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."
Yesterday, Corp Fin posted this new batch of 32 Compliance & Disclosure Interpretations that deal with Non-GAAP Financial Measures, including interps that deal with business combinations; Item 10(e) of Regulation S-K; EBIT and EBITDA; segments; Item 2.02 of Form 8-K; FPIs and voluntary filers.
These CDIs replace a set of old FAQs that the Staff issued in 2003. Here’s a redline to note the differences between the two, courtesy of Davis Polk.
Status of Regulatory Reform: What Does Dodd’s Retirement Mean?
RiskMetrics’ Ted Allen recently weighed in with enlightening analysis of where we stand on regulatory reform and the possible impact of Senator Dodd’s retirement announcement (here is the Washington Post’s take on the same topic):
Capitol Hill and governance observers have varying views on what U.S. Senator Christopher Dodd’s planned retirement may mean for his sweeping financial reform and corporate governance legislation. Most observers believe that Dodd’s decision to step down will make him more determined to pass a reform bill this year to cement his legislative legacy. His spokeswoman said this week that Dodd is “committed to continue working in a bipartisan fashion to pass strong financial reform this year.”
The U.S. Chamber of Commerce, the Financial Services Roundtable, and other business advocates express hope that Dodd will be more likely to compromise with Senate Republicans because he no longer has to appease left-leaning and populist voters in Connecticut. At the same time, consumer advocates point out that Dodd won’t have to raise campaign funds and thus should have more freedom to stand up to Wall Street interests. Other observers say that Dodd’s retirement won’t make a significant difference, because it still will be difficult for Dodd and his fellow Democrats to attract Republican support for the legislation.
Dodd, who chairs the Senate Banking Committee, announced Jan. 6 that he would not seek another six-year term in office. Dodd, 65, would have a faced a difficult re-election fight this year; he was trailing in opinion polls behind his potential Republican challengers.
In early November, Dodd unveiled a draft 1,136-page bill to overhaul the financial regulatory system. The bill included various governance provisions, such as an annual “say on pay” requirement, authorization for the SEC to adopt a proxy access rule, and provisions to mandate majority voting in director elections and to require companies to obtain shareholder consent for classified boards.
However, Senator Richard Shelby, the ranking Republican on the banking panel, and his GOP colleagues criticized the far-reaching bill, while some Democrats expressed concerns. In early December, Dodd assigned Democratic and Republican committee members to work in pairs to try to reach consensus on different provisions. Senator Charles Schumer of New York, who introduced the “Shareholder Bill of Rights Act” last year, was assigned to work with Senator Michael Crapo, a business-friendly Republican from Idaho, on executive compensation and governance provisions. Other senators were delegated to work on systemic risk principles, regulation of derivatives, and oversight of the Federal Reserve.
On December 23, Schumer and Shelby said in a joint statement that they were making “meaningful progress” on the bill. While staff members for Schumer and Crapo have met, it doesn’t appear that they have reached common ground. According to committee observers, Schumer wants to keep the governance provisions in the bill, while Crapo isn’t convinced they are necessary and wants to hold hearings. Some Democratic staffers resist the idea of holding hearings, because they fear that Republicans are trying to delay the process and have no intention of supporting a revised bill.
A committee mark-up hearing has been scheduled for Jan. 26, but some staff members are skeptical that the lawmakers will complete their work by then, according to the Financial Times. Before a mark-up is held, committee members will be given a chance to offer amendments. “I think that we still have a chance [to pass a bill with governance provisions],” Jeff Mahoney, general counsel of the Council of Institutional Investors, told R&GW. “I don’t think [Dodd’s] not seeking re-election changes much.”
Mahoney said he hopes that Schumer will keep pushing to keep the governance provisions in the bill. He also expressed optimism that Shelby and other Republicans, who generally favor market-based mechanisms over additional government regulation, will be receptive to reforms that empower shareholders. Mahoney said the council will continue lobbying for its three governance priorities–“say on pay,” authorization for a proxy access rule, and a mandate for majority voting in board elections.
