Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
We have posted a new nifty chart that analyzes what the SEC and NYSE rules, disclosure, lenders and D&O insurer issues are implicated under six different scenarios involving auditing crisises, including:
– Auditor gives SAS 71 letter with exceptions
– Auditor unable to perform SAS 71 review
– Failure to file Section 906 certification
– Failure fo file a Form 10-Q
– Unable to file clean 906 CEO/CFO certification in a timely manner
– Auditor pulls opinion
– Decision made to reaudit
CEO Turnover and Succession
In this podcast, Steve Wheeler of Booz Allen Hamilton analyzes the latest trends regarding CEO turnover and succession planning (as reflected in Booz Allen’s recent study), including:
– What are the most notable trends you found in your study?
– What do you see happen to most CEOs at targets in the wake of a merger?
– What do you see happen to CEOs at companies that are not performing well?
– What are the timeframes that companies are looking at for CEO performance?
– Are the trends different on a global scale?
– Your study talks about the end of the imperial CEO and the beginning the era of the inclusive leader – what does that mean for companies and CEOs?
It’s Just Human Nature: Playing “Fast and Loose” in the Credit Market
This WSJ article is one of those that you read and it gives you pause. This excerpt says it all:
“In a new report that assesses the status of the market, the Moody’s Corp. unit said it was passed over and not hired for 75% of the commercial mortgage-backed securities rating assignments issued in the past few months as a result of its requirement that issuers add an extra layer of credit enhancement. Moody’s said issuers are “rating shopping” — meaning they were hiring competitors that would hand out higher ratings on securities. Because Moody’s makes money rating the creditworthiness of bond issuances, blacklisting could potentially eat away at the firm’s bottom line if the trend continues.”
Brings back memories of why Congress forced the SEC to conduct a study back in 2003 regarding the role and function of rating agencies in the markets – which then led to the Credit Rating Agency Reform Act of 2006 (which gave the SEC more power over rating agencies). Learn more in our “Rating Agencies” Practice Area.
As the rumors predicted, the SEC will hold an open Commission meeting next Wednesday – July 25th – to propose some version of shareholder access; adopt a definition of “significant deficiency”; approve the PCAOB’s AS #5; and issue a concept release on IFRS.
Is the SEC Allowed to Float Drafts of Proposals?
As Dave blogged last week, the WSJ reports that a draft of the SECs’ shareholder access proposal has been making the rounds – but until we see what is announced at the open meeting, it is hard to know what version of it will actually be proposed.
Some members have asked whether the SEC is permitted to circulate a draft outside of the SEC before the Commission meets to formally propose a rule. I guess that depends on one’s interpretation of the Administrative Procedures Act (which is the Act that governs rulemaking by the federal government). I am far from an APA expert, but I think that the biggest issue is not so much that someone at the SEC gave a copy of a draft proposal rule to someone – the issue may be that the SEC did not process any comments received on a draft in accordance with the APA (ie. make them publicly available). Every so often, you will see a memo briefly summarizing a meeting between SEC Staffers and outside parties that is posted on the public comments section of the SEC’s website; this is done to comply with the APA.
On the other hand, some members have distinguished between talking about the general concepts with outside parties (as being generally okay) – from releasing specifics about a proposal even before the Commission has voted on it. One member points out that “leaks” are nothing new and occurred way back in the day when the tender offer rules were revised in the early ’80s – and that this resulted in some quasi-whistleblowing activity. I suspect that floating drafts goes on more than we know – but I would bet the final product probably is the better for it…
McGuire Woods put out this interesting client memo earlier this week:
“IRS officials continue to explain how the IRS will use FIN 48 Disclosures and SEC correspondence in examining taxpayers. As previously reported (see “IRS Releases Internal Memoranda on FIN 48“), the IRS is studying whether its policy of restraint on tax accrual workpapers remains sufficient in the new world of uncertain tax position disclosures. For now, the policy of restraint remains in effect with respect to FIN 48 workpapers. Nevertheless, the IRS is forging ahead with training examiners to more effectively audit taxpayers using FIN 48 Disclosures, as well as publicly available Securities and Exchange Commission (SEC) correspondence on those disclosures. In fact, FIN 48 Disclosures are the “centerpiece” of this year’s training for IRS agents, according to Robert D. Adams, Senior Industry Advisor to LMSB Division Commissioner Deborah Nolan.
