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."
I was trying real hard to not blog at all this week (which would be a first in years) – but I just can’t help myself. That is one downside to becoming a blogger – you look for story ideas in everything you do (or at least, you should be). For every blog I post, there are three that lay in draft form for months and months until I finally delete them as unworthy or untimely. And my blogging style isn’t even that involved – I favor fairly short pieces that link to more information from other sources.
But as Francine McKenna of “re:theauditors.com” fame describes in this blog, there is another downside to blogging. By blogging, you become a journalist whether you realize it or not – and with that, you open yourself to the world. It comes with the territory.
The good news is that the upsides of blogging far outweigh the negatives in my opinion. You only live once and blogging gives you a great opportunity to connect with like-minded souls. And that’s just a personal benefit. There are numerous professional benefits. Read more about the pros/cons of blogging and whether you have what it takes to blog in my article from the “Summer 2008” issue of InvestorRelationships.com (which is still a free publication).
Microsoft’s Shareholders Vote on Say-on-Pay
Last week, Microsoft held its annual meeting, including its first triennal vote on pay (which received 99% support). In this blog, Microsoft’s Deputy General Counsel John Seethoff describes the results of the meeting – and links to this Roll Call op-ed by Carpenters Ed Durkin and Microsoft’s GC Brad Smith on why a three-year cycle for say-on-pay makes sense.
So What About the Ohio AG’s Lawsuit Against the Rating Agencies?
In his “D&O Diary” Blog, Kevin LaCroix examines the latest efforts to bring the credit rating agencies to bear for their role in the financial crisis. Good stuff.
Since every company should now consider addressing walkaway numbers in this year’s proxy statements, we have devoted the “Fall ’09 issue of Proxy Disclosure Updates” to analyzing how to draft this type of disclosure. We even provide a model walkaway disclosure in this critical issue.
You will receive this issue, which is posted on CompensationDisclosure.com, by taking advantage of a no-risk trial to Lynn, Borges & Romanek’s “Executive Compensation Service” for 2010 (which includes the 2010 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide” that we mailed last week to those that ordered the Service).
Act Now: As part of the Lynn, Borges & Romanek’s “Executive Compensation Service,” if you try a no-risk trial now, not only will you receive the walkaway issue described above and the 1000-page plus Executive Compensation Disclosure Treatise, you will also receive the Winter issue of Proxy Disclosure Updates – with important new proxy disclosure guidance – soon after the SEC adopts its new executive compensation rules.
Corp Fin’s Chief Accountant Speaks: What’s Doing
In FEI’s “Financial Reporting Blog,” Edith Orenstein provides a rundown of remarks from Corp Fin Chief Accountant Wayne Carnall at an FEI conference recently. Here are related notes from WebCPA. [I’ll be down at the ABA meeting in DC today and will blog next week about any gloss Pat McGurn provides on these 2010 updates to RiskMetrics’ policies that came out last night.]
It is good to hear that Corp Fin’s “Financial Reporting Manual” will be updated soon to include 25-years worth of content based on meeting with the “CAQ Regs” Committee. Although as Edith tweeted, there could be a downside to adding 780 pieces of guidance (or subset thereof) to the Manual. That’s gonna be hard to memorize. [I’ll blog on Monday about the nature of the accounting proposals that passed the House Financial Service Committee yesterday, as reported by Edith. Too much going on.]
I laughed pretty hard reading Edith’s notes about the “secret societies” that meet with the SEC. Trust me, those meetings are not as exciting as they may sound – at least the ones I’ve been to.
Shocker! Rich Ferlauto Heading to the SEC
I almost fell off my chair when I read this press release yesterday that Rich Ferlauto is leaving AFSCME and joining the SEC as Deputy Director of Policy of the agency’s Office of Investor Education and Advocacy. It will be interesting to see if AFSCME will continue to be so active regarding shareholder issues without Rich – and it will also be interesting to see Rich wearing short-sleeve shirts and smoking from a corn cob pipe…
Here are some thoughts about Twitter that I posted a while back on “The Mentor Blog“:
Recently, I blogged about how you need to learn about Twitter since more and more executives are using it and you need to be able to recognize the corporate & securities law issues that arise, just like any other medium. I also noted that I’ve been regularly Tweeting since the beginning of the year.
