Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Last week, the Financial Times ran a special supplement in honor of its 125th anniversary and they duplicated their front page from February 13, 1888. (I magnified the font size and it’s still hard to read; no wonder everybody wore bifocals.) On this ancient front page, there’s a letter to the editor in which a disgruntled shareholder of the Metropolitan District Railway gripes about the “most depressing character” of the company’s six-month results and calls for the shareholders to oppose the re-election of the chairman and all board members, demand the resignation of all directors and managers, and call a special shareholders meeting to appoint a special investigative committee. Just goes to show you there is nothing new in the world of shareholder feistiness!
In addition, check out the notice in the last column about some guy who disavows his involvement with a certain prospectus. That is why the Securities Act requires signatures and consents. Also, there were a disturbing number of notices under “Latest Shipping News” about shipwrecks and the like. Harrowing times back then.
Wanna Make a Bundle? Read Some Corp Fin Comment Letters!
Interesting Bloomberg article that claims that a short seller named Muddy Waters made a mint – and caused $7 billion in losses for Chinese stocks – by simply reading through comment letters Corp Fin had uploaded to Edgar. Hat tip to Lois Yurow for pointing this out!
Screening Existing Directors for Independence
In this podcast, John DiRocco of Sunoco provides some practical guidance about how to screen existing directors for independence issues, including:
– How often should companies screen existing directors for independence conflicts?
– How should the screening be performed (oral, written, etc.)?
– What types of circumstances indicate that there should be follow-up diligence?
– How much time does a typical screening take?
– Any practical tips on how to screen?
Yesterday, Corp Fin posted this useful guide that foreign private issuers can use to determine how to access the US capital markets.
SEC Chair Walter on Sophisticated Technology
A few days ago, SEC Chair Elisse Walter delivered this speech on technology. This was not a social media speech – in fact, “social media” was not mentioned. Rather, it was a speech about sophisticated technologies with numerous acronyms (along with explanations of what they meant), all of which I didn’t recognize. See if you do:
– MIDAS
– CAT
– Reg SCI
– ARP
– API
– TCR
– ABAP
Meanwhile, this Washington Post article notes that Chair Walter is pressing forward even though Mary Jo White is on deck. Chair Walter delivered this testimony to Congress last week on the SEC’s state of affairs. And Commissioner Luis Aguilar delivered this speech yesterday on proxy disclosure…
Harriet Pearson on Sen. Rockefeller’s Cybersecurity Approach
In this podcast, Harriet Pearson of Hogan Lovells provides analysis into Sen. Rockefeller’s survey of corporate responses to his cybersecurity questionnaire and the overall challenges in this area (check out the “Chronicle of Data Protection Blog” that Harriet contributes to), including:
– Why is cybersecurity a hot topic for lawyers now, and not just IT?
– Tell us a little bit about yourself and your practice. In particular, about your experience at IBM and how that’s relevant to cybersecurity.
– Senator Rockefeller recently published a report on his interactions with the CEOs of a number of US companies on cybersecurity. What did he – and they – say, and what’s the significance of that?
– What is driving Rockefeller?
– So it seems that concern about this issue on the part of Senator Rockefeller, the President, the SEC and others, will not go away. Do you agree? Where is cyber-security on the policy curve for legislation and regulation?
– What about the SEC? How is that regulator looking at this set of risks?
– Since it’s not going away as a policy and political issue, what do you recommend companies do to manage the risk back at their companies?
Gunster’s Robert White blogs about how cybersecurity legislation continues to move forward…and this time perhaps without resistance from the Fortune 500. And there is this Executive Order from President Obama last week for government and companies to jointly create a framework to share information on cyberattacks for critical infrastructure.
