If you’re relatively new to being in-house – or you want to gain that perspective – take advantage of our new “In-House Accelerator“! This online – and offline – training program is free for members of TheCorporateCounsel.net. In addition to the “In-House Accelerator” paperback (paperback consists of 216 FAQs; here’s the “Table of Contents“), there is a series of podcasts & other comprehensive materials covering these four areas:
1. Corporate Governance
2. Proxy Season
3. ’34 Act Reporting
4. Other
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2018 Proxy Season”
Tune in tomorrow for the webcast – “Pat McGurn’s Forecast for 2018 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS to recap what transpired during the 2017 proxy season and what to expect for 2018. Please print out this “Course Materials” deck in advance.
Tomorrow’s Webcast: “Tax Reform – What’s the Final Word?”
Tune in tomorrow for the CompensationStandards.com webcast – “Tax Reform: What’s the Final Word?” – to hear Winston & Strawn’s Mike Melbinger, Choate Hall’s Art Meyers and PricewaterhouseCoopers’ Ken Stoler talk about how the new tax legislation will impact executive pay arrangements. Please print out this “Course Materials” deck (45 pages!) in advance.
On Friday, the Supreme Court announced that it would hear a challenge to the SEC’s appointment of its administrative law judges. Here’s the intro from this Bloomberg article:
The U.S. Supreme Court will decide whether the SEC’s in-house judges were appointed in violation of the Constitution, agreeing to hear a case that could upend administrative hearing systems across the federal government. The move came at the request of the Trump administration, which switched sides in November and told the justices it would no longer defend the SEC’s system.
The dispute could affect more than 100 cases currently at the SEC, along with a dozen that are on appeal in the federal courts. It also could have ramifications for other government agencies, including the Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau, which have similar systems for appointing their administrative law judges.
As we blogged at the time, the Trump Administration’s decision to change the government’s position in this case led to the SEC’s reappointment of all its ALJs in an effort to cure any constitutional defects in the appointment process. Left unanswered for now is the question of the effect that a Supreme Court decision invalidating those prior appointments would have on previously adjudicated cases.
This D&O Diary blog has more details on the case and the issues involved – and says that the case is likely to be resolved during the current term.
SEC Updates “Enforcement Manual”
Recently, the SEC updated its “Enforcement Manual” – a great resource for those dealing with SEC enforcement investigations. And second only to our “SEC Enforcement Handbook” in that area.
Also, check out this new Cleary Gottlieb blog – “Cleary Enforcement Watch” – which covers global enforcement, white collar, and regulatory trends & developments.
We haven’t blogged much about FASB’s new lease accounting standard, but now that the new revenue recognition standard’s in place, here’s a reminder – the new lease standard will go into effect for fiscal years beginning after December 15, 2018.
With the deadline approaching, FASB recently issued an exposure draft of a new auditing standard update intended to ease the implementation process. According to FASB’s press release, the proposed ASU would:
– Add an option for transition to ASU No. 2016-02, Leases (Topic 842), that would permit an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements
– Add a practical expedient that would permit lessors to not separate nonlease components from the associated lease components if certain conditions are met. This practical expedient could be elected by class of underlying assets; if elected, certain disclosures would be required.
Yeah, I could pretend that I know what this means, but that wouldn’t be a smart play. Fortunately, there’s this Thompson Reuters article on FASB’s proposed action to help us all out. Comments on FASB’s exposure draft are due by February 5th.
The FASB lease accounting standard evolved over a period of years – but this recent blog from Steve Quinlivan says that another new standard designed to address “stranded tax effects” of the new tax reform legislation is being fast tracked. On second thought, since the proposed change has only a 15-day comment period, it might be more accurate to say that it’s being strapped to a rocket sled!
SEC’s Investor Bulletin: How to Comment on Rule Proposals
Recently, the SEC issued this investor bulletin explaining how to submit comments on proposed rules. Also see our own checklist on this topic…
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net 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. Here’s some of the newer entries:
– Why You Ain’t Getting a Board Seat
– Revenue Recognition: Pre-Clearing With Corp Fin Before IPOing
– SEC Investigations: “Are We Covered?”