With 10-months-plus experience under my belt, I can honestly say that – at this point – there probably isn’t much marketing value for lawyers to be on Twitter. If you blog, tweeting about your blog entries can help promote your blog and I think is a “must.” But most lawyers aren’t blogging – and until they do, I wouldn’t bother being a “regular” on Twitter right now. Following the blogs that cover your industry and interests is more educational and worth your time.
For me, one of my job descriptions is “journalist” so following others with like-minded interests helps me identify story ideas for the numerous blogs on our sites – so there is some value in Twitter for me. But so far, there are few folks with like-minded corporate law & corporate governance interests on Twitter (eg. think there are only two of us with M&A law background) so the marketing value of Twitter is pretty limited for you. And too many of the folks that I “follow” on Twitter continue to tweet about their personal lives and thus clog up my Tweetdeck with all sorts of useless drivel. Sorry, I really don’t care that your cat is sick.
If critical mass is reached and the marketing value proposition of Twitter for those of us in corporate compliance becomes real, I’ll let you know. Until then, Twitter’s value is limited to informational and not much in the way of marketing…
By the way, you may want to read Bruce Carton’s recent blog about whether the number of followers you have on Twitter may impact a client’s hiring decision. I gave my ten cents on the topic in a comment to the blog.
Obtaining followers is pretty easy now since folks have learned some tricks of the trade to quickly score hordes by using scantily clad women. According to the Avvo Blog, this is exactly what some have done recently (although there may have been “hijacking” involved per this article)…and another thing about Twitter, it can get snarky, as noted in this blog.
What About Twitter for Investor Relations?
In comparison to my thoughts about Twitter for marketing purposes, we have these somewhat different thoughts about Twitter for IROs from the Q4 Blog. Here is an excerpt from that blog:
Social networks are having a dramatic impact in helping marketers and public relations professionals increase brand awareness and build new relationships with consumers. But how have these tools been adopted in the highly regulated world of investor relations?
To answer this question Q4 analyzed 80 public companies and their use of Twitter during the Q2 2009 earnings season (a new report analyzing the 3rd quarter was just released – 270 more companies are now using Twitter). Some of the findings of the report which were issued in a press release revealed that:
– 55% are using Twitter for investor relations.
– 48% are using Twitter to engage with their audience.
– 34% of the companies were from the technology sector, including Cisco, Dell, Oracle and Sun to name a few.
– 68% provided a link to their Q2 quarterly earnings release.
Bear in mind that the stats above are culled from those companies using Twitter – based on the list of companies in Q4’s report, it looks like that number is relatively small right now, about 80. The list of companies is useful for those that want to monitor what others are doing now, since Twitter may well be here to stay. Personally, I worry about companies using Twitter to get their message out because the 140 character limit can impede placing words in context. More about this later…
Full-Time IR Website Manager: No Longer a Luxury
One of the more innovative – and capable – IR departments experienced a snafu last quarter when its earnings results was accidentally posted prematurely. Dominic Jones does a great job in his IR Web Report providing three lessons that this episode delivers.
Knowing that the economy continues to wreak havoc with your budget, we have decided to freeze the prices for our publications for next year. As all our memberships expire at the end of the year, please take a moment to renew today at our “Renewal Center” for:
Comprehensive Price List: Here is a PDF that is a universal order form with the 2010 prices for all of our publications and web sites.
More on “Verifying Pay Amounts: A Company’s Special Use of Experts”
Recently, I blogged about one company’s disclosures that it used its independent auditors to check its math for its performance metrics and incentive pay calculations. Here is a response from a member:
I found this entry fascinating – to the extent anything related to executive comp disclosure can be “fascinating.” I recall that we, as outside counsel, used to prepare the compensation disclosure tables for our clients. Then, the client’s HR folks did it. Then internal finance, i.e., accountants, would do it. Given the ridiculous complexity in the rules and interpretations and the fact that liability, in my opinion, does or will attach to the disclosures, it is not surprising that a company would now have outside experts checking its work and be proud of it.
What is often not discussed when implementing these new rules is the added cost and burden created by the disclosures. Even more scary is the fact that every proxy undoubtedly has some mistakes in it. I’m sure that almost all of them are non-material. However, the risk is so great at this point that the proxy has essentially turned into a process not unlike filing a 10-K. I don’ t mean to downplay its importance but it really seems like what matters is the qualitative disclosure of why compensation committees do what they do, not adding thirteen more ways to calculate how much people walk away with.
