Monthly Archives: August 2011

August 17, 2011

The PCAOB’s New Concept Release on Auditor Rotation & Independence

Yesterday, the PCAOB issued a concept release on auditor rotation and independence, as first warned was coming by Chair Jim Doty in a speech shortly after he arrived at the agency two months ago. This is bound to be quite controversial and it appears that the PCAOB will take its time considering the concept as a roundtable on the topic isn’t scheduled until March ’12. Comments made by some of the newer PCAOB Board Members during the open meeting yesterday indicate that the PCAOB’s inspection staff has found numerous problems with independence that has led to this concept release.

The perceived independence issues associated with a company paying the fees of an auditor who performs the company’s audits were dealt with in Sarbanes-Oxley in ’02 when the lead audit partner and audit review partner were required to be rotated every 5 years. Here’s an excerpt from Board Member Steven Harris’ remarks during the meeting:

Over the years, many alternatives have been considered to further strengthen auditor independence. For example, prominent individuals such as Paul Volcker and Michel Barnier, the European Commissioner for Internal Market and Service, have suggested at various times consideration of “audit-only” firms. Under this concept, in exchange for the statutory franchise given to the audit profession, auditing firms would perform only accounting and audit related services and not provide non-audit services. Others have suggested lengthening the list of prohibited non-audited services. And it has also been suggested that the mandatory tendering of audit contracts could be required at regular intervals.

While some of these or other alternatives may merit further consideration, they do not address the fundamental conflict of interest inherent in the system. The auditor is paid by the company that he or she audits. And, as a natural and inevitable result of that arrangement, auditors know that if they push management too hard, they risk losing the fee not just for the current audit but, potentially, the fees for an unlimited number of audits in the future. In essence, they risk losing an annuity.

And the stat in this excerpt from Chair Doty’s remarks surprised me as I thought changing auditors was fairly rare:

To be sure, when auditors change, there may be a learning curve for the new auditors. But consider this: according to the research firm Glass Lewis, between 2003 and 2006, more than 6,500 public companies, or nearly 52 percent of all public companies, voluntarily changed their auditors. How did auditors and companies manage those changes? What did auditors, and the audit committees that oversee them, do to make sure the new auditors were in a position to provide reasonable assurance in the early years of an engagement? This experience should inform the responses of preparers and auditors to this concept release. The learning curve, and cost-based issues involved in changing audit firms, cannot be fairly described as uncharted waters.

SEC Approves NYSE Rule Allowing Exchange to Favor Certain IR Services

As noted by Dominic Jones in his “IR Web Report,” the SEC’s Division of Trading and Markets recently approved new Section 907.00 of the NYSE’s Listed Company Manual, which will result in the NYSE including information about a suite of “complementary” investor relations services available to listed issuers, including investor relations website and news distribution services from giant Thomson Reuters and shareholder identification services from Ipreo.

Although I didn’t submit a comment letter, I did blog my disapproval of the concept that the NYSE’s rules should favor secondary services offered by the exchange. And I agree with Dominic’s conclusion expressed in this excerpt from his blog:

In its decision, the SEC conceded that by subsidizing the services of some vendors and not others, the NYSE would cause some companies to shift their business to its preferred service providers, but it said that competition between exchanges would lead the NYSE to provide better quality services. The SEC also said it recognized that “some small service vendors may be placed at a disadvantage” by its approval of the rule given that the NYSE contracts only with large vendors capable of providing services to all of its listed companies.

“Nonetheless, the Commission does not believe that the proposal harms the market for the complimentary products and services in a way that constitutes an inappropriate burden on competition or an inequitable allocation of fees, or fails to promote just and equitable principles of trade, in a manner inconsistent with the Act,” it said.

My view is that the SEC’s decision is disappointing as it will lead to a continuation of the broad stagnation we have seen in the US investor relations services market over the past few years.
Smaller IR service providers will continue to struggle to compete against those vendors subsidized by the NYSE. Meanwhile, the big, subsidized vendors will have little incentive to improve their services when no other vendors are large enough to replace them.

