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."
Due to this White House press release from Friday, the status of Luis Aguilar and Elisse Walter to become SEC Commissioners has been upgraded from “rumor” to “announced intentions.” Once nominated – and if confirmed by the US Senate – they will fill out the Commission and both serve as Democratic Commissioners. Elisse’s appointment in particular is timely given the potential merger of the SEC-CFTC and she is a former CFTC General Counsel (as well as a former Corp Fin Deputy Director). Here is a Washington Post article about the coming nominations.
If these two are indeed nominated, it will prove me wrong that this Administration wouldn’t bother to fill the open Democratic slots – although these candidates have been “rumored” for months and nothing was done until now, so maybe I’m partially right?
Today’s a Big Day: Paulson’s Proposed Regulatory Overhaul
Today, Treasury Secretary Henry Paulson will unveil his final report that serves as a potential blueprint for a regulatory overhaul. This is the product of Paulson’s Committee on Capital Markets Regulation that has been working on reform efforts for the past year – efforts that began well before the market went south and the housing market exploded. Here is the executive summary of the report – and here is the 212-page report.
The report breaks down proposals into short-, intermediate- and long-term:
1. Short-term – Take action now to improve regulatory coordination and oversight now in reaction to the credit crunch by:
– Empower the President’s Working Group on Financial Markets (which would be expanded to add heads of banking regulators) to serve as the inter-agency body to promote coordination and communication for financial policy – and extend its authority over all of Wall Street rather than just financial institutions.
– Create the Mortgage Origination Commission set – and regulate – uniform minimum licensing qualification standards for state mortgage market participants.
– Ensure the Federeal Reserve the sole authority to draft regulations for national mortgage lending laws and clarify and enhance the enforcement authority for federal laws.
– Enhance the temporary liquidity provisioning process during those rare circumstances when market stability is threatened so that the process is calibrated and transparent; appropriate conditions are attached to lending; and information flows to the Federal Reserve through on-site examination or other means as determined by the Fed.
2. Intermediate – Eliminate some of the duplication of the US regulatory system
3. Long-term – Create an “optimal” regulatory framework, with an objectives-based regulatory approach, with a distinct regulator focused on one of three objectives— market stability regulation, safety and soundness regulation associated with government guarantees and business conduct regulation.
Here is a statement from SEC Chairman Cox, recognizing a need to integrate a reduced number of regulators; former SEC Chairman Arthur Levitt holds a similar view according to this NY Times article from Sunday (although Arthur doesn’t like the idea of the stock exchanges taking on more self-regulation).
Competing Democratic Reform Efforts: Here is a WSJ op-ed from Senator Schumer from Friday (remember that Schumer put out a reform report with NYC Mayor Bloomberg in early ’07). And Rep. Frank is ready to spring into action, as noted in this NY Times column.
My Ten Cents: Initial Reactions and a Bit of Cynicism
It’s hard to evaluate the Treasury’s broad plan without seeing it. I agree that we need regulators with the power to oversee a range of products that now stretch across the jurisdictions of too many agencies. So some change is definitely warranted. So without knowing the details yet, here’s a stab at an initial reaction:
The plan for reform makes Sarbanes-Oxley look like a drop in the bucket in terms of the magnitude of change. And a lot of it sounds great on paper. Sure, we have too many regulators. Can you believe there are at least six regulators for financial institutions in this country? The Fed, FDIC, OCC, OTS, NCUA and a myriad of state regulators. Merging them and the SEC-CFTC is nothing new and has only been stopped in prior years due to political maneuvering on the Hill.
Then, the cynic in me digs in. It’s easy to propose a lot of change for the sake of change in the face of a major crisis. But what’s it gonna cost? There is no way that a new government agency – or even a merged one – is gonna hit the ground running. New people get hired and need to be trained. There is no institutional memory to guide them. It’s true that the most ripe time to effect governmental reform is during a crisis (and during a Presidential election year) – otherwise folks argue for the status quo – but as many complain about SOX, it might not be wise to act too hastily when the chips seem down.
On the other hand, the new Grand Poobah role for the Fed seems like it would consist of little more than as an information gatherer until a crisis has developed. Being reactive rather than proactive is not gonna stop a reincarnation of the mess we are mired in today.
Much of the “meat” of the Paulson plan would seem to reflect the view that rules and agencies are no substitute for market discipline. But is market discipline really the right answer given what we are experiencing now? In my opinion, a lot of the blame for what is happening today is that Wall Street financially engineered itself into a hole. And it’s a dark hole, with a bottom that no one can understand. You can create all the regulators you want, but none of them will ever be able to understand the complex morass of securitizations, resecuritizations, swaps, etc. that have grown to trillions and can’t be explained. For me, this is the crux of the problem and can’t be solved by regulation. “No doc” mortgages were being originated because there were plenty of places to go and immediately sell them.
A decade ago, I spent a year in the Corp Fin branch that reviewed the asset-backed securities that were registered with the SEC. Most ABS aren’t registered and most of the complex instruments that have been created over the past 15 years have been traded over-the-counter. If you have ever read a resecuritization prospectus, you quickly realize that it’s mostly mumbo jumbo. And I’m sure the asset-backed market has become much more “sophisticated” since my very limited experience with it.
I also fall back on some of my in-house experiences. Watching a room full of bankers conduct a PowerPoint presentation to explain how smart it would be for the company to issue “tracking stock” (this was fashionable about a decade ago when a dozen or so companies got convinced of the need to create securities for which there were no voting rights and – arguably – no fiduciary duties to the holders; not the best governance framework nor not a sound investment as it turned out). Or enter into synthetic real estate leases to keep debt off the books because a company is too highly leveraged. More mumbo jumbo.
