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 got quite a few responses to my blog on whether Apple should have handled its disclosure issues related to CEO’s Steve Jobs differently. In fact, NY Times’ reporter Joe Nocera wrote a great column on the topic the day after my blog.
Here are excerpts from several responses from members:
– The Jobs situation is a good illustration of the affirmative-duty-to-disclose question, which a lot of junior lawyers have a hard time grasping,
– Interestingly, some companies create problems for themselves when they throw in a risk factor about dependence on key management personnel, largely to stroke the ego of their CEO who could be replaced without much difficulty.
– The health disclosure question comes to a head when the CEO/CFO certifications must be filed. At what point is someone else effectively functioning as PEO or PFO? Let’s imagine a PEO/PFO is in a car accident or a coma, or just “out of sorts” for a couple weeks. Should companies start thinking about implementing procedures like the 25th Amendment to the US Constitution? That would be the logical extension of the Form 8-K Item 5.02 and certification issue.
I’ve done the analysis about whether a company could have an obligation to disclose health problems of its CEO and I normally would have agreed with your suggestion that Item 5.02(b) (retirement, resignation or termination) might be triggered if a CEO became so debilitated that he wasn’t truly functioning in that position. However, I keep coming back to the recent SEC Staff guidance that Item 5.02(b) is not even triggered when the CEO dies in office (see Interpretation 217.04 of Form 8-K CDIs)! How bizarre is that!
– One might consider whether information concerning Steve Jobs’ health something that a reasonable investor would want to know in making a buy/sell decision regarding Apple stock (and thus would be considered “material” under a TSC v. Northway analysis) as contrasted with mere intrigue surrounding a celebrity CEO (which is not particularly relevant to investors). If the former, one would think it is difficult for Apple not to disclose in connection with, say, a Form 10-K or 10-Q filing because its contains MD&A, which has broad materiality-based disclosure requirements. If the latter, there should be no disclosure obligation.
As a policy matter, query whether the investing public is better served by all companies including a risk factor stating that from time to time key personnel may have illnesses, which could be serious, might interrupt service to the company and that the interruption might be permanent. Further consider if anyone is served by a disclaimer of any duty to update info about the health of key personnel to the extent disclosure occurs.
Your Take: What Should Have Apple Done?
Here is a poll where you can anonymously provide your legal analysis:
Most large US public companies are incorporated in Delaware, but not all. You may ask: why did some blue chip companies choose to incorporate in New York rather than Delaware, which has long been favored because of its efficient corporate law structure and renowned courts whose justices are business savvy? Because these companies were formed long before Delaware earned its well-deserved reputation. Long-standing New York companies include General Electric (1892), International Paper (predecessor company incorporated in 1898), Xerox (1906) and IBM (1911).
In many areas, New York law and Delaware law are similar. In fact, New York recently passed two amendments to its business corporations law (signed into law by Gov. Patterson on July 22nd) that will put New York companies on equal footing with their Delaware counterparts in certain areas.
The first amendment – S.7350 / A.10824 – allows companies to move from the default plurality standard for director elections to majority election via a bylaws amendment. Until now, New York companies could only change from a plurality to a majority standard by amending their charters, which requires shareholder approval (and under the SEC’s rules, the filing of preliminary proxy materials). Delaware companies have always been able to easily make this change through a bylaws amendment, which does not require shareholder approval.
The other amendment – S.7349 / A.10825 – allows New York companies to pay dividends out of either surplus or net profits, which is consistent with Delaware law. Previously, New York companies could only pay dividends out of surplus.
I imagine that New York companies are happy that their state legislature is staying on top of issues like this – and these moves are seen as friendly to both companies and their shareholders.
Now Available: RiskMetrics’ Annual Policy Survey
RiskMetrics has opened its annual policy survey to corporate issuers in the United States as well as global institutional investor clients. This year, they desire to gather corporate views earlier in the policy formulation process. The survey questions are nearly identical for both the institutional and issuer surveys – both seeking a broad perspective on the policy topics they’re investigating for the 2009 proxy season, including compensation, board elections, director independence and more.
As in recent years, RiskMetrics will also hold an open comment period in the Fall to solicit specific feedback on their proposed policy changes.
