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 year, the Corp Fin Staff promised a bit more in the way of explanation when it issues no-action responses in the shareholder proposal area. So far this proxy season, it looks like the Staff is keeping its promise. Recent no-action letters granting exclusion on “ordinary business” grounds (ie. Rule 14a-8(i)(7)) bears this out. For example, in this response to Ford Motor, the Staff includes a sentence about how setting product pricing is “fundamental to management’s ability to run a company on a day-to-day basis.” Other examples include responses to Duke Energy, Verizon and Masco.
And in this response to AT&T, the Corp Fin Staff explains how net neutrality “has recently attracted increasing levels of public attention” but that it hasn’t emerged “as a consistent topic of widespread public debate such that it would be a significant policy issue.” I imagine one could debate whether the Staff’s statement foreshadows a possible change to the topic being deemed a significant policy issue – but my view is that the Staff is merely articulating a nuance on how to distinguish whether something is ordinary business.
None of the Staff positions is these no-action letters are new, but the one sentence explanations should help us read the tea leaves as to how the Staff feels about certain topics. Hat tip to Keir Gumbs of Covington & Burling for pointing these new responses out!
Note that I believe the AT&T resolution was filed with Mike Diamond – aka “Mike D” – of the Beastie Boys as a co-proponent.
Moxy Vote Update
In this podcast, Mark Schlegel of Moxy Vote LLC discusses the latest developments in proxy voting capabilities (here is last year’s podcast), including:
– What happened over the last year at Moxy Vote since the launch?
– What can issuers do with Moxy Vote?
– What are we doing for this proxy season?
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:
– Facebook’s Raw Deal
– California: No Rescission Without Privity
– Interview: Delaware Chancellor Chandler on Key Director Issues
– Ninth Circuit: Guidance on Important Scienter Issues
– Does That Matter Really Need To Go To The Board?
As reflected by how many times I get asked “how many executive officers should we have?” by members, a common challenge that all public companies have to make is the determination of who should be considered an “executive officer” for purposes of disclosure in their SEC filings. Not only does such a decision have an impact on the company’s disclosure obligations, but it has other consequences as well.
To assist in these determinations, companies often benchmark against their peers to gain comfort that the number of employees designated as “executive officers” is not too far off the norm. Given the dearth of benchmarking data available in this area, I jumped at the chance to work with LogixData to compile a comprehensive benchmarking study that I have posted in our “Executive Officer Determination” Practice Area.
This study provides:
– Analysis of how “executive officer” determinations are made
– Key benchmarking statistics drawn from the Form 10-Ks and proxy statements filed by all public companies during 2010
Note at the end of our study, you can email LogixData if you wish to receive a more detailed breakout of the benchmarking stats.
Nugget #4: Board Evaluations – The Independent Directors Should Experiment With When to Hold Executive Sessions
Recently, I started dribbling out some of the gems that Alan Dye and I shared a number of years ago during a series of “50 Nuggets in 50 Minutes” webcasts. Here is #4:
Executive Sessions – The independent directors should experiment with when to hold executive sessions – Normally, executive sessions are held just before – or after – a regular board meeting. Holding an executive session after a board meeting enables the independent directors to react to matters discussed at the board meeting.
On the other hand, it may be preferable to hold executive sessions before board meetings as a way to prepare for the board meeting – and not be sidetracked by what transpires at the board meeting. However, these executive sessions might last forever and exhaust directors before they get to the board meeting. To solve this potential problem, we like the idea of having the executive session the afternoon before a board meeting that commences the next morning.
Boards should experiment and determine what works best for them. For example, Intel’s board holds executive sessions in the middle of their board meetings.
More on our “Proxy Season Blog”
With the proxy season in full swing, we are posting 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:
– Recent Bylaw Amendments that Address Proxy Access
– Deja Vu: Apache Raises Proof-of-Ownership Objection Again
– Carpenters Ask Large-Cap Firms to Provide Board Access
– An Updated Proxy Season Time & Responsibility Schedule
– Proxy Advice: Glass Lewis Takes Over PGI’s Clients
Professor Paul Gillis has done a great job of analyzing issues related to China and accounting practices in his “China Accounting Blog.” In particular, I recommend reading his entries entitled “Audit scandals in China” and “China and the PCAOB” (the PCAOB has not inspected any of the 59 Chinese audit firms registered with it).