Based on conversations with staffers on both sides, Mahoney said he believes that most committee members and staff members still are trying to reach consensus where possible. “No one wants to run this through on a partisan basis,” Mahoney said, recalling the recent rancor over health care reform legislation.
On December 11, the House of Representatives approved a narrower financial reform bill, which includes proxy access and “say on pay” but not other governance provisions. No Republicans voted for the final bill. Dodd has a greater need than the House Democrats to enlist Republican support because Senate rules require 60 votes to cut off debate on most bills. While the Democrats now hold 60 seats in the Senate, Dodd knows from the health care debate that he can’t count on every Democrat to support legislation that has no Republican support.
Dodd also has a limited amount of time to pass a bill before his term expires next January. During election years, lawmakers seldom pass any substantive legislation after their August recess. Senator Tim Johnson, Dodd’s likely successor as Banking Committee chairman, is unlikely to support significant new restrictions on banks. Johnson represents South Dakota, where Citigroup and other banks have significant operations.
Ask the Experts: Schedule 13D and Schedule 13G Issues
We have posted the transcript from our recent DealLawyers.com webcast: “Ask the Experts: Schedule 13D and Schedule 13G Issues.”
RiskMetrics’ New Summary: “Consolidated 2010 Voting Guidelines”
Last week, RiskMetrics posted this set of “Consolidated 2010 Voting Guidelines,” a 72-page document that highlights the key aspects of the entirety of its voting policies. In comparison, the document RiskMetrics released in November highlights only the policy guidelines that were added or modified for 2010.
Webcast: “Disclosure Controls & Procedures: An In-House Perspective”
Tune in tomorrow for our webcast – “Disclosure Controls & Procedures: An In-House Perspective” – to hear Barbara Blackford of Superior Essex, Doug Chia of Johnson & Johnson, Carrie Darling of CareFusion, Josh DeRienzis of PSS World Medical, Cindy Grimm of Texas Instruments and Isobel Jones of Del Monte Foods discuss the evolution of disclosure controls and procedures at their companies, as well as the techniques by which they help train others in their organization in an effort to ensure inadvertent disclosures aren’t made – and that disclosures are full and accurate when made.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
And then on Thursday, catch another TheCorporateCounsel.net webcast – “ESG Disclosures: Environmental, Climate Change, Social Responsibilities” – to hear Gail Flesher and Betty Moy Huber of Davis Polk, Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster, Brink Dickerson of Troutman Sanders and Jane Whitt Sellers of McGuireWoods discuss environmental, climate change and social responsibility disclosures and how companies are rethinking their approach to such disclosures.
The passing into a new decade last week – combined with the announcement of the pending retirement of Senator Dodd – reminded me that it is a good time to address the Year 2000 scare in the securities law context, particularly for those youngsters who may not remember much of it. Back in ’97 and ’98, I was heavily involved with the SEC’s Y2K efforts – both internally within the agency as well as pressuring companies to provide better disclosure.
In a nutshell, Senators Dodd and Bennett (as well as many others) pressured the SEC into being very proactive in pressuring companies to step up their Y2K efforts. As time was running short, their idea was to use disclosure requirements to gauge where companies stood with respect to being prepared. As a result, Corp Fin issued a controversial interpretive release in mid-1998, using Item 303 of Regulation S-K – ie. MD&A – as a tool to elicit disclosure about Y2K preparedness (note that yours truly is one of the contacts on the release).
This release was controversial because it used the “known uncertainties” component of Item 303 to make this strong statement: “We expect that for the vast majority of companies, Year 2000 issues are likely to be material.” The SEC expected companies to disclose their state of readiness, preparedness costs, risk and contingency plans – even if some of those companies didn’t believe any of this was material to them.