Here are survey results on how companies use rules of conduct for their board meetings and annual meetings:
1. At our company, we:
– Have formally adopted Robert’s Rules of Order for all Board and Board committee meetings – 3%
– Sometimes use Robert’s Rules of Order for Board and Board committee meetings – 6%
– Reject the idea of adopting Robert’s Rules of Order for Board and Board committee meetings – 18%
– Have not considered adopting Robert’s Rules of Order for Board and Board committee meetings – 72%
2. At our company, we:
– Have formally adopted Robert’s Rules of Order for all annual shareholder meetings – 3%
– Sometimes use Robert’s Rules of Order for annual shareholder meetings – 12%
– Reject the idea of adopting Robert’s Rules of Order for annual shareholder meetings – 16%
– Have not considered adopting Robert’s Rules of Order for annual shareholder meetings – 69%
3. When we use Robert’s Rules of Order for a shareholder meeting, our parliamentarian typically is:
– Board Chair – 25%
– General Counsel – 58%
– Other in-house lawyer – 8%
– Corporate Secretary (if different than above) – 0%
– Someone else within the company – 8%
– Someone else outside the company – 0%
Please take a moment to participate in our “Quick Survey on End-User Exception for Swaps” and “Quick Survey on Shareholder Engagement.”
Our “Q&A Forum”: The Big 7500!
In our “Q&A Forum,” we have blown by query #7500 (although the “real” number is much higher since many of the queries have others piggy-backed on them). I know this is patting ourselves on the back, but it’s nearly ten years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been nearly 25,000 questions answered.
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don’t contain legal advice.
Pledging & Hedging: Sample Insider Trading Policy Language
We suggest inclusion of the language below in insider trading policies as a possible response to the new ISS voting guidelines for pledging and hedging. Companies will need to decide whether to narrow the language to just “executive” officers (ISS uses the term “executives”) and whether to define “significant” (ISS does not). Also, a few companies already prohibit all pledging, and not just significant pledging, and companies may want to consider that approach as well, although we view that approach as a bit harsh.
Board members and officers are prohibited from, directly or indirectly, [pledging and hedging any of the Company’s equity securities] [(1) pledging a significant number of the Company’s equity securities, or (2) hedging with respect to any of the Company’s equity securities]. For these purposes, [(a)] “pledging” includes the intentional creation of any form of pledge, security interest, deposit, lien or other hypothecation, including the holding of shares in a margin account, that entitles a third-party to foreclose against, or otherwise sell, any equity securities, whether with or without notice, consent, default or otherwise, but does not include either the involuntary imposition of liens, such as tax liens or liens arising from legal proceedings, or customary purchase and sale agreements, such as Rule 10b5-1 plans[, and (2) “significant” means [the lesser of] 1% of the Company’s outstanding equity securities [and 50% of the equity securities of the Company owned by the board member or officer]]. Also for these purposes, “hedging” includes any instrument or transaction, including put options and forward-sale contracts, through which the board member or officer offsets or reduces exposure to the risk of price fluctuations in a corresponding equity security.
“Equity securities” include common stock, voting preferred stock and options and other securities exercisable for, or convertible into, settled in, or measured by reference to, any other equity security determined on an as-exercised and as-converted basis.
The equity securities attributable to a board member or officer for these purposes shall include equity securities attributable to the board member or officer under either Section 13 or Section 16 of the Securities Exchange Act of 1934. [Equity securities that are pledged shall not be counted toward board member and officer ownership requirements.]
Good grief. The sequestration takes effect a week from this Friday – March 1st – and Congress is on a lengthy break. So it looks quite possible that it won’t be averted this time. As noted in this Reuters article, the automatic budget cuts could affect not only the SEC and CFTC, but also the PCAOB even though it is a self-funded non-profit that doesn’t rely on Congressional appropriations. More to come as the sequestration becomes “real”…
SEC Approves the PCAOB’s Budget
Last week, the SEC approved the PCAOB’s budget of $245.6 million (8% more than last year) – funded primarily by an accounting support fee of $234 million. Here are remarks from Chair Walter and Commissioner Aquilar. In his remarks, Commissioner Gallagher notes that it’s possible for the SEC to approve the PCAOB’s budget in private (but that he is glad that the SEC doesn’t do that).
Auditors Under Scrutiny Get More Serious About Internal Controls
Apparently, when the PCAOB complains about the quality of auditors’ review of internal controls (see News Brief dated 12/10/12, where the PCAOB found problems in connection with audits of internal control in 22% of the cases inspected), the auditors take heed and put the heat on their company clients, at least according to this article in Compliance Week. It appears that auditors are, in fact, looking for more audit evidence and documentation and applying greater skepticism and scrutiny.
