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."
There is no issue that lights up the Twittersphere in the corporate governance area than board diversity. Thus, people certainly were tweeting heavily earlier this week when news of a proposal by the European Union justice commissioner that companies allocating fewer than 40% of the slots on supervisory boards to women could face serious sanctions after 2020. [Although certainly not tweeting at the record 50k per minute that occurred last night during the President’s speech.]
For this proposal to go forward, the European Commission must first approve it in the coming weeks, then the legislation would need approval from the EU’s 27 governments and the European Parliament. As the studies in our “Board Diversity” Practice Area show, the number of women on US boards remains around 10% (with 30-40% of boards not having a single woman!) – with not much improvement in recent years…
“Getting Beyond Denial: Conflict Mineral Rules More Important (And Apply Sooner) Than You Thought”
I have calendared a webcast for September 27th with the longest title I have ever used – “Getting Beyond Denial: Conflict Mineral Rules More Important (And Apply Sooner) Than You Thought” – because I think the significance of the SEC’s new conflict mineral rules has been missed by some. And because one subtlety to the new rule’s 2014 effective date is that although it is a long time before companies are required to first report, those disclosures are going to cover 2013 – so companies need to have their ducks in a row by 2012 year-end. That’s right – by the end of this year!
Last week, the US District Court of Delaware delivered this decision – in Delaware Coalition for Open Government v. Strine – holding that Delaware’s confidential Chancery Court arbitration statute violates the First Amendment of the US Constitution. My understanding is that defendants plan to appeal. We are posting memos in our “Securities Litigation” Practice Area.
Mailed: July-August Issue of “The Corporate Executive”
We just mailed the July-August Issue of The Corporate Executive, and it includes pieces on:
– Barnes & Noble’s Gaffe: Grant Limits Under Section 162(m)
– Recent Court Decisions May Create Openings for Litigation
– Follow-Up: One Tax Question Resolved for 2013
– Say-on-Pay Round-Up: Year 2
Here are the survey results on insider trading policies related to pledges & margin accounts:
1. Does your company’s insider trading policy prohibit insiders from pledging their company shares?
– Yes – 37.7%
– No – 62.3%
2. If your company’s insider trading policy does not prohibit pledges, does your company:
– Discourage or advise against pledges – 55.^%
– Require preclearance for pledges – 66.7%
– Include criteria that must be met for pledges (e.g., financial wherewithal, limited to a specified percentage of holdings) – 18.6%
3. If your company’s insider trading policy requires preapproval or satisfaction of certain criteria for pledges, who makes that determination?
– CEO – 0%
– CFO – 4.2%
– GC – 79.2%
– Board Committee – 4.2%
– Other – 16.7%
4. Does your company’s insider trading policy prohibit insiders from using margin accounts with their company shares?
– Yes – 40.4%
– No – 59.6%
5. If your company’s insider trading policy does not prohibit margin accounts, does your company:
– Discourage or advise against margin accounts – 65.2%
– Require preclearance for margin accounts – 56.5%
– Include criteria that must be met for margin accounts – 17.4%
6. If your company’s insider trading policy requires preapproval or satisfaction of certain criteria for margin accounts, who makes that determination:
– CEO – 0%
– CFO – 11.8%
– GC – 88.2%
– Board Committee – 0%
– Other – 11.8%
Please take a moment to participate in this “Quick Survey on Proxy Solicitors” and this “Quick Survey on Delegation of Authority.”
Failure to Produce Audit Records: Hong Kong Regulators Also Face Troubles
Check out this development on audit paper requests featuring a court battle between Hong Kong’s Securities and Futures Commission and Ernst & Young Hong Kong after E&Y failed to produce SFC-requested records.. It appears that it’s not just the PCAOB that’s having problems gaining access to China-based companies’ audit papers due to an auditor’s interpretation of China’s State Secrecy laws (as covered in this blog).
It will be interesting to see how E&Y is going to defend itself on this in open court, particularly given there’s a recent new law on accountant liability in Hong Kong that significantly ups the ante for auditors. Thanks to Liza Mark of Dorsey & Whitney for pointing this development out and her insight into this area!