In addition to the FIN 48 Disclosures, IRS agents are being trained on reading SEC comment letters issued to taxpayers and the accompanying taxpayer responses. Some disclosure filings made to the SEC are selected for review. SEC staff may provide filers with comments on these filings in situations in which the SEC believes the filings could be improved or enhanced. Once the SEC reviews are completed, the comment letters and responses are made available online in 45 days. Although the purpose of SEC filings is to give investors the information they need to make informed decisions about the financial position of companies, including risks associated with tax positions, comment letters and responses with respect to these filings may provide ‘helpful’ tax information to IRS agents.”
Last Chance: Early Bird Discount Expires Tomorrow
For those watching via webcast, don’t forget that the Early Bird deadline expires tomorrow – Friday, July 20th. So this is your last chance to take advantage of a nice discount on the Member Appreciation Package to catch these October Conferences by video webcast:
We know that next proxy season will be as challenging as this past one, as the SEC continues to tweak its rules or interpretations of them – and as companies tweak what they disclosed after they see what emerging best practices are. So take advantage of this discount while you can.
We promise that these Conferences will be as practical as they were last year. These Conferences focus on developing practical skills with proven effectiveness. If you have questions, please contact me – or our HQ at info@thecorporatecounsel.net or 925.685.5111.
In this podcast, Peggy Foran of Pfizer explains the company’s new policy regarding board engagement, including:
– What does Pfizer’s new policy entail?
– How will the board’s activities under the new policy differ from what the Pfizer board has done in the past?
– Some commentators have urged that the Pfizer board’s “engagement” be webcast so that more shareholders can participate. Why won’t it be?
Management-Shareholder Engagement: The Results Are “In”
Speaking of “engagement,” did you catch this WSJ article on Monday that summarizes how the proxy season unfolded? This quote from ISS’ Pat McGurn encapsulates the piece: “We’ve never had a season that had so much activity going on in the wings and much less taking place center stage.”
What really struck me was that “24% of shareholder proposals for annual meetings were withdrawn this year, as of July 6.” Wow! That’s truly amazing, particularly given that there are many proponents with whom it’s a waste of time to even attempt to negotiate a proposal “out.” But clearly, more and more companies are realizing it’s worth the time to “engage” with those proponents who are willing to meet somewhere in the middle on the issues raised (and remember, those issues are not always those presented in a shareholder proposal – many proponents have ulterior motives, which they cannot include in a proposal because it might be excludable under the bases in Rule 14a-8).
Over the last few days, plenty has been written in the media about how the Whole Foods CEO John Mackey has been posting messages – anonymously – about his company and his competitor on this Yahoo! message board devoted to Whole Foods’ competitor Wild Oats (if you want to read some of the CEO’s posts related to Wild Oats, scroll down for the URLs in this blog). Wild Oats is now in the process of being bought by Whole Foods, but first needs anti-trust clearance from the Federal Trade Commission – and the FTC has sued to block the deal. The CEO’s postings came to light when they were mentioned in the FTC’s memo filed last week to support its motion for a preliminary injunction (and here is the FTC’s original complaint). According to this NY Times article regarding “sock puppets,” Mackey has been posting anonymously for 8 years.
Lord knows why Mackey has been doing this, particularly given that he is one of those rare CEOs that has his own blog, which he can use to express his views. For more on issues raised by employees that blog, see our “Employee-Blogger” Practice Area.
My take on the provocative story is that I didn’t realize that folks were still using message boards. That’s so ’90s! Back then, everyone was concerned about cybersmears and message boards – and how they could impact your stock price. It was such a big issue that I got halfway through writing a book on the topic, that I ended up scrapping because the issue dropped off the edge of a cliff, as everyone migrated away from message boards as “bigger and better” things to do on the Web emerged.
Apart from potential legal issues and liabilities, the biggest problem I have with this CEO’s activities is that it sets a poor example by the company’s leader. Back when I wrote on this topic, one area I would focus on is how companies should adopt policies to ensure employees didn’t post messages about their employer due to legal and other reasons. Here is a set of FAQs on Cybersmears and Message Boards that I wrote at least five years ago – note that it includes a section on “Potential Employer Obligations Arising from Employee Messages” that probably holds water even today. I didn’t think to include a statement that anonymous postings by a CEO could tank a merger…
The Whole Foods Fiasco: What are the Disclosure and Securities Laws Issues?