The article reports that some audit committee members are hearing “presentations from audit firms explaining how they plan to approach controls differently going forward. ‘They’re basically saying they’re being responsive to the findings in the inspection reports, and that’s increasing the work,'” commented one committee member. That same member indicated that he expected “auditors to spend more time creating flowcharts of processes and transactions to identify potential sources of misstatement. ‘Under auditing standards, you have to have an understanding of the flow of transactions as a basis for setting the scope of audit work….The PCAOB has formed a view that a lot of audits are not sufficient in documenting the flow of transactions, so the firms are moving to flowcharting.'”
The article also reports that auditors will also be “asking more questions and performing more documentation on the skills and qualifications of individuals within the company who perform various control activities. As an example, [the committee member said], most control systems have some kind of reconciliation procedure, such as reconciling a bank account to a master account. Typically, auditors accept the qualifications and the details of the reconciliation without a great deal of questioning, he says. ‘The board now is saying they think auditors should get into the detail of who did the reconciliation and how that person performed the reconciliation….If you rely on a review of the reconciliation as a control, you ought to talk to the person who does it and determine what they do when they review it.'”
Another commentator noted that “internal auditors likely do not perform documentation to the level of detail that external auditors are now demanding, … because they work more closely on a daily basis with the processes…. [C]onsensus is still very much developing on what external auditors need to do to gain the PCAOB’s approval during inspections. ‘In some areas, external auditors are just not sure what’s going to satisfy the reviewers….They’re not always clear on what’s needed or not needed.'”
Apparently, the issue of who will bear the costs has not often been raised with audit committees. “‘Establishing or creating more audit evidence means doing more work, and that means incurring more cost….The cost needs to be shifted somewhere. The cost is absorbed either by paying for it directly with the external audit costs going up, or by absorbing it internally as the company does more documentation and more work.'”
Meanwhile, this Reuters article details how PCAOB Chair Jim Doty is saying that the PCAOB may take enforcement action against China-based auditors if it cannot obtain access to the audit papers of China-based companies.
Let’s gear up for the ’13 proxy season with a little humor. Proposal #12 from this Form 6-K filed by Nomura Holdings – a Japanese investment and financial services company – is quite an eye-opener. This shareholder proposal – entitled “Amendment to the Articles of Incorporation (Regarding overhaul of basic daily movements)” – would require that all toilets in the company’s offices be Japanese-style toilets, which are on the floor requiring the user to squat. The proponent’s reason for the proposal is that the company is on the verge of bankruptcy and it is time to get serious. Or more specifically as noted in this article:
“cannot avoid bankruptcy if it merely adopts a spiritual approach such as encouraging sales persons to speak in a loud voice, but the company can surely avoid failure if they straddle over a Japanese-style toilet every day and strengthen their lower body.”
Anyways, be glad that you are not dealing with shareholder proposals in Japan. As noted in this Huffington Post article, the proponent who submitted this toilet proposal had submitted a total of 100 proposals to Nomura, of which only 18 were accepted for the ballot. I didn’t do diligence to rifle through the 19 proposals to be voted upon and see if they were from the same proponent – but the title of Proposal #5 did catch my eye: “Amendment to the Articles of Incorporation (Regarding limit on the ratio of personnel expense to income and giving three banzai cheers)”…
Two Reports on Shareholder Proposals: Environment, Social & Declassification
– 48 S&P 500 companies entered into agreements to move toward declassification;
– 38 successful precatory proposals, with average support of 82% of votes cast;
– Over 60% of successful precatory proposals by public pension funds and over 30% of all successful precatory proposals; and
– 42 board declassifications, reducing the number of classified boards among S&P 500 companies by one-third.
You Commit Fraud in China? Death
As noted in this article from way back, two brothers and their father were sentenced to death recently for cheating 15,000 investors out of over $1.1 billion. And this Bloomberg article notes how a woman was sentenced to death for engaging in a $113 million fraud a few years back…
Move over Dave & Marty! Ginny & Broc are gonna give you a run for your entertainment dollars. In this podcast, Ginny Fogg of Norfolk Southern provides some insight into how to handle shareholder proposals, including:
– What is your shareholder proposal intake process (eg. who gets copies and is there a log)?