I honestly believe that you could comply with the spirit and intent of the rules by cutting proxy disclosure in half. In fact, it would probably be more informative to investors. However, you’d have to have some serious fortitude to actually do it. To wit, over dinner conversation with very smart friends from all walks of life, they all universally acknowledge that it is a complete waste of time to read proxies because it tells them nothing meaningful about their investments. I’ve got to tell you, it is really life affirming…
Teaching IFRS in Schools
One reason why some are scared of adopting global accounting standards in just a few short years is that there is a shortage of expertise about global standards. Here is is an interesting letter regarding the testing of IFRS on the CPA exam from the Colorado State Board of Accountancy to the AICPA’s Board of Examiners: I have heard that at least some of the Big 4 have told colleges they will not hire their students unless they teach IFRS in the classroom.
Recently, Deloitte conducted a survey about whether the SEC should proceed with its IFRS roadmap – 51% said “yes” but push it back one year, 20% said approve the roadmap as proposed and 12% said to reject the roadmap entirely. Here are the results.
Tune into our webcast tomorrow – “Ask the Experts: Prepping for a Wild Proxy Season” – to hear a panel of experts provide practical guidance in a variety of areas that those grappling with the upcoming season know all too well. Note that I’ve posted the list of questions in the order that they will be asked to help you follow what’s going on and take notes.
Join these experts:
– Dave Lynn, Editor, TheCorporateCounsel.net and Partner, Morrison & Foerster
– Alan Dye, Editor, Section16.net and Partner, Hogan & Hartson
– Alan Singer, Partner, Morgan Lewis & Bockius
– Beth Ising, Partner-elect, Gibson Dunn & Crutcher
Renewal Time: As all memberships expire at year-end, it is time to renew your membership to TheCorporateCounsel.net so you can catch the upcoming companion webcasts to prepare for the proxy season:
If you’re not yet a member, try a 2010 no-risk trial and catch tomorrow’s webcast for free…
Corp Fin Releases Two New Lock-Up CDIs
Yesterday, Corp Fin’s Office of Mergers & Acquisitions issued these two new Section 5 CDIs:
– New Question 139.29 (registered debt exchange offers and executing lock-up agreement with note holder before filing registration statement)
– New Question 139.30 (negotiated third-party exchange offer and acquiror executing lock-up agreement before filing registration statement)
And there was also activity on this page of outdated/superseded CDIs (one item added and one removed)…
SEC Brings First Regulation G Enforcement Action: Abuse of Non-GAAP Measures
Some big news from Davis Polk: Last Thursday, the SEC announced settled charges against SafeNet, Inc. and certain of its former officers and employees in connection with an alleged earnings management scheme that materially misstated SafeNet’s GAAP and non-GAAP financial results. What’s unique about this case is that one of the charges is that the defendants violated Regulation G by reporting non-GAAP earnings that improperly excluded certain ordinary expenses as non-recurring charges. This is the first enforcement action under Regulation G since its enactment in 2003, and it serves as a reminder that the regulation is another tool within the SEC’s already powerful enforcement arsenal.
Regulation G prohibits disseminating false or misleading non-GAAP financial measures (i.e., measures that are not calculated in conformity with GAAP, and that often exclude non-recurring, infrequent, or unusual expenses) or presenting the non-GAAP financial measures in such a manner that they mislead investors or obscure the company’s GAAP results. Regulation G requires companies to reconcile the non-GAAP financial measure to the most directly comparable GAAP financial measure.
The SEC alleges that, in order to meet earnings targets, SafeNet’s CEO and CFO directed SafeNet’s accounting personnel to improperly reclassify various expenses in both its GAAP and non-GAAP numbers. This improper accounting included:
– reclassifying ordinary operating expenses (such as ongoing advertising expenses and Sarbanes-Oxley compliance costs) as integration expenses incurred in connection with acquisitions;
– the improper reduction of accruals for certain professional fees; and
– the improper reduction of inventory reserve accruals.
The CEO and CFO also allegedly mischaracterized these items in SafeNet’s earnings calls. For example, in response to questions about the nature of advertising costs classified as integration expenses, the CEO asserted that these costs were “one-time in nature” when they actually related to ongoing expenses.
