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."
With our blockbuster Conference only a week away – “New Rule 144: Everything You Need to Know – And Do NOW” – we have posted our Course Materials so that you can print them out in advance. If you have registered for the Conference, please use your ID and password to access these “Course Materials,” including this printable set of model documents. (Note you need to register for the Conference to access these Materials; members of TheCorporateCounsel.net receive a discounted rate, but the Conference is separate from membership.)
In addition to a “Comprehensive Rule 144 Outline,” nifty charts and useful analysis, the Course Materials include these model documents:
– Model Memorandum to Directors and Executive Officers
– Seller’s Representation Letter #1 – Sales by Affiliate of Reporting Company
– Seller’s Representation Letter #2 – Sales by Affiliate of Non-Reporting Company
– Seller’s Representation Letter #3 – Sales of Restricted Securities by a Non-Affiliate
– Standard Broker’s Representation Letter for Affiliates: “We Will Comply” Letter
– Legend Removal Representation Letter #4.a – to Broker
– Legend Removal Representation Letter #4.b – to Issuer and Transfer Agent
– Legend Removal Broker’s Cover Letter #5 – to Transfer Agent and Issuer
– Broker Instruction/Representation Form
– Letter: Reminder of SEC Restrictions and Company Policy (can be stapled to stock certificate, etc.)
The Course Materials alone are worth the rate of this Conference. You will need all of these documents starting February 15th, when new Rule 144 becomes effective.
New Rule 12h-6: Deregistration Stats So Far
Last week, Corp Fin Director John White gave this speech at PLI’s Annual European conference, which provides a solid recap of the SEC’s international efforts in the corporate finance area. (Chairman Cox also recently delivered this speech entitled “International Business — An SEC Perspective.”)
In his speech, John notes that 100 companies have filed to withdraw from U.S. registration under the SEC’s new deregistration rules during 2007 (which doesn’t include 25 that had previously deregistered under the older exit rules but filed a Form 15F to gain the benefit of new Rule 12h-6). The 100 FPIs represent just under 9% of all FPIs as of the beginning of 2007 and 53% are from the European Union.
It is notable that during 2007, more than 75 new foreign private issuers registered securities in the US. So perhaps it’s too early to tell what the long-term impact of new Rule 12h-6 will be…
Probable Cause for Car Search: No Broker-Dealer License
I’ve heard of getting into trouble driving with a driver’s license – but driving with a broker-dealer license? Keith Bishop notes: I thought that this recent California case was interesting for several reasons:
1. The Court of Appeal found that the police had probable cause that the defendant was selling securities without a broker-dealer license and could lawfully search the defendant’s vehicle in connection with his arrest.
2. The appellate court upheld a burglary conviction based on the fact that the defendant entered the victim’s home to solicit an investment.
3. The court ruled that violation of California’s broker-dealer registration requirement (Cal. Corp. Code Sec. 25210) is a general intent crime. Thus, guilty knowledge is not an element of the crime. (For example, the defendant does not have to know that he or she is selling securities.) However, the defendant’s good faith believe that he or she is not required to be licensed is an affirmative defense.
4. It should be noted that the defendants’ failure to disclose that they lacked a B-D license also supported criminal convictions for selling securities by false statements or omissions (Cal. Corp. Code Sec. 25401).
Among the important topics that will require up-to-the-minute guidance, the Conference will cover:
– What are the SEC Staff’s latest positions from their recent waves of comment letters – and upcoming Staff Report – such as the Staff’s new expectations for the CD&A, including specific suggestions and examples
– How to overcome the unexpected challenges from the Staff’s comment letters
– What are examples of what companies intend to change in this year’s proxy disclosures
– How to analyze and disclose perks, including how to determine whether something is a “perk”
Upcoming House Hearing on Severance Pay
Rep. Henry Waxman (D-Cal.) has asked Charles Prince, Stanley O’Neal, and Angelo Mozilo to testify at a February 7th hearing on severance pay (here are the letters sent to the executives and other requests for testimony). Until recently, Mr. Prince was the CEO of Citigroup and Mr. O’Neal was the CEO of Merrill Lynch; each took home around $40 million and $161 million, respectively, after being forced to retire after their firms suffered heavy losses from mortgage investments. Mr. Mozilo is the CEO of Countrywide Financial, who is expected to receive a $115 million payout if a planned buyout by Bank of America is completed.