And I would imagine that this is just a drop in the bucket. I haven’t worked on Wall Street and I’m not privy to her dark secrets. But I think I know enough to give my ten cents in asking for some of those on Wall Street to change their philosophy and stop looking for fees at the expense of the financial health of this country. There has to be accountability at the top. As said so often during the Sarbanes-Oxley reform debates, you can’t regulate ethics and morality.
I like the idea of what has happened in the United Kingdom. In the wake of the Northern Rock failure, the Financial Services Authority went out and conducted a post-mortem and issued a report saying “what they missed, what needed to be corrected and what they were doing about it.” Hopefully, this is part of the Paulson plan that will be released today, but I doubt it. We need to know what went wrong before we fix it, right? Or maybe this crisis runs so deep that no one really knows the extent of what went wrong. Even if that’s true, let’s understand and learn from that as part of such a report to start…
The Bottom Line: Smarter people than me will offer more cogent arguments “for” and “against” various aspects of the numerous proposed reforms. And I’m grateful for that. All I ask is that if new governmental agencies are formed, please avoid the cartoonish names that are mentioned in the Paulson plan. The “Business Conduct Regulator” sounds like it came from the Flintstones…
Have you had a chance to read about the 580-page examiners report about what happened at New Century Financial, a sub-prime lender in bankruptcy, leading up to its collapse? It eerily has some similarities with the audit of Enron. Here is a WSJ article on the report.
In the report, the bankruptcy examiner strongly condems the role of the independent auditor – KPMG – and its work performed in connection with the 2005 and 2006 audits of New Century, including the firm’s judgments, independence and objectivity. It discusses potential disputes among the professionals – just as it occurred at Enron – as well as notes a lack of adequate experience among some of the staff and a lack of documentation that would provide a basis for their judgments and conclusions, and rationalization of materiality. The report also heavily criticizes the company’s audit committee and internal auditors.
Remember that KPMG – until recently – had a court-appointed monitor as a part of their tax shelter sanctions (and subsequent deferred plea agreement with the DOJ). It appears the alleged problems with the New Century audit may have occurred during the time period when the monitor was in place, albeit his role was primarily focused on the firm’s tax practice. Here is the first complaint filed against New Century…
Notably, the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR) is looking at recommendations that could further relax regulation with respect to some of these matters. Also notable is that this report comes at a time when auditors are pressing hard to limit the ability of bankruptcy trustees to bring litigation against them.
Nasdaq Revises Its SPAC Listing Proposal
Last week, the Nasdaq revised its proposed rule change regarding SPACs that it originally filed a few weeks ago. Under the revised proposal, SPACs would not be required to use cash in completing a qualifying business combination as was originally required in Nasdaq’s proposal.
Speaking of SPACs, Goldman Sachs made news this week for jumping on the SPACs bandwagon with a new breed of them – see this DealBook blog and the Liberty Lane Acquisition Form S-1 filed by Goldman.
American Greed: The TV Show
I guess it was just a matter of time before the people that run television would come up with a reality-based show solely about greed. “American Greed” is in its second season on CNBC and has run episodes already on quite a few situations that you likely are familiar with (eg. WorldCom).
A few weeks ago, I blogged about Canada’s new material contract filing requirements and waxed about what might happen if the same standard applied in the US. A member responded as follows:
Unrelated to your pessimism regarding the lengths to which some pracitioners may go to further their clients efforts to avoid disclosure of terms of material contracts is the consideration that boilerplate used for many agreements includes a general confidentiality provision relating to the agreements’ terms. In many of those cases, there is a simple “as required by law” exception to the confidentiality provision.
The exception often is used by a party required to file reports with the SEC as authorization to file the contract with the SEC as a material contract, subject to a request for confidential treatment for those portions of the contract that, consistent with applicable regulations, are permitted to remain confidential. And, after its review and processing of the related confidential treatment request, whatever the SEC Staff allows to remain confidential, so remains; whatever the Staff objects to remaining confidential, gets disclosed to the public in one form or another, consistent with applicable regulations.
Of course, in many instances where one party REALLY does not want to have certain terms disclosed and it is unclear whether these terms are of a type for which the Staff will grant confidential treatment, the typical confidentiality provision can be much more elaborate – for instance, allowing the counterparty to intercede with the government seeking to require disclosure and, perhaps, more significant remedies, such as the right to terminate a commercial-type agreement.
All of this being said (and again leaving your pessimism aside), I have noticed agreements where concepts meant to remain confidential are relegated to schedules, and the report, which includes the agreement as an exhibit, simply omits the schedules. Presumably, the basis for omission of the schedules relates to the provisions of the second sentence of Item 601(b)(2) of Reg S-K which states: “Schedules (or similar attachments) to these exhibits shall not be filed unless such schedules contain information which is material to an investment decision and which is not otherwise disclosed in the agreement or the disclosure document.”
Notably, Item 601(b)(10) of Reg S-K doesn’t contain an analogous provision. However, most practitioners are aware of a variety of practices that have developed in relation to the filing of exhibits and schedules to contracts, whether the contracts are filed pursuant to Item 601(b)(2) or (b)(10). Specically, many practitioners are aware of registrants which have omitted schedules to (b)(10)-filed contracts.
Presumably, these registrants have concluded that the omission is immaterial in light of other disclosure. In addition, many practitioners are aware of registrants which have omitted exhibits that are forms of contracts executed contemporaneously with a filed material contract and simply file that executed versions of these contracts. While the immateriality of these forms is undeniable (unless the exhibits are not filed in executed form contemporaneously with the primary contract), it is unclear whether this practice is sanctioned by applicable regulations.