Even after SafeNet’s auditors required SafeNet to reclassify a significant portion of these costs as ordinary expenses and called its use of integration costs “abusive” and “a means of meeting [non-GAAP] EPS guidance,” SafeNet continued to misclassify certain items for purposes of its non-GAAP numbers. To address the disparity between its GAAP and non-GAAP numbers, SafeNet created certain bogus categories in its non-GAAP reconciliation including: “Research and Development–non-recurring;” “Sales and Marketing–non-recurring;” and “General and Administrative–non-recurring.” SafeNet used these categories to offset the ordinary recurring expenses that its auditor had refused to allow SafeNet to treat as integration expenses.
A few observations:
– Although this is the first Regulation G enforcement action, it has been clear for many years that the SEC views non-GAAP measures with suspicion and that the burden is on companies to demonstrate not only that the non-GAAP measures are useful to investors but that they have been compiled in good faith and on a reasonable basis.
– SafeNet’s alleged conduct in this case suggests that the SEC could have brought an enforcement action against SafeNet and its executives under Section 10b-5 for material misstatements even in the absence of Regulation G.
– The complaint uses that ill-defined multi-purpose SEC term of opprobrium, “earnings management”, to describe the conduct in question. Our experience is that cases like these are generally grounded in an underlying rule violation, and that “earnings management” is alleged not as the actual offense but as a motive that turns what might otherwise have been an innocent mistake into the basis for enforcement.
– Despite this case, we continue to believe that companies that are accurately disclosing and reconciling their non-GAAP numbers should feel comfortable using them. In fact, at a recent PLI conference, Meredith Cross, Director of the Division of Corporation Finance, said that she has asked the staff to review the Division’s current Regulation G interpretations and guidance to see whether any adjustments are needed because she does not want companies to feel constrained from using non-GAAP numbers that they think accurately tell their story.
As noted in this article, a New Zealand company is under fire for submitting financials to the New Zealand Stock Exchange because it included the words “fudge this” next to the depreciation line item. Here’s the letter sent by the exchange to the company inquiring about this statement…
Any other locals feel this way? I’m bummed because the Washington Post has basically killed it’s print edition with a complete redesign. The print is so small I can’t read it. They’ve forced me to read it online (which is free). Unbelievable given how the newspaper industry is on its knees…
– What’s the hardest part of writing a book?
– What was your goal in writing the book?
– Did any parts of it change as you conducted research to write it?
– How has private equity influenced deal-making over the years?
– How can the book serve to help deal lawyers in their daily practice?
California (Finally) Extends Securities Exemptions to Nasdaq Capital Market Issuers
Some news from Allen Matkins: On August 17th, the California Corporations Commissioner certified the Nasdaq Capital Market under two key provisions of the Corporate Securities Law of 1968. These certifications will immediately extend significant legal benefits to companies with securities listed on that market.
Previously, the Nasdaq Stock Market operated as an over-the-counter market and consisted of the Nasdaq National Market and the Nasdaq Capital Market (fka Nasdaq SmallCap Market). In 2006, the Nasdaq Stock Market began operating as a national securities exchange. At about the same time, the Nasdaq National Market was renamed the Nasdaq Global Market. The Nasdaq Global Market presently consists of two tiers – the Nasdaq Global Market and the Nasdaq Global Select Market.
Securities listed or authorized for listing on the Nasdaq Global Market are “covered securities” under the National Securities Markets Improvement Act. As a result, California and other states cannot impose qualification or registration requirements under their securities or “blue sky” laws. In 2007, the listing standards for the Nasdaq Capital Market were increased and the SEC added securities listed or approved for listing on that market to the list of “covered securities” for purposes of the NSMIA.
In general, the offer and sale of securities in California must be qualified with the Commissioner unless an exemption from qualification is available or state regulation has been preempted by federal law such as the NSMIA. Long before Congress preempted state qualification requirements for covered securities, California had exempted securities of companies listed on exchanges certified by the Commissioner pursuant to Corporations Code Section 25100(o). This exemption was from the qualification, but not anti-fraud, provisions of California’s securities laws.
While Congress’ enactment of the NSMIA in 1996 seemed to make this exemption irrelevant, it remained important because it is unclear whether the federal preemption of state qualification requirements pursuant to the NSMIA extends to options, warrants and other rights to acquire a listed security. Because Section 25100(o) also excepts warrants and other rights to acquire a security listed or approved for listing on a certified exchange, the exemption continues to be relevant and important.