According to RiskMetrics: “You should plan to address how [your severance package] aligns with the interests of … shareholders and whether this level of compensation is justified in light of your company’s recent performance and its role in the national mortgage crisis,” Waxman wrote in his letter to the three executives.
On Jan. 17, Waxman’s committee sent out another round of letters–this time to current employees of the three companies, requesting documents and testimony on the process used to decide on severance packages for O’Neal, Prince, and Mozilo. Waxman called on John Thain, Merrill Lynch’s new CEO; Vikram Pandit, the new CEO of Citigroup; and Mozilo himself, who still serves as CEO at least until the Bank of America takeover, to submit to the committee copies of all documents related to drafting the severance agreements at each company – including the names of outside consultants hired to help the board’s compensation committee draft the agreements. The executives will have until Jan. 25 to submit the documents to the oversight committee, the letter states.
Three additional letters, also sent on Jan. 17, went to the respective chairmen of each company’s compensation committee. Harley Snyder of Countrywide, John Finnegan of Merrill Lynch, and Richard Parsons of Citigroup were asked to appear at the Feb. 7 hearing committee hearing to address how the executives’ severance pay was determined, and “on what basis [the] [b]oard of [d]irectors decided to approve [the] pay package,” Waxman wrote.
Survey Results: Compensation Committees and Compensation Consultants
Speaking of Rep. Waxman, given his keen interest in compensation consultant conflicts, it’s a good time to report the survey results from our most recent Quick Survey, repeated below:
1. Does your compensation committee:
– have a policy that it will not employ any compensation consultants who perform services for management – 16.1%
– not have such a policy, but does not intend to employ any of the same compensation consultants as management – 51.6%
– employ some (or all) of the same compensation consultants used by management – 32.3%
2. In practice, how does your compensation committee go about hiring an expert for making recommendations regarding CEO compensation?
– Management offers up a consultant to the compensation committee that it finds acceptable, subject to committee approval – 44.3%
– Compensation committee left completely on its own to find and hire whatever consultant it wants – 50.8%
– Compensation committee has not hired an expert for setting CEO compensation – 4.9%
3. Assume the company already is using consultant A for general compensation advisory purposes, will your compensation committee:
– Use the same consultant to help set executive compensation – 36.1%
– Use a different consultant to help set executive compensation – 37.7%
– Too early to tell what the compensation committee will do going forward – 26.2%
4. Regarding compensation committee charters, the committee has:
– A charter that states that the compensation committee will be the sole entity in the company to hire compensation consultants specifically related to CEO compensation – 59.0%
– A charter that states that both the compensation committee and management have the authority to hire compensation consultants specifically related to CEO compensation – 18.0%
– A charter that does not address who hires compensation consultants – 23.0%
My Ten Cents on Consultant Conflicts: I think Rep. Waxman’s interest in conflicts is somewhat unfounded. My experience is that the relatively few board advisors on CEO pay within big consulting firms really are walled off from the much larger departments doing more general HR work. There are more important processes broken in the CEO pay area that are more worthy of attention, such as the severance pay area for which Rep. Waxman has called this hearing on…
With a hat tip to RiskMetrics, the New York City Comptroller’s office announced in this press release that Par Pharmaceuticals has agreed to adopt an annual shareholder advisory vote on executive pay. In October, a non-binding proposal received 56.8% support at the company’s annual meeting.
Par Pharmaceuticals is the 3rd company to agree to an annual advisory vote on executive pay. On CompensationStandards.com, we are maintaining a list of those companies that have agreed to adopt some form of “say on pay” in the “Advisory Shareholder Vote/Say on Pay” Practice Area.