As the Professor notes, many privately-owned Chinese companies have gone to US stock markets to raise capital over the past few years – companies that found it difficult to get regulatory approval to list on Chinese stock exchanges. Many of the US listings were accomplished using the “backdoor” method of a reverse merger, where a Chinese company merges into a publicly listed shell – a practice that has drawn the SEC’s attention according to this article.
Contingencies: Corp Fin Chief Accountant Warns Against Over-Reliance on ABA Treaty
At a recent New York Bar Association conference, the Chief Accountant of the SEC’s Division of Corporation Finance, Wayne Carnall, warned against over-reliance on the so-called ABA-auditor “treaty” in reporting litigation contingencies on financial statements.
The “treaty,” which has been in place for roughly 35 years, seeks to preserve attorney-client confidences by providing a structure for dialogue between auditors and corporate counsel regarding financial statement presentation of information on pending and potential litigation. It provides the template for the “auditor inquiry letters” directed to both inside and outside counsel, and cautions corporate counsel (both inside and outside) against providing certain kinds of information to outside auditors.
One important feature of the treaty cautions counsel against providing to auditors estimates about the amount or range of potential loss from a litigation unless the lawyer believes that the probability of inaccuracy is “slight.”
A problem is that Generally Accepted Accounting Principles (“GAAP”), and in particular ASC 450 (formerly FAS 5), call upon those preparing financial statements to evaluate whether a loss from litigation is “probable,” whether the amount of loss can be “reasonably estimated,” and, where the loss is both probable and can be reasonably estimated, to accrue an appropriate amount. Where accrual is not required, but a loss is nonetheless “reasonably possible,” the financial statements are to include “an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made.”
At the bar association conference, Chief Accountant Wayne Carnall, in responding to questions, warned that reliance on the treaty would not justify nonfulfillment of ASC 450’s requirements. He observed that the treaty is “not part of the accounting codification” and that the requirements of GAAP must control. He also warned that “companies have an obligation to comply with GAAP and compliance with the ‘treaty’ is not a defense.” The Chief Accountant has elsewhere made clear that litigation contingency reporting will be under a microscope this financial reporting season. Given the historical prominence of the ABA treaty in lawyer-auditor dialogue, companies may want to make sure that the litigation reporting requirements of ASC 450 are being fulfilled.
Webcast: “The SEC Staff on International Issues”
Tune in tomorrow for the webcast – “The SEC Staff on International Issues” – to hear the Chief of the Corp Fin’s Office of International Corporate Finance Paul Dudek – as well as former Senior Staffers Alex Cohen of Latham & Watkins and Sara Hanks – discuss the latest rulemakings and interpretations from the SEC that relate to non-US companies.
Old-Timers Trivia Question: There have been three heads of OICF over time. Paul and Sara are the latest – who was the first? Drop me a line if you know the answer…
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 231 companies filing their proxies, 58% triennial; 6% biennial; 31% annual; and 5% no recommendation. And in the “Dodd-Frank Blog,” Steve Quinlivan discusses the reasons for the “against” vote at Beazer Homes as well as the results reported in the 54 Item 5.07 Form 8-Ks filed so far this proxy season.
The NYSE’s Annual Corporate Governance Letter
The NYSE has sent its annual corporate governance letter, highlighting considerations for NYSE-listed issuers as the annual shareholders’ meeting season approaches.
Valentine’s Day? Fine Design Dine & Wine
You ready for Valentine’s Day? Treat yourself to fine food in great atmosphere by reading the tremendous showcases on this site, FineDesignDine.com. If you’re a Top Chef fan, winner Stephanie Izard’s restaurant recently was featured. The pictures alone are worth trying it out. Delectable.
In this podcast, Harlene Ellin of Fine provides some insight how you should be treating yourself to fine food and atmosphere through her site FineDesignDine.com, including:
– What is the purpose of Fine?
– How did you come up with the idea for it?
– Has there been any surprises so far?
On CompensationStandards.com, we just posted the Spring 2011 issue of the Compensation Standards newsletter, in which Dave Lynn has drafted model say-on-pay disclosures to help you prepare your upcoming proxy statement. It includes a model executive summary, say-on-pay resolution and say-on-frequency resolution. We have also posted a Word version of the newsletter so that you can cut and paste as a starting point for your proxy disclosures.
