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."
We just put the finishing touches and mailed the March-April ’08 issue of The Corporate Counsel, which includes guidance on the process for obtaining issuer-specific and interpretive guidance from the Corp Fin Staff. For those that haven’t tried a no-risk trial, try one now to get this issue rushed to you. In an upcoming issue, we will discuss the process for obtaining informal legal guidance and relief from Corp Fin’s Office of the Chief Accountant.
The March-April ’08 issue includes analysis of:
– Obtaining Staff Guidance Today
– Staff Response Process
– What Staff Relief Means
– The New 8-K Item 5.02 CDIs
– Current Disclosure of Cash Bonus, Etc. Plans (Item 5.02(e))
– Officer and Director Appointments, Resignations, etc. (5.02(b)–(d))
– Bebchuk’s Shareholder Proposal—Follow-Up
– Expect More Full 1934 Act Reviews
– Non-AFs—Failure to Include the SOX 404(a) Report in the 10-K
– SEC–0; Short Sellers–3—More Thoughts on Mangan, Etc.
Happy 6th Anniversary to Me!
Today marks six full years of blogging for me. It’s definitely personally and professionally rewarding, but it can tend to rule your life (but doesn’t cause death like this NY Times’ article intimates). That’s why I’m so glad Dave joined me on this blog last year.
And I’m excited that Steve Haas of Hunton & Williams has joined me on the DealLawyers.com blog. On Friday, Steve posted his first entry. Any other M&A practitioners out there interested in blogging? I’m hoping to add a half-dozen others willing to post something once or twice per month. If interested, give me a buzz or email me. You too can “be somebody”!
Nasdaq: Housekeeping the Rules
Recently, Nasdaq submitted a proposal to the SEC that would reorganize the rules applicable Nasdaq-listed companies. These rules would be moved from the Rule 4000 Series of the Nasdaq manual to the Rule 5000 Series – and would not change the substance of any rule. According to Nasdaq, the reorganization is necessary because the rules have become complex over time and difficult to navigate.
I applaud the Nasdaq for recognizing the need to clean up its “house.” We are in the process of doing the same for our sites, which have grown heavy with content over the years and are in need of some reorganization. Recently, Section16.net and CompensationStandards.com have undergone a “tune up.” Let us know if you have suggestions about how improve our sites.
The interest in our inaugural issue of InvestorRelationships.com has been overwhelming. As Yoda would say, investor relationships are very strong in this one.
No doubt that one reason for the interest is the lead article entitled “The E-Proxy Experience: Practice Pointers and Pitfalls to Avoid.” Sign-up for free copies of this new quarterly newsletter and see what you think of the pointers.
Broadridge’s Latest E-Proxy Stats
In our “E-Proxy” Practice Area, we have posted the latest e-proxy statistics from Broadridge. As of March 31st:
– 283 companies have used voluntary e-proxy so far (a big leap from 103 at the end of February – understandable since proxy season is in full swing)
– Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 25% 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% last month)
– 0.45% of shareholders requested paper after receiving a notice; this average is down from 0.70% at the end of February
– 55% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 14% had non-routine matters proposed by shareholders. None were contested elections.
– Retail vote goes down dramatically using e-proxy (based on 92 meeting results); number of retail accounts voting drops from 19.0% to 4.5% (over a 75% drop) and number of retail shares voting drops from 31.4% to 13.9% (a 56% drop)
This recent WSJ article entitled “Shareholder Voting Declines as Companies Adopt Web Ballots” muses on various reasons why retail voting has declined when e-proxy is used. I doubt it’s a “temporary phenomenon as shareholders make the adjustment.”
Our May Eminders is Posted!
We have posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
“Witches Brew”: SEC Accuses Trader of Rumormongering on Deal
As noted in this NY Times article on Friday (and this Wilson Sonsini memo), the SEC settled a case with a former securities who allegedly spread false rumors to profit from a pending buyout of Alliance Data Systems by the Blackstone Group (the deal tanked later due to other reasons). The SEC said this was its first “rumormongering” case.
According to the NY Times article, the trader allegedly “fabricated a rumor that Alliance Data’s takeover was being renegotiated to $70 a share from $81.75 a share. The trader said that Alliance Data’s board was meeting to discuss the revised proposal. At the time, Alliance Data’s board members were on a plane and could not be reached for comment.” Trading in Alliance Data’s stock was suspended due to heavy volume caused by the rumor, which the trader had sent via instant messages to 31 other traders and other market participants. He was short selling the stock at the time.
Reading the SEC’s complaint, it’s not clear if the trader knew that the board was on a plane and unavailable – my guess is that he didn’t know (and thus was unlucky because if they had been reached and quashed the rumor more quickly, the damages would have been reduced and perhaps this case wouldn’t have been brought or the penalty would be been less than the $130,000 he ended up paying).
In the SEC’s press release, SEC Chairman Cox noted ““The commission will vigorously investigate and prosecute those who manipulate markets with this witch’s brew of damaging rumors and short sales.” It will be interesting to see if the SEC’s Enforcement Division will be bringing more of these cases, particularly due to the heightened interest in hedge funds and their failures to adopt adequate insider trading compliance programs (see Dave’s recent blog on the SEC’s Section 21(a) Report involving the investigation of the Retirement Systems of Alabama).
On the one hand, SEC Chairman Chris Cox has been under fire, mostly due to his comments just before the Bear Stearns deal was announced (and more generally due to the crisis on Wall Street). On the other, he is being mentioned as a possible running mate for John McCain, as noted in this ABC poll. This is the world of “inside the Beltway” in a nutshell.
In the face of the market crisis, Chairman Cox recently gave testimony before the House Subcommittee on Financial Services/Appropriations regarding the President’s proposed SEC budget for fiscal year 2009. Noting that the agency’s budget has not been increased for three years, Cox is seeking a 4% increase over two years. Trust me, this ain’t much because after taking inflation into account and the impact of pay raises, the head count for the Staff would remain basically the same.
It’s hard to imagine how the SEC will be able to regulate new markets (eg. rating agencies), delve into the complicated derivatives and securitization morass and chase the seemingly ever-increasing number of wrong-doers with its current level of staffing (this op-ed from yesterday’s NY Times by three former SEC Chairs agrees). Not to mention the challenges of integrating a global regulatory framework. If that’s not enough, maybe this will get your attention – there is a total of one person in the SEC’s Office of Risk Assessment today.
Even some in the government are skeptical that the President’s budget for the SEC makes sense. According to this article in the FT.com, the GAO will examine the SEC’s Enforcement Division to ensure it has adequate recources; looking at the SEC’s budget justification (page 13), you can see that the percentage of enforcement cases filed within two years of an inquiry first being made has markedly declined over the past few years. And in this speech, Senator Reed discusses his views on the topic.
SEC Filing Fees: Going Way Up
In yesterday’s fee rate advisory, the SEC announced that filing fees will be going up after October 1st (or whenever Congress approves the SEC’s budget, which historically is significantly later than October 1st) to $55.80 per million from $39.30 per million of securities registered with the SEC.
This is a 42% hike, after a 28% hike last year. Before this period, there had not been a hike for quite some time. Note that there is no mention in the SEC’s press release of a reason for the hike. Actually, the press release doesn’t even mention that this is a hike from last year (but we still remember how Chairman Cox was quite proud of the steep drop in ’06, with a lot of fanfare in that press release). You may recall that the SEC’s fee rates aren’t related to the amount of funding available to the SEC; instead, the money goes to the US Treasury.
The Leap Year Curse
In typical leap year fashion, word on the street is that many companies missed the 120-day proxy filing deadline on Tuesday. Apparently, some service providers had the due date as Wednesday on their “filing calendar.” Yikes, a “failure to communicate“?
Warning, today’s blog is cranky. If you’re not in the mood for moping, turn this channel off. For starters, I am bummed the “new” Wall Street Journal is less business and more politics/world affairs. In my opinion, Rupert Murdoch is killing the brand and the unique WSJ experience. In Monday’s edition, it seemed like only one article in Section A was devoted to business and the other two sections were limited to two pages in length. Looks like a fast – rather than a slow – death for those that read the WSJ for their business updates.
Moving on, I got a chuckle reading Prof. Steven Davidoff’s observation that most of the mainstream media mistook a registration rights offering registered with the SEC by employees of Apollo Global Management as a filing by the fund to go public. As the Professor noted, “it’s nothing of the sort.”
I definitely can relate since I deal with journalists on a daily basis in this job. Understandably, many of them don’t know the intricacies of SEC filings compared to those of us that have lived with them for our entire careers. Nor should they; their jobs force them to become generalists on dozens – if not hundreds – of topics.
The ability of bloggers to provide analysis of developments in their narrow niches is what makes the Web so great – and threatens the viability of mass media. Wearing my journalist’s hat a few months ago, I sat on a panel with major business reporters in New York and had some mild disagreements about whether bloggers could provide real value since they typically aren’t trained as journalists. Clearly some can (and of course, some can’t since there is no barrier to entry to become a blogger). Perhaps proving the point that some can, Professor Davidoff’s blog has recently become part of the NY Times’ DealBook empire. I imagine we will see more of the melding of non-traditional and “real” journalists in the near term…
Another thing I’ve noticed with old media: As all the traditional newspapers have undergone severe cuts in staffing over the past few years, the number of errors – both large and small – seem to have tripled. Check out this recent – and novel – press release from the SEC. It’s purpose is to point out an error in a NY Times article. It’s a rare type of press release and thankfully so, because if the SEC issued a press release for every error committed by a journalist covering this “space,” I imagine there would be more than a handful of folks in the SEC’s Office of Public Affairs.
Speaking of the NY Times, SEC Enforcement Director Linda Thomsen responded to a recent NY Times article that was critical of the Division’s efforts by delivering this public statement. Given that the SEC likely disagrees with all sorts of things written in the media, I imagine that this response is directed more broadly to the various quarters (including some members of Congress) that have been critical of Enforcement lately.
And speaking of the SEC’s Office of Public Affairs, I wonder who put them up to issuing this odd press release yesterday to announce that Corp Fin has made its recommendations to the Commission regarding proposals on the cross-border tender, exchange offer and business combination rules? That’s a new one – and I doubt we shall see a press release each time a rulemaking is sent to the 10th floor for consideration. Maybe OPA did add some bodies…
Survey: Auditors Asking to Review Board Minutes
Recently, in our “Q&A Forum,” a member asked what is the common practice when an independent auditor asks a client to review their board minutes. I provided my own thoughts on what that practice might be – but I pose the question to you to see if we can build a consensus:
Hat tip to Jim McRitchie’s CorpGov.net for pointing out that PIRC – one of the proxy advisors in the United Kingdom – has issued a research report that recommends that shareholders vote against Aflac on its say-on-pay proposal at the company’s annual meeting. Given that the UK is one of those countries with experience regarding say-on-pay, I believe this is noteworthy for all of us. We have posted a copy of the PIRC report in the “Say on Pay” Practice Area on CompensationStandards.com.
So why is this development noteworthy? It probably won’t impact Aflac’s ability to garner majority support at next week’s meeting since it’s reported that RiskMetrics has recommended a vote in favor of Aflac’s pay package – but it might cause some companies that were contemplating allowing this type of non-binding resolution on their ballot to reconsider. And maybe the publicity of the PIRC report will cause Aflac to adjust its pay practices for next year (but I doubt it unless Aflac’s proposal doesn’t get majority support given what the CEO Dan Amos has said in his flurry of recent interviews where he is asked about his executive pay views). Both the RiskMetrics and Glass Lewis policies regarding “say on pay” are posted in the “Say on Pay” Practice Area.
Recently, I blogged my thoughts about “say on pay” – this WSJ article from yesterday quoted a number of governance experts that have similar concerns about unintended consequences from say on pay.
Say on Pay in Europe: Heating Up?
As noted in this RiskMetrics article, shareholders in the United Kingdom are challenging executive pay practices more than ever before during this proxy season. BP had 9% voted “against” and another 27% “withheld” – which is a high level compared to what has been happening in the UK during the past few years.
And in March, shareholders of Philips, a Dutch electronics company, rejected an amended executive pay plan; which was the first time that has happened. But it wasn’t a “first” for long as VastNed lost a vote a few weeks later and Corporate Express pulled its plan from the meeting agenda after pressure from shareholders, as noted in this IR Magazine article.
AFL-CIO’s “Executive PayWatch”
In this CompensationStandards.com podcast, Vineeta Anand, Chief Research Analyst for AFL-CIO Office of Investment, talks about the AFL-CIO’s popular online tool “Executive PayWatch,” including:
– What is Executive PayWatch?
– What is the theme this year and what do you hope to accomplish?
– How do people typically use it?
Recently, I blogged about a case brought in the US District Court, Southern District of Texas, by Apache Corporation, who sought a declaratory judgment supporting its exclusion of a shareholder proposal submitted by the New York City Employees’ Retirement System. The case sought to enjoin a lawsuit brought by NYCERS in the Southern District of New York over the exclusion of a employment-related proposal by the Corp Fin Staff under the “ordinary business” basis of the SEC’s shareholder proposal rule (ie. 14a-8(i)(7)).
A few days ago, Judge Miller of the US District Court, Southern District of Texas ruled from the bench for Apache, granting Apache’s declaratory judgment. We have posted the Order and related Memo – even the trial transcript! – from the court in our “Shareholder Proposals” Practice Area.
Interestingly, Judge Miller’s opinion appears to stake out new territory from a judicial point of view. For the first time, a court has endorsed Corp Fin’s view that a proposal that involves some significant policy matters can nonetheless be excluded under Rule 14a-8(i)(7) to the extent that the proposal also deals with core ordinary business matters; here for example, advertising, marketing, sales and charitable giving. We’ll see if the Second Circuit ultimately follows suit (I believe the Texas case isn’t binding on the SDNY one, but under a res judicata theory, it’s likely the Second Circuit would recognize the SDTX’s decision and rule in favor of Apache).
Also interestingly, the Texas court didn’t take the bait offered by Apache with respect to the appropriate standard of review for SEC Staff no-action: Apache asked the court to find that a company that excludes a shareholder proposal in reliance on a no-action letter is entitled to a rebuttable presumption that such exclusion was proper. The court declined to adopt such an approach, however, concluding that Staff no-action letters are only persuasive – but not binding – authority.
Shareholder Proposals: Debunking a Conspiracy Theory
Recently, RiskMetrics ran a piece entitled “Spike in No-Action Requests Worries Investors.” In the article, Subodh Mishra notes that “issuers had challenged 33% of all governance-related proposals filed this year, compared with just 20% in calendar 2007. Challenges by issuers also are more likely to be successful this year than last. For example, 48% of last year’s requests for no action were granted, while this year’s figure so far stands at 69%, according to RMG’s analysis.”
It is interesting to look at the rate of success for exclusion requests – and I don’t remember seeing this type of analysis conducted for other proxy seasons. It’s good stuff. I do think companies were more willing to fight proposals this year. Anecdotal evidence indicates that more exclusion requests under Rule 14a-8(b) regarding proof of ownership were made compared to year’s past. In other words, companies used to be more willing to overlook the “technicalities” of whether a proponent was eligible to submit a proposal (eg. amount of securities held; length of holding period; proof of ownership). Not this year.
But I don’t buy into the notion that there was some sort of conscious SEC Staff decision to be more pro-management this year, even though that’s where the numbers could lead you. Rather, I would argue that the exclusion rate is a direct product of the types of proposals submitted this year and the types of arguments made. So I would not rush to judgment using a conspiracy theory (which other bloggers and journalists have done).
For example, one reason for the increase of exclusion requests granted likely relates to the fact that more companies implemented shareholder proposals when they were received – thus, quite a few proposals were allowed to be excluded as “moot” under Rule 14a-8(i)(10). So ironically, the number of exclusions may have risen because more companies did what shareholders wanted. Another likely factor for the higher exclusion rate is that Corp Fin granted more exclusions under Rule 14a-8(b) this year because companies were more picky about whether the proponent was eligible as noted above.
Perhaps all of this stuff would make for a fine academic paper that delves beyond the numbers into the specifics…
JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues
Tune in tomorrow for our DealLawyers.com webcast – “JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues” – during which Professors Elson, Cunningham and Davidoff will analyze the novel Delaware issues presented by the Bear Stearns transaction, including:
– What significant anti-takeover provisions are in the amended merger agreement?
– How does the provision work that calls for the parties to work in good faith to restructure the deal if Bear Stearn’s shareholders turn it down?
– What is the JPMorgan Chase guarantee – and how does it work? How about the NYC building option and the Section 203 provision?
– How valid are the attacks against the fairness opinions delivered in the deal?
– Why was there a discussion of a 39.5% share exchange and what would be the Delaware law on it?
– How about the abandoned, uncapped 19.9% option – was that valid under Delaware law?
To warm up for the program, check out Professor Davidoff’s analysis of the Form S-4 filed for the deal (which the SEC declared effective on Friday) as well as this WSJ article indicating that post-deal details will be announced soon.
Last week, the NY Times ran this critical article about the growing use of deferred criminal prosecutions. It reminded me that I hadn’t yet blogged about the new Morford Memo, distributed internally by the Department of Justice a month ago. The Morford Memo provides guidance on corporate monitoring (eg. selection critieria, scope of responsibilities, terms). Here is the Morford Memo – and memos about it are posted in our “White Collar Crime” Practice Area.
In this 15-minute podcast, Gary DiBianco of Skadden, Arps provides some insight into the Morford Memo, including:
– What is the Morford Memo?
– What do the principles outlined in the Memo seek to address? What specific practices?
– What are the DOJ’s views on the duties of a monitor as expressed in the Memo?
– What does the Memo say about the monitor’s reporting obligations to the company and the government?
– What happens when a company disagrees with a monitor’s suggestions?
Congress remains skeptical of the DOJ’s unfettered discretion in this area. Rep. Frank Pallone (D-NJ) introduced legislation in January that would establish requirements for entry into deferred prosecution agreements.
The Treasury’s Restatement Study
Last week, Treasury Secretary Henry Paulson released a study on restatements that the Department commissioned last May when it began its look into reforming the capital markets. The study – “The Changing Nature and Consequences of Public Company Financial Restatements” – conducted by Professor Susan Scholz confirms what other studies have shown, that the number of restatements has soared over the past decade (although the restatements associated with fraud and revenue has declined since Sarbanes-Oxley was passed).
The numbers of restatements have dropped since the implementation of the requirement for an independent audit of internal controls of public companies, that provide reasonable assurance with respect to the accuracy of financial statements.
You can pluck out statistics from the Treasury’s study in this press release – and have a look-see at other studies about restatements in our “Restatements” Practice Area.
As noted in this CFO.com article, a key focus for the SEC’s Advisory Committee on Improvements to Financial Reporting is restatements – some changes are bound to be recommended and ultimately acted upon by the SEC.
I just put the finishing touches on our new newsletter – “InvestorRelationships.com” – which is a quarterly online publication. This newsletter is free, as well as all the issues for the rest of ’08. You simply sign-up online to be notified when the next issue is available (you also need to sign-up to be e-mailed an ID and password in order to access future issues).
Why this new newsletter? As you can see from the article titles in the Spring ’08 issue listed below, I felt there was a dearth of practical guidance on the cutting-edge – as well as the “bread ‘n butter” – issues confronted by those involved in investor relations, shareholder services and corporate governance today. Take a look and let me know what you think:
– The E-Proxy Experience: Practice Pointers and Pitfalls to Avoid
– The Coming Online IR Campaigns: The Future of Director Elections
– The Regulation FD Corner
– Ten Steps to a Clawback Provision with “Teeth”
– Notables: All the Latest
Washington Mutual: Case In Point
The jaw-dropping results from the Washington Mutual annual meeting this week are timely in that they bolster my argument that companies need to learn how to “campaign” during the proxy season cycle. These arguments – and specific recommendations about how to campaign – are in my piece entitled “The Coming Online IR Campaigns: The Future of Director Elections” (sign-up to obtain your free copy).
So what happened at the WaMu meeting? Here is what has been reported so far:
– One director resigned, Mary Pugh, who was the Chair of the company’s Finance Committee.
– Some reports state that all director nominees received majority support (eg. see this article); others are reporting that three nominees failed to reach a majority. Change to Win’s press release states that one director had 51.2% withheld, another had 50.9% withheld and Ms. Pugh had 61.9% withheld.
– Change to Win called on the WaMu board to immediately release full election results and demand the resignation of any directors who failed to win majority shareholder votes. WaMu then issued this press release that contains preliminary results – notice the paragraph at the bottom that leads one to believe that the difference in the three challenged nominees getting majority support was the presence of broker non-votes.
– With a vote of 51%, shareholders supported a precatory proposal to appoint an independent director as chair.
– In February, WaMu revised its incentive program in a way so that mortgage-related credit losses and foreclosure costs could have been cast aside when awarding management’s performance bonuses. Shareholders were not pleased – and WaMu’s CEO announced at the annual meeting that the board would soon revise the pay program to hold management more accountable for credit-related losses.
The campaign against WaMu has been intense during the past month, fueled by plenty of online tactics. For example, Change to Win launched this blog that targeted the company. Yes, the future is now. Read the Spring ’08 issue of InvestorRelationships.com today to learn how to protect yourself. ] I also recommend reading this new memo from Davis Polk about how the ’08 proxy season is faring so far.]
Corp Fin’s New M&A Chief: Michele Anderson
Congrats to Michele Anderson, who was promoted to Corp Fin’s new Chief of the Office of Mergers & Acquisitions. Most recently, Michele served as a Legal Branch Chief in the Office of Telecommunications – but she spent time in OM&A a few years back. She replaces Brian Breheny, who was promoted to Deputy Director a few months ago.
On Monday, the SEC will hold an open Commission meeting to vote on a proposal to mandate XBRL. Given that this has been one of Chairman Cox’s top priorities since he took office – and the Chairman and SEC Staff have not been shy about their timeframe to kick-start mandatory XBRL – this is no surprise.
We just announced a May 15th webcast – “XBRL: Understanding the New Frontier” – to help you understand the signficance of what these means for you (and your CPA brethren). As a warm-up for this program, here are three quickie “foods for thought”:
1. This Ain’t Edgar – You’ll note that the webcast panel is populated by reps from the major financial printers. Don’t let this fool you into thinking that XBRL is just another version of Edgar, with tasks that can be contracted out. This is much more than that – and I believe entails a new skill set that all the finance and auditing folks are gonna have to know. It’s gonna be a huge education effort. As with most new things, there is plenty of misinformation out there. One article I just read called XBRL the “new Edgar.” The only rationale I can conceive for that statement is that XBRL will increase public access to information filed via Edgar.
Let’s see if I can make this clearer: Edgar tagging just involves placing tags on a disclosure document to enable it to be filed on the SEC’s system. In comparison, XBRL will likely affect how companies approach their financial disclosure. Information coded in XBRL will likely used – and abused – in ways that companies don’t worry about today. Similar to the many speeches that Chairman Cox has delivered over the years, SEC General Counsel Brian Cartwright gave this speech on Saturday at the ABA Spring Meeting.
2. We Need Time to Learn – I can appreciate that Brian was trying lay out the simplicity of the concept of XBRL because many of us still have not grasped what it really is – but I worry about the speed by which it will be implemented. I hope there will be a fairly long phase-in period before it becomes mandatory (and I think that will be the case since the SEC’s meeting notice refers to a “near- and long term-schedule”). As noted in this CFO.com article, others have similar concerns – for example, the SEC’s Advisory Committee on Improvements to Financial Reporting urged the SEC to wait three years. The Advisory Committee also wants to phase-in the legal liability of XBRL documents, starting with them being considered “furnished” rather than “filed,” as it’s currently done in the SEC’s Pilot Program.
3. XBRL Will Provide “Bennies” – For me, there certainly is an upside to XBRL. The most fascinating aspect is not the enhancement to disclosure through “conversion” of financials into a XBRL format simply by adding tags. Rather, the value-creation occurs when XBRL becomes embedded into a company’s enterprise resource management system, so that data can be extracted and analyzed to drive business decisions with greater speed and precision. Public financial reporting simply is an ancillary by-product of embedded XBRL. Thanks to Jim Brashear for allowing me to “borrow liberally” from some of his ideas…
Delaware Court of Chancery Permits Insurgent To Nominate Short Slate
On Monday, the Delaware Court of Chancery ruled on another advance by-law case (here is a blog about the other case). Here is some analysis from Travis Laster: If the recent JANA Partners v. CNET decision (currently on expedited appeal) wasn’t enough to make corporations review and update their advanced notice bylaws, the attached opinion should do the trick. In Levitt Corp. v. Office Depot, Inc.,, Vice Chancellor Noble holds that (i) a bylaw requiring advanced notice of “business” to be proposed at an annual meeting extends to director elections and director nominations, but that (ii) the advanced notice bylaw was not applicable because the corporation had given notice that the election of directors would be an item of business at the meeting. In light of the second holding, the Court concluded that the stockholder did not have to give advance notice of its intent to run a short slate. As with CNET, this is a decision that will likely prompt an appeal.
On March 14, 2008, Office Depot sent out its notice of annual meeting. Item 1 on the list of items of business was “To elect twelve (12) members of the Board of Directors for the term described in this Proxy Statement.” The proxy statement contained standard Rule 14(a) disclosures regarding how votes would be tabulated in an uncontested versus a contested election. On March 17, 2008, Levitt filed its own proxy statement seeking to nominate two candidates for director.
Office Depot had a relatively standard advanced notice bylaw which provided that “business” could be brought before the annual meeting if (i) specified in the notice, (ii) otherwise properly brought before the meeting by the board, or (iii) proposed by a stockholder in compliance with advanced notice requirements. The time period for advanced notice was “not less than 120 calendar days before the date of the Company’s proxy statement released to shareholders in connection with the previous year’s annual meeting.” The bylaw required the stockholder proposing business to provide standard information, including basic stockholder information and a brief description of the business to be conducted.
Levitt did not try to comply with the advance notice bylaw. Office Depot rejected Levitt’s nominations for failure to comply.
In granting judgment on the pleadings for Levitt, Vice Chancellor Noble first held that the scope of “business” under the Office Depot advanced notice bylaw extended to director nominations by stockholders. The Court construed the plain meaning of the term “business” broadly to include all “affairs” or “matters” that could be considered at an annual meeting. This included director elections. (11-12). The Court also relied on Section 211(b) of the DGCL, which provides for an annual meeting to elect directors “and other business.” As a matter of plain language, the Court held that this section indicated that electing directors was “business.” (13)
This holding makes sense as a matter of contractual interpretation, but it conflicts with widespread corporate practice. Many corporations have separate advance notice bylaw requirements, one for “nominations” and another for “business.” The information requested for the former is typically different than the latter. The advance notice windows are also often different, with the former including additional windows for issues such as an increase in the size of the board. The Levitt decision could render the bylaws of companies with dual structures ambiguous, as nominations now arguably will be covered by two competing sections. It would be prudent to clarify when “business” means “all business, including nominations of candidates for and the election of directors” versus “all business other than nominations of candidates for and the election of directors.” Interestingly, the opinion indicates that Office Depot previously had a dual structure, but eliminated its “nomination” bylaw. The Court declined to give significance to the amendment.
Based on this first holding, one would think that the Office Depot advanced notice bylaw would apply to Levitt’s nominations. But the Court then went in a different direction. The Court instead agreed with Levitt that because Office Depot had sent out a notice of meeting saying that the business of the meeting would include the election of directors, that item of business was properly before the meeting under the advanced notice bylaw and the stockholder did not have to separately give advance notice. (15-16). The Court rejected the argument that the notice of meeting contemplated only a vote on the corporation’s nominees for directors, finding that it was not supported by the text of the notice (which referred generally to “elections of directors”). In support of its interpretation that the notice also contemplated a contested election, the Court cited the standard Rule 14(a) language on contested elections that appeared in the Office Depot proxy statement.