Nasdaq Acts on IFRS
Recently, Nasdaq made this proposal to amend its listing requirements to accept financials prepared in accordance with IFRS from foreign private issuers. It is anticipated that all stock exchanges will amend or interpret their listing standards to conform to the SEC’s acceptance of IFRS.
The Rise of “Social” Proposals
Over the past few years, shareholders have been supporting so-called “social” proposals more than ever before (also known as “ES&G” proposals). For a long time, the percentage of shareholders that supported these types of proposals remained in single digits. Given the growing support of them over the past few proxy seasons, it wouldn’t be surprising if they started to routinely receive majority support.
During our recent webcast with Pat McGurn of RiskMetrics (transcript here), Pat noted that “30% of the E&S proposals won at least 15% support last year. And more than 25 of their proposals won support in excess of 30%. And several, including one that was opposed by management, ended up winning.”
And as Pat noted, companies are more willing to settle on these types of these issues nowadays and have these proposals withdrawn. Some boards are concerned about reputational risk; some are worried about the long-term impact of issues like climate control. In fact, last Fall, Grant Thornton conducted a survey of more than 500 business executives and found that only a quarter of survey respondents agreed that profits needed to be sacrificed when dealing with these issues, while three quarters believed corporate responsibility could enhance profitability. As a result, 77% said they expected corporate responsibility initiatives to have a major impact on their business strategies over the next several years.
Other findings in the Grant Thornton survey include:
– 19% of the companies surveyed report having a single point person in charge of all their corporate responsibility programs.
– 68% say they expect environmental responsibility reporting to be mandatory within the next three to five years, yet 55 percent say they have no plans to do any kind of corporate responsibility reporting.
– The four greatest obstacles to successful execution of corporate responsibility programs are: focus on quarterly earnings or other short-term targets, cost of implementation, measuring and quantifying ROI, and a non-supportive corporate culture.
– The three greatest benefits of enacting corporate responsibility programs are: improves public opinion, improves customer relations and attracts/retains talent.
– 72% of respondents believe that government should regulate companies for their effect on the environment and 56 percent said companies should be regulated for their effect on human rights and labor practices.
– 70% of respondents foresee increased government regulation for environmental responsibility in five years or less.
– 62% believe that pressure to pursue corporate responsibility programs in the future will come chiefly from consumers (45%) and investors (21%).
– 64% believe that the human resources department should take on social programs, 50% say operations should be in charge of environmental initiatives and 57% say finance should be responsible for economic responsibility programs.
Yesterday, Blockbuster became the 5th company to agree to a non-binding vote on executive compensation – it will place this topic on the ballot starting in 2009. Here is a list of companies that have agreed to “say-on-pay.”
The PCAOB Speaks: Latest Developments and Interpretations
Given that it’s still relatively young for a regulator, the PCAOB continues to change dramatically. Join us tomorrow for our 1st annual webcast – “The PCAOB Speaks: Latest Developments and Interpretations” – regarding what is happening at the PCAOB. During this webcast, senior PCAOB Staffers will provide a wide range of practical guidance, from what are the latest issues, like internal controls for smaller companies interpretations, to whom do you call to resolve an issue, and much more. Join these experts:
– Mary Sjoquist, Special Counsel to PCAOB Board Member Bill Gradison
– Sharon Virag, Director, Technical Policy Implementation, as part of Chairman Olson’s Staff
– Kayla Gillan, Chief Administrative Officer, RiskMetrics Group and former PCAOB Board Member
During the program, I will be spending some time interviewing Kayla about her experiences as one of the founding Board Members (following up on this blog).
Delaware Supreme Court Denies Director Standing To Sue
From Travis Laster: In Schoon v. Smith, the Delaware Supreme Court held that a director who was not also a stockholder lacked standing under Delaware law to assert derivative claims on behalf of the corporation he served. The Court held that derivative standing would be recognized only where necessary “to prevent a complete failure of justice.” The Court noted that although the director was not himself a stockholder, he was affiliated with a stockholder who had the ability to sue derivatively, and thus a “complete failure of justice” would not result.
The Court’s decision leaves open the possibility that a non-stockholder director, unaffiliated with any stockholder, might be able to sue derivatively if necessary “to prevent a complete failure of justice.” The opinion contains an extensive discussion of the history and purpose of the derivative action.
More insight on this case is available from Steven Haas on the “Harvard Law Corporate Governance Blog.”
Tune in today for this CompensationStandards.com webcast: “The Section 162(m) Workshop.” This webcast will be held in a “workshop” style, where experts provide analysis of the numerous issues raised for specific types of employment arrangements, including guidance on what well-designed plans should look like under the IRS’ latest guidance. Join these experts:
– Christine Daly, Partner, Holme Roberts & Owen LLP
– Elizabeth Drigotas, Principal, Washington National Tax, Deloitte Tax LLP
– Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
– Mike Kesner, Head of Deloitte Consulting’s Executive Compensation Practice
– Paula Todd, Managing Principal, Towers Perrin
You may want to print out these “Course Materials,” which consist of notes regarding hypothetical 162(m) scenarios (courtesy of Regina Olshan of Skadden Arps).
What We Got Here is a Failure to Communicate…
If a company doesn’t respond timely to an SEC comment letter, it likely is more than a failure to communicate (I just love using that line from “Cool Hand Luke”). Since the end of 2006, the SEC Staff has sent more than 50 threatening letters that tell companies to respond to outstanding comments now – or else the Staff will post the correspondence relating to the Staff’s review. Not meaning to pick on any particular company, but here is a sample of these letters.