Act Now: To immediately access this issue of the Compensation Standards newsletter, try a CompensationStandards.com no-risk trial now since this newsletter is posted on CompensationStandards.com as one of the benefits of membership.
A New CD&A Template
In this CompensationStandards.com podcast, Kurt Schacht of the CFA Institute’s Centre for Financial Market Integrity talks about a CD&A Template put together by the joint efforts of a group of issuers and investors, including:
– Why was the template put together?
– What was the process for drafting it?
– How do you envision companies using it? How about investors?
– How does mandatory say-on-pay impact its use?
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:
– Board Diversity Survey: Cracks in the Ceiling for Women
– 23 Things Not to Write In An E-Mail
– Following Morrison v. National Australia Bank, Southern District of New York Court Weighs In
– Ten Country Interagency Report on Boards and Risk Management
– A Disclaimer Too Far
– Risks, Compliance, the SEC and New Concerns for Directors
I’m not pulling your leg on this one. A physical altercation between John Chevedden and a process server has led KBR to file this brief (and these exhibits) as part of its lawsuit to exclude a shareholder proposal submitted by Chevedden due to his alleged lack of eligibility (I also recently blogged about how other companies are challenging Chevedden’s eligibility).
The brief provides detailed allegations about how Chevedden has gone to great lengths to avoid being served – and how Chevedden knocked down a process server when she finally caught up with him outside a UPS store. The process server swore out a police report, which is pending before the City Attorney’s office. We continue to post pleadings filed in this case in our “Shareholder Proposals” Practice Area.
House Financial Services Committee: “Oversight” = “Micromanagement”
Last week, the House Financial Services released a draft version of its Oversight Plan for this Congressional session. Rather than focus on oversight of what caused the recent financial crisis – including enforcement of existing laws and tackling why there has been a dearth of cases brought in the subprime area, etc. – it looks like the Committee intends to spend its time micromanaging the implementation of Dodd-Frank (even though Congress hasn’t given the SEC the resources to do so). In addition, it looks like the Committee will be micromanaging the FASB and the standards it creates. So much for the independence of these two regulators.
The Treasury Department has announced the launch of a ‘beta’ Consumer Financial Protection Bureau website, ConsumerFinance.gov, with the initial focus on soliciting ideas on the Bureau’s creation and priorities and for answering questions on its work.
More on our “Proxy Season Blog”
With the proxy season in full swing, we are posting 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:
– The Latest SEC Comment Letter Trends
– Proxy Access: It Has Been Done Before
– Broadridge to SEC: Mandate Use of Social Media
– Challenges Continue with XBRL Compliance
– The Quality of the Shareholder Vote in Canada
A Call for Nominations: Regulatory Innovation
With all that has transpired in the past year, it seems that now more than ever we need some innovative approaches to financial regulation. Therefore, Dave is pleased to be a part of Morrison & Foerster’s establishment of the 2011 Regulatory Innovation Award through the Burton Foundation. This award will honor an academic or non-elected public official whose innovative ideas have made a significant contribution to the discourse on regulatory reform in the arena of corporate governance, securities, capital markets or financial institutions. If you know of someone meeting these qualifications who should be considered for this award, please submit the nomination before February 18th.
Yesterday, Beazer Homes USA filed this Item 5.07 Form 8-K which revealed that it has become the second company to fail to receive majority support for its say-on-pay, with 54% voting “against.” As I blogged before, Jacobs Engineering became the first last week. That’s two failed votes out of roughly 30 SOPs voted upon so far – nearly a 7% rate.
In my poll last week – in which folks guessed how many failed votes there would be this year – zero picked 1-2 failures; 4% predicted 3-4 failures; 18% predicted 5-10 failures and 75% predicted more than 10 failures (5% said “what me worry?”). At the current 7% rate of failure, it looks like the smart money will have pegged it.
I’ve been amused by some who have recently reported that only 1 out of 20 have failed so far – as if a 5% failure rate was a good thing – and that’s not even counting the companies who have garnered a significant “against” vote like Monsanto and Johnson Controls. If you apply that failure rate to the number of companies that will hold SOP votes soon enough, the image is scary.