– What are the steps in deciding how to react to a shareholder proposal?
– What do you do for relief during the proxy season?
– Who drafts and reviews a statement in opposition to a shareholder proposal?
– What is a typical gameplan in handling a shareholder proponent who says they are coming to the annual meeting?
Last week, I asked “how many firms does it take to reach a consensus?” I received many responses but this one was the most clever: “It takes 10 for a minyan (quorum) in Judaism. That sounds like a good number for a consensus.”
Conflict Minerals Briefs: More Coming In!
Recently, I blogged that briefs were being filed in the conflict minerals lawsuit filed by the Chamber. Here is a Compliance Week article and a Davis Polk blog discussing these briefs in more detail…
The Ongoing Saga of Judge Rakoff & the SEC
For several years, Judge Jed Rakoff has been rejecting SEC settlements because he thinks they are too soft – particularly the agency’s practice of allowing companies to settle fraud cases without having to admit that they had done anything wrong. This DealBook article lays out the oral arguments before a federal appeals court in the SEC v. Citigroup case. And here is a “Securities Law Prof Blog” about it…
Yesterday, the Senate Banking Committee announced its agenda for this term of Congress. Not sure it really says all that much…
SEC Issues FAQs on Broker-Dealer Registration Exemption for Rule 506 Offerings
David Jenson of Leonard, Street and Deinard provides us this blog about how the SEC released FAQs last week regarding Section 201 of the JOBS Act, which offers a new limited exemption from broker-dealer registration. Anna Pinedo of Morrison & Foerster blogs this about the FAQs:
Title II of the JOBS Act formalizes the guidance that has been provided by the SEC in various no-action letters relating to the types of activities that may be conducted by matchmaking sites without requiring broker-dealer registration. Section 201 notes that a matchmaking site will not be required to register as a broker-dealer solely by virtue of its private capital raising activities (which may include the use of general solicitation) provided that it complies with specified conditions.
The FAQs clarify that this provision does not require further rulemaking, but notes that a platform cannot permit an issuer to conduct a general solicitation in a Rule 506 offering until the SEC promulgates its final rules. The FAQs note that the exemption from broker-dealer registration in this section is applicable only when securities are offered and sold pursuant to Rule 506. The FAQs also address compensation and note that “Congress conditioned the exemption on a person and its associated persons not receiving any “compensation” in connection with the purchase or sale of such security.” Congress did not limit the condition to transaction-based compensation. The staff interprets the term “compensation” broadly, to include any direct or indirect economic benefit to the person or any of its associated persons. At the same time, we recognize that Congress expressly permitted co-investment in the securities offered on the platform or mechanism. We do not believe that profits associated with these investments would be impermissible compensation for purposes of Securities Act Section 4(b).” To this end, the FAQs note that a venture fund may operate a matchmaking site.
The FAQs also note that the availability of the exemption from broker-dealer registration should not be construed as suggesting that the entity is not otherwise a “broker” or a “dealer” and refers to its guidance on the types of activities typically associated with broker-dealer status. The Staff also notes that the JOBS Act exemption does not address state registration requirements.
Below is Part 3 of a collection of memories from members about working at the printers (here’s Part 1 and Part 2). Please keep them coming and I will only blog them if you give me permission, and you can determine whether you want attribution or anonymity:
– Always fun to watch the linotype in action with the lead slugs lined up upside down and backwards.
– Back in 1988, I was an administrative clerk (basically a sub-paralegal (I was still in college, on break)) at a large NYC white shoe firm. It had been raining for about 4 days straight. I had been working late, and was waiting at my desk reading the paper waiting for a car (due to the rain, there was quite a delay). Around 10pm, I got a frantic call from the paralegal coordinator who said she had been calling every paralegal in the firm and asked me to take on the following task. I said OK.