Query: How Many Bald Guys Does It Take To…

Just back from vacation and digging out. Enjoyed our time in Seattle, including a visit with the Pacific Northwest Chapter of the Society of Corporate Secretaries to talk social media. Great pic of the three wise bald men, PACCAR’s Kevin Fay; me; and Microsoft’s Peter Krause:


– Broc Romanek

August 16, 2011

More on Credit Rating Removal: Rule 134

Another aspect of the credit rating removal rulemaking that I blogged about yesterday is the amendment of Securities Act Rule 134 to remove paragraph (a)(17), which permitted the disclosure of a security rating assigned, or reasonably expected to be assigned, by a nationally recognized statistical rating organization (NRSRO) in a Rule 134 notice (or “tombstone” as some like to call it). Rule 134, of course, provides that a communication published after a registration statement with a Section 10(a) prospectus is on file and limited to the Rule 134 content will not be considered a prospectus or free writing prospectus for the purposes of the SEC’s rules.

Rule 134(a)(17) appears to be arguably an innocent bystander in the quest to remove credit ratings from SEC rules and forms prompted by Section 939A of the Dodd-Frank Act, which required the SEC to “review any regulation … that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any reference to or requirements in such regulations regarding credit ratings.” Nonetheless, the SEC believed that the presence of the reference in Rule 134 represented reliance on credit ratings, and ultimately determined that the change would not have a material impact on the information available to investors “because issuers will (as is common now) be able to disclose a credit rating in a free writing prospectus.” In fact, the free writing prospectus is now pretty much the only place where a credit rating can be disclosed in a securities offering, because Dodd-Frank’s repeal of Rule 436(g), as a practical matter, prevents the disclosure of credit ratings in a prospectus (or report incorporated by reference into a prospectus) for the purpose of offering the security.

The SEC did note that the removal of the safe harbor for the credit rating reference did not necessarily result in a communication that included rating information being deemed to be a prospectus or a free writing prospectus, rather the issuer would have to make the determination now based on all of the facts and circumstances. While that statement is helpful, I am not sure if it provides too much comfort in the Rule 134 context, so that by and large I expect that we will say goodbye to ratings in Rule 134 notices come September 2. (Note that the SEC did not rescind or otherwise amend Item 10(c) of Regulation S-K as part of the quest to remove credit ratings, which governs how disclosure of credit ratings should be provided when an issuer elects to include disclosure of credit ratings in an SEC filing)

Testing the Bounds of the Disqualification Waiver

A few weeks back, the SEC denied Xerox Corporation’s request for a waiver of the disqualification provisions of forward looking statement safe harbors found in Securities Act Section 27A and Exchange Act Section 21E, which arose because Xerox acquiree Affiliated Computer Services, Inc. had settled a civil action with the SEC, which subjected Affiliated Computer Services to an order prohibiting future violations of the antifraud provisions of the federal securities laws.

The SEC decided to deny the waiver request on the grounds that the disqualification provisions in the forward looking statement safe harbors did not apply to Xerox, because Xerox acquired Affiliated Computer Services after the violations alleged in the SEC’s action were committed and Xerox did not otherwise become subject to the SEC’s order. This appears to be the first time that the SEC has addressed this issue.

Large Trader Reporting Rules Adopted

With all of the volatility in the markets over the past few weeks, it reminds us that much of the concern coming out of the financial crisis focused on identifying and evaluating systemic risk. A few weeks back, the SEC moved a bit closer to having enhanced insight into market movements with the adoption of the large trader reporting rules. As this Alston & Bird memorandum notes:

The large trader reporting requirements are intended to provide the Commission with data to support its investigative and enforcement activities, as well as to facilitate its ability to assess the impact of large trader activity on the securities markets, to reconstruct trading activity following periods of unusual market volatility, and to analyze significant market events for regulatory purposes. The Commission has had the authority to adopt a large trader regime for 20 years. In response to the market crash of 1987 (and the less severe break of 1989), Congress passed the Market Reform Act of 1990, which, in part, added Section 13(h) to the Exchange Act.3 Section 13(h) specifically authorized the Commission to establish large trader reporting and was intended to provide the SEC with the ability to identify causes of market disruption. The Commission proposed a large trader registration and reporting regime for the third time shortly before the flash crash of May 6, 2010, in which the Dow Jones Industrial Average fell about 900 points and then recovered those losses within minutes. The flash crash and the recent financial crisis prodded the Commission to finally and unanimously adopt these new requirements.

