

The SEC cuts public companies some slack when it comes to disclosure of merger negotiations. In general, the Staff’s position is that even though MD&A’s “known trends” disclosure requirement might be read to require companies to address pending talks, if the company doesn’t otherwise have an obligation to disclose preliminary talks, then disclosure won’t be required in response to this line item in an Exchange Act report. (See, e.g., Securities Act Rel. No. 6835 (May 18, 1989)).

The SEC’s position is helpful, but this issue isn’t confined to Exchange Act reporting. Public companies have a duty to disclose material information under other circumstances as well, including situations involving leaks for which the corporation or insiders are responsible – and it’s these situations in which the disclosure issue usually arises.

Legally, there are two major issues to keep in mind in deciding whether you need to say something. The first is whether you’ve got a duty to disclose that you’re engaged in discussions. While there’s no general obligation to dispel rumors in the marketplace that you aren’t responsible for, the problem is that you’ll seldom be able to determine whether you’ve got responsibility for the leak or not – and there’s a pretty good chance that you might.

The second legal issue is whether information about the potential deal is “material.” That question, as everybody knows, is a function of its probability and its magnitude under the test announced by the Supreme Court in Basic v. Levinson. There are a lot of ways to look at Basic’s requirements, but it goes without saying that the further down the path you are, the more likely it is that information about your deal is going to be considered material.

While lawyers naturally tend to focus on the legal issues, business concerns frequently drive a decision to go public with negotiations. Companies may feel that their hands are forced by the media’s decision to run with a story on the rumored deal, or by inquiries from the Nasdaq or the NYSE about the reasons behind unusual market activity. Once information leaks, the need to manage the potential damage to key relationships may also make a compelling business case for disclosure. What’s more, there’s sometimes concern that speculation may cause the market to get carried away. That can lead to the unpleasant situation where the market price rises above the price levels that the parties are negotiating.

Once a decision to disclose pending talks is made, the next issue becomes, how much do you say? Often, people want to say as little as possible. The parties may decide not to identify the buyer, and sometimes, will avoid making any disclosure about the price as well. Sometimes, discussions about what you’re going to say can get pretty contentious, as the two sides may have conflicting views when it comes to the extent of disclosure that’s appropriate.

If you’ve got a relatively efficient market for your stock, and you don’t feel a need to reach out to other constituencies, a minimalist approach may work. Just bear in mind that the less you say, the less freely you can communicate with your key constituencies and the more you remain at risk for the consequences of market speculation. If you don’t say enough, you may find yourself needing to make a second announcement, which only further complicates everyone’s life.

When leaks happen, companies often find themselves in a completely reactive position, with very little time to think through all of the implications of their decisions about disclosure. That’s why I think the best advice is to address the possibility of leaks early on in the process, and chart out a course for managing the disclosure process if they do occur.

Advance planning won’t stop leaks from happening, but it will put everyone in a better position to respond to them if they do. Getting a jump on this issue may make it less painful when you hear the familiar sound of Sonny & Cher’s “I Got You Babe” coming through your clock radio, followed by a couple of morning DJ’s cheerily reminding you that “It’s Groundhog Day!”


Broc’s note: A great version of “I Got You Babe” is the one by UB40 and the Pretender’s Chrissie Hynde.

Bernie Peepoff: The Game is Up

On Friday, my family went to a local art show which included a Washington Post diorama contest for using peeps (ie. the marshmellow Easter candy) in artwork. Here are photos of some of the best from the 1100 entries. Although not nearly among the best, I was laughing because this entry featured a parody of the Bernie Madoff scandal:

And here is me with a major Peep:

– Broc Romanek