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."
A member recently emailed me about this SEC Staff comment letter, surprised that the Staff would refuse to process a registration statement due to its material deficiencies – and that the Staff would make a referral to the Enforcement Division if the registration statement would approach going effective.
Internally in Corp Fin, this type of letter is called a “bedbug” letter and these have routinely been issued for decades to registration statements that are filed with problems so large that it would be a waste of Staff time to write up comments. The standard language in the bedbug letter hasn’t varied at all over the years – perhaps the threat to make the Enforcement referral should be stated overtly rather than implicitly, particularly in this case where the addressee is in China…
Shareholder Engagement: UK Style
Recently, as noted in this ISS Blog, the United Kingdom’s Financial Reporting Council (FRC) released a “Stewardship Code” that includes principles on how institutional investors should engage with portfolio companies after collecting comments from a variety of market participants on potential approaches to fostering dialogue between investors and issuers.
The code includes principles on: the monitoring of investee companies; the escalation of activities taken to protect or enhance shareholder value; collective engagement; voting policy; managing conflicts of interest; and public reporting and reporting to clients.
The FRC is encouraging institutional investors to report publicly on the extent to which they follow the code and intends to list all those who have done so.
The Mad Rush: Three Weeks Until the “5th Annual Proxy Disclosure Conference”
As happens so often, there is now a mad rush for folks to register for week of proxy disclosure and executive pay conferences that starts in three weeks – on Monday, September 20th. With an aggregate of over 50 panels, if these conferences don’t help get you prepared for the upcoming proxy season of change, nothing will. You can either register for the three days of the “18th Annual NASPP Conference” (in Chicago) – or the two days of the “5th Annual Proxy Disclosure Conference” & “7th Annual Executive Compensation Conference” (in Chicago or by video webcast) or a combination of both. Note that we just extended the length of the last panel of the” 5th Annual Proxy Disclosure Conference” to cover proxy access in more depth. Register Now.
When I first saw this press release from Towers Watson regarding how few companies are prepared for say-on-pay, I thought our marketing department had outdone itself since our comprehensive week of executive pay conferences comes up in less than a month – with an aggregate of over 50 panels on executive pay topics. If these conferences don’t help get you prepared, nothing will. You can either register for the three days of the “18th Annual NASPP Conference” (in Chicago) – or the two days of the “5th Annual Proxy Disclosure Conference” & “7th Annual Executive Compensation Conference” (in Chicago or by video webcast) – or a combination of both.
Here are highlights from the Towers Watson press release:
– Only 12% of respondents said they are very well prepared for the say-on-pay legislation, while 46% said they were somewhat prepared. Just under one-fourth of respondents (22%) didn’t know if their companies were ready.
– 69% said they were identifying potential executive pay issues and concerns in advance, while 60% said they were improving their CD&A to better explain the executive pay program’s rationale and appropriateness for the company. In addition, many companies indicated they are engaging with proxy advisors (44%) to discuss areas of concern, meeting with key institutional shareholders (29%) and preparing a formal communication plan (23%).
– More than one-half (59%) of respondents believe that proxy advisory firms have substantial influence on executive pay decision-making processes in U.S. companies. However, 42% said that guidelines established by proxy advisory firms have had no or minimal impact to this point on the design of their executive compensation programs.
Mr. Ponzi’s “Securities Exchange Company”
Here are some thoughts from Keith Bishop of Allen Matkins:
Regarding Broc’s blog about a fake SEC a while back, I’ve always thought it ironic that the SEC has virtually the same name as Charles Ponzi’s company. In 1919, Mr. Ponzi named his company the “Securities Exchange Company” or SEC. Thus, while his own last name has become a synonym for fraudulent pyramid schemes, the name of Ponzi’s company is quite similar to the government agency that now pursues those schemes. Here is an interesting article on the subject.
In another historical confluence of names, some may remember O.P.M. Leasing Services which perpetuated a decade of fraud before collapsing in the early 1980s. “O.P.M.” was an acronym for “Other People’s Money” which also happens to be the title of Justice Louis Brandeis’ well known collection of essays on economic collusion.
Book Review: “Circle of Greed” – The Rise and Fall of Bill Lerach
Recently, Kevin LaCroix provided this review of Bill Lerach’s new book in his “D&O Diary Blog.” By the way, Bill is fresh out of prison and on the book lecture tour…and as noted in Ideoblog, he’s teaching and not feeling the least bit remorseful…
After nearly a decade of battle, the SEC adopted proxy access during an open Commission meeting by a 3-2 vote – and then promptly posted the 451-page adopting release. Here’s a press release – and Chair Schapiro’s opening remarks (and commentary from Harvey Pitt on Bloomberg News). Here are dissenting remarks from Commissioners Casey and Paredes – and supporting remarks from Commissioners Walter and Aguilar.
Here are the basics:
– What are the thresholds for a Rule 14a-11 access right? – Shareholders (or groups) must have 3% of the voting power (so it doesn’t vary by company size as proposed) and have have held their shares for three years (up from one year as proposed) when they give notice of the nomination on Schedule 14N. When calculating the 3%, shareholders will be able to pool assets and include securities loaned to a third party as long as they can be called back – but securities sold, shorted or not held through the company’s annual meeting will need to be deducted.
– Who can be nominated as a shareholder candidate? – Shareholder nominees must satisfy the applicable stock exchange’s independence standards – and the shareholder exercising the right must not have the intent of changing control of the company. If a company wants to challenge a nominee’s qualification, it can use the Staff’s no-action process.
– How many nominees can be placed on the ballot by shareholders? – Greater of one director or 25% of the entire board. If the number of shareholder nominees exceeds the number permitted under Rule 14a-11, then preference will be given to the larger holder – not the first to nominate as the SEC had proposed.
– Is there any “opt-out” of the process rules? – Nope, it’s mandatory and neither companies nor shareholders are not permitted to opt out or select a more restrictive mechanism. Rule 14a-8 was amended so that companies may not exclude shareholder proposals that seek to establish less restrictive proxy access procedures.
– When do the new rules take effect? – 60 days after their publication in the Federal Register, which is expected to happen next week. However, the deadline for submitting a nominee is120 days before the anniversary of this year’s proxy mailing. So access essentially applies to an annual meeting next year only if the first anniversary of the mailing of this year’s proxy materials occurs 120 days or more after effectiveness. The example given during the open meeting: if the rules are effective on November 1st, then shareholders have a proxy access right if the company mailed their proxy materials on or after March 1st during 2010.
– How are smaller companies treated? – They get a three-year delay in effectiveness if the company has a public float of less than $75 million.
– How are foreign private issuers treated? – They aren’t subject to the new access rules, just like the other proxy rules.
A few weeks ago, the SEC approved FINRA’s proposal to renumber NASD Rule 2720 – relating to public offerings of securities with certain conflicts of interest – to FINRA Rule 5121 as part of the process of FINRA’s development of a consolidated rulebook.
Third Circuit Rejects A “Fraud Created The Market” Theory for Presumption of Reliance
As noted in this Edwards Angell Palmer & Dodgememo, a ruling last week – Malack v. BDO Seidman LLP, No. 09-4475 (3d Cir.; 8/16/10) – by the US Court of Appeals for the Third Circuit should help to limit federal securities fraud class actions. The 3rd Circuit court squarely rejected use of the “fraud created the market” theory to establish presumption of the essential element of reliance in securities fraud claims.
A few weeks ago, the SEC issued two releases seeking comment on three of the six topics related to its work plan to consider incorporating IFRS into the financial reporting system for US companies. As you will recall, the work plan is designed to help the SEC determine whether – and if so, how and when – IFRS should be incorporated (and because this is that type of a baby step, that’s why technically they’re not “proposing” releases – but they do seek public comment). Comments are due by October 18th.
This release requests comments on a number of potential contractual and corporate governance issues, such as: how would companies deal with contracts which require or rely on financial statements prepared in accordance with GAAP (e.g., requirement to deliver financial statements audited in accordance with GAAP, covenants based on GAAP financials, earn-outs based on GAAP financials)? How would companies comply with the requirements to have an “audit committee financial expert”? How would companies deal with state statutes that use GAAP concepts for matters such as determining the ability to declare a dividend or determining when a shareholder vote is required for a disposition of assets?
And the other release seeks comment on: US investors’ current knowledge of IFRS and preparedness for incorporation of IFRS into the financial reporting system for US companies; how investors educate themselves on changes in accounting standards and the timeliness of such education; and the extent of, logistics for, and estimated time necessary to undertake changes to improve investor understanding of IFRS and the related education process to ensure investors have a sufficient understanding of IFRS prior to potential incorporation.
The questions raised by these two releases are far-reaching and illustrate a number of potential “traps for the unwary” for US companies after implementation of IFRS for financial reporting purposes. This KPMG memo in our “IFRS” Practice Area explains more…
The FASB’s Growth Spurt; Chair Bob Herz Retires
As noted in this press release, the FASB intends to grow from five to seven members (which is the size it had from ’73-’08; the reduction to five a few years ago was widely criticized). And Chair Bob Herz will soon retire, replaced by Leslie Seidman on an interim basis starting on October 1st.
Six Senators Seek Improved Off-Balance Sheet Disclosure
A few weeks ago, six Senators sent a letter to the SEC, asking the agency to consider adopting new rules governing off-balance sheet disclosures as noted in this Reuters article.
The “Going Concern Blog” recently wrote this piece on how the Dodd-Frank Act may soon exempt companies with market caps of less than $75 million from complying with the SOX requirement to have an audit of their internal control system and how that smaller companies that have voluntarily complied with Section 404 may soon scrap their efforts (the piece was written before Dodd-Frank was passed obviously – but is still an interesting read).
In comparison, at least one company has gone to great – and manipulative – lengths to avoid falling with the grasps of Section 404 as noted in this recent SEC Enforcement action against Ephraim Fields brought recently…
The Latest US GAAP-IFRS Convergence Schedule
A few weeks ago, CFO.com published a nice schedule of expected events concerning the convergence of US GAAP and IFRS, including deadlines for the submission of comments on exposure drafts.
Recently, the FASB made available the “pre-release public view” of the 2011 US GAAP Financial Reporting Taxonomy. An updated taxonomy will be released in September, kicking off the official 60-day public comment period.
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:
– Disclosures to Independent Auditors: What’s the Risk of Waiver?
– Denny’s Removes Director Who “Fails” to Resign
– A New Approach to Catching Insider Trading?
– It’s Time for a Change: Let’s Unleash the Power of the Web for Disclosures
– Who is a Director’s Lawyer When Disputes Arise in the Boardroom?
Recently, I blogged about how at least one Senator wants a review of the “revolving door” of the SEC. In the “Legal History” Blog, Dan Ernst recently wrote about how the issue is as old as the SEC is – that is over 75 years old.
For me, it’s a non-issue in most cases as rules already exist that address those folks that most likely need a “cooling off” period (ie. former senior Staffers). But it’s fascinating to read about the topic with a historical perspective…
How to Handle Mini-Tender Offers
In this DealLawyers.com podcast, Bob Kuhns of Dorsey & Whitney explains how to handle mini-tender offers conducted by others, including:
– What is a “mini tender offer”?
– What do parties conducting mini tender offers file with the SEC?
– How can companies become aware that a mini tender is happening with their stock?
– What can companies do to combat mini tenders?
Exploring the New World of Web Disclosure
We have posted the transcript from our recent webcast: “Exploring the New World of Web Disclosure.”
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:
– Getting ready for the Dodd-Frank Act’s Say-on-Pay requirements
– The latest on the Dodd-Frank Act’s disclosure provisions
– Favorite vacation spots
Another Judicial Roadblock: Judge Won’t Approve Citi-SEC Settlement
A few weeks ago, the SEC and Citigroup entered into a settlement regarding allegations that the company misled investors over subprime investments. Citigroup agreed to pay a $75 million penalty and two former executives agreed to pay $100k and $75k, respectively. Earlier this week, Judge Ellen Segal Huvelle of the SD-NY refused to approve the settlement in this order (here’s a motion for a shareholder to submit an amicus curiae brief); just like Judge Rakoff did in the SEC-Bank of America settlement earlier this year. Here is some commentary on this situation:
Even with the proxy season wound up, we are still 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:
– US Proxy Season Review: Environmental/Social
– Action by Written Consent: A New Focus for Shareholder Activism
– You Think You Have Problems? How About 13,000 Attendees for an Annual Meeting
– The ISS Preliminary U.S. Postseason Report
– Less Support for Independent Chair Proposals
As I blogged a few weeks ago, the SEC will consider adopting its proxy access rules next Wednesday, August 25th at an open Commission meeting. No word on how the big question marks – the ownership threshold and holding period – will be resolved.
There has been a flurry of last minute lobbying by a number of groups and I wonder how much of a spectacle the meeting will be. My guess is “not much” as open Commission meetings tend to be fairly mellow, but you never know. But there could be fireworks shortly afterwards. As noted in this Bloomberg article, the US Chamber of Commerce may be gearing up to sue if the SEC approves access.
30 More Days for Comments: FASB’s Disclosure of Contingencies Proposal
Yesterday, the FASB extended the comment period on its proposal to revise the disclosure requirements for loss contingencies by 30 days so that it now ends on September 20th rather than August 20th. Note that the FASB has not changed the proposed effective date (at least not yet). The proposal continues to be controversial, as reflected by this US Chamber editorial yesterday in the WSJ (here is the Chamber’s letter).
Overcoming the Challenges: Integration Issues & Merger of Equal Issues
We have posted the transcript for our recent DealLawyers.com webcast: “Overcoming the Challenges: Integration Issues & Merger of Equal Issues.”
For dog lovers only: Back in ’81, Jimmy Stewart delivered this memorable poem about a dog named “Beau” on the Johnny Carson show. It’s quite moving if you watch it to the end…
Recently, SEC Chair Schapiro testified that 374 professionals would be hired over the next year to help the agency carry out it’s new duties (bringing the total number of Staffers to 4200), with a total of perhaps 800 over a longer period of time. Given the poor existing job market for lawyers, there are a lot of folks whose ears perked up over this news. Here’s the SEC’s “Job Center” for those that fall into this category. You may want to review my tips for getting hired by the SEC, as noted in this blog.
Dodd-Frank: How Did Self-Funding for the SEC Fare?
Not well. The budget requests from President Obama to Congress to support the SEC are noted in Chair Schapiro’s testimony. Section 991 of Dodd-Frank didn’t survive in the form originally desired by the Senate (ie. self-funding for the SEC) – rather the final Act reaches a middle ground in Section 991(e), under which the SEC can establish a $100 million reserve fund with the Section 6(b) registration fees it collects, which it can dip into without going through the normal Congressional appropriations process (as noted in this Reuters article).
This “Securities & Exchange Commission Reserve Fund” is held by the Treasury – and the SEC has 10 days after dipping into the fund to notify Congress of the date, purpose and amount drawn. Under the terms of the Act, it looks like the SEC has wide latitude as it is limited to “necessary to carry out the functions of the Commission” – but of course, Congress may decide to interpret that phrase strictly. Any funds drawn by the SEC can be replenished by more fee collections, but no more than $50 million can be deposited in any one year.
Otherwise, it’s business as usual where the independent SEC is required to go to Congress annually to get funded. Not the best framework in my opinion…
What if the Act had authorized the SEC to put penalties from enforcement proceedings into the fund? It likely would raise constitutional questions. See Tumey v. Ohio, 273 U.S. 510 (1927); see also Caperton v. A.T. Massey Coal Co., No. 08-22 (U.S. June 8, 2009).
The SEC’s New Ethical Requirements
Recently, the SEC adopted supplemental standards of ethical conduct for its employees, mainly to respond to the SEC’s Inspector General report that contained allegations of insider trading by some of the attorneys in the Enforcement Division made back in May.
The “supplemental” standards give guidance on permitted, prohibited and restricted financial interests and transactions, as well as engaging in outside employment (yes, some Staffers have been known to moonlight on occasion in unrelated fields). Once these standards take effect in mid-August, SEC Staffers won’t be able to trade securities if they have possession of material nonpublic information nor trade in one “directly regulated” by the SEC. I don’t think that includes public companies making filings through Edgar. There is a requirement now for Staffers to clear trades through a computer system and hold any purchases for six months (unless they are sold at a 10% loss or more).
Over the past year, we have recorded much angst on this blog over a new power of attorney law in New York as it didn’t appear to take into consideration how the law impacted many corporate & securities law transactions. As noted in this Sullivan & Cromwellmemo, the New York Legislature has now passed – and the Governor has signed – amendments to the New York Power of Attorney Law, Sections 5-1501-5-1514 of the General Obligations Law, which became effective on September 1, 2009. The amendments will become effective on September 13, 2010 and will then be deemed to have been in effect on and after September 1, 2009, in effect amending the prior law retroactively. The amendments will alleviate the concerns about the effect of the prior law on business and commercial transactions and the automatic revocation of prior powers of attorney.
Books & Records: Investigations Into Rejections of a Director’s Resignation
John Grossbauer of Potter Anderson notes: Recently, the Delaware Supreme Court issued this opinion – in City of Westland Police v. Axcelis Technologies – affirming the dismissal of a books and records demand against Axcelis Technologies made for the purpose of investigating alleged wrongdoing in connection with the rejection of a takeover proposal and the refusal to accept the resignation of three directors who had failed to receive a majority vote in the election of directors under a board-adopted “plurality plus” system.
The Court found the failure to respond affirmatively to the offer was a matter of business judgment absent additional facts suggesting some wrongdoing by the directors. With regard to the demand for information related to the decision not to accept the resignations, the Supreme Court affirmed the Court of Chancery’s decision that a challenge to the failure to accept the resignations would not be governed by the Blasius standard of review.
However, in rejecting the claim, the Supreme Court provided a roadmap for future plaintiffs who desire to inquire into a board’s decision not to accept resignations under a plurality-plus system. The Court cited with approval the Court of Chancery’s decision in Pershing Square, LP v. Ceridian Corp., 923 A.2d 810 (Del. Ch. 2007), in which the Chancery Court found an inquiry into particular persons’ “suitability” to be directors to constitute a proper purpose. The Supreme Court stated that the failure receive a majority vote, at least under a board-adopted majority vote system, would constitute a “credible basis to infer that the director is unsuitable, thereby warranting further investigation” in the event the board fails to accept a resignation of one or more directors who failed to receive the required vote.
Section16.net: Combination of Our Q&A Forums
For the many of you that are members of Section16.net, you will notice that we just folded our “Electronic Filing Issues Q&A Forum” into our primary “Q&A Forum” on that site. The combined Q&As were integrated so that they are listed chronologically. We had created the “Electronic Filing Issues Q&A Forum” in 2003 after the SEC adopted rules that mandated electronic filing of Forms 3, 4 and 5. Now that time is passed, there had been relatively few new questions being added as the 2000 Q&As in that old Forum covered the waterfront pretty well. We figure the combination of the Forums will help simplify your searches of the treasure trove of past Q&As (now a combined 6300!) – since you will now only have to conduct a search once rather than twice…