– HSR: Watch Out for Those Comp Awards!
– Private Funds: ’40 Act Exemptions
– Reg A+ Offerings: Frequently Asked Questions
I was excited to see this Bloomberg article about how a company accidentally ignored a comment letter from Corp Fin because the emails from the Staff went into a spam folder at the company. The reason for my excitement is this: when I started in Corp Fin in the late ’80s – back before widespread use of computers – we had to call counsel to dictate our comments over the phone!
This “pre-computer days” process had these steps from the perspective of a front-line Corp Fin examiner:
1. Since Edgar wasn’t mandatory yet, paper copies of SEC filings were delivered – and if selected for review, they would be placed in a wooden box out in the hallway that was assigned to you.
2. You would review the filing and write out your draft comments by hand.
3. Your reviewer would read your draft comments and literally cross out – or add – comments. No points off for bad handwriting! Tough love for the reviewer.
4. You would call the person whose name was on the transmittal letter. Since there no voicemail back then, you might need to try calling a bunch of times. Or you would reach a secretary and they would try to call you back a bunch of times (but you weren’t around since you were taking a nap down in the SEC’s library). Serious phone tag.
5. Dictating the comments over the phone could take as long as an hour – depending on how many comments there were (remember that you were reading the bad handwriting of the accountants on the Staff too – their comments were combined with the legal comments, just like today) and how clear your diction was (if not clear, you would need to repeat yourself multiple times).
6. Rinse, wash, repeat for each round of comments. The good ole days…but at least companies couldn’t lose their comments in a spam folder!
So the question remains, how does “disclosure controls” fit into all of this…
Here’s the intro from this blog by Cooley’s Cydney Posner:
Is it just me? Am I the only one that finds having to decipher a load of graphics in a proxy statement to be somewhat daunting on occasion? Inclusion of graphics in lieu of copious text has been almost de rigueur in proxy statements for several seasons now as a way to facilitate comprehension of sometimes complex data. And most often, those graphics are relatively effective for that purpose. As we head into the 2018 proxy season, however, this piece on CFO.com suggests that some forms of visual presentation may be, well, a lot more useful than others.
According to the article, featuring some graphics does make sense because research has shown that people “process visual information faster than verbal information. And we do it with a part of the brain that requires less energy.” That’s especially true with line and bar charts. Where things get trickier, the article suggests, is with pie charts: “a pie chart often makes it hard to figure out the exact magnitude of a data point (a slice) and uses a lot of text to display very little data. It also forces readers to rapidly move their eyes back and forth between the legend and the graphic to interpret the data. A simple table can be a lot more elegant, experts say.”
And more sophisticated tools, such as “exploding 3-D pie charts” can compound the problem, according to one academic. He also took issue with “stacked bar charts,” according to the article, “’because they make estimating the values of the variables on the top of the bars difficult.’”
Tomorrow’s Webcast: “Handling the Proxy Season – The In-House Perspective”
Tune in tomorrow for the webcast – “Handling the Proxy Season: The In-House Perspective” – to hear Intuit’s Betsy McBride, Juniper Networks’ Shahzia Rahman and Oracle’s Renee Strandness discuss how to prepare for the proxy season from the in-house perspective…
Tune in tomorrow for the CompensationStandards.com webcast – “The Latest: Your Upcoming Pay Ratio, Tax Reform & Proxy Disclosures” – to hear Mark Borges of Compensia, Alan Dye of Hogan Lovells and Section16.net, Dave Lynn of CompensationStandards.com and Jenner & Block and Ron Mueller of Gibson Dunn discuss all the latest guidance about how to overhaul your upcoming disclosures in response to tax reform, pay ratio and say-on-pay – including the latest SEC positions, as well as how to handle the most difficult ongoing issues that many of us face.