On his “The Race to the Bottom” Blog, Professor Jay Robert Brown does a great job of analyzing the securities law issues implicated by the Whole Foods anonymous posting incident as follows:
“The WSJ has reported that the Commission has opened an investigation into the activities of Whole Foods CEO John Mackey. It seems that Mackey over an eight year period made posts on an online stock forum run by Yahoo using a pseudonym. Mackey, according to the WSJ report, “lauded Whole Foods’ stock, cheered its financial results and bashed a company Whole Foods made a bid to acquire.” Some of the posts are here. The Journal speculated that the SEC might be looking into whether Mackey’s statements contradicted statements made by the company, were “were overly optimistic about the firm’s performance,” or violated Regulation FD.
We talk often about SOX, particularly in the context of investor confidence. Accurate disclosure is, in the end, at the core of investor confidence. But, while Mackey may have exercised very poor judgment, does that equate to a violation of the securities law?
There are two broad categories of possible violations. They include fraud (making materially incomplete or inaccurate statements) and selective disclosure (providing material information to select persons in the market). My book, The Regulation of Corporate Disclosure, examines these topics in detail.
Selective disclosure is not per se improper, a legacy of Chiarella. (We have criticized the awful reasoning of this case on my blog. Suffice it to say that it validated deliberate selective disclosure by corporate insiders in some cases). Regulation FD was a regulatory response to this case and the problem of selective disclosure. Regulation FD does not exactly prohibit selective disclosure. Instead, to the extent a company (through its agents) deliberately discloses material non-public information to certain investors/market professionals, it must simultaneously make public disclosure of the information. A company that accidentally disclosed material non-public information on a selective basis has 24 hours to disclose it to the entire market. See 17 CFR 243.100, et seq.
These provisions will be very difficult to apply to Mackey. First, with respect to Regulation FD, the SEC will have to show that Mackey disclosed material nonpublic information. Second, once disclosure occurs, it is not the disclosure of the information that violates Regulation FD but the failure to disclose the information to the entire market. This burden rests with Whole Foods. The SEC will need to show that Whole Foods knew about the disclosure and failed to meet the requirements of Regulation FD. While the CEO made the disclosure and he is an agent of Whole Foods, the SEC and courts may have a hard time attributing the information to the company given Mackey’s the possible stealth involved (indicated by the reported use of a pseudonym). Finally, Regulation FD only applies to disclosure to certain types of investors or market professionals such as analysts. It really was not intended to apply to disclosure that was arguably to the entire market. Disclosure in the Yahoo forum is arguably to the entire market (and, in any event, would arguably meet the defintion of “public dislcosure” for purposes of Regulation FD).
As for the antifraud provisions (primarily Rule 10b-5), there is no question that the prohibition on fraud applies to material disclosed on the Internet. Posting false information or making inaccurate statements in chat rooms or threaded discussions can be the basis of a fraud suit much the same was as false statements in press releases. The SEC will need to show that Mackey made materially false or incomplete statements. The problem here is materiality. Since he used a pseudonym, the market was arguably unaware that he was directly connected to Whole Foods. As a result, the market may have not treated his statements as material but instead viewed them no different than uninformed statements from ordinary investors.
This is not, however, the end of the story. Even without disclosing his identity or role in the company, the depth of the comments, the accuracy over time, and the uniqueness of the information, may well have alerted the market to the fact that he had unique information that could only come from an insider (either because he was an insider or because he was communicating with an insider). In those circumstances, those in the market may well have treated the statements as material. Analysts who follow Whole Foods in Yahoo could probably resolve this.
We shall see where this case goes. At a minimum, it suggests that top officers ought not to be communicating (perhaps at all but certainly not through pseudonyms) in chat rooms and investor forums.”
Romeo & Dye Analyze New Section 16 Interps
Recently, the SEC Staff issued long-awaited Staff interpretations on Section 16 issues. In the latest issue of Romeo & Dye Section 16 Updates – which was just mailed – Peter and Alan analyze the numerous new and modified interps, including a controversial one regarding aggregate reporting that will have a widespread impact on many Section 16 filings.
Act Now: To receive this critical guidance, take advantage of our “Half-Off for the Rest of 2007” No-Risk Trial for Romeo & Dye’s Section 16 Annual Service. Note that this Annual Service is a print service and this guidance is NOT available on Section16.net.