The rule’s effective date is October 2, 2011. Those entities identified as “Large Traders” must comply with the self-identification requirements of Rule 13h-1(b) by December 1, 2011. Broker-dealers must comply with the recordkeeping, reporting and monitoring requirements by April 30, 2012.

– Dave Lynn

August 15, 2011

Dave & Marty on Proxy Access

In the latest installment of the Dave & Marty radio show, Marty and I are in Manhattan discussing the DC Court of Appeals decision in the proxy access case and the implications for the SEC. We also date ourselves yet again with a discussion of our favorite songs from The Allman Brothers Band.

Upcoming Changes to S-3 Eligibility: Staff Relief Possible?

A few weeks back, Broc blogged about the changes to Form S-3/F-3 eligibility adopted by the SEC in response to Section 939A of the Dodd-Frank Act, which directed the SEC to remove credit ratings from its rules and forms. The changes go into effect on September 2, however the rules provide for a 3 year “grandfathering” period whereby issuers with a reasonable belief that they would have been eligible under the old criteria can continue to use the Form. Under the new criteria, S-3/F-3 is available for:

1. An issuer that has issued (within 60 days of the registration statement filing date) at least $1 billion of non-convertible securities other than common equity ( e.g., debt, preferred), in primary offerings for cash (not exchange offers) registered under the Securities Act (excluding, e.g., Rule 144A, Reg. S offerings) over the last 3 years; or
2. An issuer that has outstanding (again within 60 days of the filing date) at least $750 million of the same securities referenced above; or
3. The issuer is a wholly-owned subsidiary of a WKSI; or
4. The issuer is a majority-owned operating partnership of a REIT that qualifies as a WKSI.

Some have expressed concern that, despite the SEC’s efforts to address commenters’ concerns and keep as many issuers on S-3/F-3 as possible, there are still some investment grade debt issuers who will be excluded going forward, once the grandfathering period comes to an end. We heard from the Staff at the ABA Annual Meeting last week that they would be amenable to considering requests for relief from any issuers who would otherwise lose their status as a result of the changes to the Forms. We also heard from the Staff that issuers relying on the grandfathering provision should generally not be concerned about the need to obtain consents from rating agencies when they are providing required disclosure concerning the reasonable belief that the issuer would have satisfied the investment grade eligibility criteria if it were still in effect (i.e., by referencing the issuer’s rating, the actual or anticipated rating for the securities or the belief that the securities would be rated “investment grade”).

The bottom line here seems to be that the Staff is going to be somewhat flexible in implementing these particular Dodd-Frank Act-mandated rule changes, so give them a call if you have a concern.

Director Pay Climbs a Bit and Shifts More to Equity

More and more these days, I get questions about director compensation issues, perhaps reflecting the trend toward making director pay more complicated than the old days of cash retainers and meeting fees. As noted in this recent study of 2010-2011 director pay conducted by the NACD and Pearl Meyer & Partners, director pay recently rose 5% at larger firms and 20% smaller firms, with an increasing emphasis on equity compensation in the form of full value shares.

– Dave Lynn

August 12, 2011

W-Day is Here: The SEC’s Whistleblower Rules Are Now Effective

Over one year after enactment of the Dodd-Frank Act, the SEC’s whistleblower rules go into effect today, establishing a process for lucky whistleblowers to cash in with bounties of up to 30% of the government’s recovery when cases involve in excess of $1 million. The SEC’s whistleblower website is expected to be updated later today to provide a link to the new Form TCR and FAQs about what the whistleblower rules require with regard to submitting information to the SEC, to submitting a claim for an award under the program and the procedures and considerations in connection with assessing award claims. According to this Reuters article, the SEC Staff has indicated that it will seek to remedy problems with the whistleblower program if they arise.