Many commentators thought this was a stretch for MD&A, and it probably was. But you have to understand that many companies were in the dark about the extent of their own Y2K issues. During 1998, I averaged 2-3 speaking gigs per month on the topic and it helped me learn how to handle a hostile audience. There were two types of hostile audiences: senior managers who didn’t want to make this type of disclosure and IT folks who thought the SEC didn’t go far enough (although many thanked the SEC for forcing their senior managers to finally pay attention to this important issue and give them the resources to combat it).
I still firmly believe that if the SEC had not taken this extraordinary step to force companies to more closely consider their Y2K risks, it would have been pure bedlam at the turn of the century. Of course, since not much transpired at when the clock struck midnight, the success of all those Y2K efforts is overshadowed by all the “hype” that now makes Y2K a laughing matter. But trust me, it was real – just like it is right now for 30 million Germans whose debit cards stopped working because they can’t handle the digits “2010”…
And yes, I still owe Joe Babits a lunch because the world did not end ten years ago…
Speaking of Comment Letter Fatigue…
As we all have been engaged in writing oodles of comment letters this decade, it’s natural that some would experience comment letter fatigue (a topic I touched upon recently in the e-proxy context). Apparently, this commentator has more fatigue than most…
– What are the Fed Reserve’s new guidelines?
– What is your own experience in implementing guidance from the Fed?
– What do you recommend that financial institutions do in response to the Fed’s guidelines?
We recently posted the latest annual update of Alan Kailer’s chapter regarding preparation of the executive compensation tables on CompensationStandards.com.
Below are the results from a recent survey we conducted on the topic of your company’s plans for this year’s D&O questionnaire in the area of related-party transactions:
1. Regarding the level of related-party information that we request from directors and officers:
– We ask each D&O to inform us of any related-party transaction – 55.7%
– We ask each D&O to inform us of only those related-party transactions over $120,000 – 40.2%
– We ask each D&O to inform us of only those related-party transactions over $50,000 – 1.0%
– We ask each D&O to inform us of only those related-party transactions over $25,000 – 0.0%
– Other – 3.1%
2. Regarding the level of related-party information that we request from directors and officers:
– We ask each D&O to submit an annual list of their entire immediate family – 9.3%
– We ask each D&O to submit an annual list of their entire immediate family, including place of employment and any entities in which they own more than a specified amount – 21.7%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each D&O to list any immediate family members doing business with these entities – 53.6%
– Other – 15.5%
3. Regarding how “complete” we require the list of immediate family members:
– We require each D&O to provide a complete list of each individual that falls under the definition of “immediate family members,” regardless if there has ever been any contact with them (e.g., in-law living in another country) – 29.2%
– We request that each D&O provide a list of immediate family members they are in contact with and require an affidavit that there is no contact with other known “immediate family members” (egs. estranged child or hostile father-in-law) – 2.1%
– We do not require each D&O to provide a list of immediate family members; instead, we rely on the directors to self-report related-party transactions – 65.6%
– Other – 3.1%
4. Regarding the method(s) of due diligence review that we perform for related-party transactions:
– We rely solely on each D&O to alert us to any potential transactions – 32.0%
– We conduct a periodic review of SEC filings, Web search engines, and relevant web sites to update the lists of immediate family members provided by our D&Os – 0.0%
– We conduct a periodic review of our accounts payable and receivable for transactions with individuals on the list of immediate family members provided by our D&Os – 25.8%
– We distribute the lists of immediate family members to our business unit heads and require them to monitor for related party transactions – 2.1%
– All – or some combination – of the above – 27.8%
– Other – 12.4%
Please take a moment to respond anonymously to our “Quick Survey on Impact of Loss of Broker Nonvotes for ’10 Proxy Season.”
Profile: SEC Chair Schapiro’s First Year
Here is a Bloomberg article that profiles SEC Chair Schapiro’s first year in office.
Mailed: November-December Issue of The Corporate Counsel
The November-December issue of The Corporate Counsel includes pieces on:
– 2010 Proxy Season Items
– New SLAB Narrows 14a–8(i)(7) Ordinary Business “Risk” Exclusion
– Staff Says It Won’t Necessarily Settle for Futures–Only Comments on Executive Compensation Disclosures–What That Will Mean For Issuers
– Other SLAB 14E Items
– A Few Thoughts on Proxy Access
– Can No Disclosure Be Good Disclosure?