With voluntary E-Proxy now effective, many companies have been waiting to see what fees will be charged by Broadridge (formerly known as ADP) in order to run a cost-benefit analysis and determine whether cost savings would truly be realized by using E-Proxy (don’t forget our “Cost-Benefit Worksheet“). Broadridge’s fees have finally been announced – and I believe they work like this:
1. Existing fee rates remain in place for beneficial owner processing.
2. If an issuer decides to use voluntary E-Proxy, the following incremental/step-based fees apply for sending a notice, etc. to beneficial owners:
– First 10,000 accounts @ $0.25 per
– Next 10,001 – 100,000 accounts @ $0.20 per
– Next 100,001 – 200,000 accounts @ $0.15 per
– Next 200,001 – 500,000 accounts @ $0.10 per
– 500,001 + accounts @ $0.05 per
Regardless of the number of accounts that an issuer wants to “E-Proxy,” Broadridge will charge a minimum fee of $1500. In other words, if an issuer wants to E-Proxy to just a few accounts, the fee will be $1500 regardless of step-based fee formula above (but this floor is not a fee that is tacked onto the step-based fee).
As an example of how this works, an issuer using E-Proxy for 100,000 beneficial owner accounts would incur fees as follows:
– First 10,000 accounts @ $0.25 = $2,500
– Next 90,000 accounts @ $0.20 = $18,000
Total Cost = $20,500
3. Rather than have separate fees for various services, Broadridge will provide the following services as part of the step-based fees above (ie. they are “inclusive”): print and fulfillment (ie. mail) services for the notice; fulfillment and fulfillment support for hard copy requests; 800# set up; Internet and 800# voting, support two work flows (sending notices and hard copy proxy materials), and will also provide a standard landing web page (ie. where shareowner inputs control number) and standard shareowner portal (ie. where shareowner arrives once the control number is recognized; this is where proxy materials, voting platform and place to request hard copy is located).
Issuers can upgrade and have a customized landing page and shareowner portal, where the fee will vary depending on what features an issuer wants. Annual storage fees for hard copies are approximately $1,000 per document (so storage is cheaper if you have a combined proxy and annual report vs. two separate documents) for the first 5,000 copies and $800 for every 5,000 after that.
4. Note that same rates in #2 above apply if Broadridge is hired to send notice, etc. to registered owners. However, when calculating costs, the registered accounts are not combined with beneficial accounts. In other words, when making your registered owners calculation, you start at the top of the step-based fee ladder.
5. Broadridge’s suppression fees remain in place for large issuers (>200,000 positions) at $0.25 per suppression, and changes slightly for small issuers (<200,000 positions) to $0.40 per suppression for householding, etc. The e-delivery suppression fee, however, remains at $0.50 for small issuers.
The NYSE’s and SEC’s (Lack of) Role in Broadridge’s E-Proxy Fee-Setting
Note that the NYSE and SEC aren’t directly involved in Broadridge’s fee-setting process regarding E-Proxy. In contrast, the SEC requires issuers, brokers and banks to ensure that proxy materials are distributed to beneficial owners – and NYSE Rule 465 governs the fees paid by listed companies to brokers and banks for their distribution of proxy materials and other communications to the shareholders. Nearly every broker and bank have contracted with Broadridge to perform the functions related to these beneficial ownership obligations, including distribution of proxy materials, proxy tabulation and responses to requests for shareholder lists; resulting in a near-monopoly.
Under Rule 465, the NYSE and SEC are required to bless how much Broadridge charges brokers and banks to forward proxy materials to shareholders (issuers reimburse these brokers and banks – in practice, issuers directly get billed by Broadridge). This rate-setting exercise occurs every few years, with the last rate-setting transpiring in 2002. As part of this fee-setting process, the public is allowed to comment.
Under E-Proxy, Rule 465 comes into play only to the extent an issuer continues to rely on affirmative consents to e-delivery – or chooses to send paper to some beneficial owners. So, the SEC and NYSE largely remain uninvolved in setting Broadridge’s E-Proxy fees – something that has a number of issuers concerned, judging by the e-mails I recently have been receiving from some in-house members.
E-Proxy: The Issue of “Usability”
When E-Proxy was proposed, one fear expressed by commentators was that companies aren’t sufficiently prepared to provide proxy materials and a voting platform that enables shareholders to easily access the materials and vote. By looking at the first handful of companies that have revealed that they are trying E-Proxy, this fear may not have been far off the mark.
Here is one thought from an anonymous member: “What gets me about these initial E-Proxy companies is that everyone is following the prevailing vendors’ (some say manipulative) leads – in requiring people to enter their voting codes in order to view the proxy materials. The voting code should only be required to execute a proxy – not to view or print.
