Monthly Archives: March 2010

March 31, 2010

Supreme Court Decides Jones v. Harris Associates L.P.

Yesterday, the Supreme Court vacated the judgment of the Seventh Circuit in the much watched case of Jones v. Harris Associates L.P. The Court held that in order to demonstrate that a mutual fund investment advisor breached the “fiduciary duty with respect to the receipt of compensation for services,” a mutual fund shareholder must show that the advisor charged “a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” The holding essentially confirms a standard (known as the Gartenberg standard) that had been applied in most lower courts over the past 30 years, closing the door on the ability of judges to impose what they deem to be reasonable fees and instead letting the marketplace decide.

Of particular note in the case was that in the Seventh Circuit proceedings, Judge Posner’s dissent questioned the ability of the market to police excessive compensation more broadly, noting that “executive compensation in large publicly traded firms often is excessive because of the feeble incentives of boards of directors to police compensation” and that “competition in product and capital markets can’t be counted on to solve the problem.” The Supreme Court did not pick up on any of these broader topics, noting “[t]he debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today’s mutual fund market is a matter for Congress, not the courts.”

The State of Shareholder Engagement Today

I think that one of the key observations about this year’s proxy season is that we are seeing unprecedented levels of issuer engagement with shareholders on issues, including on corporate governance and executive compensation concerns. Movements such as “say on pay” are all about driving more engagement, although it is perhaps too soon to tell whether increased engagement is really making a difference.

The IRRC Institute and ISS recently announced that they are jointly conducting a study of the state of issuer-investor engagement in the United States. They just started the process of seeking input from issuers and investors on their engagement activities, utilizing a short web-based survey that investigates the issues, goals and outcomes of engagement. IRRCI/ISS hope that “[r]esponses will provide important information on the level and focus of engagement activity, as well as insight into the expectations and experiences of both issuers and investors. The goal of the study is to illuminate how the engagement process can become more productive and successful for both issuers and investors.”

How to Prepare for ISS’ New GRId

In this podcast, Ning Chiu of Davis Polk discusses how to prepare for RiskMetrics Group’s new Governance Risk Indicators (“GRId”), including:

– What is ISS’ new governance rating service?
– How does it differ from CGQ?
– What governance areas do you recommend that companies focus on most going forward?

– Dave Lynn

March 30, 2010

Corp Fin Posts “Dear CFO” Letter on Repos

The Corp Fin accounting Staff has posted an illustrative “Dear CFO” letter regarding the accounting and disclosure for repurchase agreements, securities lending transactions or other transactions involving the transfer of financial assets with an obligation to repurchase the transferred assets.

The Staff is asking whether any of these sorts of transactions have been accounted for as sales as opposed to collateralized financings. In this regard, the Staff is looking for three years of historical data regarding these agreements, and additional detail supporting the sale accounting determination. The Staff is also seeking a justification as to why more disclosure was not provided in MD&A when these transactions were accounted for as sales.

As this Dow Jones Newswires story notes, the letter is being sent to nearly two dozen large financial and insurance companies, apparently reflecting concerns driven by recent revelations that Lehman may have used repurchase agreements to mask $50 billion in debt.

PCAOB Proposes Standard for Auditor Communications with the Audit Committee

Yesterday, the PCAOB proposed for comment a new standard on communications with audit committees, as well as some related amendments to interim standards. The new standard would replace interim standards AU sec. 380, Communication with Audit Committees and AU sec. 310, Appointment of the Independent Auditor. Comments are due on the proposal on May 28, 2009.

As noted in the press release announcing the proposal, the proposed standard would establish requirements relating to:

1. Communication of an overview of the audit strategy, including a discussion of significant risks, the use of the internal audit function, and the roles, responsibilities, and location of firms participating in the audit;

2. Communication regarding critical accounting polices, practices, and estimates;

3. Communication regarding the auditor’s evaluation of a company’s ability to continue as a going concern; and

4. Evaluation by the auditor of the adequacy of the two-way communications.

The proposed standard also includes requirements for engagement letters with auditors which seek to ensure that the engagement letter records the terms of the audit engagement.

More on “The Mentor Blog”

We continue to post new items daily on our 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:

– Restatements: Nine-Year Study
– Study: Link Between Withhold Votes and CEO Turnover
– Adjusted EBITDA Is Out of the Shadows as Staff Updates Non-GAAP Interpretations
– The IRS’ Corrections Program to Cure Section 409A Defects
– US Banks: Are Audit Committees Going “Overboard”?