– CFOCA Update
– More on Obtaining CFOCA Waiver Letters for Separate Financials of Acquired Businesses, Subsidiaries and Guarantors
– ABA Committee’s Statement of Effect of the FASB Codification on Audit Response Letters
– The Staff’s New Section 13(d)/(g) CDIs
Act Now: Get this issue on a complimentary basis when you try a 2010 no-risk trial today.
Tune in tomorrow for our CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Compensation Disclosures – What You Need to Do Now!” – featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller as they cover the new SEC rules that relate to executive compensation disclosures. Here is an outline of what will be discussed that you can print out in advance and take notes on.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
Don’t forget today’s TheCorporateCounsel.net webcast – “How to Implement the SEC’s New Rules for This Proxy Season” – during which Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn will provide practical guidance on how to handle the new SEC rules that don’t deal with compensation issues.
Sample Model D&O Questions for the New SEC Rules
In response to the SEC’s new proxy disclosure requirements, Dave Lynn and Mark Borges have just finished sample model questions for your D&O questionnaire (and much more analysis) as part of the Winter 2010 issue of “Proxy Disclosure Updates.” Here is a blurred copy of that 20-page issue to give you a sense of it.
You will receive a full copy of this issue, which is posted on CompensationDisclosure.com, immediately upon taking advantage of a no-risk trial to Lynn, Borges & Romanek’s “Executive Compensation Service” for 2010 (which includes the just-mailed 2010 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide”).
FINRA Adopts New Private Offering Rule on Use of Proceeds
And here is one from Allen Matkins: “Private offerings of securities by a FINRA member firm or a control entity must comply with new disclosure and filing requirements and limitations on the use of proceeds. FINRA adopted new Rule 5122 to require FINRA member firms, and associated persons that engage in certain private placements of its own securities or the securities of a control entity, to comply with certain disclosure and filing requirements and limitations on the use of proceeds. The private placements subject to the new rule are known as Member Private Offerings or MPOs. FINRA adopted Rule 5122 to address concerns with regard to conflicts of interest in MPOs. Traditionally, MPOs have been excluded from the scope of existing FINRA rules that generally applied to public offerings.”
Tune in tomorrow for our webcast – “How to Implement the SEC’s New Rules for This Proxy Season” – during which Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn will provide practical guidance on how to handle the new SEC rules that don’t deal with compensation issues.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
Recently, Cisco shareholders narrowly supported a say-on-pay proposal by a majority. In this CompensationStandards.com podcast, Julie Tanner of Christian Brothers Investment Services discusses the recent Cisco vote on say-on-pay and other CBIS activities, including:
– What were the results of your say-on-pay proposal on Cisco’s ballot? How did that compare to last year?
– How does Christian Brothers select which companies to which it will submit shareholder proposals?
– What types of proposals has Christian Brothers submitted for the 2010 proxy season?
– Does Christian Brothers engage with companies before – or after – it submits shareholder proposals?
In this CompensationStandards.com podcast, Greg Taxin discusses Soundboard Review Services activities, including:
– Why was Soundboard founded?
– What opportunities for boards does Soundboard provide? How does it differ from what advisors do today?
– What is the diligence process that Soundboard undertakes to understand a company’s executive compensation processes?
– What is the “opinion letter” that Soundboard provides at the end of its evaluation?
Heads Up: Change in Edgar Search Functionality
A while back, I blogged that the SEC had decided to name its “IDEA” tool so that it would become “Next-Generation EDGAR.” The SEC has now posted a notice – which appears on their “Company Search” page – indicating that as of August 19th, Edgar filings will be accessed only by an Edgar script as the Idea script will no longer be operational. This change will be transparent to most users, but bookmarked links to previous filing searches or RSS feeds may be broken and will need to be recreated. As Jim Brashear of Haynes & Boone remarked to me: “What’s comes after the “Next-Generation EDGAR System”? “Next-Next Generation”?