As in JANA, the Levitt decision effectively left the corporation without any advance notice protection whatsoever for director nominations. This, of course, is an odd result for a company that nominally has an advance notice structure in place. In support of this outcome, the Court observed that “neither Subchapter VII of the [DGCL] nor any provision of Office Depot’s Bylaws discusses or imposes limitations on the nomination process.” The Court did not explain how it reached this conclusion given its prior holding that the term “business” in Office Depot’s advanced notice bylaw included director elections and nominations.
In light of the Levitt decision, corporations should make sure that their bylaws explicitly discuss “nominations.” Corporations also may wish to consider changing the historic and ubiquitous language that appears in notices of annual meetings and identifies the first item of business as “election of directors.” One alternative to avoid the Levitt problem would be to say “election of the Board of Directors’ nominees.” Because all candidates are voted on as a single item of business, however, the better route is likely to be to maintain the historic language in the notice of meeting and instead make sure that the bylaws have a specific advance notice structure for stockholder nominations.
As noted in this WSJ article, both Senator Barack Obama and Senator John McCain attacked executive compensation last week. You may recall that Senator Obama introduced a bill on “say on pay” in the Senate after it passed in the House last year. Below is an excerpt from Sen. Obama’s Friday speech (and here is a video and full text of the speech):
We all believe in that fundamental, American value that if you do good work, if you’re successful, you should be rewarded. But if you’re a Wall Street CEO today, it doesn’t seem to matter whether you’re doing a good job or a bad job for your shareholders and workers: You’ll be rewarded either way.
Take the home building company, KB Home. They lost nearly $1 billion last year. But their CEO walked away with a $6 million cash bonus, and that’s on top of his $1 million base salary. And just the other week, we learned that when Countrywide Financial was sold a few months ago, its top two executives got a combined $19 million. Nevermind that Countrywide is as responsible as anyone for the scandalous mortgage crisis we’ve got today – a crisis that’s the source of many of our other economic problems.
This is an outrage. But as I said in a recent speech at the Cooper Union in New York City, this isn’t an accident. It’s because of decisions made, not just in boardrooms or trading floors, but in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales, using their clout to rig the game against everyday Americans.
So what we need to do is restore balance to our economy and put in place rules of the road to make competition fair, and open, and honest. One place we can start is by restoring common sense to executive pay.
That’s why last year, I proposed legislation that would give shareholders a say on what CEOs are getting paid, and help ensure that companies are disclosing the rationale for the salary and benefits that CEOs are getting. This isn’t just about expressing outrage. It’s about changing a system where bad behavior is rewarded – so that we can hold CEOs accountable, and make sure they’re acting in a way that’s good for their company, good for our economy, and good for America, not just good for themselves.
We’ve seen what happens when CEOs are paid for doing a job no matter how bad a job they’re doing. We can’t afford to postpone reform any longer. That’s why Washington needs to act immediately to pass this legislation.
And here are some tidbits from the WSJ article:
– Obama on his “say on pay” bill: “Washington needs to act immediately to pass this legislation” and change “a system where bad behavior is rewarded.”
– If the “say-on-pay” bill doesn’t pass this year, it “will be a priority for Sen. Obama as president,” campaign policy director Heather Higginbottom says. A spokesman for New York Sen. Clinton’s Senate office says she also favors additional federal rules on executive-pay disclosures.
– Sen. McCain hasn’t taken a stance on the say-on-pay bill, and opposes legislative or regulatory cures for executive-pay problems, says senior policy adviser Douglas Holtz-Eakin.
– In a campaign appearance Friday, Sen. McCain said he strongly endorsed Aflac Inc.’s voluntary decision to become the first public U.S. company to give investors a say on pay; the vote is to occur at Aflac’s May 5 annual meeting.
– An Obama commercial that has aired in 14 states assails chief executives “who are making more in 10 minutes than ordinary workers are making in a year.”
– Sen. McCain recently blasted what he called the “outrageous” and “unconscionable” rewards received by leaders of Bear Stearns Cos. and Countrywide Financial Corp. despite the credit crisis
My Ten Cents: Say on Pay
For what its worth, here is my current thinking on “say on pay.” And maybe it’s a cop-out, but I would say that I’m torn at this moment in time. On the one hand, I find the arguments that it’s a slippery slope to have shareholders vote on a matter that is supposed to be a board task (ie. that shareholders will eventually be voting on all sorts of board tasks) and that shareholders won’t have the requisite knowledge to vote on a complex pay package convincing.
On the last point, I worry that say on pay will provide RiskMetrics with even more clout given that most investors will need help deciphering 30 pages of pay disclosure across the many companies in which they invest (although a partial fix for this is for boards to simplify their pay packages so that CEOs aren’t getting paid in a dozen different ways – why is there a need for such complex pay packages?).