To expound on Hong Kong’s new accountant liability law, it’s a little convoluted – the Hong Kong Legislative Council just passed a comprehensive rewrite of the existing Companies Ordinance of Hong Kong (Cap 32). One of the major initiatives of the rewrite provides for the imposition of criminal liability on auditors of Hong Kong incorporated companies for “inaccurate auditor’s report. Here’s a set of FAQs for the new Companies Ordinance rewrite – and here’s the Major Initiatives explanation. This memo does a good job of summarizing the situation. Note that the amended Companies Ordinance is waiting on implementation regulations, so it will take a while before it’s implemented.
Mailed: July- August Issue of “The Corporate Counsel”
We just mailed the July- August Issue of The Corporate Counsel, and it includes pieces on:
– Dodd-Frank Marches On: SEC Adopts Compensation Committee/Adviser Independence Rules
– Compensation Adviser Conflict of Interest Questionnaire
– Whose EDGAR Filing Is It, Anyway?
– Disclosures Regarding an SEC Investigation–The Latest Developments
– JOBS Act Update
Here’s a classic from John Jenkins of Calfee Halter: So I’m sitting here in my office on a sunny afternoon on the Thursday before Labor Day, and I get the bright idea to tackle the SEC’s release adopting the final version of the Conflict Mineral disclosure rules required by Dodd-Frank.
This was not the best idea I’ve had this week.
We’ve all made our way through massive SEC releases before (the Aircraft Carrier, the Executive Comp rules, and Securities Act Reform all come to mind), but this 368 page juggernaut may well be the Citizen Kane of bureaucratic prose. I tried to slog through it, but I only got to page 25 or so before the description of the labyrinthine due diligence and reporting requirements mandated by the new rules simply overwhelmed me:
As an exception to this requirement, however, an issuer that must conduct due diligence because, based on its reasonable country of origin inquiry, it has reason to believe that its necessary conflict minerals may have originated in the Covered Countries and may not have come from recycled or scrap sources is not required to submit a Conflict Minerals Report if, during the exercise of its due diligence, it determines that its conflict minerals did not, in fact, originate in the Covered Countries, or it determines that its conflict minerals did, in fact, come from recycled or scrap sources. Such an issuer is still required to submit a specialized disclosure report disclosing its determination and briefly describing its inquiry and its due diligence efforts and the results of that inquiry and due diligence efforts, which should demonstrate why the issuer believes that the conflict minerals did not originate in the Covered Countries or that they did come from recycled or scrap sources. On the other hand, if, based on its reasonable country of origin inquiry, an issuer has no reason to believe that its conflict minerals may have originated in the Covered Countries, or, based on its reasonable country of origin inquiry, an issuer reasonably believes that its conflict minerals are from recycled or scrap sources, the issuer is not required to move to step three.
As I read this paragraph again and again in an effort to comprehend it, a strange thought occurred to me, so I took a break and Googled “Monty Python’s Meaning of Life script.” Sure enough, there was a copy online, and I quickly scrolled down to the scene where John Cleese plays a headmaster addressing a class full of British public schoolboys. I was right — the text of the Conflict Minerals Release bears a striking resemblance to Cleese’s ramblings in the film:
Headmaster: All right, settle down, settle down. Now before I begin the lesson will those of you who are playing in the match this afternoon move your clothes down on to the lower peg immediately after lunch before you write your letter home, if you’re not getting your hair cut, unless you’ve got a younger brother who is going out this weekend as the guest of another boy, in which case collect his note before lunch, put it in your letter after you’ve had your hair cut, and make sure he moves your clothes down onto the lower peg for you. Now…
Wymer: Sir?
Headmaster: Yes, Wymer?
Wymer: My younger brother’s going out with Dibble this weekend, sir, but I’m not having my hair cut today sir, so do I move my clothes down or…
Headmaster: I do wish you’d listen, Wymer, it’s perfectly simple. If you’re not getting your hair cut, you don’t have to move your brother’s clothes down to the lower peg, you simply collect his note before lunch after you’ve done your scripture prep when you’ve written your letter home before rest, move your own clothes on to the lower peg, greet the visitors, and report to Mr Viney that you’ve had your chit signed. . .
The resemblance between the two passages leads me to one of three conclusions. First, the staff members involved in writing this release are big Monty Python fans; second, President Obama appointed John Cleese to the Commission when I wasn’t looking; or third, life really is as absurd as the Monty Python guys make it out to be.
Reporting Equity Awards: Twists to Otherwise Durable Standard
Learn about Corp Fin’s new approach to reporting equity awards in the Summary Compensation Table and the Director Compensation Table when it comes to complex equity award structures in the Summer issue of our Compensation Standards newsletter. If you’re not a member of CompensationStandards.com, get this issue for free when you try a no-risk trial for 2013.