A Focus on Swaps and 13D Reporting in CSX Litigation
For the past year, CSX Corp. has been locked in a battle with an activist investor – The Children’s Investment Fund (TCI) and its affiliates – over governance reforms and now that battle has gone to court over the issue of swaps and Section 13(d) reporting.
Last fall, TCI called on the CSX Board to undertake a number of initiatives, including separating the Chairman and CEO roles, adding new independent directors, allowing shareholders to call special meetings, aligning management compensation with shareholder interests, presenting a detailed operating plan with specific long-term operational and cost targets to address under-performance, justifying the capital spending plan, and improving relations with labor, shippers and shareholders.
By the end of 2007, TCI had formed a group with 3G Capital Partners and filed a Schedule 13D indicating that they intended to nominate five directors for election at CSX’s 2008 annual meeting scheduled for June 25th – and in a subsequent Schedule 13D/A, the group indicated plans to present a proposal to amend the company’s bylaws to permit 15% or greater shareholders to call a special meeting.
Last week, CSX filed a complaint in the Southern District of New York seeking injunctive and declaratory relief against the group based on allegations that the funds are seeking to change or influence control of CSX through the use of swaps and secretly coordinated efforts while failing to comply with the Schedule 13D and Schedule 14A reporting requirements.
The complaint alleges that 37 million shares of CSX common stock were transferred to financial institutions that were counterparties to swaps referencing shares of CSX common stock in anticipation of the company’s February 28, 2008 record date, indicating the existence of understandings that those counterparties would vote the shares in accordance with TCI’s and 3G’s wishes, or alternatively indicating that the counterparties would vote with TCI and 3G because of their relationships with those funds.
CSX also challenges, among other things. the funds’ disclaimer of beneficial ownership of shares referenced in swap arrangements, the timely filing of their initial Schedule 13D and the adequacy of their disclosure regarding their intentions and arrangements, understandings or relationships. CSX wants the court to order, among other relief, that the funds divest their interests and terminate their swap arrangements, or that the funds be prohibited from voting their shares (or be subject to proportional voting) at the annual meeting.
The funds filed a Schedule 13D/A indicating that the allegations in the complaint are without merit and that they intend to defend themselves vigorously.
In this case, CSX is taking on one of the most vexing problems that is faced today with respect to beneficial ownership reporting and contests for control – that swaps and other similar instruments which provide investors solely with economic exposure (and arguably without any voting or investment power) for the most part fall outside of today’s Section 13(d) reporting requirements. Thanks to Jonathan Levy of Lindquist & Vennum for pointing this case out!
From Travis Laster: A few weeks ago – in Jana Master Fund Ltd. v. CNET Networks – Chancellor Chandler holds that an advanced notice bylaw applies only to Rule 14a-8 precatory proposals and not to all stockholder proposals to conduct business at an annual meeting. Given that the ruling clears the way for a proxy contest for control over a Delaware corporation, the decision is likely to be appealed. If it holds up, I predict that a lot of Delaware corporations will be amending their advanced notice bylaws.
The ruling interprets an advanced notice bylaw that many practitioners will likely view as industry standard and non-controversial. The bylaw does not say that it is limited to Rule 14a-8 proposals. It instead says that any stockholder who wishes to propose business to be conducted at a meeting of stockholders must (i) own at least $1000 of stock for at least a year, (ii) propose the business 120 days before the one year anniversary of the mailing of the prior year’s proxy statement, and (iii) include with the proposal the information required by the federal securities laws.
Jana, which had held the requisite stock for only 8 months, made proposals to pack the CNET board. CNET responded that the proposals were not validly made under its bylaw. Jana then filed suit in the Court of Chancery. Rather than taking on the fiduciary duty issues implicated by a bylaw that limits the right to make director nominations to a stockholder owning a certain amount of stock, the Court of Chancery construed the bylaw as applying only to Rule 14a-8 proposals. The Court identified three reasons for its interpretation.
First, the Court cited the language of the bylaw which referred to a stockholder who “may seek to transact other corporate business” at the meeting. The Court held that this language must refer to a Rule 14a-8 proposal, since stockholders generally do not need to “seek” permission “to transact … business” at an annual meeting. This holding would seem to beg the question of whether a corporation can enact an advance notice bylaw in the first place. Since Delaware courts have previously answered that question “yes,” it follows that for a stockholder to comply with an advance notice bylaw, it must “seek to transact” business in compliance with the bylaw. If a stockholder fails to comply with the bylaw, it logically may not “transact business” at the meeting. It is thus not clear that anything necessarily follows from the “may seek” language, which seems rather standard.
Second, the Court focused on the timing requirement of 120 days before the one year anniversary of the prior year’s proxy statement. The Court viewed this language as consistent with the timing of a Rule 14a-8 proposal that would go in management’s proxy statement rather than a proposal that would be made at the meeting and be the subject of a stockholder’s own solicitation. Having been on both sides of arguments about the 120 day anniversary issue, I have traditionally viewed the fighting issue there as the length of the advance notice period (which typically works out to about 200 to 230 days). I have not previously seen anyone argue that this language was a constructive limitation to Rule 14a-8 proposals.
Third, the Court cited the requirement that “such notice must also comply with any applicable federal securities laws establishing the circumstances under which the Corporation is required to include the proposal in its proxy statement,” finding that this language silently incorporated Rule 14a-8. This also strikes me as relatively typical language designed to make sure the corporation has access to at least the same types of information about any proposal that it would be entitled to under a Rule 14a-8 proposal.
Based on these three factors, the Court concluded that the CNET bylaw only applied to Rule 14a-8 proposals. As a result, JANA or any other stockholder would be free to make proposals at the annual meeting without any advance notice requirement, including proposals made from the floor of the meeting.