How to Handle Hedge Fund Activism
On DealLawyers.com, we have posted the transcript from our recent popular webcast: “How to Handle Hedge Fund Activism.”
When Will Michael Phelps Be Swimming for His Eight Medals?
Both my boys are competitive swimmers (and my wife used to be) and Kate Ziegler grew up swimming in our neighborhood, so we’re pretty excited about Michael Phelps and Katie Hoff’s upcoming events at the 2008 Beijing Olympics.
However, I had a hard time figuring out when Michael would be swimming when we are on vacation next week – here is what I figured out from this complex NBC Olympic schedule (all gold medal swimming events will be shown live and at night Eastern Time; but it’s unknown when at night they will be swimming):
– 653 companies have used voluntary e-proxy so far (this pretty much is the head count for this proxy season)
– Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 32% had less than 10,000 shareholders)
– Bifurcation is being used more as the proxy season progresses (but still not all that much); of all shareholders for the companies using e-proxy, now over 10% received paper initially instead of the “notice only” (up from 5% a few months ago)
– 1.1% of shareholders requested paper after receiving a notice; this average is about double what the trend was a few months ago
– 57% of companies using e-proxy had routine matters on their meeting agenda; another 31% had non-routine matters proposed by management; and 12% had non-routine matters proposed by shareholders. None were contested elections.
– Retail vote goes down dramatically using e-proxy (based on 586 meeting results); number of retail accounts voting drops from 20.6% to 5.5% (over a 73% drop) and number of retail shares voting drops from 34.8% to 16.7% (a 52% drop)
A Note on Bifurcation
A number of members whose companies bifurcated have told me that a primary reason they did so was because Broadridge maintains a database of investors who prefer paper. So far 2.5 million investors have asked to be in this database.
Many companies have a fair number of their shareholders in this database – often over double digits in terms of percentages – and these companies recognized that it would be challenging to do a notice-only delivery and risk fulfillment issues (egs. not printing enough to meet demand; service provider botching the fulfillment, etc.). For these companies, it was better to bifurcate and keep the number of shareholders who requested paper much lower than it otherwise would have been the case.
In other words, the relative level of shareholders that requested paper would be a bit higher than the 1.1% experienced if these companies had not bifurcated (if I comprehend the Broadridge stats correctly). But this all still begs the question of why so many companies didn’t bother to bifurcate? I imagine they will next year to reap the cost savings available…
The Yahoo Annual Meeting: My, My, How Things Change
I got a chuckle out of the Washington Post’s headline for the Yahoo annual shareholders’ meeting this Saturday: “Shareholders Give Yahoo a Vote of Confidence.” It’s funny because each director received over 75% of the vote – meaning that nearly 25% of shareholders “withheld” their votes from these directors, who ran unopposed and without a major “just vote no” campaign. [You may recall that Carl Icahn had initially challenged management by running an opposing short slate, but he was appeased and placed on the board – so he withdrew his campaign.]
It wasn’t that long ago that directors routinely received 98% of the vote – so I really wouldn’t call 75% a “vote of confidence.” And now a major shareholder is questioning the results and asking for a recount of its votes…
On Friday, the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR) issued its final 172-page report.
The final report has 25 recommendations for implementation by the SEC, FASB and PCAOB. Although the report is probably most important for accountants, it certainly has implications for lawyers and IROs/corporate communications. And these recommendations are likely to be taken seriously – the SEC already has acted on two of the recommendations: mandatory XBRL and guidance on company websites.
Posted: SEC’s Interpretive Release on Corporate Use of Websites
On Friday, the SEC posted its interpretive release on corporate use of websites. I’m off on vacation soon – and Dave is already floundering on a beach – so it’s gonna be a while before we dribble out some original thoughts…
Last SEC Commissioner Sworn In
On Friday, Troy Paredes was sworn in as a SEC Commissioner. The gang’s all there now – and I imagine the shareholder access debate will resume as Chairman Cox has promised. By my count, there is a total of twelve Commissioners that have served in that capacity during the access debate…
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!