– Dave Lynn

March 29, 2010

Smith & Wollensky’s “Steak for Stock” Promotion: The Rebuttal

One of my “throw-in’s” in a recent blog created quite a stir – in the blog, I noted this “Steak for Stock” promotion from Smith & Wollensky. As one member noted: “If they accept their own stock (are they public?), do you suppose it is a tender offer? Or is there an exception if the steak is ordered well-done?”

Smith & Wollensky’s competitors have taken notice. Maloney & Porcelli have now weighed in with this promotion

Directors and Officers as Broker-Dealers? California Weighs In

From Keith Bishop: The California case of People v. Cole has caused some concern about whether officers and directors of issuers must be licensed as broker-dealers. Last October, the California Commissioner issued this release in an attempt to allay these concerns. Note that the Commissioner is considering – but has not yet formally proposed – a rule to mirror SEC Rule 3a4-1, which sets forth the conditions for a non-exclusive safe harbor for persons associated with an issuer who are not deemed to be brokers.

Just Mailed: March-April Issue of The Corporate Executive

The March-April Issue of The Corporate Executive was just mailed and includes analysis of:

1. IFRS 2, Income Statement Volatility, and Tax Expense
– Warning: Tax Expense Under IFRS 2 Could Be Significantly Higher
– A Slight Reprieve But, IFRS Marches On
– Accounting for Tax Effects Under IFRS 2
– Comparing the Two Approaches
2. Understanding the ESPP $25,000 Limitation
– The Controversy
– More Complexities
– A Humdinger of a Spreadsheet
– Penalties
3. Follow-Up: ESPP Expense When Purchases Are Limited
4. Cost-Basis Reporting
– Are You (and Your Brokers and Transfer Agents) Ready?
– A Primer on Cost Basis for Stock Compensation
– Transitioning to Cost-Basis Reporting
– Companies Need to Begin Preparing Now
5. IRS Audits
– IRS Stepping Up Audit Activity
– 409A Audits Started Already?
6. The SEC’s New Compensation-Risk Evaluation: Is “Process” Disclosure Required?

Act Now: Try a no-risk trial to have this issue rushed to you.

– Broc Romanek

March 26, 2010

Nasdaq Tweaks Its Press Release Rules

A few weeks ago, the SEC approved changes to Nasdaq’s rules regarding press releases to reduce duplicative disclosures by allowing more disclosures to be made by the filing of a Form 8-K or a press release. The rule changes became effective on March 15th.

Climate Change & Bowling

A member pointed out the following disclosure – in the form of a Risk Factor – about the possible impact of climate change on bowling from the Form 10-K filed recently by Brunswick:

Adverse weather conditions can have a negative effect on marine and retail bowling center revenues.

Weather conditions can have a significant effect on the Company’s operating and financial results, especially in the marine and retail bowling center businesses. Sales of the Company’s marine products are generally stronger just before and during spring and summer, and favorable weather during these months generally has a positive effect on consumer demand.

Conversely, unseasonably cool weather, excessive rainfall or drought conditions during these periods can reduce demand. Hurricanes and other storms can result in the disruption of the Company’s distribution channel. In addition, severely inclement weather on weekends and holidays, particularly during the winter months, can adversely affect patronage of the Company’s bowling centers and, therefore, revenues in the retail bowling center business. Additionally, in the event that climate change occurs, which could result in environmental changes including, but not limited to, severe weather, rising sea levels or reduced access to water, the Company’s business could be disrupted and negatively impacted.


S&P 100 Sustainability Report Comparison

Speaking of climate change disclosures, the Sustainable Investment Research Analyst Network (known as “SIRAN”) has issued its latest review about how the S&P 100 are reporting on their sustainability. As noted by Dominic Jones, 93 of the S&P 100 firms reported on their sustainability programs in 2008, compared to only 58 in 2004.

Heading out on spring break vaca – catch you after Easter…

– Broc Romanek

March 25, 2010

SEC Files Partially Settled Regulation FD Charges

Recently, the SEC filed partially settled charges against Presstek and its former CEO for Regulation FD and other disclosure violations. The SEC’s complaint alleges that the CEO selectively disclosed material non-public information regarding the company’s financial performance to the managing partner of an investment adviser who then traded on that information. The company settled by paying a $400,000 civil penalty to the SEC, after the company took some remedial measures. The SEC is still pursuing the former CEO.