Despite the SEC’s 2007 decision to extend “covered security” status to Nasdaq Capital Market securities, the Commissioner did not certify that market for purposes of Section 25100(o). This meant that options, warrants and other rights to acquire Nasdaq Capital Market listed securities remained subject to qualification even though the underlying securities were “covered securities”. The Commissioner’s recent certification of the Nasdaq Capital Market means that companies with securities listed on that market will no longer need to be concerned with qualification in California of options, warrants and other rights to acquire their Nasdaq Capital Market listed securities.
The Commissioner has also certified the Nasdaq Capital Market for purposes of Corporations Code Section 25101(a). That statute provides an exemption from qualification for offers and sales of securities in non-issuer (i.e, secondary) transactions. The exemption is available for any security of a person that is the issuer of a security listed on an exchange certified by the Commissioner. While the preemptive effect of the NSMIA obviates the need for this exemption in the case of “covered securities” (or equal or senior securities), the exemption has some residual utility because it covers not just the covered security (or an equal or senior security) but any security issued by a person that is the issuer of a security listed on a certified exchange.
The Commissioner’s certification of the Nasdaq Capital Market will provide a non-securities law benefit to Nasdaq Capital Market companies as well. California has constitutional usury limitations. Pursuant to Corporations Code Section 25117(a), evidences of indebtedness and the purchasers or holders thereof are exempt if the issuer has any security listed or approved for listing on a national securities exchange certified by the Commissioner under Section 25100(o). The Commissioner’s certification should therefore make it easier for smaller publicly traded companies to issue debt without concern for California’s constitutional usury limits.
One of my favorites recently announced his coming retirement from law firm practice, so I thought I would take the opportunity to pick Rich Koppes’ brain since he is so knowledgeable and seen so much. In this podcast, Rich provides a look back at his career and developments in governance during that time, including:
– What has been your career path?
– Tell us about the many hats you wear these days.
– Which parts of your career have been the most fun?
– How has governance changed since you started?
– What additional changes (if any) do you think need to happen in corporate governance?
Congrats to the International Subcommittee of the ABA’s Corporate Governance committee for launching its own blog! We’ll see more corporate lawyers blogging yet…
The SEC’s Investor Advisory Committee and State Law
As the SEC’s Investor Advisory Committee gears up and sets its agenda, I recently received this concern from a member:
It strikes me that the Investor Advisory Committee and some of these discussion topics in particular (e.g. fiduciary duties, majority voting, etc.) may be another means for the SEC to push deeper and deeper into matters traditionally reserved for state law. As are clear by the comment letters on proxy access, there is widespread suspicion/ concern among issuers about the increasing pressure to federalize state corporate law. The activities of this Committee will likely only add fuel to the fire in some respects.
SEC Approves FINRA’s Rules re: Conflicts of Interest/Control Relationships, Etc.
From Clearly Gottlieb: Recently, the SEC approved FINRA’s proposal to adopt NASD Rules 2240 (Disclosure of Control Relationship with Issuer), 2250 (Disclosure of Participation or Interest in Primary or Secondary Distribution) and 3340 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts) as rules in the Consolidated FINRA Rulebook and to redesignate such rules, respectively, as FINRA Rules 2262, 2269 and 5260.
Significantly, in connection with the redesignation of NASD Rule 2240 as new FINRA Rule 2262, the SEC also approved the repeal of existing NYSE Rule 312(f), which (like NASD Rule 2240) addresses conflict of interest issues when a NYSE member firm engages in certain activities involving the securities of an entity with which it is in a control relationship. At the time of our last Alert Memo, the effective date of the rule changes had not yet been announced. FINRA has now issued Regulatory Notice 09-60 indicating that the effective date of the redesignated rules and the corresponding repeal of NYSE Rule 312(f) is December 14, 2009.
Below are the results from a recent survey we conducted on the topic of how board committees interact with the full board:
1. Do the chairs of your company’s primary board committees (audit, nominating & governance and compensation) provide oral reports to the board about what transpired during their committee meetings?