As you can tell from my commentary, I would not have bet on this outcome. I thought the case might go either way under a fiduciary duty analysis, a reasonableness analysis, or a statutory interpretation of Section 109 of the DGCL. The Rule 14a-8 interpretation surprises me.
I suspect that many Delaware corporations will find that their advance notice bylaws contain each of the three features cited by the Court, or language closely paralleling them. I also suspect that many Delaware corporations do not believe that their advance notice bylaws are limited to Rule 14a-8 proposals. Under the Jana ruling, however, assuming it holds up on appeal, these Delaware corporations may find themselves vulnerable to an argument that they really have no advance notice bylaw protection at all. This in turn renders them vulnerable to proposals made for the first time from the floor of a meeting, particularly if a majority of their outstanding voting power is highly concentrated among a few holders.
Bottom line: Unless the Delaware Supreme Court goes in a different direction, it’s time for a new generation of advance notice bylaws that (i) explicitly apply to all stockholder proposals, (ii) return to a reasonable 60-120 day advance notice period before the meeting date, rather than a date keyed off the prior year’s proxy mailing, and (iii) specify the information that must be provided without incorporating federal securities requirements by reference.
Practice Pointers in the Wake of Jana Master Fund
Here is some guidance from Cleary Gottlieb:
What action should companies take in response to this decision? The advance notice deadline specified by the by-laws of most companies about to host a 2008 shareholders’ meeting has likely already passed. For such a company, unless it has reason to believe there is a specific risk of a last-minute proxy contest, we would not recommend a rush to amend the advance notice by-law. This controversial decision may be reversed on appeal or not followed where different by-law language exists or specific additional or different facts can be presented to the court.
Accordingly, in the absence of concern about a potential proxy contest, we recommend that companies whose advance notice deadlines have passed not take any action now, but watch to see if yesterday’s decision is appealed and, if so, whether the Chancellor’s opinion is reversed or clarified on appeal. Then the board can decide whether an amendment would be appropriate. At the same time, however the appeal is decided, the board may wish to consider other amendments to the advance notice provision, including a requirement that a shareholder proponent make appropriate disclosure regarding short positions or other derivative positions relating to the company’s shares, and to update that information as well as beneficial ownership information through the time of the annual meeting.
A company, whose advance notice deadline has passed and has reason to believe a last minute proxy contest is possible, should of course immediately review its specific situation with counsel and its proxy solicitor – including the language of the by-law, prior disclosure regarding the by-law, the timing of the meeting, the extent and nature of the proxy contest risk, and its shareholder profile – before deciding how best to proceed.
Finally, companies whose advance notice deadlines have not yet passed should consider a by-law change to eliminate the risk that their advance notice provisions would be interpreted as in this decision.
I go on a week-long vacation without email access for the first time in years and wow, the world goes topsy-turvy. The Fed pushes JPMorgan Chase to bail out Bear Stearns in a mind-blowing deal that isn’t yet done and whose consideration may now be quintupled. This wouldn’t be the first time the government has pushed a company into a deal that went sour (eg. the Department of Defense “encouraged” Lockheed Martin to buy Northrop Grumman a few years before I went to work for Lockheed; after the deal was inked, the Department of Justice stopped the deal on anti-trust grounds – go figure, right?).
The deal’s initial consideration was 6% of what Bear Stearn’s market cap was – and the deal was struck just days after Bear Stearn’s CEO said that liquidity was not an issue. There are loads of other crazy stuff on this deal in my in-box and posted on numerous blogs, etc. I’m in the process of catching up and possibly setting up these future webcasts:
– Risk management and the responsibilities of various parties (ie. boards, internal auditors, outside auditors)
– How the credit crunch is impacting debt covenants and other financing arrangements
– Analyzing the novel Delaware law aspects of the Bear Stearns deal
Let me know if you (or someone you know) might fit on one of these panels.
Jamie Dimon: CEO Extraordinaire?
Then there is the whole Jamie Dimon angle to the Bear Stearns story. Who will play Jamie in the movie? George Clooney? Russell Crowe? Or Will Ferrell? Here is a poll to express your opinion:
If you’re a Delaware junkie, you need to check out this new – and free – resource that Potter Anderson & Corroon has developed: eDelaware™. It allows you to download all of the essential Delaware business statutes directly to your BlackBerry’s memory – and in addition to providing you with 24/7 access to a “carry” copy of the Delaware business statutes, it also provides brief summaries of recent key Delaware cases. Your BlackBerry will automatically update when there are new case summaries or changes to the Delaware statutes.
In this podcast, Scott Waxman of Potter Anderson (and the architect of eDelaware™) explains why – and how to – use eDelaware™, including:
– What is eDelaware™?
– What are the goals of eDelaware™?
– What is the process to subscribe for eDelaware™?
– What happens if I get a new BlackBerry and I want eDelaware™ on my new BlackBerry?
– Is eDelaware™ available for wireless devices other than BlackBerry?
– Are any enhancements on the horizon for eDelaware™?
– What type of information does Potter Anderson keep about subscribers?
– Have there been any surprises since you launched the service?
Another Delaware Bullet-Dodging Case
Recently, VC Lamb of the Delaware Court of Chancery rejected a motion to dismiss a derivative complaint challenging option grants made pursuant to stockholder-approved option plans in Weiss v. Swanson et al., C.A. No. 2828 (Del. Ch. Mar. 7, 2008). Here is a case summary from Potter Anderson:
The plaintiff alleged in his complaint that stock option grants made by the board of Linear Technology Corporation (“Linear”) were strategically timed in order to take advantage of stock prices favorable to the defendants: when the Company anticipated issuing favorable quarterly earnings releases, the director defendants “spring-loaded” the options by granting them just before they were released, and when the releases contained negative information, options were granted just after the release of the information – “bullet-dodging.”