Deadhead Flights and Incremental Costs
In the CompensationStandards.com “Q&A Forum,” Dave just posted this answer in response to a query about what is the latest thinking about the inclusion of deadhead flights in calculating the incremental cost of personal use of corporate aircraft:
“I think perhaps the most significant development on including deadhead flight costs was John White’s discussion of the issue in his September 6, 2006 “Principles Matter” speech. It was there that he said “[i]n my view, if a deadhead flight leg causes a company to incur incremental costs, those must be included in the calculation of the perk’s value.”
Even with those comments out there, in the 2007 proxy season we saw that few companies disclosed that deadhead flights have been included in the incremental cost calculation. As we noted in the November-December 2007 issue of The Corporate Executive, the inclusion of deadhead costs could increase the reported incremental cost number by as much as two to four times the amount disclosed.
Brink Dickerson of Troutman Sanders did a great presentation on Airplane Perks at our “4th Annual Executive Compensation Conference” back in October. His presentation and materials are archived on CompensationStandards.com, which includes a survey of airplane perks disclosures at many companies. You can also see the “best practice” model disclosure regarding airplane perks in the January-February 2008 issue of The Corporate Executive, where we recommend that deadhead costs and the loss of corporate tax deductions should be factored into the incremental cost calculation.”
– What will be the hot topics for investors in 2008? How do they differ from what was hot this year?
– What changes in governance policies should companies now consider as broker votes may well be gone in 2009?
– What new positions were taken by RiskMetrics in their upcoming 2008 voting guidelines?
Pat always puts together some great course materials – and this year is no exception – please print out these course materials before you listen.
Last week, I was on the road in the Midwest to speak to a few groups about a variety of topics. These topics generally related to what I call the inevitable convergence of a number of disciplines. Before you know it, I believe the IR and corporate governance departments will merge within companies – with disclosure lawyers also becoming a part of that combination. Don’t forget: with the SEC’s e-proxy rulemaking a year ago, the government explicitly recognized that many shareholders will look to corporate websites for information about their investments. I believe many of us will have to develop skill sets that we currently don’t have.
One of these skill sets is broadening our “journalistic eye” and joining the “conversation” that is happening online. I know many of you will chuckle if I predicted that at least 50% of the folks reading this blog will one day be bloggers – but I really feel that’s not too outrageous a statement. (More on all this high-minded theory some other day.)
A case in point is the new “Dell Shares” blog, where members of Dell’s IR department take turns blogging about IR issues. Very interesting and Dell is to be applauded. Taking a page from Sun Microsystems and other tech companies, Dell has a number of employees blogging (and even discussion forums on their site). Here is the popular “Direct2Dell” Blog, which focuses on the company’s products and services (and is available in Spanish, Chinese and Norwegian).
My pet peeve with Dell Shares is the disclaimer that Dell’s IR department forces us to click-through to get to its blog. As I commented on Dell Shares, I find it ironic that the IR department forces us to click through a disclaimer when the other Dell blogs don’t have such a disclaimer – given that Dell’s IR department likely is much more sensitive to what they should or shouldn’t be blogging than others within the company. Don’t let that stubborn lawyer voice within you place unnecessary obstacles to allowing yourself or others to be a part of the growing worldwide “conversation.”
The NYSE’s Annual Letter to Listed Companies
Yesterday, the NYSE sent its annual letter to listed companies to remind them of their of annual compliance requirements (there is a separate letter for foreign private issuers). The letter mentions that the NYSE’s proposed corporate governance rule changes are still pending before the SEC and they continue to discuss them with the Staff.
Wouldn’t it be cool if the FASB codified GAAP? Impossible? No, it’s being done (and I imagine it has to be done if the SEC’s XBRL taxonomy project is to be accurate). On Wednesday, the FASB issued this press release to launch the one-year verification phase of the FASB Accounting Standards CodificationTM (Codification).
During the verification period, constituents are encouraged to use the online Codification Research System to research accounting issues and provide feedback on whether the Codification content accurately reflects existing GAAP. The Codification content is not yet approved as authoritative so take it with a grain of salt. And you have to register as a user to try it out (even though its free).
I’m a simple guy, so I dig the Q&A format of this Home Depot proxy statement from last year. For example, I think the Q&A format made it easier for the company’s audit committee report (pages 66-68) to provide more useful information regarding the activities of the committee as compared to the boilerplate-type language that some companies use.