As Paul Hodgson blogged last year, 500 nays-on-pay would be the result extrapolating from the 3 failures last year out of the 60 companies that voluntarily had say-on-pay on their ballot. And as Paul noted, “Can you imagine what might happen if shareholders got organized? [FX: Long, slow, whistle on descending note….]”
Interestingly, a member brought three smaller companies to my attention that filed proxy materials after the effective date of Dodd-Frank’s SOP provision – but before the SEC postponed the applicability of SOP to smaller reporting companies. Given that the SEC hadn’t signaled the postponement beforehand, they certainly got lucky! Of course, given that they didn’t even know that SOP had applied to them, they likely don’t even know they are lucky…
Shareholder Proposals: Corp Fin Reveals Approach to Proxy Access Proposals During Stay
In this response to General Electric, the Corp Fin Staff tips its hand about how it intends to approach shareholder access proposals during the current stay of the challenge to the proxy access rule (ie. Rule 14a-11). This response is an interesting example of how the Corp Fin Staff is explaining its decisionmaking these days as the Staff indicates that it’s granting relief based on the way that Rule 14a-8(i)(8) operated prior to the shareholder access rulemaking. Probably the right answer, but one that had not yet been addressed to my knowledge.
Yesterday, the SEC celebrated bringing charges regarding expert networks by affixing a special logo dedicated to the event on its home page. That is a first. Wonder what the logo for adopting the say-on-pay rules would have been? Maybe this one…
Pat McGurn’s Forecast for 2011 Proxy Season: Wild and Woolly
We have posted the transcript for our recent webcast: “Pat McGurn’s Forecast for 2011 Proxy Season: Wild and Woolly.”
As perhaps can be expected given it’s a new ballot item for most companies, the first batch of companies reporting voting results regarding say-when-on-pay have led many members to send questions about how to properly count votes. As an example of the confusion, Steve Quinlivan notes a voting ambiguity at the end of this blog. And in his “California Corporate & Securities Law” Blog, Keith Bishop also blogs about the confusion of counting say-on-frequency votes – here is Keith’s follow-up blog too.
The bottom line is that whether a majority preferred a triennial vote depends on how “abstentions” are treated – which means that the same numbers could wind up with entirely different results for two different companies. Personally, I don’t see how abstentions wouldn’t be counted, but it seems like a matter of state law – not my area of strength. But I do note that the SEC’s adopting release in discussing the Rule 14a-8 exclusion states at footnote 151:
“Specifically, as adopted, the note to Rule 14a-8(i)(10) will permit exclusion of such a shareholder proposal if, in the most recent shareholder vote on frequency of say-on-pay votes, a single frequency (i.e., one, two or three years) received the support of a majority of the votes cast and the issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with that choice. FN 151
Footnote 151 – For purposes of this analysis, an abstention would not count as a vote cast. We are prescribing this voting standard solely for purposes of determining the scope of the exclusion under the note to Rule 14a-8(i)(10), and not for the purpose of determining whether a particular voting frequency should be considered to have been adopted or approved by shareholder vote as a matter of state law.”
One might ask whether the difference matters. There are some consequences. One is determining whether a specific frequency preference received a “majority of the votes cast” for purposes of the Rule 14(a)-8(i)(10) exclusion – so it matters for purposes of the shareholder proposal rule (I guess it also could have an impact on which preference received a plurality of the votes cast, but this situation isn’t likely to come up too often – and doesn’t seem have any legal consequences). Perhaps the biggest factor to consider is one that isn’t driven by regulation: the optics of how you report your voting results. In other words, how will it be received by shareholders and the media in general.
I expect that companies will want to disclose the potential voting implications “right” at the outset in their proxy materials – it doesn’t look good to file a corrective disclosure. So it’s something to figure out now and not when it comes time to report the voting results in a Form 8-K…
In his “Proxy Disclosure Blog,” Mark Borges gives us the latest say-when-on-pay stats: with 218 companies filing their proxies, 58% triennial; 6% biennial; 30% annual; and 6% no recommendation.
SEC Promotes Mark Cahn to General Counsel
On Friday, the SEC announced that it had promoted Mark Cahn from Deputy General Counsel to the top job. Cahn came to the SEC two years ago from WilmerHale.