– Routinely – 93.0%
– On occasion – 2.8%
– Rarely – 4.2%
– Never – 0.0%
2. If so, how long do these oral reports last on average?
– Under five minutes – 22.4%
– Between five and ten minutes – 50.8%
– Between ten and fifteen minutes – 19.4%
– Over fifteen minutes – 7.5%
3. To whom does the company circulate minutes of committee meetings?
– All directors – 40.9%
– Only the committee’s members but allow other directors to request a copy – 47.9%
– Only the committee’s members – 11.3%
4. The company’s primary board committees ask for board ratification of actions taken during a committee meeting:
– Routinely – 21.1%
– On occasion – 46.5%
– Rarely – 22.5%
– Never – 9.9%
5. The company’s primary board committees meet jointly with another board committee:
– Routinely – 2.8%
– On occasion – 26.8%
– Rarely – 35.2%
– Never – 35.2%
Please take a moment to respond anonymously to our “Quick Survey on D&O Questionnaires and Related-Party Transactions.”
More Recent Board Stats: Spencer Stuart Study
Recently, the latest “Spencer Stuart Board Index” – which annually looks at the state of corporate governance among the S&P 500 – was released. Among its findings:
– Majority voting: 65% of boards report that they require directors who fail to secure a majority vote from shareholders to offer their resignations. This is up from 56% last year.
– Director term limits: One-year terms for directors are now the norm in 68% of S&P 500 boards, versus 38% 10 years ago.
– Independent leadership: Half of all boards have only one insider, the CEO, up from 44% last year. And 37% split the chairman and CEO roles, versus 20% a decade ago.
Additionally, the study found that the profile of directors continues to evolve: Of the 333 new independent directors in 2009, just over one-quarter are active CEOs, COOs, or chairmen, down from 53% in 1999. Meanwhile, retired CEOs and leaders of divisions and functions now make up 17% and 21% of the new director pool, respectively.
California’s Placement Agent Legislation
From Keith Bishop of Allen Matkins: Recently, the press has been publishing stories of alleged pay-to-play arrangements at public employee pension funds, including the California Public Employees Retirement System, or CalPERS. Last August, the SEC proposed regulations that would prohibit federally registered investment advisers and certain exempt advisers from providing advisory services to a government client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates. The rule would also ban the use of third parties to solicit government business. Last month, Governor Schwarzenegger signed legislation that, among other things, requires California public employee retirement systems to adopt placement agency disclosure policies by June 30, 2010. These policies must impose a 5-year ban for violations. Because this legislation was enacted as an emergency bill, it takes effect immediately.
CalPERS adopted a placement agency policy earlier this year. However, CalPERS did not follow the notice and comment requirements of the California Administrative Procedure Act. Last month, I asked the California Office of Administrative Law for a determination that the CalPERS statement was an “underground regulation” in violation of the APA. Responding to allegations of pay-to-play, CalPERS announced recently that it is initiating a special review of the fees paid by its external managers to placement agents and their related activities.
Yesterday, Senator Dodd (D-CT) released a draft of his massive – 1136 pages! – financial services reform bill. Among its numerous provisions, the “Restoring American Financial Stability Act of 2009” contains a half dozen or so provisions aimed at enhancing corporate governance and executive compensation practices. For those of you who aren’t inclined to wade through the bill text, here’s a summary of the bill’s key provisions – and here’s the press release from the Senate Banking Committee. We are posting memos regarding this bill in our “Regulatory Reform” Practice Area.
As noted by Mark Borges last nite in his “Proxy Disclosure Blog,” the executive compensation provisions are:
– Advisory Vote on Executive Compensation (Section 951) – The bill would mandate an annual advisory vote on executive compensation (“Say on Pay”) for companies subject to the SEC’s proxy rules. The vote would apply to all shareholder meetings taking place one year after the bill’s enactment.
– Advisory Vote on Golden Parachutes (Section 952)- The bill would mandate disclosure of and an advisory vote on any compensation arrangements to the CEO that would be payable on a merger or other acquisition transaction that had not been previously been subject to a “Say on Pay” vote. This vote would also go into effect one year after the bill’s enactment.