To my eyes, the SEC rule plainly states that the url/link provided to shareholders needs to link directly to the materials, no navigation required. I’d venture that the fact that a code is required to view could be interpreted by some as not being “public” in the general understanding of the word, as well. This technique is likely to make the first shareholder experiences less palatable and chase people back to paper. All those people who try to go to a site without the code in hand will bail and opt for paper. We have nanosecond tolerances these days on the web.”
If you read the transcript from our recent E-Proxy webcast (or listen to the audio archive), Dominic Jones did a great job talking about usability. Here are three recent blogs from Dominic that delve more into the usability of the first E-Proxy volunteers:
Let the games begin! Our new game is called “Executive Compensation Disclosures: 51 Tips.” Our goal is to generate a bunch of practical tips that can increase the effectiveness of the processes for – and content of – your company’s executive compensation disclosures.
What’s In It For You? Four things:
1. You participate in a fun game.
2. You learn practical tips to improve your compensation disclosure skills.
3. You share some practical tips with an eager audience.
4. You achieve fame (if you want). You get points and – if you are one of the five top scorers – get your name placed in the Hall of Fame. If you wish to remain anonymous, that is fine too. No one will be acknowledged publicly unless they consent.
How to Play: Send us some practice tips on how to best navigate or improve the compensation disclosure drafting process or draft better disclosures, including things that you have seen a lot of companies do wrong this proxy season. Keep your tips brief (three or four sentences and not more than 50 words). Send us at least one tip and not more than five tips before the deadline.
How to Win: Any tip earns you 10 points. The best tips receive a bonus score of 50 points, the second-best ones earn 30 points, and the third-best ones earn 15 points. If you are among the top five scorers, your name is added to our Hall of Fame (if you consent to being named). All participants will be sent an email with their point total.
How to “Cheat”: Reflect on your own experience and derive important tips. We also encourage you to borrow ideas from your friends and coworkers. This really isn’t cheating – but my kids are always looking for the “game cheats,” so I felt compelled to act like there might be “cheats” involved.
How to Send Your Tips: Just email them to broc@naspp.com. Remember the limit of five tips. The deadline is close of business on Wednesday, August 1, 2007.
The Latest Compensation Disclosures: A Proxy Season Post-Mortem
We have posted the transcript from our recent CompensationStandards.com webcast: “The Latest Compensation Disclosures: A Proxy Season Post-Mortem.”
It’s a Wrap! California’s Stock Option Proposal
A few weeks ago I blogged about the status of the proposed changes to the California Department of Corporations’ proposed stock option regulations. These regulations are now final – and we have posted related memos in our “Rule 701″ Practice Area. Below is an excerpt from a Fenwick & West memo (which contains a nice chart):
“Effective July 9, 2007, California liberalized its regulations concerning the permissible provisions of stock option plans. Practically every stock option plan of a privately-held company that has employees in California that participate in the plan can take advantage of this liberalization.
For decades, California was unique among the 50 states in the stringency of its regulation of the scope of permissible provisions that a stock option plan or restricted stock plan could contain. For example, only California required that stock options granted to non-officer employees in California must “vest” (meaning that the shares could not be repurchased on termination of employment by refunding the purchase price) at an annual rate of at least 20% of the shares subject to the stock option.
Non-compliance with even one of the regulatory requirements meant that rather than the company being able to file a simple notice, and pay a small fee to, California, the company would have to submit a pages-long application to the California Dept. of Corporations, which could easily cost $10,000 or more to prepare. The liberalization of the regulations means this is far less likely to occur.”
Congress Tightens “National Security” Reviews of Foreign Investment in the US
On Wednesday, Congress passed the “Foreign Investment and National Security Act of 2007” to formalize and tighten the process for reviews of foreign acquisitions of businesses in the US that raise potential national security concerns. The new Act amends the “Exon-Florio Amendment to the Defense Production Act” and codifies – as well as extends – recent trends toward more stringent review of foreign acquisitions by the Committee on Foreign Investment (CFIUS), which is an interagency committee chaired by the Treasury Secretary and composed of various representatives of the executive branch. There are also enhanced Congressional reporting requirements.
The new Act cleans up many of the provisions of earlier proposals considered problematic by the business community. We have posted memos regarding this development in our “National Security” Practice Area.