This is the second Reg FD action that the SEC’s Enforcement Division has brought in the past six months after silence in this area for a while (here’s a blog about the last one). We are posting memos regarding this action in our “Regulation FD” Practice Area.

Early Bird Discount Ending Soon: “5th Annual Proxy Disclosure Conference” & “7th Annual Executive Compensation Conference”

With Congress moving quickly on financial regulatory reform, huge changes are afoot for executive compensation practices and the related disclosures – that will impact every public company. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend our popular conferences – “Tackling Your 2011 Compensation Disclosures: The 5th Annual Proxy Disclosure Conference” & “7th Annual Executive Compensation Conference” – to be held September 20-21st in Chicago and via Live Nationwide Video Webcast (both of the Conferences are bundled together with a single price). Here is the agenda for the Proxy Disclosure Conference (we’ll be posting the agenda for the Executive Compensation Conference in the near future).

Special Early Bird Rates – Act by April 15th: Register by April 15th to take advantage of this discount.

More on our “Proxy Season Blog”

With the proxy season in full gear, we are posting new items regularly on our “Proxy Season 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:

– SEC Allows Banks to Omit AFSCME’s “Bonus Banking” Proposal
– Even More on “Diversity Policies: Do You Need One? Samples Available”
– Companies Allowed to Omit Proposals on CEOs on Pay Panels
– Why So Many Preliminary Proxy Statements This Year?
– Note to SEC: “Reasonably Likely to be Enacted”? You Have Got to Be Kidding!

– Broc Romanek

March 24, 2010

Senate Banking Committee Amendments to Dodd’s Bill: Two Big Governance Changes

Following up on my blog yesterday about the Dodd bill passing the Senate Banking Committee, I forgot to mention that there were two corporate governance amendments that made it into the 114-page Manager’s Amendment on the Dodd bill, both offered by Sen. Menendez (D-NJ):

Pay Disparity Disclosure – Section 953 (the executive compensation disclosures provision) was amended to add a provision that would direct the SEC to amend Item 402 to require companies to disclose (i) their CEO’s annual total compensation, (ii) the median annual total compensation of their employees (excluding the CEO), and (iii) the ratio between CEO and employee pay. This disclosure would be required in registration statements, periodic reports and proxy/information statements

Prohibit Use of Broker Non-Votes for Executive Compensation Matters – A new Section 957 was added to prohibit broker voting of uninstructed shares in director elections, executive compensation matters, or any other significant matter as determined by the SEC. While its language is general, this provision appears to be aimed at codifying the recent change to NYSE Rule 452, as well as precluding brokers from voting shares in “say-on-pay” votes (although Mark Borges notes that since it also applies to any shareholder vote involving “executive compensation,” it appears that it could extend to numerous compensation-related matters, such as the adoption of an employee stock plan and the approval of severance agreements).

Here is Davis Polk’s summary of the Manager’s Amendment – and here is some member feedback on the broker non-vote provision that I included today on “The Mentor Blog.”

And speaking of pay disparity, as a follow-up to my blog on the recent spate of shareholder proposals on pay disparity, it appears that the SEC Staff is rejecting requests from companies to exclude them under Rule 14a-8, as noted in this Reuters’ article.

Nostalgic for Options Backdating

Ah, remember the good ole days when citizens were just mad at Corporate America solely over options backdating. Those were the days! Luckily, backdating continues to creep into the news every once in a while. For example, criminal charges were dismissed recently against Broadcom’s former CEO and CFO – this may mark the end of new criminal cases (although there still needs to be a final disposition against the former Comverse CEO; here is an Ideoblog piece on this case) – while a securities lawsuit against Comverse was settled for $225 million (while a separate derivative lawsuit was also settled against Comverse a few weeks later, which includes a $60 million payment by the former CEO).

And this Bloomberg article noted that an investigation conducted by Treasury’s Inspector General concluded that the Office of Thrift Supervision allowed six thrifts to improperly backdate capital injections.

Also, Kevin LaCroix of the “D&O Diary” Blog notes that former McAfee General Counsel Kent Roberts, accused of options backdating-related misconduct, was acquitted following a criminal jury trial and the SEC later dropped its separate enforcement action against him. But that apparently is not enough for Roberts – he wants vengeance and has filed a defamation lawsuit (see this Bloomberg article).