As an aside, now that XBRL has been mandated for some larger companies, sites that display SEC filings in a more user-friendly way than the SEC are springing up. For example, check out XBRLCloud.com, which includes a list of the number of errors in each XBRL filing. And this “SEC Data Guy” Blog is helping to further explain what “errors” really are in XBRL filings. I must say, this stuff is confusing…
Our January Eminders is Posted!
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Built in the same simple format as our own “Blue Justice League,” I love this casual game – “Cheese or Font” – where a name pops up and you need to click on whether it’s a type of cheese or font. If you want to play something more “legal,” our “Blue Justice League” competition still goes on. It remains the only casual game for lawyers I’ve seen online.
This new “Alice in Wonderland” trailer starring Johnny Depp looks awesome.
An Inspirational Site for the New Year
My college bud, Dino, turned me onto this inspirational site: “The Fun Theory.”
Second Circuit: Investor Ceased to be 10% Owner 26 Minutes Before Purchase
In December of last year, I blogged about Donoghue v. Local.com Corp., 2008 WL 4539487 (S.D.N.Y.), in which the court held that an alleged ten percent owner’s simultaneous purchase and sale of issuer securities at 4:32 p.m. on August 1, 2007 were not subject to Section 16(b) because the issuer had issued common stock to a group of third party investors 26 minutes earlier, diluting the former ten percent owner’s ownership to 9.75%. The Second Circuit has now affirmed that decision. 2009 WL 4640653 (2d. Cir.).
The case involved a purchase of Local.com common stock and warrants by Hearst Communication, Inc., pursuant to a stock purchase agreement executed in February 2007, as a result of which Hearst became a ten percent owner subject to Section 16. The stock purchase agreement prohibited Local.com from selling any additional shares of common stock for the next 90 days without Hearst’s written consent. Within that time, Local.com entered into an agreement to sell common stock to a group of third party investors. One of the conditions to closing was that Local.com obtain all required consents to the transaction. Hearst agreed to consent to the transaction if Local.com would reduce the exercise price of Hearst’s warrants by $0.50 a share, provided that Local.com filed a Form 8-K disclosing the terms of the consent by 5:00 p.m. on August 1, the date of closing.
Here is the sequence in which the pertinent closing events occurred:
– 12:46 p.m.–Local.com notified its transfer agent to prepare the stock certificates to be delivered to the new investors, but to wait for final approval before releasing them
– 4:06 p.m.–the new investors wired payment for their shares
– 4:32 p.m.–Local.com filed the Form 8-K disclosing Hearst’s consent
– 4:45 p.m.–Local.com instructed its transfer agent to release the stock certificates
Once the new shares were issued to the third party investors, the number of shares outstanding was sufficient to dilute Hearst’s ownership to below 10%. The question was whether the warrant amendments, which the plaintiff alleged constituted a cancellation and re-grant (an issue the court found it unnecessary to address), occurred before or after the new shares were outstanding.
The Second Circuit affirmed the district court’s holding that the private placement shares were issued and outstanding at 4:06 p.m., when Local.com received payment for the shares. This was a case that could have gone either way, based on the technicalities of the closing conditions, but the outcome is appropriate and clearly supportable.
Investment banks spend a lot of time tailoring their M&A engagement letters to address the perceived risks involved in advising widely-held public companies. Those engagements are often perceived as presenting greater liability risks than M&A advisory engagements for private companies, and that’s probably true most of the time, but a recent Massachusetts federal court decision provides a sobering reminder to investment banks that this isn’t always the case.
What’s more, the Baker v. Goldman Sachs case – here is the opinion – also shows how some of the provisions of an engagement letter designed to protect bankers in public company deals can under certain circumstances have the opposite effect in a private company transaction.