– Compensation Committee Independence (Section 953) – The bill would require the SEC to direct the national stock exchanges to revise their listing standards to prohibit the listing of any company that did not maintain an independent compensation committee. In addition, the bill would direct the SEC to adopt rules ensuring that any compensation consultant, legal counsel, or other advisor to the compensation committee was “independent” (as defined by the Commission). The bill would ensure that the compensation committee had the authority to retain compensation consultants, legal counsel, and other advisors, require specific disclosure in the proxy statement of whether the committee had retained or received advice from a consultant and whether the consultant’s work raised any conflict of interest and how that conflict was addressed, and ensure that the committee had appropriate funding to retain these advisors. Finally, the SEC would be required to conduct a study on the use of compensation consultants
– Executive Compensation Disclosure (Section 954) – The bill would require the SEC to amend Item 402 of Regulation S-K to require disclosure of information showing the relationship between executive compensation and the company’s financial performance and a pictorial comparison of the amount of executive compensation and the company’s financial performance over the preceding five years. This appears to be an apparent enhancement of the current Performance Graph.
– Clawbacks (Section 955) – The bill would require companies to develop and implement a compensation recovery (“clawback”) policy that would (i) be triggered by a financial restatement, (ii) cover all executive officers, and (iii) require recovery of all incentive-based compensation (including stock options) from the executive officers (both current and former) for the three year period preceding the restatement in excess of what they would have been paid under the restatement.
– Disclosure Regarding Employee Hedging (Section 956) – The bill would require the SEC to promulgate rules requiring proxy statement disclosure of whether a company permits its employees to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) that are designed to hedge or offset market declines affecting compensatory equity awards.
– Compensation Standards for Holding Companies of Depository Institutions (Section 957) – The bill would require the new Financial Institution Regulatory Agency to establish standards prohibiting compensation plans of a bank holding company that provide executives, employees, director, and principal shareholders with excessive compensation or benefits, or could lead to a material financial loss to the bank holding company.
– Higher Capital Charges (Section 958) – The bill would permit the appropriate federal banking agencies to impose higher capital standards for insured depository institutions with compensation practices that the agency determines pose a risk of harm to the institution.
– Compensation Standards for Holding Companies of Depository Institutions (Section 959) – The bill would require the appropriate federal banking agencies to prohibit a depository institution holding company from paying excessive executive compensation or compensation that could lead to a material financial loss to any institution controlled by the holding company, or to the holding company itself.
– Corporate Governance Provisions – A separate subtitle in the bill (Sections 971-974) would provide for several significant corporate governance changes, requiring:
– disclosure of whether a company has a single CEO/Chairman of the Board or has separated the CEO and Chairman positions;
– the annual election of all directors, thereby eliminating staggered boards;
– majority voting for all uncontested director elections; and
– proxy access for shareholders (with the SEC to promulgate rules governing this access right).
More Details about HealthSouth’s “Proxy Access Reimbursement” Bylaw
Last week, HealthSouth filed its Form 10-Q with the SEC and the company’s amended and restated by-laws are attached as Exhibit 3.3. As I blogged recently, HealthSouth just became the first company to adopt a “proxy access reimbursement” by-law and this new provision is reflected in Section 3.4(c) of the company’s revised by-laws.
Section 3.4(c) is complex and subject to several conditions and limitations. Reimbursement is not required if the Board “determines that any such reimbursement is not in the best interests of the Corporation or would result in a breach of the fiduciary duties of the Board of Directors to the Corporation and its stockholders or that making such a payment would render the Corporation insolvent or cause it to breach a material obligation incurred without reference to the obligations imposed by this Section 3.4(c).”
Reimbursement only applies if: (i) the stockholder’s nominee receives at least 40% of the total votes cast’ and (ii) fewer than 30% of the Directors to be elected are contested. The nominating stockholder (or group of stockholders) can only nominate one person for director at the annual meeting. Where the nominee is not elected, reimbursement is limited to the proportion of total expenses equal to the proportion of favorable votes received; if elected all expenses (as defined in the By-Laws) are reimbursed. There are a number of other conditions. Thanks to Mike Holliday for doing the sleuthing on this!
Check out #5265 in our “Q&A Forum” about whether a Delaware corporation must have a bylaw authorizing payment of proxy expenses. In other words, can Delaware law mandate reimbursement in the absence of a bylaw?
Ideas to Improve the Proxy Plumbing
Ahead of the SEC’s release of a concept release on fixing the proxy plumbing, a few groups have already submitted ideas to the SEC. For example, The Altman Group submitted a proposal to the SEC entitled “Practical Solutions To Improve the Proxy Voting System.” Their proposal focuses mainly on these five fixes:
1. A new methodology called ABO (i.e., All Beneficial Owners) should replace the current NOBO/OBO mechanism which has existed for 25 years, at least with regard to record dates for annual or special meetings.