In its decision, the Court rejected the defendants’ motion to dismiss for demand excusal and for failure to state a claim upon which relief may be granted. The Court also rejected the claim that plaintiff’s complaint was barred by the statute of limitations. The Court first addressed whether the plaintiff was obligated to make a pre-suit demand on the board under Delaware Court of Chancery Rule 23.1. The Court found that the plaintiff alleged particularized facts sufficient to raise reasonable doubt under both prongs of Aronson v. Lewis.
First, plaintiff raised reasonable doubt that the decisions authorizing the option grants and failing to disclose the grants to Linear’s stockholders were a valid exercise of the board’s business judgment. Plaintiff’s particularized claims sufficiently alleged that the director defendants had access to the quarterly earnings releases before they became public and knew that the releases materially affected Linear’s stock price, that the releases actually did affect the stock price, and that, in 22 out of 28 option grants made in conjunction with quarterly earnings releases, the option grants were approved before positive releases or after negative releases. The complaint further alleged that the director defendants had failed to disclose this information to Linear’s stockholders.
Second, plaintiff raised reasonable doubt that the directors were disinterested and independent. Citing Conrad v. Blank, the Court found that the board was interested and demand was excused because the directors received the challenged options and thus “they have a strong financial incentive to maintain the status quo by not authorizing any corrective action that would devalue their current holdings or cause them to disgorge improperly obtained profits.” The Court next addressed the defendants’ motion to dismiss for failure to state a claim. The Court rejected this motion, finding that because the plaintiff had alleged particularized facts sufficient to prove demand futility under the second prong of Aronson, he had rebutted the business judgment rule for the purposes of surviving a motion to dismiss. The Court further found that the plaintiff had stated claims for breach of fiduciary duty, for unjust enrichment, and for waste.
Finally, the Court rejected the argument that the complaint was barred by the statute of limitations because the statute was tolled by the fraudulent concealment by the defendants of the spring-loading and bullet-dodging plan, and because it was equitably tolled.
March-April Issue: Deal Lawyers Print Newsletter
This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– 2008: The Year of the Activist Hedge Fund
– How to Settle Insurgencies and Secure Stockholder Votes Without Creating New Exposures
– Engagement Letters: Their Role in Limiting Investment Banker Liability
– The Obligations of Financial Advisors – New Decision Upholds Contractual and Other Limitations
– Buyers Beware: Tennessee Chancery Court Tries to Get Genesco to The Finish Line
– Items to Consider When Negotiating a MAC Claim
Try a 2008 no-risk trial to get a non-blurred version of this issue for free.
Spring Break ’08: Heading out on a week vaca and thought I would leave you with this funny clip from Sarah Silverman regarding her, ahem, “relationship” with Matt Damon. More than a bit profane – but hilarious. And here is the follow-up clip…
On Monday, Canada’s disclosure rules – National Instrument 51-102 (go to Appendix H) – will be amended to expand the number and types of agreements that issuers must disclose and file as “material contracts.” In many cases, the amended rules will now require filing of certain types of material contracts even if they were entered into in the ordinary course of business.
Provisions within a contract can be striked only if they would be “seriously prejudicial to the interests” of the company or violate confidentiality provisions – except this isn’t allowed under certain circumstances (eg. debt covenants or ratios in credit agreements that are required to be filed). This standard appears pretty high (e.g. Tory’s memo notes that “this drafting suggests that it is not enough that the business would be adversely affected, or even materially harmed, by the loss or absence of the contract”). If a provision is struck, the company must provide a brief one-sentence description of the type of information redacted.
We have posted memos regarding this development in our “Canadian Law” Practice Area. And listen to this podcast with Raman Grewal of Stikeman Elliott who explains:
– What was the old standard for Canadian companies to file their “material contracts”?
– What is the new standard? What are the key differences?
– Under what circumstances can Canadian companies seek to exclude provisions that they want to remain confidential?
– How are confidential treatment requests processed in Canada?
Food for Thought: The Canadian confidential treatment standard is interesting – particularly the notion of tying it to a confidentiality agreement. If they had that in the US, I imagine some companies would add a clause to their agreements saying the thing is confidential so they would disclose nothing…or am I just a pessimist?
Practical Guidance on Conducting CEO Evaluations
One of the most challenging tasks that boards face is properly conducting a CEO evaluation. There is not much guidance out there on this topic. In this podcast, Mike Haefner, President & Founder of Perform for Life, explains how to perform CEO evaluations, including:
– Should boards use a written CEO evaluation?
– What is the typical CEO evaluation process?
– What areas should be evaluated in conducting a CEO evaluation?
Form 10-Q Filing Establishes Venue in SEC’s Offices
Several months ago, the Fourth Circuit – in US v. Benyo – reversed the District Court’s dismissal for lack of venue of the government’s charges that a defendant allegedly committed accounting fraud by filing a false Form 10-Q. The Fourth Circuit held that causing the transmission of the allegedly false Form 10-Q established venue in Northern Virginia, which is where the SEC’s servers that operate Edgar are located. (Bet you thought the servers were in the SEC’s DC headquarters! Also bet you didn’t care.) We have posted the opinion in our “Securities Litigation” Practice Area.