And last September, a three-judge panel of the Ninth Circuit Court of Appeals reversed a District Judge’s order suppressing evidence related to information obtained by a law firm from Broadcom that helped conduct the internal investigation into options backdating by the company’s former CFO. Then, Broadcom settled a backdating-related securities class action lawsuit.

Finally, a new academic study surfaced that purports to show that the practice of backdating may have been significantly more widespread than previously believed – identifying 92 companies that have not previously been publicly associated with allegations of backdating. So maybe more backdating news to come…and not related to backdating, here is a provocative piece from Bud Crystal about opportunistic option timing.

As noted in the “Securities Litigation Watch,” Adam Savett is keeping updated options backdating stats as to how cases are being disposed. Here is an excerpt from that blog: “Of the 39 options backdating cases that have been filed as securities class actions, 30 have now reached a resolution. Of the resolved cases, 9 of those cases have been dismissed and 21 have settled. This is still in line with historical trends, where settlements outnumber dismissals by approximately 2-to-1.

The twenty one settlements total $1.56 billion, for an average of $74.38 million. But, removing the largest settlement (UnitedHealth Group) lowers the average back to $31.82 million. As could have been expected the averages are slowly creeping down over time, as the UnitedHealth settlement can now be viewed as a fairly clear example of an outlier in terms of the size of the settlement.”

SOX Whistleblowing Procedure Axed by French Supreme Court

Below is news from Gibson Dunn (we have posted memos analyzing this decision in our “Whistleblowers” Practice Area):

On December 8th, the French Supreme Court issued a decision impacting companies having operations in France and subject to the “whistle-blowing” requirements provided for by Section 301(4) of Sarbanes-Oxley. In 2004 and 2007, Dassault Systèmes – the holding company of the Dassault group – adapted its “Code of Business Conduct” (the “Code”) to provide for a whistle-blowing procedure.

The Code described the procedure as being “neither mandatory nor exclusive. Any person having knowledge of material breaches of the principles described in the Code of Business Conduct in financial, accounting or banking matters or relating to anticorruption issues and which deems it appropriate may communicate such breach to the designated persons within the DS Group. This procedure may not be used outside these areas. It may be used, however, in areas relating to the vital interest of the DS Group or the physical or mental integrity of a person (in particular in case of … discrimination or moral or sexual harassment).”

The French Supreme Court held that the Dassault whistle-blowing procedure was in breach of the Act on Computing and Liberties dated January 6, 1978 (“Loi informatique et libertés”). As a matter of principle, the Act requires the National Commission on Computing and Liberties (“Commission Nationale de l’Informatique et des Libertés”) (the “CNIL”) to authorize the operation of any automatic data processing system in advance of its implementation. The CNIL, however, has created simplified declaratory procedures in a number of areas. Under a deliberation dated December 8, 2005 on the Unique Authorization on Personal Automatic Data Processing Implemented in Respect of Whistle-Blowing Procedures (the “2005 Deliberation”), whistle-blowing procedures may be subject to a mere prior declaration to the CNIL, provided the procedures do not exceed the scope of the 2005 Deliberation. The 2005 Deliberation limits the possibility to use the simplified declaratory procedure in connection with procedures implemented in connection with “financial, accounting or banking matters or relating to anticorruption issues”.

The Dassault whistle-blowing procedure going beyond these areas, the French Supreme Court decided that it was in breach of the Act as it should have received the CNIL’s prior authorization. The French Supreme Court also held that the Dassault procedure was breaching the Act in that it failed to provide for a right for any person affected by the whistle-blowing procedure to be informed, and have a right of access to, and of rectification of, any information collected in this manner.

– Broc Romanek

March 23, 2010

Dodd Bill Peculiarities: The SEC’s Reg D Preemption Gets Hammered

Yesterday, the Senate Banking Committee voted along party-lines, 13-10, to send Senator Dodd’s reform bill to the Senate floor. As noted in this NY Times article, the Committee’s Republicans decided not to offer amendments during the bill’s markup, preferring instead to seek changes before the full Senate vote.

As I imagine exists in every Congressional bill – particularly ones that weigh over five pounds – there is some weird stuff in the Dodd bill. One of the odder ones for me is Section 926 which would qualify the Regulation D preemption. Although this Section doesn’t quite reach the level of “complete deletion” of the preemption, it allows the SEC, by rule, to disqualify certain offerings from the preemption – and then any other Reg D offering that the SEC does not review within 120 days after filing loses the preemption.