2. The SEC should seek to authorize the establishment of a second mail and tabulation methodology, one that would give companies the ability (using the names available under ABO) to choose a different vendor to take responsibility for the mailing and tabulation process, while retaining the option to use the current Broadridge system. This new option would be akin to the way most companies currently use their transfer agent to mail and tabulate the votes of registered owners.
3. The SEC should require the NYSE to implement as quickly as possible a robust investor education program to try and ameliorate at least some of the impact resulting from the loss of broker voting on non-contested director elections under Amended NYSE Rule 452.
4. The SEC should amend Rule 13(f) so that information reported by institutions reflects both shares owned and also voting rights after taking into account loans and other transactions that alter such rights. We also suggest shortening the reporting period for 13(f) information to 15 days from 45 days after the end of a calendar quarter and reducing from 20 to 10 business days the pre-notification of a company’s annual meeting record date.
5. The SEC should establish new procedures to deal with issues like “empty voting” and the use of derivative positions to alter voting rights.
On CorpGov.net, Jim McRitchie has posted his analysis of the differences between The Altman Group’s ideas and the positions of the Shareholder Communications Coalition.
Today is the “6th Annual Executive Compensation Conference”; yesterday was the “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference,” whose archives are already posted. Note you can still register to watch online by using your credit card and getting an ID/pw kicked out automatically to you without having to interface with our Staff (but you can still interface with them if you need to). Both Conferences are paired together; two Conferences for the price of one.
– How to Attend by Video Webcast: If you are registered to attend online, just go to the home page of TheCorporateCounsel.net or CompensationStandards.com to watch it live or by archive. A prominent link called “Enter the Conference Here” on the home pages of those sites will take you directly to today’s Conference.
Remember to use the ID and password that you received for the Conferences (which may not be your normal ID/password for TheCorporateCounsel.net or CompensationStandards.com). If you are experiencing technical problems, follow these webcast troubleshooting tips. Here are the Conference Agendas; times are Pacific.
– How to Earn CLE Online: Please read these FAQs about Earning CLE carefully to see if that is possible for you to earn CLE for watching online – and if so, how to accomplish that. Remember you will first need to input your bar number(s) and that you will need to click on the periodic “prompts” all throughout each Conference to earn credit. Both Conferences will be available for CLE credit in all states except for a few (but hours for each state vary; see the CLE list for each Conference in the FAQs).
– How Directors Can Earn ISS Credit: For those directors attending by video webcast, you should sign-up for ISS director education credit using this form. This is meant only to facilitate providing information to ISS; they are the ones in charge of accreditation and any disputes will need to be taken up with them.
Late yesterday, I uploaded a rare afternoon blog to note Corp Fin Shelley Parratt’s important keynote speech regarding what the SEC Staff expects from 2010 executive compensation disclosures, as well as observations from the ’09 proxy season (eg. still not enough “analysis” in the CD&A). Read that blog for more information.
FASB & IASB Reaffirm Convergence by Mid-2011
As noted by FEI’s “Financial Reporting Blog,” the FASB and IASB have announced the release of a 23-page joint statement which reaffirms their commitment to improve IFRS and U.S. GAAP, and to bring about their convergence through completion of the major convergence projects outlined in the FASB-IASB Memorandum of Understanding by June, 2011. The joint statement outlines plans and milestone targets that will guide completion of the major projects by the June, 2011 target date.
Last week, SEC Commissioner Luis Aguilar delivered this speech entitled “Investors Deserve Sustainable Reform — Not More of the Same” in which he decried some of the Congressional efforts to rein in Sarbanes-Oxley and more. Equally impassioned was Floyd Norris in his column entitled “Goodbye to Reforms of 2002.”
The Coming Hostile Deals
In this DealLawyers.com podcast, Lois Herzeca of Gibson Dunn & Crutcher discusses the expected rise in hostile activity and how to be prepared, including:
– Why is hostile deal activity expected to increase over the next year?
– What interesting examples have occurred recently?
– What should companies be doing strategically to best position themselves?
– What should companies be doing in terms of structural defenses and what should they avoid?
– How should companies address their key investors and shareholder base?