On the heels of my blogging about Aflac’s upcoming say-on-pay vote yesterday, the company filed its preliminary proxy statement, which sets forth the text of its say-on-pay proposal. A relevant excerpt is set forth below:
In November 2006, an interest was expressed by a shareholder in casting a non-binding advisory vote on the overall executive pay-for-performance compensation policies and procedures employed by the Company, as described in the CD&A and the tabular disclosure regarding named executive officer compensation together with the accompanying narrative disclosure) in this Proxy Statement. We believe that our compensation policies and procedures are centered on a pay-for-performance culture and are strongly aligned with the long-term interests of our shareholders.
We also believe that both the Company and shareholders benefit from responsive corporate governance policies and constructive and consistent dialogue. Thus, with Board approval, the Company announced in February 2007 that the Company would voluntarily provide shareholders with the right to cast an advisory vote on our compensation program at the annual meeting of shareholders in 2009 when our disclosure could reflect three years of compensation data under the newly adopted SEC disclosure guidelines.
Subsequently, we concluded that the expanded disclosure of compensation information to be provided in this Proxy Statement would already provide our shareholders the information they need to make an informed decision as they weigh the pay of our executive officers in relation to the Company’s performance. As a result, on November 14, 2007, the Company announced that its Board of Directors accelerated to 2008 an advisory shareholder vote on the Company’s executive compensation disclosures. This proposal, commonly known as a “Say-on-Pay” proposal, gives you as a shareholder the opportunity to endorse or not endorse our executive pay program and policies through the following resolution:
“Resolved, that the shareholders approve the overall executive pay-for-performance compensation policies and procedures employed by the Company, as described in the Compensation Discussion and Analysis and the tabular disclosure regarding named executive officer compensation (together with the accompanying narrative disclosure) in this Proxy Statement.”
Because your vote is advisory, it will not be binding upon the Board. However, the Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.
While we believe this “Say-on-Pay” proposal demonstrates our commitment to our shareholders, that commitment extends beyond adopting innovative corporate governance practices. We also are committed to achieving a high level of total return for our shareholders.
Since August 1990, when Mr. Daniel Amos was appointed as our Chief Executive Officer through December 2007, our Company’s total return to shareholders, including reinvested cash dividends, has exceeded 3,867% compared with 660% for the Dow Jones Industrial Average and 549% for the S&P 500. During the same period, the company’s market capitalization has grown from $1.2 billion to over $30 billion.
NYSE Files Proposal to Allow Listing of SPACs
From Davis Polk: “Following a similar move by the Nasdaq Stock Market last week, the NYSE has filed a proposed rule change with the Securities and Exchange Commission that contains a new listing standard specifically for special purpose acquisition companies, commonly referred to as “SPACs.” SPACs are companies with little or no operations that conduct a public offering with the intention of using the proceeds to acquire or merge with an operating company. Until now, the American Stock Exchange has been the only national securities exchange to list SPACs.
The NYSE’s current financial listing standards for operating companies require some period of operations prior to listing. Because SPACs have no operating history, they do not qualify for listing under the NYSE’s current standards. Under the proposed new standard, a SPAC seeking to list would need to demonstrate a total market value of at least $250 million and a market value of publicly held shares of at least $200 million (excluding shares held by directors, officers or their immediate families and other concentrated holdings of 10% or more). In addition, SPACs would have to meet the same distribution criteria applicable to all other IPOs. All of the NYSE’s corporate governance requirements applicable to operating companies would apply to SPACs.
The proposed rule establishes a number of requirements applicable only to SPACs, including:
– a minimum of 90% of the IPO proceeds, together with the proceeds of any other concurrent sales of equity securities, must be placed in a trust account;
– the SPAC’s business combination must be with one or more businesses or assets with a fair market value equal to at least 80% of the net assets held in trust (however, unlike the rule proposed by Nasdaq, there is no requirement that 80% of the consideration for the initial business combination be in cash); and
– the business combination must be consummated within three years.
The NYSE would have significant discretion under the proposed rule. The NYSE indicates in the rule filing that it intends to consider proposed SPAC listings on a case-by-case basis and does not necessarily intend to list every SPAC that meets the minimum requirements for listing. In addition, after shareholder approval of a business combination, the NYSE will assess the continued listing of the SPAC and will have the discretion to delist the SPAC prior to consummation of the business combination. Upon consummation of the business combination, the NYSE will consider whether the transaction constitutes an acquisition of the SPAC by an unlisted company (a “back door listing”), and if so, the resulting company must meet the standards for original listing or be delisted.
The NYSE proposal is subject to publication and approval by the SEC.”
IR Gate! My Joke Goes Awry
A few weeks ago, I recorded a podcast where I played both the role of interviewer and interviewee. The topic was about someone impersonating analysts to gain access to managers to ask questions during earning calls. I impersonated the impersonator as a joke as part of my new brand of “gonzo journalism.” Here is a new podcast that extends that nutty concept even further.
Unfortunately, a magazine ran this article entitled “Earnings call imposter gives interview” because the interview seemed all too real. Dominic Jones blogged about this snafu in his “IR Web Report.” One member asked if I have also interviewed DB Cooper?
Dave wandered down to the House Hearing on severance pay last Friday and wrote up these thoughts (you could see Dave sitting in the background if you watched CNN; he didn’t phone this one in – compare the WSJ article and NY Times article):
“The hearing of the House Committee Oversight and Government Reform on CEO pay was a little disappointing. It had all of the potential to be the sort of public spectacle that the same Committee’s hearings on steroid use in baseball had become, but instead it was a relatively straightforward identification of some CEO pay abuses, juxtaposed to the people that are unfortunately losing their houses to foreclosure in the midst of the mortgage mess.