What will be the hot buttons for whistleblowers? Most likely, alleged Foreign Corrupt Practices Act violations will represent a large portion of whistleblower claims, given the high SEC penalties in those cases and the potential for individuals within an organization to be directly aware of bribes and other potentially illegal conduct. The opportunities are so great that U.S.-based plaintiffs’ lawyers are ramping up their advertising throughout Europe, Asia and Africa in order to bring SEC whistleblowers out of the woodwork. Some plaintiffs’ lawyers have set up websites or retooled their websites to become SEC whistleblower lawyers – here are just a few:

What will the SEC’s whistleblower program mean for companies? At this point it may be too soon to tell, but certainly the specter of whistleblower recoveries puts a premium on (1) having an effective internal reporting program that employees have confidence in, (2) establishing the right tone at the top and (3) educating employees about the internal reporting mechanisms and how they interact with the SEC’s whistleblower rules. Further, every manager in the organization should be versed in the anti-retaliation provisions of the SEC’s whistleblower rules, so that no inappropriate employment actions or threats are carried out when someone either comes forward internally or goes directly to the SEC. Finally, we will be watching how the whistleblower program affects self-reporting by companies to the SEC, as the prospect of highly motivated whistleblower claims may compel companies to “head them off at the pass” by going directly to the SEC first.

Be sure to tune into our upcoming webcast “Preparing for the SEC’s New Whistleblower Rules: What Companies Are Doing Now” on Tuesday, September 13th. We will be joined by Sean McKessy, Chief of SEC’s Office of the Whistleblower, as well as a great panel of outside counsel.

Is it a Crisis Because They Say it is So?

The events of the last couple of weeks have inevitably drawn comparisons to the Fall of 2008 (see, e.g., this New York Times article from yesterday), when the bottom fell out of the global financial system and by all accounts we came way too close to the end of the economic world as we know it. Who knows where things will go from here, but there are certainly a few things we can learn from our foggy memories of the 2008 fiasco.

First, things appear to be somewhat different this time – at least for larger companies – because their cash balances are high and leverage is lower, making it easier to weather the storm of volatile markets. In 2008 and 2009, portions of the capital markets were shut down at various times, making it exceedingly difficult for companies to raise capital, turn over maturing obligations, etc.

Second, the dark days of a few years ago taught us the value of having a shelf registration statement on file with the SEC. During and ever since the financial crisis, offerings are generally conducted with as much speed and stealth as can be mustered, because of market volatility and hedge funds that are always looking for a reason to short a company’s stock. Many of the offering techniques that are in vogue today, such as over-the-wall deals and registered directs, generally work best when a shelf registration statement is already on file and a takedown can be done quickly and quietly. Getting a shelf on file when you are a WKSI is best, because you generally want to avail yourself of the advantages of that status, which means that the shelf should be filed before your stock price plummets and you know longer qualify for WKSI status (e.g., $700 million or more of worldwide public float).

And finally, August is just a terrible month to try to do a deal or to have bad stuff happen in the economy and the markets, given that so many traders around the world often decamp for their holiday during August, particularly in the last two weeks of the month. It always strikes me as interesting how such a human element – the overriding desire to take a vacation – can have such a significant impact on the markets as a whole.

Webcast Transcript: “Key Disclosure Policies: The Dangers of Standing Pat”

We have posted the transcript for our recent webcast: “Key Disclosure Policies: The Dangers of Standing Pat.”

Poll: What Would You Do With Your SEC Whistleblower Bounty?

Online Surveys & Market Research

– Dave Lynn

August 11, 2011

Academics Call for Political Spending Disclosure

A group of 10 academics submitted a rulemaking petition to the SEC earlier this month, asking the agency to consider adopting rules that would require disclosure of corporate political spending. Activism has driven quite a few large companies to disclose details of political contributions in the last few years, but that trend is apparently not enough for this group which calls themselves the “Committee on Disclosure of Corporate Political Spending.”

To read our take on this proposal, check out the upcoming July-August 2011 issue of The Corporate Counsel. If you are not a subscriber, take advantage of our “Free for Rest of 2011” no-risk trial to The Corporate Counsel.