And learn more about this – and many more topics over 13 panels – during our upcoming “7th Annual Proxy Disclosure Conference,” which is only five weeks away. We are happy to report that the New Orleans conference hotel made it through Hurricane Issac just fine. But the city needs your support since tourism is the lifeblood of the city. If you can’t make it, you can always catch the conference by video. Register Now!
Webcast: “Hot Topics for Smaller Company Legal Depts”
Tune in tomorrow for the webcast – “Hot Topics for Smaller Company Legal Depts” – that will give you tips on how to beat a tight budget, etc. featuring Barbara Blackford, formerly of Superior Essex; Carrie Darling of Encore Capital Group; Bret DiMarco of Coherent; Stacey Geer of Primerica; Isobel Jone of Peet’s Coffee & Tea and David Scileppi of Gunster.
Note that we just added SEC Trading and Markets Deputy Director Jim Burns for today’s webcast – “JOBS Act Update: Where Are We Now” – that will analyze evolving market practices and the latest from the SEC including last week’s proposal to eliminate the ban on general solicitation in Rule 506 and 144A offerings. The program also features SEC Corp Fin Deputy Director Lona Nallengara, Wilson Sonsini’s Steve Bochner, Latham & Watkin’s Joel Trotter, Davis Polk’s Michael Kaplan and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net.
Tune in tomorrow for the webcast – “JOBS Act Update: Where Are We Now” – that will analyze evolving market practices and the latest from the SEC including last week’s proposal to eliminate the ban on general solicitation in Rule 506 and 144A offerings. The program features SEC Corp Fin Deputy Director Lona Nallengara, SEC Trading and Markets Deputy Director Jim Burns, Wilson Sonsini’s Steve Bochner, Latham & Watkin’s Joel Trotter, Davis Polk’s Michael Kaplan and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net.
Check out this WSJ article entitled “Warning to Investors: We’re an ‘Emerging’ Company” which states that 55% of investment bankers surveyed “…said they believe the new law’s easing of regulatory requirements increases “the chances of scandals at these businesses.”
SEC’s Filing Fees Going Up 19% for Fiscal Year 2013
On Friday, the SEC issued its 7th fee advisory for the year (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $114.60 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will rise to $136.40 per million, a 19% pop. A pretty hefty price hike, unlike last year’s minimal decline.
As noted in the SEC order, the new fees will go into effect on October 1st like last year (as mandated by Dodd-Frank) – which is a departure from years before that when the new rates didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year, which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
Here are two items that I posted on my DealLawyers.com Blog this week: Earlier this week, the Delaware Supreme Court affirmed Chancellor Strine’s decision from last year in Southern Peru. Justice Berger filed a brief partial dissent disagreeing with the Chancellor’s attorney’s fee analysis. Here’s analysis from Richards Layton (we are posting memos in our “Minority Shareholders” Practice Area) – and here’s a piece by Alison Frankel.
Corp Fin Issues No-Action Letter on Day-20 Pricing in Tender Offers
The SEC’s Division of Corporation Finance recently granted no-action relief to Sonic Automotive, Inc., allowing Sonic to utilize “Day 20” pricing in its recent exchange offer wherein the company offered to exchange common stock and cash for its outstanding convertible debt securities.
The exchange offer employed a VWAP formula pricing mechanism with the final price becoming fixed and publicly announced at 4:30 p.m. on the same day the offer was scheduled to expire at midnight. In addition, the exchange offer incorporated a fixed minimum and maximum purchase price where the company agreed to extend the offer by two business days should the formula result in a purchase price at the maximum amount specified.
Interestingly, it appears that counsel sought and obtained no-action relief during the pendency of the exchange offer. Thus, it seems the 20-day pricing issue may have caught the Staff’s attention during its review. The letter serves as a steady reminder to issuers regarding the need for early consideration of whether to seek no-action relief and consulting with outside counsel before utilizing “Day 20” pricing in a tender offer. We have previously discussed the Staff’s position regarding “Day 20” pricing.
The study identifies investor perceptions and preferences regarding a variety of investment disclosures. The study shows that investors prefer to receive investment disclosures before investing, rather than after, as occurs with many investment products purchased today. The study identifies information that investors find useful and relevant in helping them make informed investment decisions. This includes information about fees, investment objectives, performance, strategy, and risks of an investment product, as well as the professional background, disciplinary history, and conflicts of interest of a financial professional. Investors also favor investment disclosures presented in a visual format, using bullets, charts, and graphs.