The Baker case arose out of Goldman’s service as a financial advisor to Dragon Systems, Inc. in connection with its ill-fated sale to Lernout & Hauspie Speech Products, a Nasdaq-listed Belgian company that collapsed in the aftermath of an accounting scandal that surfaced shortly after the deal was completed. L&H acquired Dragon in an all stock deal, and the buyer’s subsequent collapse resulted in a loss to Dragon’s controlling shareholders of approximately $300 million.
Dragon’s two controlling shareholders filed a lawsuit against Goldman Sachs and related entities. The plaintiffs alleged that Goldman Sachs negligently advised Dragon to merge with L & H without adequately investigating the buyer’s value. The plaintiffs made a variety of contractual and other common law claims, including breach of fiduciary duty and negligent misrepresentation, and also alleged that Goldman’s conduct violated the Massachusetts Unfair Trade Practices statute.
With the exception of the novel statutory claim, most of the plaintiffs’ claims were consistent with what you typically see in investment banker liability cases. The most common legal theories used to sue bankers are the tort of negligent misrepresentation, and breach of contract claims premised on agency or third-party beneficiary principles. More recently, breach of fiduciary duty claims have become more prominently featured as well. With some high profile exceptions, investment bankers have generally been pretty successful in defending against these claims.
Plaintiffs relying on negligent misrepresentation or contract law principles premise their claims on allegations that they were intended beneficiaries of the contractual relationship between the banker and the company, and were thus entitled to rely upon the banker’s efforts. Since these claims depend on the contractual relationship between the bank and its client, investment bankers’ engagement letters have played a prominent role in their efforts to fend off such claims. Those letters typically include very specific statements about the parties to whom the investment bank is providing its services, together with broad disclaimers of liability to corporate shareholders or other third parties.
Interestingly, Goldman’s engagement letter with Dragon included customary language intended to accomplish this objective. The letter explicitly stated that “any written or oral advice provided by Goldman Sachs in connection with our engagement is exclusively for the information of the Board of Directors and senior management of the Company.” What’s even more interesting, however, is that the plaintiffs were able to use this language as the basis for their third party beneficiary and negligent misrepresentation claims.
What the plaintiffs did was to simply point out to the court that one of the two controlling shareholder-plaintiffs was a member of the Board, and was thus within the group entitled to the benefits of the agreement. Goldman argued that in using the quoted language, it was referring to the board in its representative capacity. However, the court looked at some other potentially ambiguous phrasing in the engagement letter, including the fact that the letter was addressed to the shareholder-director and the letter’s use of the personal pronoun “you” instead of “the company” in describing the persons to whom it was providing its services, to justify its conclusion that Goldman appreciated that others aside from the board in its representative capacity would benefit from its advice.
The treatment of the plaintiffs’ fiduciary duty claim is another area where the Company’s closely-held nature appears to have played a significant role in the court’s analysis. While the fact that the engagement letter did not include a disclaimer of fiduciary duties played an important role in the court’s decision not to dismiss these claims, the close contact that Goldman allegedly had with the plaintiffs throughout the course of the engagement was another important factor in leading the court to conclude that the plaintiffs sufficiently alleged that “special circumstances existed to create a fiduciary relationship apart from the terms of the contract.”
It is important to keep in mind that Baker involved a motion to dismiss, so this litigation is at a very preliminary stage and it is inappropriate to draw broad conclusions from it. Nevertheless, the Baker case drives home the point that although the risk profile in engagements involving widely-held public companies may generally be higher than private company engagements, private companies (and public companies with controlling shareholders) present distinct risks of their own that banks may want to take into account in drafting and negotiating engagement letters.
SEC Approves PCAOB’s 2010 Budget
Last week, the SEC issued this order approving the PCAOB’s budget and annual support fee for ’10. The PCAOB received a 16% increase for its 2010 budget, from $157.6 million to $183.3 million (raising the Staffing level to 636). The order includes three specific measures that the PCAOB should address during the year – one of which is that the PCAOB should consult with the SEC about any “plans to implement changes in response to legislative actions.” Between an active Congress and the pending Supreme Court case, it should be an interesting year for the PCAOB…