Kudos to Francis Pileggi and his “Delaware Corporate and Commercial Litigation Blog” for highlighting a new Delaware Chancery Court case that exposed independent directors of a public company to personal liability in a M&A context; a topic that always gets people’s attention.
In Ryan v. Lyondell Chemical Company, (Del. Ch. Ct., 7/29/08), the Delaware Chancery Court found that at the procedural stage of a summary judgment motion, the issue of whether independent directors should be exposed to personal liability for their role in the sale of the company can proceed to trial – despite selling the company to the only known buyer for a substantial premium. We have posted the opinion in DealLawyers.com’s “Litigation” Portal.
Earlier this week, the SEC approved Nasdaq’s proposal to adopt new listing standards for SPACs. The approved listing standards are slightly different from what was originally proposed including:
– reduced amount of gross proceeds that must be deposited from 100% to 90%
– clarified period in which SPAC must complete one or more business combinations
– required all listed SPACs contain provisions allowing shareholders to convert shares into cash if they vote against a business combination
Another SEC Commissioner Sworn In
Yesterday, Luis Aguilar was sworn in as a SEC Commissioner. Only one more to go…
Yesterday, the SEC adopted updated interpretive guidance regarding how companies can use their websites. Here is Corp Fin’s opening statement – and here is the press release (which includes a video from SEC Chair Chris Cox). The interpretive release is not yet available.
Based on comments made during the open Commission meeting and the press release, we know the SEC’s guidance is principles-based that relies on a facts-and-circumstances analysis and is divided into four parts as follows:
1. Reg FD Guidance – How information posted on a company’s site can be considered “public” and provides guidance to help companies comply with Regulation FD. The upcoming release contains factors to help determine whether online information is considered “public” so that subsequent communications would not constitute disclosure of material non-public information, including whether:
(i) a company site is a recognized channel of distribution
(ii) online information is considered broadly disseminated
(iii) information has been posted for a sufficiently long period of time so that it has been absorbed by investors
In addition, the release addresses when disclosure of information on a site is considered adequate to make such information “public” for purposes of the alternative public disclosure prong of Regulation FD (the default prong is furnishing a Form 8-K). At the open Commission meeting, it was predicted that fewer Form 8-Ks will be filed under this guidance.
2. How Liability Standards Work Online – What the liability framework is for electronic disclosure, including how companies can provide access to archived data without it being considered reissued or republished; how companies can link to third party information; appropriate use of summary information; how antifraud provisions apply to statements made by the company in blogs and electronic shareholder forums, and more.
3. No Disclosure Controls Necessary for Website – How information posted on company sites would not be subject to rules relating to disclosure controls and procedures (unless the information is the type to satisfy a ’34 Act obligation). This information remains subject to Rule 10b-5 liability.
4. Printer-Friendly Functionality Not Required – How information need not satisfy a “printer-friendly” standard, unless other rules explicitly require it.
Once the interpretive release itself is available, I’ll blog more including how it stacks up against my ten cents. Dominic Jones has more on yesterday’s open Commission meeting in his IR Web Report blog.
Gulp! The SEC’s View on Lawyer Negligence
A few weeks ago, the SEC issued an order – regarding “In the Matter of Scott G. Monson” – dismissing an enforcement action against the former in-house lawyer of a broker-dealer (this action related to an appeal by the SEC from an administrative law judge’s dismissal of cease-and-desist proceedings). The lawyer had a background in family and real estate law, etc. and took this job without any securities law background; he drafted an agreement based on a sample – and botched the job.
Although the issues in this action are fact-specific, the SEC’s order has some interesting things to say about enforcement actions against lawyers in general. In the order, the SEC acknowledges that “as far as we are aware, we have not sanctioned attorneys in litigated enforcement proceedings based on alleged negligent acts or omissions they may have committed in providing non-public legal advice to clients.”
But then the SEC’s order goes on to list the types of cases that the SEC will pursue against lawyers – and notes that this case doesn’t require the SEC to address the appropriate parameters of lawyer liability in administrative enforcement proceedings because the record didn’t show that the in-house lawyer acted negligently by a preponderance of the evidence. Keith Bishop (who is now at his new firm Allen Matkins) served as an expert for Monson.