The Delaware Supreme Court found in In re Investors Bancorp Stockholders Litigation that director equity grants based on director discretion are subject to an entire fairness standard of review. According to the Court, “when stockholders have approved an equity incentive plan that gives the directors discretion to grant themselves awards within general parameters, and a stockholder properly alleges that the directors inequitably exercised that discretion, then the ratification defense is unavailable to dismiss the suit, and the directors will be required to prove the fairness of the awards to the corporation.”
Accordingly, the Delaware Supreme Court reversed the Court of Chancery’s decision which found that the stockholder ratification defense applied because the plan provided for “specific limits on the compensation of” the non-employee and executive members of the Board. The Court of Chancery had reasoned that the stockholders’ approval of the plan reflected their ratification of all of the specific awards later approved by the Board. Hence, the Court of Chancery found that the director grants should be subject to the business judgement standard of review.
Tax Reform: The Initial 162(m) Disclosures
In his blog, Steve Quinlivan listed these recent Section 162(m) disclosures:
The cash bonuses paid and equity-based awards granted to executive officers under the MIP are intended to be fully deductible under section 162(m). In addition, the Company has adopted a policy that equity-based awards granted to its executive officers should generally be made pursuant to plans that are intended to satisfy the requirements of section 162(m). However, the Compensation Committee retains discretion and flexibility in developing appropriate compensation programs and establishing compensation levels and, to the extent consistent with the Company’s compensation philosophy, may approve compensation that is not fully deductible. Also, legislation recently signed into law would expand somewhat the number of individuals covered by section 162(m) and eliminate the exception for performance-based compensation effective for our 2018 tax year.
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The Compensation Committee believes that the use of a strict formula-based program for annual awards could have inadvertent consequences such as encouraging the NEOs to focus on the achievement of one specific metric to the detriment of other metrics. In addition, tying compensation to a strict formula would not allow for adjustments based on issues beyond the control of the NEOs. The Compensation Committee recognizes that each NEO other than the CEO (each, a “Senior Executive”) may be most able to directly influence the business unit for which he or she is responsible and therefore believes it is appropriate to use negative discretion to adjust annual awards for each such Senior Executive to take into account the achievement of objectives that are directly tied to the growth and development of their respective business unit. Furthermore, with respect to our overall executive compensation program, the use of discretion provides the Compensation Committee with the flexibility to compensate our NEOs for truly exceptional performance without paying more than is necessary to incent and retain them while structuring awards to be potentially deductible as performance-based compensation under Section 162(m) of the Code, when appropriate. However, as discussed below under “Tax Considerations,” while the tax law included an exception to the $1 million limit on deductibility for “performance-based” compensation under Section 162(m) of the Code when the Compensation Committee made its fiscal year 2017 compensation decisions, this exception was repealed.
At the beginning of fiscal year 2017, the Compensation Committee approved a maximum KEIP award amount for each NEO, other than Mr. Sethi, who became an NEO at the end of fiscal year 2017. The maximum award that each NEO is eligible to receive, however, is not an expectation of the actual bonus that will be paid to him or her, but a cap on the range ($0 to the maximum amount) that an individual may be paid while maintaining the tax deductibility of the bonus as “performance-based” compensation for purposes of Section 162(m) of the Code. See “Tax Considerations” below for a brief discussion of the “performance-based” compensation exception under Section 162(m) of the Code and its repeal. As described above in our “Compensation Philosophy,” the Compensation Committee has historically exercised negative discretion to pay significantly less than the maximum amount available to the NEOs under the KEIP award pool based on its evaluation of the achievement of business unit, Company-wide and individual performance measures for such NEOs, as described above in this CD&A.
In evaluating compensation program alternatives, the Compensation Committee considered the potential impact on the Company of Section 162(m) of the Code. Section 162(m) limited to $1 million the amount that a publicly traded corporation, such as the Company, may deduct for compensation paid in any year to its chief executive officer and certain other named executive officers (“covered employees”). At the time the Compensation Committee made its compensation decisions, the tax law provided that compensation which qualified as “performance-based” was excluded from the $1 million per covered employee limit if, among other requirements, the compensation was payable only upon attainment of pre-established, objective performance goals under a plan approved by our stockholders. However, this exception was repealed in the tax reform legislation signed into law on December 22, 2017. As a result, it is uncertain whether compensation that the Compensation Committee intended to structure as performance-based compensation under Section 162(m) will be deductible.