A client wanted to file a debt registration statement with the SEC before its annual meeting the next morning. I was tasked with getting the registration statement filed (although I am now a securities lawyer, I did not have any securities background then). I took a car to the printer and waited (luckily, the Mets were on the West Coast and I watched the game while drinking a beer). Around 1am, the 12 copies were ready and I got in a car to drive to DC (remember, it has been raining for 4 days and the planes were iffy; the first train wouldn’t get me there in time). We started the drive to DC, the driver, me and the “Box.”
Every hour, we had to pull off the road (no cell phones then!) and call the printer to confirm our location and that we were OK. The reason: there was another car following an hour behind us, with a duplicate Box. That driver was also calling in every hour and would be in position to meet up with us if we had any car trouble or an accident, etc. Note that the client had initially tried to get the partner to take this journey, then the associate, finally agreeing to a paralegal (I guess I was close enough…).
Anyway, we got to DC safely at around 6:30am, I dropped the box with one of our DC paralegals, at her house, and then I called the partner to find out what to do next. He said “go watch it get filed at the SEC.” So, the driver and I went to grab breakfast, and I went to the SEC at 9 or 9:30 and watched the documents get filed. Then, I called the partner again to confirm the filing, and since the skies were now sunny asked if I could take a flight back to NY rather than getting back in the car. He said yes, thankfully.
– Many years ago I was working on a tiny IPO for a high end winery. The wine lovers among the lawyers, bankers and accountants had fought to get on the deal, but for me it was just the luck of the draw. Late one night at the printer, people started going around the table describing their wine collections, which gave me pause since I had none – until they got to the young banker next to me who said, “I have a bottle of Chablis in the fridge and a liquor store at the corner!”
– My securities practice started as a junior associate in 1996. I had my first child in 2007 and that coincided with so much more being done via email and without in-person printer sessions (coupled with the coming recession) which was great for motherhood and a part-time practice, but I will admit that I missed the days gone by. I met my husband at Donnelley, I was designated underwriters’ counsel and he was issuer’s counsel and we worked together on probably 50 deals before we got married in 2004 (upon which I was understandably conflicted out of being underwriters’ counsel on those deals).
My favorite memory was on a deal at Merrill in NYC back in the late 1990s. It was a 144A deal with a sub-investment grade issuer, when non-GAAP numbers were often central to offering memorandums. It also happened to be my 30th birthday, and in the hey-day of lavish printer sessions. Not only did Merrill bring out a tiered birthday cake during lunch, but they presented me with a bottle of Veuve Clicquot champagne, gratis from the printer.
As all of this was happening though, the business people and investment bankers decided to sidebar into another room while the lawyers and accountants continued to work on the OM and circle the numbers needing back-up. Several hours passed and it occurred to us that we hadn’t seen the business people in a long while. Someone had the guts to go to the sidebar room only to find that it was empty, they had all just left. Finally a junior investment banker made his way into our conference room and told us to halt our work immediately, the deal was off, and everyone should collect the final drafts of things and go back to their offices and wait for instruction from their clients.
There was my cake still on its rolling card with a white table cloth over it in the corner, it had yet to have a single piece cut out of it. We all quickly tried to gather the most recent scribner’s drafts and box those up to be shipped back to our firms and make quick arrangements for cars and flights (oh how easy it was those days to arrive at LaGuardia and get to the gate even though your ticket was for a later flight and have the attendant let you on an earlier flight with just 6 minutes to spare).
I grabbed the unopened bottle of champagne and had it sent back to me at my firm (sandwiched between stacks of documents in a bankers’ box). I preserved the bottle even as I moved several times. In fact, when my husband and I got married in 2004,I decided to save a few bucks on what was turning out to be a very expensive wedding and use that bottle of champagne for our wedding toast. Imagine my surprise when the bar tender poured us our champagne in front of 300 guests for the toast and it was rose champagne, not clear! In all of our pictures, it looks like we are drinking fruit punch out of champagne glasses. I had never read the bottle to see what kind of champagne it was, I just knew the great maker. Thanks Merrill!!
Transcript: “The ‘Former’ Corp Fin Staff Speaks”
We have posted the transcript for our recent webcast: “The ‘Former’ Corp Fin Staff Speaks.”