All the Latest: Two New Blogs to Check Out
Long-time blogger Bruce Carton – a former SEC Enforcement Staffer – is back with his UnusualActivity.com blog; check out his piece on the death of ShareSleuth.com.
And a former SEC Corp Fin accountant – John Feeney – who has been advising the CFO & audit committee community on strategic financial reporting issues for past ten years has launched his “StreetDisclosure.com Blog“; John provides his first-hand account working with IFRS in this entry.
Over the past six months or so, sovereign wealth funds have increasingly been the subject of debate – in the media and in Congress – for taking stakes in distressed companies in the US and Europe. This debate has taken on many forms (eg. Boeing’s loss of a $40 billion contract to a joint venture that includes AirBus) and arguments (eg. Warren Buffett’s take from his annual letter).
As noted by RiskMetrics a while back, European Union regulators proposed guidance to member states to align policies on sovereign wealth fund investments and to aid international bodies in their efforts to craft a voluntary code of conduct to oversee these practices. Last Fall, the International Monetary Fund began to develop a code of conduct to address these issues, a project which continues – and the Organization for Economic Cooperation and Development is developing best practices guidance for countries receiving these types of investment.
During this upcoming DealLawyers.com webcast – “The Rise of Sovereign Fund Investing” – an expert panel will analyze the issues that should be considered for a sovereign wealth fund investment.
Sovereign Wealth Funds: The SEC’s Perspective
Several months ago, John Olson posted this blog on Harvard Law School’s “Corporate Governance Blog”: “I’m posting a too little noticed speech by SEC Chairman Cox, delivered a month ago in Washington, in which he discusses the growing concerns with the role of sovereign wealth funds and government-affiliated public companies in global securities markets and the impact of such government-related concentrations of capital, and related market influence, on corporate ethics and policy, transparency and the integrity of financial reporting. What about the values of corporate governance, and shareholder power, when the controlling interest or “golden share” is held by a government, particularly a government that itself does not practice transparency or tolerate democracy as we know it?”
In addition, there is this Congressional testimony:
A member recently asked how many companies participate in taking environmental and social surveys, ratings, etc., such as the Carbon
Disclosure Project, Dow Jones Sustainability Index, etc. Please take a moment for this survey:
Recently, I blogged about an interesting new website that has the potential to empower investors more. In this podcast, Andy Eggers discusses his website “ProxyDemocracy.org,” including:
– Where did you get the idea for the site? How long did it take to launch?
– What features does ProxyDemocracy.org currently have?
– Any plans to tweak things going forward?
– What have been the biggest surprises in how the site is used so far?
Just Mailed: July-August Issue of The Corporate Counsel
We have just wrapped up the July-August issue of The Corporate Counsel, which includes pieces on:
– Correcting CEO/CFO Certifications—New S-K Interps
– De-Mystifying the 135-Day Rule on the Age of Financial Statements When 1933 Act Registration Statement is Effected
– “No View” on Bebchuk Proposal
– Disclosing Pending Government Investigation—Qui Tam Actions
– Recent Uptick of Software Revenue Recognition Accounting Problems
– SEC Backs Off Inflation Adjustment
– PCAOB Inspection Tidbits
– Staff’s Non-Use of E-Mail–A Few Insights
– Clarifying California’s Updated Stock Option Regs—Expansion by Regulation of Its Rule 701-Like Statutory Exemption
– North Dakota’s New Corporation Law—Now, We Get It!
Wanna Feel Good? Remember You Aren’t Taking the Bar Exam
A member sent this in: It’s that time of year when graduating law school students find out what pain is really about – studying for the bar exam (I’ll spare you my nutty bar exam experience). A member just sent me this: In this recent decision, the Delaware Supreme Court affirmed the decision of the Delaware Board of Bar Examiners refusing denying Papdima’s request for partial certification of her qualifications to take the Delaware Bar Examination.
Papadima studied civil law for four years at the law schools of the University of Bucharest in Romania and the University of Paris receiving a joint degree in 2003 and received an LLM from the University of Paris in 2004 and an LLM from Harvard Law in 2006.