My reaction when reading this was “What issue is Congress chasing? I can’t think of any problems that seemly caused the financial crisis to warrant this?” I pondered possible answers to these queries – perhaps fraud in the private offerings and hidden shaddy deals that don’t ordinarily get reviewed? Payment of fees to unregistered brokers? None of these really rung a clear bell (but I guess NASAA is behind it per this article).

Anyways, this Section 926 would be a substantial rewrite of Section 18(b)(4)(D) of the ’33 Act (unlike the simple repeal in Section 928 of Dodd’s original draft bill back in November) by:

(1) requiring the SEC to designate certain Rule 506 offerings as not qualifying as “covered securities,” considering the size of the offering, the number of States in which the security is being offered, and the nature of the offerees;

(2) requiring that the SEC review any filing made with regard to a Rule 506 offering within 120 days, and that any filing which is not reviewed within the 120 day period would no longer be a covered security unless a state securities commissioner determines that (a) there’s been a good faith and reasonable attempt by the issuer to comply with all applicable terms, conditions and requirements of the filing, and (b) any failure to comply with such terms, conditions and requirements “are [sic] insignificant to the offering as a whole”;

(3) permitting states to impose notice filing requirements “substantially similar to filing requirements required by rule or regulation under section 4(4) that were in effect on September 1, 1996”; and

(4) requiring the SEC to implement procedures not later than 180 days after enactment of the Act, after consultation with the States, to promptly notify the States upon completion of its review of Rule 506 filings.

Alan Parness of Cadwalader adds these thoughts on Section 926:

– Condition (2) would result in total uncertainty as to the covered security status of a claimed Rule 506 offering for 120 days or more while the SEC and the states mull over the filing, is ambiguous as to whether only one state securities commissioner need determine that the offering qualifies as “covered securities” if the SEC fails to act, is unclear as to when the state’s determination must be made, and doesn’t address the consequences if the offering is determined not to constitute “covered securities.” Thus, does this condition mean that an offering which doesn’t pass muster as “covered securities” could be unwound under applicable Blue Sky laws as a sale of unregistered securities, in the absence of another exemption from registration?

– In Condition (3), the reference to Section 4(4) is incorrect (as of 9/1/96, any state filing requirements for Rule 506 offerings were governed solely by the relevant Blue Sky law, not federal law). Also, what if state filing requirements were imposed by law, and not by “rule or regulation”? And does this mean that a state couldn’t impose a filing fee for a Rule 506 notice filing substantially in excess of what was charged as of 9/1/96?

Help to

A site has been launched – by Joe Wallin and Bill Carleton – to push back on Congress keeping this Section in final legislation – see “”

An “Office of Investor Advocate” for the SEC? They Already Have Thousands

Since the SEC was born back in 1934, its mission statement has been the protection of investors. And having worked there twice, I can tell you that the Staffers believe in that mission – even when there sometimes are politically-appointed Chairs and Commissioners who believe otherwise.

So the notion of a new “Office of Investor Advocate” – which would be created under Section 914 of the Dodd bill – seems redundant to me since the entire SEC is supposed to essentially be part of that office already. Creating this new Office just adds another layer of middle-management complexity – and won’t really do anything to check a SEC Chair with an anti-investor viewpoint since the SEC Chair appoints the head of this new Office under the Dodd bill. This is a bad idea, plain and simple.

Congress and Its Study-a-Palooza

As noted in this NY Times article recently, both the Dodd bill and its House counterpart call for dozens of studies. The article correctly notes this is a common technique to punt an issue into oblivion. Maybe I’ll print some T-shirts that say, “I voted for my Congressman and all I got was this lousy study”…

– Broc Romanek

March 22, 2010

Second Circuit Decision Underscores Importance of Indenture Terms

Below is news of a development from Davis Polk (as culled from this memo):

In a recent Second Circuit decision, Law Debenture Trust Co. of New York v. Maverick Tube Corp and Tenaris, the court rejected the plaintiff’s argument that a reference to “a class of common stock traded on a United States national securities exchange” should be read to include American Depositary Shares trading on the NYSE, underscoring the importance of clearly defining terms in indentures.