I’ve seen some companies use Q&A in the forepart of their proxy statement, but not many that use it for the entire document. One usability recommendation: don’t use all caps for the questions (since that is hard for humans to read); rather, place the questions in boldface.
AFSCME’s Proxy Solicitation Expense Proposals
As noted in RiskMetrics’ “Corporate Governance” Blog, AFSCME intends (or has) submitted shareholder proposals seeking reimbursement for short-slate solicitation expenses at a handful of companies this coming proxy season. This is an alternative tactic to shareholder access that could render the access movement obsolete if it catches on.
In addition, according to RiskMetrics, AFSCME has now filed (or co-filed) binding proposals seeking shareholder access at four companies: Countrywide Financial; E*TRADE; Bear Stearns; and JP Morgan Chase. Additionally, CalPERS has submitted one to Kellwood.
Marty Dunn and other former senior Corp Fin Staffers will discuss all the latest types of shareholder proposals during our upcoming webcast: “The Former SEC Staff Speaks.”
Analysis of Distressed Debt Survey
In this podcast, Evan Flaschen of Bracewell & Giuliani provides some thoughts about the survey his firm (along with Debtwire) conducted entitled “Survey: Distressed Debt Creditor Insight,” including
– Why was the study undertaken?
– What were the study’s major findings?
– What were the biggest surprises?
– What is the overall outlook for 2008 and are you seeing any evidence so far?
One of the reasons for the popularity of this blog is because it is one of the very few that covers corporate finance law. Perhaps it’s because litigators love to talk more, but there are far more securities litigators blogging than financiers. Boy, do those litigators love a Supreme Court case – particularly one as tantalizing as Stoneridge, which was decided yesterday by SCOTUS. And in record time, the law firm memos started rolling in – we are posting them in the “Aiding & Abetting” section of the “Securities Litigation” Practice Area; here is a copy of the court opinion.
Here is a case summary from Dave: The theory of “scheme liability” as a basis for recovery against third parties in securities class actions bit the dust yesterday, with the Supreme Court’s 5-3 ruling in Stoneridge Investment Partners v. Scientific-Atlanta. Ultimately, as stated in the majority opinion delivered by Justice Kennedy, the Court concluded that “the private right of action [under Section 10(b) and Rule 10b-5] does not reach the customer/supplier companies because the investors did not rely upon their statements or representations.” In his dissent, Justice Stevens states that the majority’s view of reliance “is unduly stringent and unmoored from authority.”
Without scheme liability, plaintiffs will find it difficult to reach secondary actors involved in a fraud such as customers, suppliers – or perhaps even investment bankers – since the Supreme Court’s Central Bank decision cut off the ability to sue those third parties as aiders and abettors. Stoneridge represents yet another decision in a line of recent Supreme Court rulings that are hostile to plaintiffs and more favorable to business.
And for more detailed analysis, check out these litigation bloggers:
My Ten Cents: Policies Barring Executives from the Web
A few months ago, Whole Foods took the step to amend and restate the company’s code of business conduct to bar top executives and directors from posting messages about Whole Foods, its competitors or vendors on any online forums (broadly defined to include blogs) that aren’t sponsored by the company (unless approved by the board’s nominating and governance committee). The restated code prohibits comments on third-party Web sites so executives will “avoid the actual and perceived improper use of company information. It not only bars postings that are anonymous, but also those under the person’s real name. The bar applies to “company leadership,” which includes directors, executive team members and regional vice presidents. The restated code (scroll to page 13) was disclosed in this Form 8-K.
I understand why the company took such an action, given the revelations that the CEO posted anonymous messages about the company and its competitors from 1999 through 2006 – and the SEC’s and market’s reactions to such revelations. But I hope that no companies would feel the need to follow Whole Food’s “lead” here, because common sense should rein in company leaders from posting anonymous messages of the type made by the company’s CEO (ie. misrepresenting oneself) and this is one area not crying out for yet another corporate policy.