Unfortunately, the Delaware Board of Bar Examiners determined that Papadima failed to satisfy the qualifications to take the Delaware Bar examine because neither the University of Bucharest nor the University of Paris, from which she received undergraduate law degrees, is approved by the American Bar Association and the LLM. she received from Harvard Law School is not the equivalent of a juris doctor degree from an ABA approved law school.
What made this case particularly interesting was that Papadima has been a member of the Bucharest Bar since 2004, a member of the Paris Bar since 2006, and a member of the New York Bar since 2007 and is currently a member in good standing of all three Bars. In addition, Papadima spent several months in 2004-2005 practicing Romanian law with Linklaters in its Romanian office and after receiving her LL.M. from Harvard Law School in 2006, worked at Latham & Watkins in New York for approximately a year. Best of all, Papadima is currently employed for a one-year clerkship in the Delaware Supreme Court, assigned to Justice Jack B. Jacobs (who disqualified himself sua sponte).
We just put the finishing touches on the Summer issue of our new newsletter, InvestorRelationships.com. This newsletter is complimentary, as well as all the issues for the remainder of ’08. You simply sign-up online to gain free access to it (and be notified when the next issue is available).
– Non-Deal Roadshows: Latest Developments and Trends
– Lessons Learned: How Funds Vote on Proxy Proposals
– Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
– How Blogging Can Enhance Your Investor Relationships (and Your Career)
– My Ten Cents: The SEC’s Coming Guidance on IR Web Pages
– SEC Staff Says “No” to Non-GAAP Financial Statements
Earning Trust: The Mantra of Bloggers
At the NIRI Annual Conference last month, one of the panels I served on was “Is Your Company or IR Dept Ready for a Blog? Innovative Communication Methods for the 21st Century.” In describing why I think blogging is important for IROs, I discussed how effective a vehicle a blog can be to get people to trust you – if you do it right – because they can get a window into who you are. This allows IROs to get outside the staid press release environment that they typically live in to show their constituents – investors, analysts, employees and potential investors – that they can be trusted. And “trust” is the name of the game in investing (and also in life, but that is a different story.)
For the Summer issue of InvestorRelationships.com – the one noted above – I wrote a piece that persuasively argues why you should blog – and three considersations to determine if you have an inner blogger in you. The article will be relevant for lawyers as well as IROs. You can get this article for free if you provide us with your contact information.
More on Investor Relations and Blogs
Recently, I did a podcast with Lynn Tyson of Dell about the “DellShares” blog. Rob Williams, one of Lynn’s co-bloggers, was on the panel mentioned above and was great. Learn what transpired during the panel from several others who covered some of our roundtabling in these blogs:
– Ryan Lejbak’s blog (and here is a follow-up video with IRO blogger Rob Williams from Dell)
By the way, Ryan also uploaded this interview with me on YouTube if you want to see what I really look like. It’s pretty daunting to have a camera stuck in your face. I enjoyed doing the same thing to others during the Society’s Annual Conference…
Lately, there have been plenty of rumors about the health of Apple CEO Steve Jobs and whether he remains healthy. Until Apple finally clarified the situation on Wednesday, the company’s stock price had taken a hit since the market believes he is key to the company’s future (actually, the company didn’t clarify – rather, it was reported in this NY Times’ article based on comments made by Jobs to some of his “associates”).
And the market was wary of statements from the company that Jobs had a “common bug” or that “the matter was private” because the company has a history of not being upfront about his medical condition (Jobs had a rare form of pancreatic cancer four years ago; the company waited nine months to disclose it). In fact the company is still not being forthright, this reporter had to put clues together to come up with his own diagnosis of what surgical procedure Jobs recently had.
So the securities law issue arises: does Apple have a duty to disclose Jobs’ current condition? This is not a new issue and one that pops up periodically on our “Q&A Forum” in all shapes and sizes. Under the SEC’s rules, companies typically don’t have an affirmative duty to disclose unless a Form 8-K is triggered or a periodic report (eg. 10-Q or 10-K) is due (I say “typically” because there are other ‘disclose or abstain’ circumstances to consider).
On the other hand, the company may have a duty to update if they have an outstanding statement that the CEO’s health is sound. Given that an Apple spokesperson said Jobs’ gaunt appearance at a recent event was due to a “common bug,” there is an argument that the company had a duty to update (or was misleading to begin with).