The Big GAAP/Little GAAP Debate

While the debate goes on over whether the US will ultimately cede authority for setting GAAP to the IASB with a move to IFRS, an equally vehement debate is raging in the US over the future of standard setting for GAAP applicable to private and public companies. Edith Orenstein discusses the latest round of comments on this issue in the FEI Financial Reporting Blog. The Financial Accounting Foundation (FAF) (the body which oversees the Financial Accounting Standards Board, FASB) is considering whether to establish a private company standard setter that is separate and apart from the FASB.

A Blue Ribbon panel recommended earlier this year that an optional set of modifications and exceptions to standard GAAP be established for private companies, however the question of who would actually establish such modifications and exceptions has created controversy, as various groups consider the FASB to be best suited to the task, while others believe that a separate standard-setting body would be preferable. The AICPA and a number of state CPA societies support the idea of setting up a whole new standard setter for private company GAAP, while others such as FEI’s Committee on Private Company Standards suggest a more moderate approach of working within the existing FASB framework.

Of course we have had two standard setters for GAAS for some time, with the PCAOB being the exclusive authority for GAAS applicable to the audits of public companies, while the AICPA continues to establish auditing standards that apply to the audits of private companies. This dichotomy can be somewhat confusing for all of us non-accountants out here (as we also discuss in more detail the upcoming July-August 2011 issue of The Corporate Counsel – so sign up for a free no risk trial today).

More on our “Proxy Season Blog”

Even though the proxy season is over, we still 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:

– They Held a Revolution and Nobody Came
– Proxy Season: The Latest Voting Results
– More on “Annual Meetings: The Use of Floor Proposals”
– The Best Annual Report of 2011? Acuity’s “Storybook Year”
– Advisory Votes Help Shield Directors From Investor Dissent

– Dave Lynn

August 10, 2011

More from the ABA Annual Meeting: Proxy Mechanics

I am just back from Toronto, and as always there were lots of informative sessions at the ABA Annual Meeting. One session was centered on a roundtable recently conducted by the University of Delaware’s John L. Weinberg Center for Corporate Governance, which led to a document entitled “The Report of Roundtable on Proxy Governance: Recommendations for Providing End-to-End Vote Confirmation.” This report identifies steps toward improving the shareholder voting process in response to the SEC’s proxy mechanics concept release. The report talks about taking the following steps with the shareholder voting process:

1. Early-Stage Entitlement Confirmation: All parties that anticipate submitting votes for a shareholders’ meeting should confirm their voting entitlements with the meeting tabulator within a defined period (six days) following the record date.

2. Encouragement of Early Voting: All shareholders are encouraged to cast votes early in the solicitation period and, in any event, no later than three business days before the shareholders meeting.

3. Enhancements to Exception Processing: Tabulators should promptly (within one day) communicate to vote-reporting entities the reasons vote reports are being rejected.

4. Vote Confirmation: The proxy process should enable investors to obtain, via the Internet or other electronic means, a vote confirmation on a demand or as needed basis, utilizing, e.g., existing Voting Instruction Form (VIF) control numbers.

More on FINRA’s Plate: Social Media

Yesterday, Broc blogged about a number of things on FINRA’s corporate financing agenda. As this Morrison & Foerster memo notes, FINRA Chairman and CEO Richard Ketchum recently noted that FINRA’s Social Networking Task Force continues to examine issues relating to the use of social media by member firms, and that FINRA intends to provide further guidance on social media issues later this year. The last guidance that FINRA provided on social media issues was in Regulatory Notice 10-06, and the MoFo memo summarizes the current landscape on social media issues for FINRA-member firms.

Webcast Transcript: “Understanding the Private Company Trading Markets “

We have posted the transcript for our recent webcast: “Understanding the Private Company Trading Markets.”

– Dave Lynn

August 9, 2011

From the ABA Annual Meeting: FINRA Corporate Financing Update

Here’s a briefing, thanks to Suzanne Rothwell: Yesterday, Joseph Price, Senior Vice President, FINRA’s Corporate Financing/Advertising Regulation, briefed the ABA Subcommittee on FINRA Corporate Financing Rules on current rulemaking and matters related to the Corporate Financing Department’s review of public offerings. Joanie Ward, Shayna Richardson, and Bleecker Hawkins from FINRA’s Corporate Financing Department also participated.

Amend Rule 5110 to Address Terminated Offerings

Mr. Price explained that FINRA staff are developing amendments to Rule 5110 that will: (1) delete a provision that permits a broker/dealer to receive “tail fees” in the event of a terminated offering and(2) amend the Rule to allow the underwriting agreement to include provisions providing for liquidated damages and a right of first refusal (ROFR) in the case of terminated offerings on condition that these provisions shall not become effective if an issuer terminates a broker/dealer for cause. Termination for cause would include a failure by the firm to provide customary services.

Mr. Price stated that the staff hoped to present the proposal to the FINRA Board in September for approval of a Regulatory Notice requesting comments. After comments are considered, FINRA will present a final version of the proposal for Board approval that would be filed with the SEC for additional comment and approval.

Proposed Amendment to NASD Rule 2340 re: DPPs and REITs

The FINRA Board recently approved the publication for comment of proposed amendments to the account statement rule (NASD Rule 2340) that would require changes in how valuations are provided on account statements in the case of unlisted DPPs and REITs. Currently, NASD Rule 2340 allows broker/dealers to use the offering price or par value on customer account statements for the duration of the securities offering (which generally are at least four years and sometimes longer using two or more consecutive registration statements) until 18 months after completion of the offering. Thereafter, the issuer must provide an estimated value for broker/dealers to use on the account statements.

Mr. Price advised that the proposal would require that the account statement valuation for the security during the offering must be a net par value that is the offering price minus any front-end fees. This net par value may only be used on account statements during the “initial” offering period covered by the first registration statement. The proposal would also clarify that a broker/dealer that knows that the issuer’s estimated value is unreliable is permitted to refrain from including the issuer’s value on the firm’s customer account statements. Mr. Price stated that broker/dealers are not required to monitor each valuation for validity.

Based on Mr. Price’s explanation of the preparation of the Notice, it appears that the Notice may be published before the end of September.

Proposed Rule 5123: Filing of Private Offerings

Mr. Price advised that SEC staff have provided informal comments on a draft of FINRA’s proposal to adopt new Rule 5123 that would require that FINRA members file private placements with FINRA, unless the offering comes within a filing exemption provided in current FINRA Rule 5122, and that the offering document must disclose the intended use of proceeds and offering expenses (including placement agent compensation). FINRA’s changes to the proposal would:

1. Clarify that refilling of an amended PPM would only be necessary in the case of a “material” amendment to the PPM, such as a major change that requires recirculation or a new offering.

2. Clarify that each firm participating in a private placement will be responsible for filing because different firms may charge different fees and it may be difficult for a firm to confirm that a PPM was previously filed by another firm.

3. Revise the timing of the filing requirement to be no later than 15 days after the date of first sale in order to be consistent with Form D filing with the SEC.

Mr. Price provided an explanation of FINRA’s anticipated review methodology. FINRA appears to be developing sophisticated artificial intelligence technology to identify PPMs that meet a certain risk score, based on numbers of factors. PPMs that display sufficient risk characteristics will be reviewed by FINRA staff. All PPMs filed will also be available to FINRA examiners when they conduct an on-site examination of FINRA members.

Mr. Price explained that if FINRA identifies, for example, an issue related to the issuer’s disclosure of the use of proceeds, FINRA review will focus on the broker/dealer’s satisfaction of its due diligence obligations under FINRA Rule 2210 (the suitability rule) in light of the problematic disclosure. Mr. Price is hoping that FINRA will be able to identify problematic offerings during the offering period in order to better protect investors. In response to a question, Mr. Price explained that FINRA was not proposing to expand any of the filing exemptions in FINRA Rule 5122 despite recommendations for such changes in some of the comment letters FINRA received when it published the original version of the proposal in Regulatory Notice 11-04.

Implementation of the New COBRADesk System

Joanie Ward and Shayna Richardson provided updates on the status of the development of major changes to the COBRADesk system for use by attorneys to submit information on public offerings for review by FINRA staff under FINRA rules. FINRA staff believe that the new system will significantly facilitate the submission and review of offerings. Ms. Ward stated that she anticipated that the new system would be fully implemented by June 2012. She also stated that the COBRADesk explanatory and guidance materials will be posted on the part of the FINRA website that does not require a COBRADesk password so that they are accessible by all members and their attorneys. Ms. Richardson encouraged the attorneys to continue to provide feedback to the staff on ways to improve review procedures and advised that some of the frequent filers will be contacted to test out the new COBRADesk system.

Setting Up Government Meetings

In this podcast, Lisa Noller of Foley & Lardner discusses strategies to set up a meeting with the government, including:

– How hard is it to set up a meeting with the government?
– How do you know whether you have the appropriate people attending from the government?
– Who should you bring to the meeting?
– What should you tell the government at the meeting?
– How important is follow-up after the meeting?

Flying out early on vacation today. Dave will be manning the blog for the next week. Good time to get out of town! Sell, sell, sell…

– Broc Romanek

August 8, 2011

Proxy Access Decision: Major Impact on Other Rulemakings?

Much has been written about the DC Circuit’s proxy access decision in the Business Roundtable/Chamber lawsuit – including conjecture about what the SEC might do now regarding proxy access (see my blog with Stan Keller’s thoughts last week). As noted in this excerpt from this Covington & Burling memo, the court’s decision could have implications far beyond proxy access itself:

The SEC and other agencies will need to redouble their economic analysis in the rulemaking process. The most significant aspect of the shareholder access decision is its impact on future rulemakings by the SEC and other federal agencies. At its core, this case was about the level of economic analysis that an agency must employ when considering the potential consequences of a rulemaking. The adopting release for Rule 14a-11 included a long and detailed analysis that was intended to address the very issues that the Court ultimately concluded had been inadequately assessed in the rulemaking.

While many will observe that the Court has given the SEC a roadmap for adopting future rules, including potentially a revamped shareholder access rule, a closer reading of the opinion suggests that any such rulemaking will have to be accompanied by substantial economic analysis that may be beyond the resources that the agency can reasonably expend on any one rulemaking. Moreover, the shareholder access litigation sets a high standard for rulemaking by any agency, finding that the arbitrary and capricious standard requires a federal rulemaking to explicitly address the major comments raised in opposition to the rulemaking and provide a detailed explanation of why the rulemaking was not changed in response to such comments. In effect, this decision further elevates the importance of comment letters and even statements by dissenting agency officials.

XBRL: Liability Exemptions Phase-Out for Larger Companies

I’ve been blogging about a lot of hand-wringing by smaller companies facing mandatory XBRL and the related costs. But there is also cause for concern among larger companies as the XBRL liability exemptions are now phasing out too. As noted in this Skadden Arp’s memo:

When the SEC adopted the XBRL filing requirements in December 2008, it recognized the concerns that filers had raised about potential liabilities under the securities laws for errors and omissions in interactive data files by limiting certain liabilities for a two-year period. Each group of companies in the three-year phase-in period is provided the benefit of the two-year limited liability provisions. The limitations include deeming interactive data files “furnished” and not “filed” or part of a registration statement or prospectus for purposes of the liability provisions in Securities Act Sections 11 and 12 and Exchange Act Section 18, and exempting the interactive data file from the anti-fraud provisions of the securities laws if the company makes a good faith attempt to comply with the data tagging rules and promptly amends any deficiency after becoming aware of it.

The two-year limited liability period runs from the due date of the first Form 10-Q–exclusive of the available 30-day grace period for first-time filers noted above–for which a company was required to submit XBRL data. For the first group of companies that were required to comply with the XBRL requirements, large accelerated filers with a market cap of over $5 billion, these limited liability provisions will end on August 10, 2011. Because the filing deadline for the Form 10-Q for the period ended June 30, 2011 for large accelerated filers is August 9, 2011, the first group of companies will not lose the benefits of the limited liability provisions until they file their Forms 10-Q for the period ended September 30, 2011. Given the expiration of the limited liability periods, companies should evaluate their disclosure controls and procedures for interactive data files.