Yesterday, the SEC voted – 4-1 (Commissioner Aguilar dissented) – to propose a rule to eliminate the general solicitation and general advertising ban for offerings conducted under Reg D’s Rule 506 and Rule 144A. This rulemaking was required by Section 201(a) of the JOBS Act, which did not provide much flexibility for the agency. There is a short 30-day comment period. Here’s the press release – and here’s the proposing release (we’re posting memos in our “Regulation D” Practice Area).
As expected, the proposed rule doesn’t mandate a specific verification method (nor list a series of acceptable ones) – companies would have the flexibility to determine what are reasonable steps based on the facts and circumstances (egs. nature of the purchaser, type of information known about the purchaser, and type of the offering). Meredith Cross noted that the SEC would form a multi-divisional task force to gauge what steps companies are taking to verify accredited investor status.
During the open Commission meeting, some Commissioners noted they wished this proposal had come out sooner and in the form of an interim final rule (Paredes and Gallager). Essentially, a vote “against” the process leading to the proposal. The need for speed for these Commissioners astonishes me given the importance of what we are talking about. During her remarks, Chair Schapiro noted that just over $1 trillion was raised in exempt offerings during 2011, comparable to the amount raised in registered offerings during the same period. I don’t think 30 days worth of commenting will kill the capital markets. After all, the mission of the SEC is about investor protection. At least, the last time I looked…
Tune in on Wednesday, September 5th for the webcast – “JOBS Act Update: Where Are We Now” – that will cover this proposal, as well as analyze evolving market practices and all the latest from the SEC on the JOBS Act. The program features Corp Fin Deputy Director Lona Nallengara, Wilson Sonsini’s Steve Bochner, Latham & Watkin’s Joel Trotter, Davis Polk’s Michael Kaplan and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net.
SEC Posts Draft Taxonomy for Form SD
Yesterday, the RiskFin Staff posted draft Form SD taxonomy related to disclosure of payments by resource extraction companies. Comments are due by Halloween – and can be provided via this input form by including “Draft Form SD Taxonomy” in the “General subject matter” section.
California Rules Facebook’s Instagram Acquisition is “Fair”
Keith Bishop gives us the news that the result of California Department of Corporations ‘s fairness hearing yesterday regarding Facebook’s purchase of Instagram was favorable for the social media giant.
Related to this WSJ article, here’s news from Cydney Posner of Cooley: The Wall Street Journal has posted SEC Chair Mary Schapiro’s response letter to the inquiry from Darrell Issa, Chair of the House Committee on Oversight and Government Reform. [Broc’s note: The WSJ’s link to the letter is now dead.]
You may recall that Chair Issa’s letter was prompted by concerns over the Facebook IPO and asked a number of questions regarding IPO pricing mechanisms, communications and other matters, with a view toward revamping the IPO process. Chair Schapiro indicates in her letter that the staff is monitoring the impact of the JOBS Act and that she has previously asked the staff to review the offering communications rules and to consider issuance of a concept release. She noted that “[e]nsuring that our communications rules facilitate, not hinder, the ability of an issuer to communicate with all investors is an important aspect of the staffs review of these rules.” However, not surprisingly, she seemed to detect a few more benefits in the current system than did Chair Issa.
SEC: Today’s Open Commission Meeting Could Be Interesting
As Dave blogged last week, the SEC pushed back consideration of changes to Rule 506 and general solicitation in the wake of a highly publicized fracas of whether the new rules should be proposed first or instead adopted as interim final rules. The open Commission meeting to consider these changes is today. Cooler heads seemed to have prevailed and the rules appear that they will be proposed first.
Here’s a short WSJ opinion piece penned by Corp Fin Director Meredith Cross from earlier this week, defending the decision to first propose the rules. Heavy duty politics continue to place pressure on the SEC, during a time when the agency is adjusting to new demands placed upon it by the courts (as well as others including the Office of Information and Regulatory Affairs as noted in this WaPo article). Not a good mix.
Tune in next Wednesday for our webcast – “JOBS Act Update: Where Are We Now” – to discuss the results of this open meeting, plus much more about what the SEC has done lately – and what is becoming standard market practice – under the JOBS Act.