As a general matter, in making its previous NEO compensation decisions, the Compensation Committee endeavored to maximize deductibility of compensation under Section 162(m) to the extent practicable while maintaining competitive compensation. The Compensation Committee, however, believes that it is important for it to retain maximum flexibility in designing compensation programs that are in the best interests of the Company and its stockholders.
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Salaries are deductible, except for the portion of the CEO’s salary in excess of $1 million. The Compensation Committee designs the ACIP and equity awards, including RSUs that have a financial performance threshold, to comply with the requirements for tax deductibility under Internal Revenue Code Section 162(m) (Section 162(m)), to the extent practicable. The Compensation Committee considers tax reform enacted under the Internal Revenue Code on an annual basis when designing the compensation programs.
To maximize tax deductibility, amounts earned under the ACIP are designed to qualify as performance-based compensation under Section 162(m). This design provides that if certain financial objectives are met, our executive officers may receive up to 2x their target amounts, subject to the Compensation Committee’s negative discretion to pay any amount less than the maximum.
RSUs generally vest in equal annual installments over three years. The RSUs also include a requirement that the Company must meet an adjusted GAAP operating income target (over a 6-month period) in order for them to vest, which is intended to qualify the RSUs for tax deductibility under Section 162(m).
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Section 162(m) of the Internal Revenue Code generally places a $1 million limit on the amount of compensation a company can deduct in any one year for certain executive officers. While the Compensation Committee considers the deductibility of awards as one factor in determining executive compensation, the Compensation Committee also looks at other factors in making its decisions, as noted above, and retains the flexibility to award compensation that it determines to be consistent with the goals of our executive compensation program even if the awards are not deductible by Apple for tax purposes.
The 2017 annual cash incentive opportunities and performance-based RSU awards granted to our executive officers were designed in a manner intended to be exempt from the deduction limitation of Section 162(m) because they are paid based on the achievement of pre-determined performance goals established by the Compensation Committee pursuant to our shareholder-approved equity incentive plan. In addition, the portion of Mr. Cook’s 2011 RSU Award subject to performance criteria with measurement periods that begin after the June 21, 2013 modification was designed in a manner intended to be exempt from the deduction limitation of Section 162(m).
Base salary and RSU awards with only time-based vesting requirements, which represent a portion of the equity awards granted to our executive officers, are not exempt from Section 162(m), and therefore will not be deductible to the extent the $1 million limit of Section 162(m) is exceeded.
The exemption from Section 162(m)’s deduction limit for performance-based compensation has been repealed, effective for taxable years beginning after December 31, 2017, such that compensation paid to our covered executive officers in excess of $1 million will not be deductible unless it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017.
Despite the Compensation Committee’s efforts to structure the executive team annual cash incentives and performance-based RSUs in a manner intended to be exempt from Section 162(m) and therefore not subject to its deduction limits, because of ambiguities and uncertainties as to the application and interpretation of Section 162(m) and the regulations issued thereunder, including the uncertain scope of the transition relief under the legislation repealing Section 162(m)’s exemption from the deduction limit, no assurance can be given that compensation intended to satisfy the requirements for exemption from Section 162(m) in fact will. Further, the Compensation Committee reserves the right to modify compensation that was initially intended to be exempt from Section 162(m) if it determines that such modifications are consistent with Apple’s business needs.
Nothing drives me crazier than going to a conference & hearing a panel spend time talking about the “tone at the top.” It’s high-level governance stuff that everybody clearly knows is important. It’s “Parenting 101” – if your parents weren’t good ones, odds are that you had somewhat of a crappy childhood. That’s “tone at the top.”
But just because everybody knows about it, that doesn’t mean ‘good tone’ is widespread. In fact, sound management is quite rare in my experience. I can think of a number of governance organizations that appear to have poor management! And that shouldn’t be surprising given that quite a few folks get tasked with running an organization without any prior management experience – nor do they even recognize that management is a learned skill. They need training. To be honest, you can count me among those in that boat! But in my defense, I don’t really manage anyone – I just “coordinate” our team here. Just the type of thing any bad manager tells themselves, right?