In the “Dodd-Frank Blog,” Jill Radloff provides examples of SEC filings amended to include XBRL exhibits. And for those seeking to make XBRL easier, the XBRL Challenge Contest seeks the top open source app for analyzing financial data…

The S&P Report: US Downgraded

Here’s a copy of the S&P research report that downgraded the US long-term securities late on Friday. By the way, we occasionally post research reports that are about the broader economy, etc. in the “Credit Quality Reports” section of our “Credit Rating” Practice Area.

Poll: The S&P Downgrade

Please give your anonymous vote on S&P’s decision to downgrade the US long-term securities to AA+:

Online Surveys & Market Research

– Broc Romanek

August 5, 2011

A New Shareholder Activist Tactic? Kill the Corporate Charter

As noted in this Working Assets alert, a coalition of environmental groups, led by Rainforest Action and Appalachian Voices, is calling on Delaware Attorney General Beau Biden to revoke Massey Energy’s corporate charter. According to this alert (which includes a petition for people to sign), a corporate charter can be revoked when there is “a sustained course of fraud, immorality or violations of statutory law” in Delaware. The activists are seeking to pressure Alpha Natural Resources, which acquired Massey earlier this year, to make changes to its mining operations and replace company executives. Thanks to Gibson Dunn’s Beth Ising for pointing this development out.

Potter Anderson’s John Grossbauer notes: “I don’t believe this type of activist approach has been used before in Delaware. The only thing close are the circumstances in Oberly v. Kirby where the Delaware Attorney General tried to block the sale of a control block of stock of a public company by a Delaware nonprofit corporation. The Attorney General lost this 1991 case because the Delaware Supreme Court said it was not a sale of all or substantially all the nonstock corporation’s assets given its purpose was not to hold the shares of a particular company and it needed to diversify its holdings (an issue with which the Hershey trust wrestled more recently).”

Shareholder Proposal Lawsuit: Merck Wins Summary Judgment Dismissal

As I blogged yesterday, oral argument was held in the US District Court of DC in the PETA v Merck shareholder proposal case. As reflected in this order from the court, Merck prevailed when Judge Jackson dismissed the case. People for the Ethical Treatment of Animals (known as “PETA”) was seeking a court order to force Merck to hold a special meeting – since the annual meeting had passed and the company had excluded PETA’s proposal after obtaining Corp Fin no-action relief – so that shareholders could vote on a proposal that sought to have the company disclose its use of animal testing in in-house and contracted research. As noted in this Legal Time blog:

Hall said this afternoon PETA is weighing appellate options. She noted that Jackson said during the hearing that a more appropriate remedy would have been to seek a preliminary injunction first, a strategy Hall said the group plans to employ if they bring similar suits in the future.

Moxy Vote’s Report on Results of Shareholder Proposals

Yesterday, Moxy Vote released this report providing some stats and color commentary regarding the shareholder proposals submitted by its Advocates voted upon during annual meetings during this proxy season. It’s a nice supplement to ISS’s preliminary post-season report that I blogged about a few days ago…

– Broc Romanek

August 4, 2011

Dave & Marty on Choice of Forum, Crowdfunding and Breweries

In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:

– Choice of forum provisions
– The crowdfunding phenomenon
– Breweries we’d like to buy

Stan Keller on the Future of Proxy Access

In this brief memo, Stan Keller of Edwards Angell Palmer & Dodge weighs in on the future of proxy access, including the status of the Rule 14a-8 amendment. We have posted a number of memos on proxy access in the wake of the Business Roundtable/Chamber lawsuit in our “Proxy Access” Practice Area.

Speaking of lawsuits, there will be oral argument in the US District Court of DC held today in the PETA v Merck shareholder proposal case. Here’s the complaint filed back in April.

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:

– Private Placements: New “Know Your Customer and Suitability Obligations” for Brokers
– “Fifth Analyst Call” and Reflexive Confrontation
– HSN Board Refuses to Accept Director Resignation
– The LinkedIn IPO: A Favorable Comparison to the Internet Bubble Years
– More on “Insider Trading Analysis of Sokol Charges”

– Broc Romanek