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– How to Respond to Shareholder Proposals Seeking Board Declassification
– The ABCs of Board De-Staggering
– Acquiring US Companies with Foreign Subsidiaries: Relevant Issues
– The Window Closing Pill: One Response to Stealth Stock Acquistions
If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
The news was first leaked late Friday from the WSJ that “hackers have repeatedly penetrated the computer network of the company that runs the Nasdaq Stock Market during the past year.” That forced the Nasdaq to issue this statement that Nasdaq’s Director Desk – a provider of board portal services to 300 companies – may have been compromised for over a year! Here’s more information from the NY Times and Dominic Jones’ IR Web Report.
Even though security breaches are a mainstay of modern life (check out the half a billion record breaches listed on this page), this could set back the board extranet movement a decade. And for good reason. Security is paramount when it comes to sensitive board materials. I can’t imagine companies not rethinking their posting of board materials online if their safety is at all in question.
I just can’t understand how the federal authorities have the ability to tell a service provider to not inform its clients that there has been a breach! Or why? What is the harm in Directors Desk telling its clients that there has been a breach so they can immediately protect their sensitive information? Even if the hacker was state-sponsored – as intimated by Jeffrey Carr in this blog (and as noted by Dominic Jones) – I don’t see how not informing boards of the breach can be justified, particularly given the seriousness of the breach. Carr notes in his blog: “The nth level effects of this breach could dwarf anything that we’ve seen to date.”
Of course, I still can’t wrap my head around how it took Directors Desk so long to discover the breach if enhanced security is what sold the product – it’s reported that the breach existed for over a year until it was discovered. Carr’s analysis of Directors Desk’s security measures is that it is no match for a serious hacker. Before passing judgment on the entire board portal industry, I’ll await his analysis of the security measures that other board portal providers utilize, but frankly I’m scared to hear that analysis…
SEC Speaks About a Lack of Funding
During last week’s annual PLI “SEC Speaks” Conference, many SEC officials talked about the agency’s limited funding and how hard it will be to implement Dodd-Frank timely on such a shoestring budget. For example, here is Chair Shapiro’s opening remarks, which she closed by talking about the strain of operating under the existing budget with expanded Dodd-Frank responsibilities. Later in the day, Corp Fin Director Meredith Cross mentioned that she can’t fully staff her newly created offices because of funding woes.
PLI has posted notes for each the panels devoted to the SEC’s Divisions (but not the workshop sessions), including:
SEC Commissioner Casey raised a few eyebrows during her speech when she challenged the Enforcement Division’s ability to apply new Dodd-Frank provisions to conduct that pre-dated the enactment of the Act based on anti-retroactivity principles.
Webcast: “Recent Developments Regarding Fairness Opinions, Valuation Analyses and Related Topics”
Tune in tomorrow for the DealLawyers.com webcast – “Recent Developments Regarding Fairness Opinions, Valuation Analyses and Related Topics” – to hear Kevin Miller of Alston & Bird, Steve Kotran of Sullivan & Cromwell, Stuart Rogers of Credit Suisse Securities and Jennifer Muller of Houlihan Lokey discuss the latest developments and trends of fairness opinions and valuation analyses. Please print off these course materials before the program.
A few days ago, the “WSJ Law Blog” cited to this speech delivered by the SEC’s General Counsel David Becker who said that whistleblowers should not have to use internal company reporting options before running to the SEC under the controversial Dodd-Frank whistleblower fraud bounty program. Becker’s logic is that some compliance programs “no matter how elaborately conceived and extensively documented, exist only on paper” and are “shams,” giving an example of a company where the “ostensibly anonymous employee hotline … actually rang on the desk of the CEO’s secretary.”
Does this tip the SEC’s hand as to where the agency will end up after months of business protest about the structure of the Dodd-Frank whistleblower bounty program? Perhaps not given that it was announced earlier this week that Becker is headed back to the private sector and he was speaking in a personal capacity (as the disclaimer that SEC speakers always gives indicates)…
Towards State of the Art: Scrubbing Your Bylaws, Governance Guidelines & Committee Charters
We have posted the transcript for our recent webcast: “Towards State of the Art: Scrubbing Your Bylaws, Governance Guidelines & Committee Charters.”
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:
– More on “Dress Code for Delaware Courts”
– California: Secondary Trading In Private Company Shares
– Staleness Calendar for 2011 Offerings
– Politics, Corporate Lobbying and the FASB
– Will Whistleblower Claims Give Rise to More SEC Enforcement Actions?