Anyway, Cooley’s Cydney Posner blogged about the NACD’s new report on culture. I received it a while back & posted it in our “Code of Ethics” Practice Area – but couldn’t bring myself to blog about it for the reasons stated above. Sound management starts with a heavy dose of self-awareness by the board & senior management team…
Interactive Tool: Researching Boards Around the World
Pretty cool. Spencer Stuart has an interactive tool that will allow you to compare global board trends in governance, compensation & more. It’s worth checking out as more institutional investors apply an international outlook to their investments.
– Utilizing Social Media in Proxy Contests
– Planning for M&A Cybersecurity Risks
– True-Ups After Chicago Bridge: The Two Sides to Working Capital Adjustments
– Valuation Analysis: Key to Avoiding Failed M&A Deals
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
When Reg FD was adopted back in 2000, some predicted the death of the investor “one-on-one” – private meetings between investors and top corporate brass. That prediction turned out to be about as accurate as the one that said we’d all be flying our jetpacks to work by now.
Instead, these meetings remain common, particularly among companies seeking to raise their profile with investors. But now the smarty-pantses at Harvard Business School have published a new study that looks what gets asked at those meetings. While a lot of questions are pretty mundane – e.g. “what keeps you up at night?” – some clearly represent an effort to obtain more timely information about companies than what’s been publicly disclosed. Check out this excerpt:
The cash balance of the firm two months after the release of the quarterly report may be stale information. Understanding whether the firm has sufficient cash to continue operations may be salient for an investor’s investment decision so the investor will seek more timely information from management. From a regulatory perspective, timely questions appear to pose the greatest regulatory risk for managers in responding. Nonetheless, we find that most private interactions include at least one timely question posed to management.
Representative examples of timely questions include:
– “How much cash do you have now?”
– “Do you know additional sell side analysts that will be launching initiation reports?”
– “Are you done with recruitment or still enrolling?”
– “Are the Q2 earnings call expectations still valid?”
Management’s responses to any of these questions may raise Reg FD issues – and reaffirming quarterly guidance has been specifically flagged by the Staff as a problem under Reg FD. The study’s results suggest what many of us have long thought – that these private investor meetings are an FD compliance minefield.
Governance Survey: Silicon Valley v. S&P 100
The latest edition of Fenwick & West’s annual governance study surveys the governance practices of companies in the Silicon Valley 150 Index and compares them with those found at S&P 100 companies. Here are some of this year’s highlights:
– Adoption of dual-class voting stock structures has emerged as a recent clear trend among the mid-to-larger SV 150 companies. 11% of Silicon Valley companies surveyed had dual-class structures in 2017 compared to 9% of the S&P 100.
– Classified boards are now significantly more common among SV 150 companies than among S&P 100 companies. Compared to the prior year, classified boards remained fairly consistent, holding steady at slightly less than 7% for the top 15 companies in the SV 150 while the S&P 100 has been at 4% since 2016.
– Fewer Silicon Valley companies have adopted majority voting policies than their S&P 100 counterparts. Approximately 60% of the SV 150 companies have majority voting policies, compared with 97% of the S&P 100.
– 2017 continued the long-term trend in the SV 150 of increasing numbers of women directors and declining numbers of boards without women members. the rate of increase in women directors for SV 150 overall continues to be higher than among S&P 100 companies. When measured as a percentage of the total number of directors, the top 15 of the SV 150 now slightly exceed their S&P 100 peers (the top 15 averaged 25.4% women directors in the 2017 proxy season, compared to 23.9% in the S&P 100).
The study also addresses other governance metrics & tracks changes over time.
Buybacks: Primed for a Tax & Activist Driven Comeback?