In fact, I believe Whole Food’s policy is too broad and would limit the company’s leadership to engage in the important online “conversation.” Ironically, Whole Foods is one of the few companies currently contributing to that conversation since it has allowed blogging by its leaders (at least the CEO; here is his blog). In today’s world, the importance of being allowed to learn from like-minded individuals can’t be overstated and the easiest way to do to engage them is through the Internet, either by e-mail or the Web.
One of the more influential books on my career is “The Cluetrain Manifesto,” which essentially foretold the social networking/Web 2.0 craze that is here to stay. When the book was published in the late ’90s, I saw the authors present here in DC at a local “Netpreneurs” event, complete with a guy in a Gorilla suit and beach balls being bounced above the crowd. Ah, those glorious ’90s when I still had hair…
Many of the companies I have spoken with continue to have a “wait and see” attitude about whether they will try voluntary e-proxy this year. The latest e-proxy statistics from Broadridge bear this out. Below is a summary of their findings as of the end of December; a more complete set of stats are posted in our “E-Proxy” Practice Area:
– 69 companies have used e-proxy so far (with 2 having to do a second notice); another 40 have committed to do e-proxy
– Size range of companies using e-proxy varies considerably; all shapes and sizes
– 2/3 of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management and 6% had non-routine matters proposed by shareholders
– Retail vote goes down dramatically using e-proxy (based on 51 meeting results); number of retail accounts voting drops from 17.1% to 4.0% (over a 75% drop) and number of retail shares voting drops from 28.0% to 13.3% (over a 50% drop)
– Real money can be saved; aggregate of $17.5 million net savings for the 69 companies
Foreign Private Issuers: May Try to Exclude US GAAP Even Before March 4th
Yesterday, the SEC posted this notice that it will entertain requests to allow foreign private issuers to file Form 20-Fs without US GAAP reconcilation even before the March 4th effective date of the SEC’s new rules on the topic. The request has to be in writing to the SEC Staff (although they can call the Staff in advance to hash out their circumstances). Here is an excerpt from the SEC’s notice:
In response to questions, the staff has advised companies that until this new rule is effective that they are subject to the existing rules regarding the inclusion of U.S. GAAP information in filings with the Commission. However, the staff is aware that some foreign private issuers with a fiscal year ending after November 15, 2007 that prepare their financial statements using IFRS, as issued by the IASB, will want to file their annual report on Form 20-F before March 4, 2008. These companies also want to exclude U.S. GAAP information from that filing. The staff does not want to discourage companies from filing their 20-F before March 4, 2008. Accordingly, these companies are encouraged to contact the staff in the Division of Corporation Finance to discuss this issue. These companies can contact either Craig Olinger – Deputy Chief Accountant (202-551-3547) or Wayne Carnall — Chief Accountant (202-551-3107) to discuss their particular facts or circumstances.
The staff also noted that this same release provides similar relief from the requirement to provide U.S. GAAP information if the financial statements are filed under Rules 3-05, 3-09, 3-10 and 3-16. Likewise, companies that intend to file financial statements with a fiscal year ending after November 15, 2007 that are prepared using IFRS, as issued by the IASB, that exclude U.S. GAAP information in a filing under the Securities Exchange Act of 1934 before March 4, 2008 are similarly encouraged to discuss their fact pattern with the staff.
M&A: The ‘Former’ SEC Staff Speaks
Catch the DealLawyers.com webcast tomorrow – “The ‘Former’ SEC Staff Speaks” – to hear former Senior Staffers from the SEC’s Office of Mergers & Acquisitions weigh in on the latest rulemakings – and interpretations – from the SEC. This webcast will provide a complete “bring-down” of what’s happening at the SEC – and provide practical guidance about what you should be doing as a result. Join:
– Dennis Garris, Partner, Alston & Bird LLP and former Head, SEC’s Office of Mergers & Acquisitions
– Jim Moloney, Partner, Gibson Dunn & Crutcher LLP and former Special Counsel, SEC’s Office of Mergers & Acquisitions
The grace period for DealLawyers.com has expired. As all memberships are on a calendar-year basis, if you haven’t renewed, you won’t be able to catch this webcast or this upcoming one: “MAC Clauses: All the Rage.” So renew your membership today!