Webcast: “Projections, Prospects & Other Crystal Ball Provisions: Colliding with 20/20 Hindsight”
Last week, I complained about how some folks may have missed the news that a new wave of say-on-payish & proxy disclosure litigation has been rampant for the past 4 months – including the transcript from the recent CompensationStandards.com webcast on the topic. Thanks to Mike Melbinger, I have posted numerous complaints and other pleadings from these lawsuits in the “Executive Compensation Litigation Portal” on CompensationStandards.com.
Are Rating Agencies Ramping Up to Publicly Warn on Excessive Executive Pay?
In a blog entitled “Moody’s Warns Jeffries on ‘Excessive’ Pay,” Paul Hastings’ Mark Poerio notes:
This article from the New York Times begins: “To Moody’s, the high pay [of $78 million for top executives] is a reminder of ‘excessive compensation’ among Wall Street firms, potentially leading investment banks to take excessive risks and irritating critics on Capitol Hill and among regulators.” Fast forward to the proxy statement disclosure implications: How will the company handle its discussion of the riskiness of its executive compensation structures? Going to the design of the firm’s executive compensation, Moody’s has apparently expressed concern that “the firm has not put in place measures like longer award vesting periods and more expansive powers to claw back compensation . . . to ensure that employees will not suffer consequences from excessive risk-taking.” It will be interesting to see how the firm’s shareholders and proxy advisory firms react to the Moody’s report, and whether the firm’s compensation committee acts preemptively beforehand.
I can’t recall a rating agency ever making a concern over excessive executive pay public? Maybe the NY Times sleuthed this out. Or maybe it’s a new trend…
Poll: How Many Companies Will Receive a “Failed” Say-on-Pay Vote in ’13?
Sadly, the web polling software I was using for my blog surveys is defunct. But below is an attempt to use another polling tool to gauge what y’all think will happen with say-on-pay this year:
Create your free online surveys with SurveyMonkey, the world’s leading questionnaire tool.
Last night, eight law firms joined to issue this report on 13 open issues related to the Iran Threat Reduction and Syria Human Rights Act as the first time that companies need to provide disclosure under this new law draws nigh. A number of the answers in the memo address the “affiliate” issue that I raised in this blog earlier this week…
By the way, 4 companies have already filed “IRANNOTICES” with the SEC, per this Edgar search…
A Magic Number? How Many Firms Does It Take to Reach a Consensus?
First of all, let me commend those brave souls who have taken the lead to get law firms together to issue a consensus firm memo – as well as those tasked within each firm to help negotiate its language. This is no easy job – and I imagine it involves hours and hours that are not billable (and perhaps some hurt feelings to boot). Kudos!
The notion of a consensus memo is a relatively new phenomenon – I believe the first one was issued in October ’02 in the wake of Sarbanes-Oxley regarding Section 402 and insider loans. And there have been a handful more since then. I believe this new one with eight is the fewest number of firms to join together in harmony.
Anyways, I got to wondering how many firms does it take to reach a consensus? What is that magic number? Is five too few? Send me your feedback. I believe there hasn’t been any caselaw relying – or deciding not to rely – on any of the consensus memos pushed out over the past decade.
A few days ago, the NYSE submitted this rulemaking petition to the SEC seeking to amend the Section 13(f) beneficial ownership reporting rules, including shortening the current 45-day reporting deadline for Schedule 13Fs so that reporting is required 2 days after the quarter ends – as well as pushing for a reporting requirement on a monthly basis rather than the existing quarterly framework. The Society of Corporate Secretaries and NIRI co-signed the petition, as more frequent reporting would assist companies to determine who their larger shareholders are for engagement and vote projection purposes.
As noted in this recent webcast, rulemaking petitions don’t carry any special weight typically – so I found it unusual for the NYSE to submit a petition given that it is in frequent direct contact with the SEC. Over the past decade – which is how long petitions have been posted online – the NYSE and Nasdaq have only submitted one petition each – and both of those were fairly insignificant (one to extend a implementation date deadline and one to seek equal treatment among the two exchanges). It is possible that someone at the SEC asked the NYSE to file the petition as a way to test the waters – or maybe this is a new approach for the exchanges to seek regulatory changes…or none of the above…