I recently blogged about reports on the decline in stock buybacks during most of 2017. Well, it looks like those might come roaring back to life in the new year. This article from “TheStreet.com” says that stock buybacks will be driven by an increased ability to repatriate foreign cash – and pressure from activist hedge funds. Here’s an excerpt:
Activists typically pressure corporations with a lot of cash on their balance sheet to either spend it on the business, launch a big stock buyback program or issue a special dividend. In many cases, corporations have put their cash overseas to avoid U.S. taxes. However, the historic passage of a $1.5 trillion tax overhaul legislation is expected to change the calculus on off-shore cash, considering that a vital component of the package is a provision imposing a low 15.5% repatriation tax for money held offshore. Expect the rule to drive activist hedge funds to put new pressure on companies to repatriate cash, then distribute it to shareholders.
On the other hand, not everybody is buying into this narrative – this Bloomberg article suggests that most Wall Street analysts expect companies to use their tax windfall to increase their capital investments.
Here’s the results from our recent survey on director compensation in the wake of the 2015 Citrix decision:
1. When it comes to limits on our director pay:
– Yes, we have adopted limits since Citrix – 51%
– Yes, we had limits even before Citrix – 22%
– No, we don’t have limits – 26%
2. For those that have limits, our limits apply to:
– Cash only – 0%
– Equity only – 56%
– Both cash & equity – 44%
3. For those that have equity limits, our limits are based on:
– Dollar limit – 85%
– Share limit – 33%
4. For those that have limits, our limits are based on:
– Multiple of annual compensation – 35%
– Maximum number based on estimates of future compensation for a set period – 36%
– Other – 35%
5. For those that have limits, our limits are based on:
– Peer review – 43.6%
– What we could derive from the case law & settlements – 20.0%
– Our discretion – 58.2%
– Other – 16.4%
Privilege: “Oral Download” of Investigation Results to SEC May Waive Work-Product Protection
This Cleary memo addresses a recent decision by a Florida federal magistrate that could throw a monkey-wrench into a common method of informing the SEC’s Enforcement Division about information obtained in an internal investigation.
It’s not unusual for outside counsel retained to conduct that investigation to share factual information conveyed in witness interviews with the Division of Enforcement. That’s frequently done orally, and under the assumption that conveyance of this information won’t waive the protection of the attorney-work product doctrine for the underlying documentation of those interviews. The memo says this decision calls that assumption into question. Here’s the intro:
On December 5, 2017, Magistrate Judge Jonathan Goodman in the United States District Court for the Southern District of Florida held in SEC v. Herrera that the “oral download” of external counsel’s interview notes to the Securities and Exchange Commission (“SEC”) waived protection from disclosure under the attorney work product doctrine. In the same order, Magistrate Judge Goodman held that providing similar access to the client’s auditor did not result in a waiver.
As a result of the decision, the law firm was ordered to disclose to certain former employees of its client the interview notes that were orally conveyed to the SEC. The firm subsequently moved for clarification or reconsideration of the order – and an evidentiary hearing is scheduled for January 10th.
Coming Attractions: Securities Class Actions for Cyber Breaches
This Davis Polk memo says that securities class actions surrounding cybersecurity breaches are just a trickle now – but may soon become a wave:
The existence of securities fraud litigation following a cyber breach is, to some extent, not surprising. Lawyer-driven securities litigation often follows stock price declines, even declines that are ostensibly unrelated to any prior public disclosure by an issuer. Until recently, significant declines in stock price following disclosures of cyber breaches were rare. But that is changing. The recent securities fraud class actions brought against Yahoo! and Equifax demonstrate this point; in both of those cases, significant stock price declines followed the disclosure of the breach. Similar cases can be expected whenever stock price declines follow cyber breach disclosures.
The memo addresses emerging theories of liability in these cases & steps that companies can take to reduce their risk of a securities class action in the event of a cyber breach.
Last month, the WSJ published an investigative report that suggested that hundreds of corporate insiders frequently had uncanny timing when it came to gifts of company stock.