For the subset of the 350 companies that were both reviewed by Corp Fin as part of the executive compensation review project and have received one of these “all clear” letters from the Staff, you will soon find your comment letter and response posted on the SEC’s website. It looks like the Staff hung pretty close to the timeline of “45 days since the Staff started informing companies that they were clear,” which is earliest that the Staff can post letters/responses pursuant to its own policy (which was confirmed in the Staff’s Report on executive pay).
I just took a cursory swing through the SEC’s database over the weekend and found these:
There’s a few more out there and we’ve posted a more comprehensive list on CompensationStandards.com in a new “SEC Comments” Practice Area. Hopefully, somebody can prove me wrong – but it’s quite challenging to run searches on the SEC’s comment letter database – as well as the third-party providers’ databases – to find these letters. The good ole boolean-type searches don’t seem to work for these particular batch of letters…
Why the Blogosphere is Putting the “Hurt” on Mainstream Media
As everyone knows, mainstream media is in trouble, particularly daily newspapers. For example, the Washington Post has reduced its staff to such a degree that the “Business” section regularly runs a list of product recalls on its front page (and a majority of the Post’s revenue stream now comes from its Kaplan Training enterprise; not its newspaper).
Here is a case in point why bloggers with greater knowledge in their niche can outdo the mainstream journalists. In this article from Saturday’s Post, the reporter tries to make a story out of a fairly bland comment issued by Corp Fin last August asking how Berkshire Hathaway handles director nominations submitted by shareholders (comment letter and response are linked to above; note the article is written by a Bloomberg reporter, reaffirming how scantily the Post is devoting resources to business).
Here an excerpt from the article, which is entitled “Berkshire Hathaway to Formalize Director Nomination Procedure”:
“The nominating committee does not have a formal policy by which shareholders may recommend director candidates,” the SEC wrote in a letter to Hamburg dated Aug. 21. “Please state why it has no such policy, as required. Hamburg responded that company policy “will provide that Board of Director candidates recommended by shareholders will be evaluated using the same criteria as are applied to all other candidates.” Hamburg didn’t return a call seeking comment. A subsequent SEC letter to Hamburg, dated Nov. 27, said its review of Berkshire was complete, with no further comments.
A few years ago, the SEC added Item 7(d)(2) of Schedule 14A to require companies to disclose in their proxy statements if they have a “nominating or similar committee” and “whether the committee will consider nominees recommended by security holders” and, if so, “describe the procedures to be followed by security holders in submitting such recommendations.” Apparently, Berkshire Hathaway forgot to include a description of their procedures in their proxy statement. From their response, it seems like the company will simply codify their existing procedures in a policy. These procedures – that all candidates are considered based on their qualifications – are pretty much the same as 99% of Corporate America.
These typical procedures are the backdrop of the ongoing extensive battle over proxy access. Very few companies receive nominations from shareholders (and I mean very few) because it’s unlikely that their candidates will have the skill sets that boards are looking for – and of course, because they haven’t gone through the board’s recruiting process that often takes as long as six months. Most shareholders realize its a futile exercise and don’t bother to submit nominations.
So the fact that Berkshire Hathaway will add this disclosure to their proxy statement is not really news at all. Rather, my opinion is that it’s a reporter’s lack of understanding about how the Corp Fin comment process works. Not surprising since it would be hard for an industry outsider to know…
The Latest on Fairness Opinions
We have posted the transcript from our recent DealLawyers.com webcast: “The Latest on Fairness Opinions.”
Travis Laster notes: You might recall Chancellor Chandler’s November 30th opinion in Ryan v. Gifford, in which the Chancellor ordered production of communications between a special committee created to investigate option backdating and its counsel. The Chancellor provided two bases for his ruling: first, a traditional “good cause” analysis under Garner v. Wolfinbarger, and second, a more novel analysis in which the special committee was found to have waived privilege by presenting its report orally to the full board, including directors who were the subject of the investigation.