In addition to testimony from some experts on the state of the mortgage crisis and issues with executive pay (which was covered by Nell Minow of The Corporate Library), the hearing featured Angelo Mozilo from Countrywide, E. Stanley O’Neal formerly at Merrill Lynch, and Charles Prince formerly at Citigroup. The respective compensation committee chairmen from those organizations also appeared, including Richard Parsons, Chairman of Time Warner.
The questioning was relatively light – both in volume and in tone – given the sparse turnout from Committee members on an unusual Friday hearing (the day when many members are heading home to their district). Much of the questioning focused on issues outlined in the Committee’s majority Staff memorandum, which outlined a number of issues that tend to be wrong with the CEO pay process – “confusion” about for who a compensation consultant is working (i.e. the CEO, the comp committee or the company), questionable use of 10b5-1 plans, awards that don’t seem to make sense in light of the circumstances or the rationale, extraordinary low performance targets, and payment of performance bonuses and the awarding of retirement and severance benefits even in a year as bad as 2007.
The battle lines were clearly drawn, with Chairman Waxman (D-CA) and his colleagues in the majority pointing out the financial distress that many Americans face while these three executives reaped rich rewards. Meanwhile, Representative Tom Davis (R-VA) repeatedly drew the old sports and entertainment analogy for executive pay – saying that no one expected Ben Affleck and Jennifer Lopez to pay reparations for Gigli.
Both sides were careful not to sully the reputations of the three CEOs who all represented classic American success stories, and clearly the CEOs (particularly Mozilo) seemed to be emboldened as the hearing went on and the “light” touch was evident. The only thing that tripped up Mozilo were questions concerning a threatening email that he sent seeking reimbursement of taxes for his wife’s travel on company aircraft – he apologized, noting that he was an “emotional person” – but Representative Issa (R-CA) was quick to jump to his defense and note that many of his colleagues in Congress fly their spouses all over the world on government aircraft because they need to have their spouse with them when conducting business.
One of the particular areas of questioning was on Mr. Mozilo’s sales of substantial amounts of stock under Rule 10b5-1 plans while Countrywide was conducting an accelerated share repurchase program. Mr. Mozilo asserted that all of his stock sales were done pursuant to a plan to diversify his holdings in anticipation of retirement and were unrelated to the stock repurchase program. The Chairmen of the Merrill Lynch and Citigroup compensation committees noted that these kinds of sales were unlikely at their companies, given their very high stock ownership and retention requirements.
While the Democrats on the Committee may not have been able to establish these CEOs as suitable scapegoats, the majority was certainly able to put some questionable pay practices under the microscope at a time when most people are worried about paying for their house – as opposed to paying for taxes on spousal travel on the company jet.”
My Ten Cents: It’s too bad the committee members did such a poor job of questioning the hearing’s compensation committee members. Had they simply followed the path of the Committee staff’s memo, they could have called for an explanation of each of the actions by the compensation committees (although some of the meaty issues were addressed, like why did Prince got a bonus for 2007).
My primary “take-away” is that when a successful CEO throws a temper tantrum over pay – even if the demands are unreasonable – the board caves in. My guess is that all too often boards are told the consultant is hard to work with – or is not responsive or does not understand the company – and has to go. Boards comply – and there is typically no explanation other than “the board thought it was time for a change.”
I can’t resist addressing the mistaken comparison between CEO pay and the pay levels in the sports & entertainment industry. Putting aside the fact that only the top 1% of athletes and actors get paid astronomically – remember all those starving actors and baseball players buried in the minor leagues – it’s apple and oranges because the processes by which the relative amounts are established are completely different. I recently addressed this point by posting a comment on this compensation consultant’s blog. I guess the argument that public company CEOs will be flocking to hedge funds doesn’t hold much water anymore…
Aflac’s CEO Speaks
Take a moment to read this interview in Friday’s WSJ with Aflac CEO Daniel Amos (there is a video of him linked from the article). Aflac will be the first company in the US to have shareholders vote on “say on pay” at their May annual meeting.
During the interview, Mr. Amos says: “I want to be paid what I am worth” and “compensation is the way the scorecard is kept.” There are many CEOs who feel that way. But there are many others (like GE’s Jeff Immelt and others who have taken significant steps) that realize that CEOs’ total compensation and accumulated wealth generally are out of whack – particularly when it comes to equity grants and post-employment arrangements. Here’s where compensation committees need to be doing a better job. And just as importantly. where stand-up CEOs need to take the lead.
For many CEOs, the real scorecard is their legacy and what others will remember them for. The typical CEO will not want to be remembered as caring more about squeezing the last nickel for themselves than the well-being of the company’s employees, shareholders, customers and communities. Instead, there are a growing number of CEOs and directors who feel an obligation to do something to restore trust in our leaders and the integrity of our markets. (Who can forget former DuPont CEO Ed Woolard’s candid remarks that we taped a few years back.)
So cheer up, we do believe that there is a sea change coming as more CEOs and boards start to make significant changes (we’ll continue to update our list of responsible actions on CompensationStandards.com). But as reflected from the House severance hearing, we still have a loooong way to go (particularly if there are more CEOs like the one described in this article).
Exec Comp Comment Letter Highlights
On CompensationStandards.com, Mark Borges continues to blog regularly on the latest compensation disclosures in the proxy statements as they are filed with the SEC. He also recently waxed on the highlights in the publicly available comment letters in this blog.
And we continue to maintain our list of links to the SEC’s comment letters as they are posted – here is the latest list.
Here is some sad news – my good friend Maria Pizzoli of Sun Microsystems recently passed away. Maria was well known in the Bay Area legal coummunity and this notice describes her beautifully. A memorial service was held last week; donations in lieu of flowers can be sent for an educational fund for her very young son Nate.