I also worry that most shareholders will blindly vote in favor of pay packages, thereby arguably providing directors a shield from liability for the poorly designed pay packages they give a CEO (a theory espoused by the wise Professor Charles Elson, who points out how ironic it is that most directors oppose say on pay). And there are more convincing arguments, including those espoused by some investors who would rather just vote against/withhold directors than participate in a non-binding vote. Or those who say a simple “thumbs down” doesn’t help the board understand which aspects of a pay package are objectionable.
On the other hand, I am at my wit’s end to understand why CEO pay packages aren’t changing. I hear a lot about how the behavior of directors has dramatically changed in the boardroom over the past five years. But I really don’t see much evidence of that when reviewing proxy disclosures. Some commentators claim that the stories in the mainstream media about CEOs getting paid for non-performance are only outliers – but then I look for a CEO whose compensation I can point to as a model and I come up fairly empty.
So maybe “say on pay” is necessary to shake up the boardrooms of this country so that directors truly understand that the excesses of the past need to be reversed. That the 15 years of being paid in the top quartile have added up to a batch of inflated data in peer group benchmarks – and the sole cure is to wind back the clock and take a huge pay cut. Boards may need to be pushed by “say on pay” to see daylight on this issue, because nothing else seems to work.
So I’m personally at a crossroads regarding this issue. There was a “Say on Pay Roundtable” organized by the Working Group on Advisory Votes on Compensation last week; Carol Bowie of RiskMetrics reports on what happened there in this article (scroll down) – and check out the many resources we have on this topic posted in our “Say on Pay” Practice Area on CompensationStandards.com. And then there is this hopeful article from yesterday’s WSJ. Maybe this information can help you make up your own mind. It’s a challenging issue and an important one that needs to be addressed before it’s legislated for us…
Last Tuesday, I attended a roundtable in New York City on the advisory vote on executive compensation (otherwise known as “Say on Pay”). I was sitting through a panel discussion featuring representatives of the various proxy advisory firms, listening to them talk about the criteria that they would use to analyze a Compensation Discussion and Analysis when formulating a voting recommendation on a Say on Pay proposal when it occurred to me that one of them, RiskMetrics Group (which acquired ISS last year), is itself a reporting company that has to comply with Item 402. I was immediately curious about what was in its executive compensation disclosure.
So yesterday, I took a look at the RiskMetrics’ information. Although the company just filed its first annual report on Form 10-K, it won’t file its first proxy statement until later this month. Consequently, I had to go back to the Form S-1 registration statement from its initial public offering earlier this year.
Like many other newly public companies, the Form S-1 disclosure is on the light side. At 10 pages, it features a Compensation Discussion and Analysis (which clocks in at 2,871 words), a Summary Compensation Table, and four of the other required disclosure tables (a Grants of Plan-Based Awards Table, an Outstanding Equity Awards at Fiscal Year-End Table, an Option Exercises and Stock Vested Table, and a Director Compensation Table).There’s no Pension Benefits Table or Nonqualified Deferred Compensation Table, which isn’t too surprising, and no severance and change in control disclosure (it doesn’t appear that the company has any such arrangements in place).
I noted two interesting features in the disclosure. First, in the CD&A (which starts on page 105) the company describes the five corporate objectives used in determining its 2007 bonus compensation, but doesn’t give the performance target levels. Instead, the company provides the following statement:
“Our corporate objectives for 2007, particularly the specific financial targets for revenues, EBITDA and cash flow, which we used for purposes of determining our 2007 bonus and equity compensation for our executive officers, were set at levels which our board of directors intended to be challenging and which provided an incentive for our executive officers to meet our corporate objectives, including increasing our revenues, earnings and cash flow. However, our corporate objectives were (and are) also intended to be attainable if we have what we considered to be a successful year. We believe that a senior management team that is providing strong performance should be able to achieve our corporate objectives in most, but not all, years.”
I interpret this as a “degree of difficulty” statement as specified by Instruction 4 to Item 402(b). It’s a statement that may come in handy if you run into an issue with this type of disclosure down the road.
Also, the company provides an alternative summary compensation table (at page 114), which adds the anticipated grant date fair value of the equity awards it intended to grant to its named executive officers for fiscal 2007 to the other compensation elements reported in the required Summary Compensation Table (these awards had not been granted at the time of the IPO). I guess this is a pretty strong endorsement of these alternative tables and another not-so-subtle criticism of the current equity award reporting requirements.
RiskMetrics status as a reporting company puts the ISS business in a unique position. Its executive pay disclosure is going to be closely scrutinized each year; particularly given its new policy on evaluating executive pay disclosures to make voting recommendations on Say on Pay proposals. (By the way, RiskMetrics has announced that it intends to give its shareholders an annual advisory vote at each annual meeting to approve its executive compensation policies and practices.) I’m probably not the only one who is looking forward to taking a look at its proxy statement in a couple of weeks.
The Section 162(m) Workshop
We have posted the transcript from our recent CompensationStandards.com webcast: “The Section 162(m) Workshop.”