The company (but notably, not the committee or its counsel) sought interlocutory review of the waiver analysis in the November 30th decision. In a new opinion (posted in our “Options Backdating” Practice Area on CompensationStandards.com), the Chancellor denied the application, noting that the company did not challenge the Garner analysis and thus any appeal would be futile.
More importantly, the Chancellor’s new opinion goes into much greater detail regarding the various factors that caused him to find a waiver from the presentation to the full board. These included (i) the lack of Special Committee authority to take action independently of the full board, (ii) the broad scope of the investigation combined with the absence of any written report presenting the committee’s findings, (iii) the fact that directors who were the subject of the investigation had their personal counsel present to hear the report, (iv) the willingness of the company to refer to the committee’s work in public filings and communications with regulatory authorities, and (v) the extensive reliance by the individual defendants on the exculpatory effects of the committee investigation, including in a subsequently withdrawn summary judgment brief.
The Chancellor also takes pains to confirm the narrow scope of his ruling: “[I]t is worthwhile to repeat that the relevant factual circumstances here include the receipt of purportedly privileged information by the director defendants in their individual capacities from the Special Committee. The decision would not apply to a situation (unlike that presented in this case) in which board members are found to be acting in their fiduciary capacity, where their personal lawyers are
not present, and where the board members do not use the privileged information to exculpate themselves. Similarly, the decision would not affect the privileges of a Special Litigation Committee formed under Zapata, or any other kind of committee that (unlike the Special Committee here) has the power to take action without approval of other board members.”
The Chancellor’s ruling thus does much to limit the potentially broad sweep of his earlier and much briefer opinion. Future special committees can still expect to see plaintiffs make waiver arguments based on Ryan, but it should be far easier for counsel to navigate around the waiver problem based on the additional analysis that the Chancellor has now provided.
SEC Staffer Added to Executive Compensation Disclosure Webconference
Since all memberships are on a calendar-year basis, you will need to renew your CompensationStandards.com membership to catch Mike, Dave Lynn, Mark Borges, Ron Mueller and Alan Dye on January 23rd and 31st.
Reaction: The Corporate Library Reports on Compensation Consultants
Here are some thoughts from an anonymous member about Dave’s blog on a study from The Corporate Library finding that companies using compensation consultants tend to pay higher CEO compensation, and such compensation levels do not necessarily relate to increased shareholder returns:
“I cannot help but comment on the The Corporate Library report that you blogged about. I am very concerned about anyone relying on or using the results of The Corporate Library Report. The methodology is so flawed that I seriously question the validity of the report. It also demonstrates a complete lack of understanding of executive compensation practices. For example:
– It combines STIs and cash long-term incentive plans and then measures them as a percentage of base salary, with no reference to the peer groupings. The results could simply be a function of which companies have cash LTIPs in addition to STI plans, the mix of compensation elements at those companies, as well as the revenue sizes of the companies that each consultancy has as clients.
– It tries to measure long-term incentives by vehicle (e.g., stock options separately from performance plans), when the mix of LTI vehicles varies widely from company to company
– It ignores restricted stock grants and performance shares, significant elements of executive pay.
– It ignores the types of clients that the consultancy firms have. For example, some consultancy firms have a higher concentration of high-tech company clients, which generally focus on stock options (e.g., Compensia, Radford).
– It ignores the fact that many companies use 162(m) bonus pools in the Grants of Plan-Based Awards table which distorts what is actually attributable to the incentive plans
– It doesn’t look at total pay
– While detailing the average target value of all performance-related equity awards and average maximum value as a percent of target for nonequity compensation for companies using consulting firms, the Report does not indicate those percentages for companies not disclosing they used compensation consulting firms. Thus, the numbers provide no comparison on which to make a judgment on the effect of compensation consulting firms on this issue.
– It does not acknowledge an obvious finding which is there is not a correlation of higher CEO pay to multi-service firms. In fact, the data appears to support a different conclusion, i.e., higher CEO pay is associated with boutique executive compensation consulting firms. This seems to indicate that independence is not an issue at multi-service firms.
– Finally, we disagree that compensation firms have very different methods of designing executive compensation practices. Our experience is that other factors are much more relevant, including the company’s pay objectives, business strategy, competitive market for talent, life cycle, and culture, than the consulting firm or individual practitioners at those consulting firms.”