Clearly, Jobs is very important to investors and many articles have been written that essentially argue that by taking the job of CEO, you relinquish your right to privacy; here are articles from the Financial Times; TheStreet.com; and below is an excerpt from this San Mercury News article:
No hard rules guide how companies handle health issues of their executives. But corporate governance experts say companies need to be forthcoming when health issues affect the ability of executives to perform. That does not mean, though, that Jobs has to submit details of his health simply to allay the worries of investors, said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. “If his health is such that he can’t carry out his job, the company must disclose that,” he said. “It’s only material if it affects his ability to carry out his responsibilities. Up to that point, it’s up to him.”
But it is the board’s role to keep tabs on the health of its chief executive and have emergency, and long-term, succession plans in place, said Nell Minow, editor of the Corporate Library, a corporate governance research group. “The primary issue is, the board needs to be on top of it,” she said. In general, such information is best kept private, otherwise “it can create more uncertainty than is necessary,” Minow said. However, she was critical of Apple CFO’s Oppenheimer’s response that “Steve’s health is a private matter.”
“That’s what we in Washington call a non-denial denial,” Minow said. “It’s very important that investors are confident of his health. He is responsible for a large part of the company’s success. He’s the one who holds up the iPhone and says, ‘Here’s what I did.'”
Looking beyond the SEC’s rules, companies also need to consider the rules of the stock exchange where their stock is listed. Since Apple is listed on Nasdaq, Rule 4310(16) requires the company: “except in unusual circumstances, a Nasdaq-listed issuer shall make prompt disclosure to the public through any Regulation FD compliant method (or combination of methods) of disclosure of any material information that would reasonably be expected to affect the value of its securities or influence investors’ decisions. The issuer shall, prior to the release of the information, provide notice of such disclosure to Nasdaq’s Market Watch Department if the information involves any of the events set forth in IM-4120-1.” Under this guideline, the importance of disclosing a CEO’s illness would depend on the “materiality,” which would take into consideration a mix of factors including the relative importance of the CEO and the magnitude of the illness.
In comparison, Section 202.05 of the NYSE Listed Company Manual states that companies are “expected to release to the public any news or information which might reasonably be expected to materially affect the market for its securities.” However, the SROs rarely enforce their own listing standards, particularly in this area where “materiality” remains relatively subjective.
The reality remains that since someone’s health is such a sensitive topic, there isn’t a standard practice – but that companies must take care not to be misleading nor create a duty to update. And I won’t go down the path of when a CEO’s health is so debilitated that their responsibilities are diminished to the point that they don’t truly function in the position of that officer, which arguably could trigger a Form 8-K under Item 5.02…that’s another kettle of fish to fully analyze…
California Finally Resolves Conflict with E-Proxy
On Tuesday, California Gov. Schwarzenegger signed Senate Bill 1409 into law, which amends Section 1501 of the California Corporations Code so that California’s annual report delivery requirement piggyback’s on the SEC’s eproxy rules and resolve the conflict I’ve been blogging about for some time. It seemed like this bill would be signed back in February; obviously, not a high priority.
Specifically, the bill states that the California annual delivery requirement “shall be satisfied if a corporation with an outstanding class of securities registered under Section 12 of the Securities Exchange Act of 1934 complies with Section 240.14a-16 of Title 17 of the Code of Federal Regulations, as it may be amended from time to time, with respect to the obligation of a corporation to furnish an annual report to shareholders pursuant to Section 240.14a-3(b) of Title 17 of the Code of Federal Regulations.”
This bill has been approved as an urgency statute and is effective immediately; obviously too late for the past proxy season but “good to go” for next year. Hat tip to Paul Blumenstein of DLA Piper and we have begun posting memos on this development in our “E-Proxy” Practice Area.
Lifehack: Enhance Your Productivity
Check out the website called “Lifehack” for some ideas about how to live your life. Here is a blurb about “10 Overrated Business Books & What To Read Instead.” And my favorite is “How to Write in a Thousand Words or Less” – that’s my philosophy for all our newsletters…