At issue was the interpretation of the indenture’s “Public Acquirer Change of Control” definition, which depends in relevant part on whether: “a Person who … acquires the Company … has a class of common stock traded on a United States national securities exchange or the Nasdaq National Market.” The trustee argued that “common stock” would include ADSs because they are traded on the NYSE and, as a matter of custom and usage, the trading of ADSs is a form of trading common stock. The trustee also argued that to exclude ADSs from the Public Acquirer definition would be a commercially unreasonable interpretation because there was never any intention to exclude foreign issuers from the Public Acquirer definition.

The court, however, refused to find that ADSs implicitly qualified as “a class a common stock traded on a national securities exchange” for purposes of the Public Acquirer definition. Noting that the indenture included more than 100 defined terms and explicitly referred to ADSs in other provisions, the court asserted that it was not its role to rewrite the Public Acquirer definition to give it a commercially reasonable effect but rather to give effect to intentions expressed in the agreement’s own language, particularly in light of the “pains taken by the parties to have the Indenture set out detailed definitions of numerous terms.”

The phrase “common stock traded on a United States national securities exchange or the Nasdaq National Market” is usually relevant in convertible debt to define repurchase rights or conversion rights (typically at a make-whole premium) upon a “change of control,” “fundamental change” or similar event. Many indentures specifically include ADSs as part of that definition, which is an important term issuers should consider in structuring their convertible debt. More generally, this decision underscores that courts in New York are generally reluctant to apply the “intent” or “spirit” behind a contract provision but instead apply the literal terms of the contract. Companies entering into complicated credit arrangements such as indentures should make sure they hire experienced counsel to ensure that the language does in fact reflect the intent behind the provisions.

Seller’s Key Issues in 2010: Still a Tough Seller’s Market

Tune in tomorrow for the webcast – “Seller’s Key Issues in 2010: Still a Tough Seller’s Market” – to hear Wilson Chu of K&L Gates, Mary Korby of Weil Gotshal and Carl Sanchez of Paul Hastings discuss the latest issues for sellers doing deals.

Governance Risk Assessments in M&A

In this podcast, Paul Hodgson of The Corporate Library discusses his recent report on “How Governance Could Have Saved $100 Billion: AOL and Time Warner,” which demonstrates how incorporating an assessment of corporate governance risk into due diligence prior to a merger or acquisition could save billions of dollars in shareholder value, including:

– Why was this study undertaken?
– What were the major findings?
– Based on the findings, what do you think companies should consider before entering into a deal?

– Broc Romanek

March 19, 2010

A Fuss Over Semi-Annual Bonuses

Here is something I recently blogged on’s “The Advisors Blog“:

Just when “bonus” has become the equivalent of a four-letter word in households across the country, the WSJ ran this article noting that at least 50 companies have recently disclosed plans to pay semiannual bonuses, with more than half of them having adopted the plans since 2008 (fyi, the Hay Group did the research for the WSJ on this). This piece ignited a hailstorm in my world as nearly 2 dozen journalists called me yesterday seeking comment.

My immediate take was that there wouldn’t seem to be justification for such a widespread move and that this short-term approach fostered by more frequent bonuses could cause even more managers to manipulate the numbers and all the other perils of short-termism. And for the most part, that is still my position.

However, I checked in with some of the responsible experts that we deal with frequently and got this feedback:

Semi-annual bonuses were adopted by a small fraction of companies due to those companies’ inability (or unwillingness) to set 12 month financial targets due to the uncertainty of the economy. I’ve seen companies adopt the semi-annual approach and they seem to only pay the bonus when the calendar year is over. I imagine the compensation committees made sure the goals were stretch-based on the best available information at the time the goals were set. Some of these same companies retained the discretion to reduce bonuses prior to payment after taking stock of the year as a whole.

I do not disagree with you that using six-month measurement periods is too short-term, but it’s possible that the compensation committees took comfort in the fact that LTI represented the largest component of pay and most executives have substantial ownership, so the risk of maximizing short-term results at the expense of long-term performance was fairly modest.

This too shall pass, as compensation committees hate negotiating bonus targets two times per year (or even four times if you count the end-of-the-period negotiations on what to include – or exclude – in the final performance calculations).

Another expert noted that the two industries highlighted – tech and retail – are long-time users of semi-annual and quarterly bonuses. Take those out of the data and this is only a handful of companies. See Fred Whittlesey’s blog about “when is a trend not a trend”…

FINRA Files Revised Proposal to Regulate IPO Abuses

In the fall of 2003, the NASD (now, “FINRA”) proposed rule changes to prohibit certain abuses in the allocation and distribution of shares in an IPO – at approximately the same time, the SEC proposed amendments to SEC Regulation M that would have also regulated several of the IPO practices proposed to be regulated by the NASD/NYSE proposed rules. Neither of the proposals have been adopted yet.