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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 address on the left side of that blog. Here are some of the latest entries:
– Proxy Advisor Regulation: European Style
– It Was Written in The Stars – Not the Merger Agreement
– The Future of Private Ordering of Proxy Access
– Exclusive Forum Provisions Update
– Mid-Season Proxy Season Update: UK and US
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:
– Conflict mineral disclosure rules
– Disclosure of payments by resource extraction issuers
– Favorite Van Morrison song
Say-on-Pay: Now 57 Failures
I’ve added two more companies to our failed say-on-pay list for 2012 on CompensationStandards.com as Applied Micro Circuits and Iconix Brand Group have failed during the past week or so. We are now at 57 companies in ’12 that have failed to garner major support. Hat tip to Karla Bos of ING Funds for keeping me updated.
Survey: ISS & Glass Lewis Experiences
Ahead of our panel – “How to Work with the Proxy Advisors: Navigating the Say-on-Pay Minefield” – during our “Say-on-Pay Workshop: 9th Annual Executive Compensation Conference” on October 9th, Pearl Meyer & Ptrs is conducting this brief survey about your experience with proxy advisors during the past year. Please participate.
Register Now: Only six weeks until our action-packed pair of executive pay conferences – register now.
On Thursday, the SEC’s Division of Trading and Markets issued this set of 14 FAQs about research analysts and underwriters. As noted in this memo, the FAQs are consistent with positions announced by the Staff at various conferences, but do contain some new information, and provide a helpful written statement of SEC staff positions on several important matters.
Facebook’s California Fairness Hearing
The mass media has studiously covered the steady drop in Facebook’s stock price – including the recent expiration of lock-ups last week (also see Robert White’s blog regarding the lock-up lessons learned) – but only Keith Bishop has followed Facebook’s request for a fairness hearing before the California Department of Corporations for its acquisition of Instagram. Check out Keith’s program guide to the fairness hearing.
ISS Extends Policy Survey Period Til This Friday
ISS has extended its survey period through this Friday, August 31, and will be followed by an open comment period in October after which ISS will publish its draft policies. Unless specifically requested by the submitter, feedback received during the October open comment period will be made available publicly via ISS’ online Policy Gateway.
As noted in this study posted in our “Audit Fees” Practice Area, Audit Analytics found that for 2011 the ratio of non-audit fees over revenue was the lowest calculated for the ten years analyzed and the same ratio of audit fees was the lowest since 2004. Here is a summary of Audit Analytics’ findings:
– Non Audit Fees as Compared to Audit Fees: In 2002, non-audit fees represented 51% of the total fees paid by research population, but after three years of steady decline non-audit fees appear to have leveled off at about 20% of total fees. To some extent, the drop in non-audit fees as compared to audit fees is attributable to the Auditor Independence Rules adopted by the SEC in 2001, which precluded the principal independent accountant from performing certain non-audit services to ensure auditor independence when performing the independent audit.
– Non-Audit Fees as a Percentage of Revenue: After six consecutive years of decreases in the cost of non-audit fees as a percentage of their revenue, accelerated filers experienced a slight uptick in 2009, but the uptick was due to a decrease in revenues instead of an increase in fees. After the 2009 uptick, both 2010 and 2011 experienced decreases. The 2011 figure was the lowest value calculated for the ten years under review: $121 of non-audit fees for every million dollars in revenue.
– Audit Fees as a Percentage of Revenue: The ratio of audit fees over revenue peaked in 2005, when the average amount of audit fees paid per $1 million of revenue was $597. After three consecutive years of decline the figure increased slightly in 2009, but as with non-audit fees, the uptick is due to a decrease in revenues instead of an increase in fees. Both 2010 and 2011 experienced decreases and during 2011 experienced the lowest value since 2004: $466 of audit fees for every million dollars in revenue. The fees declined despite the extra work demanded of the auditors during the same period when more and more companies were required to obtain auditor attestations pursuant to SOX 404(b).
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 address on the left side of that blog. Here are some of the latest entries:
– FINRA Proposes Corporate Financing Rule Changes for Deferred Comp Arrangements
– Study: Securities Class Action Filings Involving Accounting Allegations Increase
– Chamber of Commerce Goes After Glass Lewis
– FINRA Rule 2111 Becomes Effective July 9th
– Tips for SEC’s New Confidential Submission Process
The Second Deal Cube Tourney: Round One; 3rd Match
As noted in these rules (and keep sending more pics for the next tourney), please vote for two of the following four cubes below:
