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."
As noted in this press release, on Friday, the SEC and CFTC jointly issued an “advance notice of proposed rulemaking” that requests public comment on defining certain key terms and prescribing regulations regarding “mixed swaps” as required by Title VII of Dodd-Frank. In other words, they issued a concept release.
Why did this project start with a concept release? I’m not sure, but I’m guessing it is part of the overall process to be “super duper” open about the Dodd-Frank rulemaking – and because it is being conducted jointly with the SEC and CFTC, this early input will help the agencies coordinate and get some kinks worked out prior to actually going out with proposals.
Trends in Going Concern Opinions
Recently, Audit Analytics released its annual “Going Concern” report – here’s some of the highlights:
– It is estimated that 19.8% of auditor opinions filed for year end 2009 will contain a qualification regarding the company’s ability to continue as a going concern.
– Year end 2007 received the highest number of going concerns for the decade (3284) with 2008 coming in at a close second (3275) and 2009 estimated to experience a drop (3007), mostly due to company attrition from the 2008 going concerns.
– An analysis of the 3,275 companies that filed a going concern in 2008 found that 205 of these companies filed a termination of registration with the SEC.
Use of ESOPs in Deals
In this DealLawyers.com podcast, Jude Carluccio of Barnes & Thornburg explains how ESOPs are being used in deals these days, including:
– How are ESOPs considered a special type of shareholder?
– What are recent examples of ESOPs being used in deals?
– What factors might lead an acquiror to consider using an ESOP in a deal?
– What are the types of issues that companies should consider before using an ESOP?
Sick of Dodd-Frank already? This video of clowns diving in unison is hilarious…but begs the question: why are they doing it? Take this anonymous poll to weigh in:
This blog has never had a true vacation in over eight years and it probably never will. Dave will be blogging next week when I am off. I need it after reading this recent NY Times article about how online journalists burn out. I’ll see you again on August 16th.
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:
– Analyst Calls: Another Reason to Exercise Caution
– FTC Challenges CEO’s Statements as an “Invitation to Collude”
– Dude, Where Did You Get All that Stuff?
– SEC Loses Insider Trading Case – But Wins War on Swap Jurisdiction
– More on “Drafting Standing Delegations of Authority from the Board: Factors to Consider”
I normally don’t blog about rumors, but the SEC repeatedly has indicated that it would hold an open Commission meeting to adopt proxy access soon so that it will be in place for the next proxy season. So when Kara Scannell wrote in this WSJ article earlier this morning that the SEC’s meeting would be Wednesday, August 25th – according to “people familiar with the matter” – I thought I would pass it along and stem the flow of emails asking me when it would happen. Of course – until we see the SEC’s official meeting notice – that date may change, as rumored meeting dates often do…
Three Prominent UK Pension Funds Urge Companies to Resist Annual Director Elections
Here is news culled from this Wachtell Liptonmemo written by Adam Emmerich, William Savitt and Brian Walker:
In response to new “good governance” guidance from the UK’s Financial Reporting Council (FRC) that requires companies either to put their directors up for annual reelection or to explain why they have opted for triennial elections, three of the UK’s largest institutional investors wrote an open letter urging companies to resist.
The letter, published in the Financial Times and delivered to every company listed in the FTSE All-Share index, criticizes the FRC’s guidance as unnecessary and damaging to the interests of companies and shareholders. The measure threatens to “engender a short-term culture with the risk of effective boards being distracted by short-term voting outcomes,” the investors write, which would be “detrimental to the interests of shareholders such as the pension funds we represent, who seek to have long-term, constructive, relationships with the directors of companies in which they invest.” The letter closes with a promise to support boards of directors who provide a reasonable argument for retaining triennial elections.
The investors manage three of the UK’s biggest pension funds – Hermes Equity Ownership Services, Railpen Investments and Universities Superannuation Scheme – who between them manage assets of £106 billion (US$169 billion). The letter is a powerful reminder that corporate governance arrangements should be designed to encourage the long-term strategic vision and direction necessary to maximize value for all constituencies. Replacing experienced and contemplative stewardship with myopic proxy politics encourages asymmetric risk-taking and similar tactics that pay off today at the expense of tomorrow.
As we have long argued, subjugating the corporate enterprise to the whims of the moment benefits no one – least of all shareholders, as these influential investors recognize. This very public resistance by large, sophisticated, long-term investors to the one-size-fits-all prescriptions of “good governance” may well mark a turning point in the fight for the preservation of shareholder capitalism in a form that allows for the continued strength and growth of American and European public companies.
July-August Issue: Deal Lawyers Print Newsletter
This July-August issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Will Mandatory Shareholder Approval of Golden Parachutes Dull Their Luster?
– Mini-Tender Offers: More Frequent – No Less Troubling
– Latest Developments in Use of Top-Up Options
– Blood in the Water? Use of Delaware’s Two-Record Date Statute May Provide Flexibility, But Can Also Expose a Weak Hand
– Delaware Protects Attorney-Client Privilege for Investment Banker Communications
– Leveraged Acquisitions: A New Post-Credit Crisis Structure
– Delaware Court of Chancery Announces New Rules for Controlling Shareholder Freeze-Out Transactions
With so many provisions in Dodd-Frank, it is understandable if a number of “sleepers” arise. But perhaps they won’t since many of us are looking for them – and if they’re found, they aren’t “sleepers” by definition, right? I guess it depends on your definition of “sleeper.”
My definition of the terms mean that the provision applies to many companies, not just a few. As a result, something like this nice find of an Investment Company Act issue in this Pillsbury memo doesn’t really apply to our community since most of us don’t deal with hedge funds investing in exchange traded funds.
The new Congo disclosure requirement in Section 1502 – “whether company products contain minerals from Congo or neighboring countries and if so, what steps those companies are taking to track the source of the minerals” – isn’t much of a sleeper since most companies won’t be required to make this type of disclosure; plus it has been written upon plenty (see these memos). Even the Washington Post has written an article about it.
My guess is that something will be overlooked somewhat at first; much the same way that Section 404 – “internal controls” – was overlooked when Sarbanes-Oxley was enacted. I’m curious to hear your thoughts on what the sleepers of Dodd-Frank are…shoot me an email.
Dodd-Frank: A FOIA Flap Over the SEC’s Exemption
Over the past week, a debate has grown over Section 9291 of Dodd-Frank. That provision provides an exemption for the SEC from FOIA relating to information obtained during “surveillance, risk assessments, or other regulatory and oversight activities.” The debate started when a Fox News article expressed concerns about the potential for overbroad application. Since then, the SEC has responded with letters to Congress, as noted in this Washington Post blog, and this statement:
The new provision applies to information obtained through examinations or derived from that information. We are expanding our examination program’s surveillance and risk assessment efforts in order to provide more sophisticated and effective Wall Street oversight. The success of these efforts depends on our abilty to obtain documents and other information from brokers, investment advisers and other registrants. The new legislation makes certain that we can obtain documents from registrants for risk assessment and surveillance under similar conditions that already exist by law for our examinations. Because registrants insist on confidential treatment of their documents, this new provision also removes an opportunity for brokers, investment advisers and other registrants to refuse to cooperate with our examination document requests.
As noted in the WaPo blog, the SEC has sought this exemption for some time, so that those it regulates would be more receptive to providing information the SEC wanted access to, such as emails. We’ll see if the clamor for tweaking this provision to limit this new exemption will continue as one member emailed me: “It is reasonable as a law enforcement agency that the SEC keeps documents and evidence gathered in a law enforcement and prosecution case confidential until a case is closed, to ensure fairness to the case and defendant. However, in the case of examination and inspection reports, it seems that keeping such reports “dark” and non-public, after the exam has been completed, has led to bad behavior on the part of regulators and those regulated which in turn has not served the public well.”
Hotties of Investor Relations
For something light-hearted, check out Dick Johnson’s recent blog on his “IR Cafe,” discussing a recent Dealbreaker piece that lists attractive women in the IR world…
According to this WSJ article, CalPERS, CalSTRS and CII are jointly gearing up for proxy access by establishing a database of prospective directors. The database is tentatively dubbed 3D for “Diverse Director Database.”
Below is an excerpt of an interview recently conducted by Francis Byrd of The Altman Group with Anne Sheehan who runs the governance initiatives for CalSTRS (here is the full interview) that relates to the 3D project:
Byrd: Recent media stories have reported that CalSTRS and CalPERS, working with other investors, are in the process of developing a database of potential director nominee candidates for short slates and for submission to companies. What skill sets are you seeking from these potential candidates and how will you assure that these individuals meet (or exceed) the criteria specified by companies’ boards of directors?
Sheehan: We are working on establishing a database of independent director candidates and we are doing that for a few important reasons. One reason is that there is now demonstrated economic value from having a diverse board of directors and we believe that makes the composition of boards a shareholder value issue.
Another reason is the necessity to expand the pool of qualified candidates. Almost 3,000 of the sitting directors on companies in the Russell 3000 are between the ages of 70 and 90, a lot of companies have retirement policies that typically go into effect at 72, and couple that with the adoption of majority voting standards by companies and this looks like a significant long-term shareholder value concern. Add to that the last three decades of market collapses, beginning with the 1987 crash, and we as long-term investors have to take the director pool seriously.
In each of these major collapses, the one thing that is a constant is that these failures were cultural, related to the people that were serving on the boards and how they discharged their duties to shareholders. We can only have an effect on the cultural mind-set by expanding the pool. This is not a short-term goal and we realize that this will not be accomplished in one annual meeting season. As to qualifications, the SEC’s recent disclosure rules requiring disclosures regarding director qualifications is going to be very valuable for shareholders because we should learn why the sitting directors are on the boards.
Naturally, the qualifications are going to have to match the company’s needs. We will put quality people in the database, many of whom will not have prior public company board service and we will do some screening to be sure that the qualifications that people put forth are true, but the final decision will still be made by shareholders when they vote. The nominating committees on these boards are going to be critical to this effort as well and in the final analysis, we are dealing with a human problem and there are no guarantees. There aren’t any in the current environment and the existence of the CalSTRS/CalPERS data base is not going to produce any magical guarantees either.
Here is a guest post on CorpGov.net that sets forth an academic’s view of how proxy access might work, with directors colleges run by activist investors serving as the training ground.
CalSTRS & Relational Investors Threaten Occidental Petroleum with a Proxy Fight
As noted in this WSJ article yesterday, CalSTRS (not CalPERS, as erroneously noted in many media pieces) and Relational Investors threatened to launch a proxy fight recently at Occidental Petroleum by sending this letter to the company’s board, complaining about excessive pay practices and poor CEO succession planning. You may recall that Occidental was one of the three companies that lost a say-on-pay vote during this proxy season, as noted in this blog.
Critical FCPA Diligence in Deals Today
We have posted the transcript for the recent DealLawyers.com webcast: “Critical FCPA Diligence in Deals Today.”
The standard 10b5-1 plan document recently was re-written by one of the major brokerage firms. It is better than their old form, but still not a good approach. I have several concerns with most broker-prepared 10b5-1 plans. First, while the rule is very simple in what a plan must include, the plans tend to ask for representations and other commitments from the executive that simply are not germane to having an effective plan.
I’m more troubled by what some of the plans ask from issuers. Issuers should be willing to verify the number and terms of outstanding options, and can commit to honoring option exercises against the payment of the exercise price, but should go no further. In particular, issuers should not commit to providing notices upon various corporate events. Brokers should get this information from customary exchange and market sources. The bottom line here is that Rule 10b5-1 plans are not the “issuer’s plans,” but the “executive’s plans,” and issuer involvement simply is not justified.
I am also is troubled by the representation that some of the plans contain that the executive will not disclose any non-public information to the broker. But what if the broker, through its investment banking operation, is executing a major transaction for the issuer? Still no disclosure? Of course not, but that is not how the plans read.
Transcript: “Evolving Insider Trading Policy and 10b5-1 Plan Practices”
We have posted the transcript for our popular webcast: “Evolving Insider Trading Policy and 10b5-1 Plan Practices.”
ISS Solicits Feedback for Its Policy Survey
As it has done the past few years, ISS is soliciting feedback ahead of announcing its policy updates for the 2011 proxy season. It’s shorter this year with just 29 questions, but the deadline is tomorrow even though the survey was posted late last week…
Our August Eminders is Posted!
We have posted the August issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
On Monday, I blogged about how a movement towards shareholder approval of political spending was gathering steam. Yesterday, as Ted Allen blogged in ISS’s Insight Blog, the House Financial Services Committee approved a bill introduced by Rep. Michael Capuano – by a vote of 35-28 – that would require companies to obtain investor approval before spending more than $50,000 per year in general corporate funds on political activities. We’ll see if this goes anywhere…
Survey Results: Director Education/Orientation
We have posted the results from our recent survey regarding director education & orientation, repeated below:
1. Does your board require directors to obtain continuous education:
– Yes – 15.2%
– Not anymore, we removed the requirement over the past year – 6.1%
– Never did require it – 78.8%
2. If you answered “not anymore” or “never” above, does your board encourage directors to obtain continuous education:
– Yes – 77.8%
– No – 14.8%
– Not yet, but it’s under consideration – 7.4%
3. Do any of your directors obtain – or will obtain during the next year – continuous education by:
– Third-party director colleges – 46.9%
– Third-party education provided in-house (i.e. the teachers come to the boardroom) – 40.6%
– Other educational opportunities (e.gs. in-house training in the boardroom, “homework,” plant visits) – 71.9%
– Doubt they will obtain any director education over the next year – 15.6%
4. If your directors obtain continuous education, are the topics covered:
– More business/operational in nature – 23.3%
– More legal/governance/ethics in nature – 76.7%
5. Does your company have a director orientation program for new directors:
– Yes – 72.7%
– No – 27.3%
6. Does the board require new directors to participate in the company’s director orientation program:
– Yes – 69.7%
– No – 30.3%
Please take our new “Quick Survey on Rule 10b5-1 Plan Practices.”
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:
– What is Corporate Access Worth? Cost Estimates to Reach Company Reps
– Judge Rakoff Addresses Stanford Directors’ College
– NASAA: The Long-Awaited “One-Stop Filing” System for Rule 506 Notice Filings
– SEC Cops Don’t Need Guns, Badges on Their Beat
– CEO Succession Study: Fewer CEOs Are Being Forced Out
I just finished writing a special July-August issue of The Corporate Counsel entitled “Say-on-Pay Solicitation Playbook: Practical Guidance on Strategies and More.” You will need this issue to help you prepare for mandatory say-on-pay. It includes analysis on:
– A Wake-Up Call: The Big Three
– The Drill Down: Why Did Shareholders Reject Motorola, Occidental and KeyCorp?
– The Cry for Shareholder Engagement: What is “Shareholder Engagement”?
– The Roadmap: How (and When) to Engage Effectively
– Overcoming Reg FD Concerns about Engagement
– Peeking Under the ISS Hood
– How Proxy Advisors & Major Institutions (& Employees) Vote on Pay
– The Roadmap: “When” and “How” to Hire a Proxy Solicitor
– The Preliminary Vote Count Looks Close: What Can You Do?
– Confidential Voting Policies: Proper Implementation
– How to Calculate Voting Result Percentages: Read Your Bylaws (and Compare with Your Proxy)
– The Importance of Making Your Compensation Disclosure “Usable”
– How to Gear Up for Mandatory Say-on-Pay
Dodd-Frank: Why There Might Be So Many Technical Issues
The excerpt below from a Gibson Dunn email does a nice job of explaining how the process leading to the passage of Dodd-Frank may have created more implementation issues compared to a “normal” bill:
As we move into the implementation phase of this legislation, one point to bear in mind is how many technical — and not so technical — issues and problems we will discover in this 2,300 page bill. One reason for the likely surfeit of problems, ironically, is the manner in which the conference on the bill was conducted. Normally, the vast majority of the work done in conference is accomplished behind closed doors, with staff toiling over language and checking each-other’s work.
The conference on the Dodd-Frank bill, in contrast, was open and televised, and the “work” was done by members, on the fly, with little time or ability for anyone to check their work. In a sense, the conference was much like a committee mark-up, where amendments are added through a process that is often loosely-structured due to the expectation that problems can be cleaned up on the floor or in conference. When a conference is conducted in this manner, you create a remarkably transparent process, but there is little or no opportunity after the fact to clean up errors and identify unintended consequences prior to enactment. And Congress was using live ammunition.
Another consequence of the transparent, free-flowing conference process was that more issues than one might normally expect were committed to regulatory discretion. In the absence of quick consensus, decisions on thorny issues were deferred for regulatory consideration. It has been oft noted that nearly 250 regulations and 70 studies are required by the Act.
Two results of the conference logically follow. First, agencies will grapple with hundreds of thorny issues that Congress could not or chose not to decide and also attempt to clean up and rationally interpret errors or ambiguities in the legislative text through regulations. Second, Congress (and Chairmen Frank and Dodd indicated as much during conference deliberations) is likely to take up a technical corrections bill some time in the coming year. Of course, if that bill comes up in 2011, it will do so without Senator Dodd, who is retiring.
Dodd-Frank: A Look Behind the Scenes of How It Got Passed
This recent Washington Post article tells the story about how key lieutenants behind scenes ensured passage of Dodd-Frank. It’s worth reading…
Yesterday, SEC Chair Schapiro announced that the SEC would go the extra yard ahead of its blistering rulemaking schedule and start accepting comments on its various projects right away through this Dodd-Frank comment page. The comment letter page is broken up by the Titles in the new legislation, with 31 separate areas for comment, including a section under Title IX which covers the governance and executive compensation provisions. Each rulemaking will have its own comment period as usual – and as required by the Administrative Procedures Act – but this “field day” may help to shorten the comment periods and get rules in place before next year’s proxy season.
Perhaps even more important is the SEC’s “newly-established best practices when holding meetings with interested parties,” which include:
– Staff will try to meet with any interested parties seeking a meeting. When the number of requests exceeds availability, the staff will seek out parties with varying viewpoints. Staff may have to limit the number of meetings with similarly situated parties and will limit multiple meetings with the same party.
– Staff will reach out as necessary to solicit views from affected stakeholders who do not appear to be fully represented by the developing public record on a particular issue.
– Staff will ask those who request meetings to provide, prior to the meeting, an agenda of intended topics for discussion. After the meeting, the agenda will become part of the public record.
– Meeting participants will be encouraged to submit written comments to the public file, so that all interested parties have the opportunity to review and consider the views expressed.
Given the level of rulemaking the Staff has on its plate, time management is of the essence and these “best practices” should help curtail wasteful meetings where the same points are made over and over again (and problems are identified but no solutions are proposed).
It will be interesting to see if this transparency works to reduce the number of requests for meetings given the mass media’s recent fascination with “who is lobbying the regulators.” The NY Times ran this front-page article today on the topic.
Corp Fin Extends Its New CDIs to the Asset-Backed Market
Yesterday, Corp Fin reissued a bunch of the CDIs that were issued last week to update them to include their applicability to the asset-backed market reflecting the Ford Motor Credit no-action letter that was issued later in the day after the interps first came out.
Here’s how badly I need a vacation – and gives you a window into the journalism process over here. I first became aware of this change when I saw that the new CDIs showed up in Corp Fin’s “Outdated or Superseded Compliance and Disclosure Interpretations.” Yes, confusing – but what makes me chuckle is that I kept humming Roberta Flack’s “Killing Me Softly“…vacation coming up soon…
Webcast: What You Should Be Doing Now
Ahead of our package of two full-day Conferences on the executive pay provisions of the Act – coming up in less than two months, catch tomorrow’s special pre-conference webcast to help you start taking the actions you need to be taking now. Dave Lynn, Mark Borges and Mike Kesner headline this webcast: “The New Pay Legislation: Action Items.”
Anticipating the passage of the Dodd-Frank Act, Dave Lynn just put the finishing touches on a special “Summer 2010″ issue of Compensation Standards that lays out a number of action items that you should be considering now to comply with the new executive compensation provisions in the Act. This print newsletter is a part of a CompensationStandards.com membership; try a “Rest of ’10 for Half-Price” no-risk trial to gain immediate access to this issue.
Even More Guidance: Ahead of our package of two full-day Conferences on the executive pay provisions of the Act – coming up in just two months – we have just announced a special July 29th pre-conference webcast to help you start taking the actions you need to be taking now. Dave Lynn, Mark Borges and Mike Kesner headline this webcast: “The New Pay Legislation: Action Items.”
And don’t forget Mark Borges’ “Proxy Disclosure Blog” on CompensationStandards.com, where Mark has been posting analysis daily about the new executive pay provisions of Dodd-Frank.
Governance Rating Merger of Equals: The Corporate Library & GMI
Last Thursday, The Corporate Library and GovernanceMetrics announced they had suddenly merged. Neither of the entity’s products or services (or names) will change – as noted in these FAQs – even their principal places of business will continue to be separate, New York City for GMI and Portland, Maine for TCL. TCL’s CEO Richard Bennett becomes CEO of the combined entity; GMI’s CEO Howard Sherman becomes the Executive Director.
Definition of “Securities”: SEC Staff Believes “Life Settlements” Included
Last week, the SEC’s Life Settlements Task Force (a “cross-Divisional” body created a year ago) released this report recommending that life settlements be clearly defined as “securities,” including recommending that the Commission itself should:
– Consider recommending to Congress that it amend the definition of security under the federal securities laws to include life settlements as securities
– Instruct the Staff to continue to monitor that legal standards of conduct are being met by brokers and providers
– Instruct the Staff to monitor for the development of a life settlement securitization market
– Encourage Congress and state legislators to consider more significant and consistent regulation of life expectancy underwriters