The WSJ examined 14,000 donations of stock to private foundations by insiders – and found that 3x as many were made before price declines of 25% or more than were made prior to comparably-sized price increases. It quoted a professor as saying that the chance that this kind of timing could result from random luck is “extremely small.” If luck’s not involved, what’s behind the fortuitous timing of these gifts? This excerpt speculates that this may be a case of old wine in new bottles:
Good luck or coincidence is one explanation for many of the well-timed stock gifts. Academic researchers say another possible explanation for some, given the outsize number of such gifts, is that some donors might be guided by inside information or backdating their stock gifts. Legal experts don’t agree on whether donating based on nonpublic information would be unlawful. Backdating a gift could be tax fraud, tax lawyers said.
When I first read this story, I thought the use of inside information was a more plausible explanation than backdating. Even after the Supreme Court’s decision in Salman, it’s not at all clear that a stock gift can give rise to insider trading liability. What’s more, some insider trading policies don’t apply to gifts of stock, it’s certainly plausible that insiders might capitalize on non-public information when it comes to gifting stock.
On the other hand, I was pretty skeptical about the idea that people are backdating gifts. I’ve been involved with a number of gifting situations involving insiders over the years – and large gifts usually involve pretty extensive planning by wealthy, well-advised individuals. So, I guess I wasn’t surprised that research showed that their timing is generally pretty good. But Broc reminded me that this is the kind of thing people said about options backdating a decade ago as well, so I did a little digging.
The most interesting thing I found was this study by an NYU professor referenced in the WSJ report. That study reached similar conclusions about the timing of CEO stock gifts almost a decade ago. It concluded that legal use of inside information could be part of the story, but also flagged evidence that strongly suggested that some insiders were backdating gifts as well:
Tests used to infer the backdating of executive stock option awards yield results consistent with the backdating of CEOs’ family foundation stock gifts. For instance, I find that the apparent timing of certain subsamples of family foundation stock gifts improves as a function of the elapsed time between the purported gift date and the date on which the required stock gift disclosure is filed by the donor with the SEC. This association between reporting lags and favorable gift timing does not hold for CEOs’ stock gifts to other recipients. Stock gifts of all types, including family foundation gifts, are also timed more favorably if they are larger and if they occur in months other than December, when many tax-driven charitable contributions ordinarily take place.
Ahem… well, it looks like my skepticism may just turn out to have been naivete. This could get interesting. . .
Insider Loans: SEC Brings a Rare Enforcement Proceeding
Since we’re sort of taking a stroll down memory lane today, I thought it was appropriate to flag this recent blog from Steve Quinlivan about a recent enforcement proceeding involving violations of Sarbanes-Oxley’s prohibition on loans to insiders. Here’s an excerpt summarizing the proceeding:
According to the SEC in an order settling an enforcement action, Alan Shortall was CEO and Chairman of Unilife Corporation, a Nasdaq listed issuer. According to the SEC, Shortall arranged for Unilife to make personal payments on his behalf aggregating approximately $340,000 over four years. The advances were outstanding for five to 36 days. According to the SEC, this violated provisions of the Sarbanes-Oxley Act which prohibits public companies from making loans to directors and executive officers, as codified in Section 13(k) of the Exchange Act.
In addition, an unnamed director of Unilife was going default on loans secured by a pledge of Unilife shares. Shortall agreed to arrange for Unilife to cover the loans. As Shortall understood Unilife could not loan money to the director, Shortall told the Chief Accounting Officer the loan was for the benefit of an external consultant. The SEC also found these transactions violated Section 13(k) of the Exchange Act.
Our more veteran readers may remember how much angst Sarbanes-Oxley’s prohibitions on loans to insiders caused at the time of their enactment. Interestingly though, it hasn’t resulted in a lot of enforcement activity. There may be a few others, but I’m only aware of one other enforcement proceeding dealing with loans to insiders – and that was way back in 2005.
First backdating & now loans to insiders – I think it may be time to get a MySpace account…
Audit Reports: PCAOB Staff Updates Guidance
I recently blogged about the PCAOB Staff’s implementation guidance on the new audit report regime. Last week, the Staff issued updated guidance providing additional information on determining auditor tenure – see page 4 of the updated document. We’re posting memos on the new audit report standard & the implementation guidance in our “Audit Reports” Practice Area.