Last week, this AICPA Conference speech from SEC Deputy Chief Accountant Julie Erhardt was posted (the Conference was held a few weeks ago); it does a nice job summarizing the comments received on the SEC’s concept release regarding the use of IFRS by US issuers. In addition, these AICPA speeches from Associate Chief Accountants were posted:
– Joel Levine’s speech on XBRL
– Steven Jacob’s speech on MD&A; and 404 internal control implementation issues
– Stephanie Hunsaker’s speech on consents and experts; consolidation method to the equity method for an investment; and MD&A disclosures in the current credit environment
– Todd Hardiman’s speech on large errors and materiality
“I spent Monday through Wednesday attending the largest conference devoted to current events affecting financial reporting, featuring plenty of the SEC’s staff – the ones who interact with the auditors examining the year end financials. And I’m wondering: when did the SEC become afraid of its own shadow? There seemed to be an overwhelming aura surrounding the SEC presenters, a kind of self-consciousness that they be careful to not “write GAAP” in the delivery of their speeches to the audience.
When this conference first began thirty-five years ago, the intent was to bring the SEC’s thinkers and doers in front of a large audience of auditors, to discuss the problems they’d seen in filings with the audience. The intent was not to “speechify GAAP” – but to get the message out as to the problems they’d seen and describe how they handled it. The goal: to identify troublesome practice issues and tamp them down before they became pervasive by presenting them to the auditors who could do something about it. That’s a worthwhile service to everyone involved in the financial reporting chain, from preparers down to users and the auditors in between.
That’s not writing GAAP – that’s being an effective regulator. (And don’t forget that writing GAAP is something that the SEC is empowered to do.) Preventing problems through effective communication has always been at the heart of this conference. And this effective communication worked quite well long before the advent of Blackberries and the internet – accounting firms responsible for keeping their SEC knowledge current seemed to get the message quite well by the state-of-the-art information distribution means, like overnight delivery and fax machines.
Now that there’s virtually instant transmission of data, including the publication of all the speeches on the SEC’s website at no charge to readers, critics are complaining about the dissemination of the comments in the speeches as being unfair. Absurd.
The comments of the SEC commentators were full of reminders of current GAAP, but missed the pithiness of years past when they described fact patterns that showed how a standard was misinterpreted or misapplied, and how they expected it to be remedied if encountered in practice by members of the audience. Instead, many of the commentators offered comprehensive reminders of where trouble might occur in the application of new accounting standards, rather than reporting on the known snafus they’d seen. Instead of warning registrants and auditors about problems they’d seen, it’slike they’re wish-listing problems they hope don’t happen. While there’s value in that approach, there might be a lot more value in what they’d done in the past. Shouldn’t regulators act like regulators, instead of acting like their walking on eggshells?”
SEC Delays Direct Registration Deadline Until March 31st
Recently, I blogged about some quirks in the new direct registration program. In this adopting release issued last week – which approves the Exchanges’ rule changes on an accelerated basis – the SEC extended the deadline for listed securities to be eligible for inclusion in the direct registration framework from January 1st to March 31st.
The SEC’s release states “. . . .there has been some confusion regarding the steps the listed companies need to complete to become compliant with these requirements. As a result, certain listed companies are still in the process of completing the necessary steps, which could include modifying their by-laws or having their boards take other actions, to become DRS eligible. In addition, in some cases, even though a listed company has completed all actions required to be taken by the company to become compliant, the company’s transfer agent is still completing the process necessary for the transfer agent to facilitate the company’s DRS eligibility.
In order to assure that listed companies have adequate opportunity to comply with the listing standards that require listed securities to be eligible for inclusion in a direct registration program, each of the Exchanges is proposing to extend the effective date for its DRS eligibility requirement until March 31, 2008.”
Section 16 Year-End Compliance Checklist
On Section16.net, Alan Dye has posted his annual “year-end checklist” for Section 16 compliance purposes (including a Word version of the checklist, which is accessible via a link on right corner of this page).