Recently, FINRA filed Amendment #3 to the NASD’s rule filing to move this proposal along and the SEC issued this notice to solicit comments (note the comment period is only 21 days long). The revisions proposed by FINRA are intended to address comments submitted so far and to otherwise clarify the proposal- but the scope of the revised proposal is only moderately changed from the original ’04 proposal and would apply to any equity security registered under either Section 12 or 15(d) of the ’34 Act (i.e., the rule is not limited to “hot” IPOs nor does it include the exemptions for REITs, direct participation programs or other securities found in FINRA’s Rule 5130).

More on our “Proxy Season Blog”

With the proxy season in full gear, we are posting new items regularly on our “Proxy Season 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:

– “Executive Officers”: One Con of a Larger Group
– How Socially Responsible Investors View Companies in 2010
– Interview: T. Rowe Price’s Donna Anderson
– Even More Samples: Companies Complying with the SEC’s New Rules
– Even More on “Shareholder Proposals: Chevedden Sued Over Eligibility”
– Understanding the New Director Qualification CDI
– Do Last Year’s Risk Factors Look Good? Not So Fast

– Broc Romanek

March 18, 2010

The Citizens Decision: Now What?

As noted in this Politco article, according to a bipartisan poll, voters oppose by a 2-to-1 ratio the US Supreme Court’s ruling in Federal Election Commission v. Citizens United. As I blogged, that decision cleared the way for companies and unions to more broadly run political advertising.

In response to the decision, a large group of shareholder organizations and major investors have announced that they are working together to advance a three-pronged response. Led by, the group is targeting legislative changes from Congress and rule changes by the SEC (this topic recently was added to the Investor Advisory Committee’s agenda). Until that happens, the group will focus on submitting shareholder resolutions to companies.

Meanwhile, another group – including the Center for Political Accountability, Council of Institutional Investors and nearly 50 institutional investors and shareholder advocate groups – have started a letter campaign urging companies in the S&P 500 index to adopt transparency and board oversight for political spending. I expect lots of change in this area in a relatively short period of time.

As this Sonnenschein alert notes, Congress already has a range of bills that have been introduced, including three constitutional amendments, that respond to the Citizens decision. And I’m just loving the satirical campaign being waged by Murray Hill Inc. (as noted by this Washington Post article).

Check out Bob Monk’s blog for a series of interesting commentary on the consequences of Citizens. And Larry Ripstein recently blogged this commentary on Ideoblog.

Chamber Outspends RNC & DNC Even Before Citizens United

Below is an entry from Jim McRitchie’s blog:

“For the first time in recent history, the lobbying, grassroots and advertising budget of the U.S. Chamber of Commerce has surpassed the spending of the national committees of BOTH the Republican National Committee and Democratic National Committee,” begins a recent article in the Atlantic. And, of course, that is before the decision in Citizens United. The article goes on to note, “Republican lawyer Ben Ginsberg went so far as to say that the parties would be ‘threatened by extinction.’ And Ginsberg supports the CU decision!”

According to The Center for Responsive Politics, the U.S. Chamber of Commerce and its national subsidiaries spent $144.5 million in 2009, far more than the RNC and more than double the expenditures by the DNC. None of the contributions that made up this $144.5 million were subject to disclosure. The article discusses expenditures around defeating health care and expenditures of about $1 million each in Virginia and Massachusetts.

And this front-page article from yesterday’s Washington Post describes how much the Chamber is planning to spend on this year’s mid-term elections…

My Annual March Madness Predictions: Georgetown over West Virginia in the final; Duke and Syracuse round out the Final Four.

March-April Issue: Deal Lawyers Print Newsletter

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

– The Deal Lawyer’s Guide to Hidden Employee Benefit Issues
– “Testing the Waters” Ahead of Exchange Offers
– Formula Pricing: “Day 20” Pricing Has Finally Arrived for Debt Tender Offers!
– Competitive Bidding in M&A Transactions: Delaware Enforces Deal Protections and Recognizes Common Law Fraud Claims
– Sealing the Deal: Drafting Contracts Today

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– Broc Romanek