Friday the 13th: Be Scared
Did you know that thieves can steal your checks, etc. by having the ink “wash” off the payee and amount (with acetone), leaving your signature, write in any amount, and cash it? Check out this video to understand more (it may take a while to load as its 6 minutes long). Apparently, the Uniball 207 is the only pen whose ink chemically bonds to the paper so it won’t wash off…
With the effective date of voluntary E-Proxy just a week old, a few companies have already filed proxy materials indicating that they will be the first to “give it a go.” In our “E-Proxy” Practice Area, we have begun a list of those companies, complete with a link to their proxy materials.
Interestingly, one company’s proxy statement even has a statement from the company’s President in the “Letter to Stockholders” touting the use of E-Proxy:
“I am also pleased that we are one of the first companies to take advantage of the new Securities and Exchange Commission rules allowing issuers to furnish proxy materials over the Internet. Please read the proxy statement for more information on this alternative, which we believe will allow us to provide our stockholders with the information they need while lowering the costs of delivery and reducing the environmental impact of our annual meeting.”
This particular company also includes a FAQ about E-Proxy on its IR web page. I would expect many companies that utilize voluntary E-Proxy to include a note on their IR web page to explain what they are doing this year – and I understand that some companies have already posted explanations (even though I haven’t seen any others; if you do, let me know). Remember that the more complete – and clearer – an explanation about what the company is doing on your website, the fewer the number of calls to your IR department…
Note that the SEC’s new rules require the Notice & Access to inform shareholders that they have an option to request a paper copy, but there is no requirement for companies to make that statement on their IR web page.
How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations
We have posted the transcript from our recent two-hour webcast: “How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations.” It was a great webcast and the panelists fleshed out a lot of issues that I believe many companies have not yet considered. And the course materials are superb. Hats off to our fine panelists on this one!
Back in early 2004, as part of an omnibus appropriations bill, Congress has been requiring companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism. Since then, Corp Fin’s Office of Global Security Risk has been gradually growing in size and issuing comments eliciting such disclosure (see this memo as well as #2911 in our Q&A Forum to better understand the specific rules that allow the Staff to seek such disclosure). And remember that SEC Chair Chris Cox served as the Chairman of the House’s Committee on Homeland Security before he came to the SEC (and often is rumored to be the next head of the Department of Homeland Security).
I was on the road last week when the SEC launched its new “anti-terrorism” tool, but just by reading the SEC’s press release, I guessed that it would be an imperfect “blacklist” and could mislead investors about which companies are truly doing business in countries associated with terrorists.
This opinion column from yesterday’s WSJ does a great job of explaining how my hunch appears to be right.
Here is an excerpt from that column, penned by Todd Malan, president of the Organisation for International Investment (which represents the interests of the roughly 1,200 foreign companies with US stock market listings):
“Under U.S. law, corporations listing on American capital markets must disclose ties to state sponsors of terror. Many (but not all) companies have been doing so for years, but without the wherewithal to comb through thousands of filings, investors are unlikely to be fully informed. In that light, the SEC’s Web tool appears a welcome response to those investors and policy makers who are hungry for such data.
Unfortunately, the SEC simply compiles a list of companies with the words “Sudan,” “Iran,” “North Korea,” “Syria” or “Cuba” in their annual reports without regard to context.
The SEC’s tool could easily mislead investors. For example, Baker Hughes, a company on the SEC’s Sudan page, states in its 2006 annual report that its subsidiaries will ‘prohibit any business activity that directly or indirectly involves or facilitates transactions in Iran, Sudan or with their governments, including government-controlled companies operating outside of these countries.’ In other words, Baker Hughes withdrew from Sudan nearly two years ago.
Another company on the SEC’s Sudan page, Immtech Pharmaceuticals, appears because it conducted clinical studies for the treatment of first-stage African sleeping sickness in Sudan. We hope this isn’t the sort of corporate behavior the SEC would define as “subsidizing a terrorist haven or genocidal state.’
Not only has the SEC named and shamed the wrong companies, it’s missed many with significant operations in countries like Sudan. Not one of the companies generally identified as enabling the Sudanese government’s genocidal capacity appears on the SEC list even though some (such as PetroChina) list on U.S. capital markets.”
Last Chance: Early Bird Discount Extended Until July 20th
In the wake of the mad rush for last week’s Early Bird deadline, we have decided to extend the deadline – just this once – until July 20th. So this is your last chance to take advantage of a nice discount on the Member Appreciation Package to catch these three October Conferences by video webcast:
– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)
[Media Oddity: Detroit rocker Ted Nugent pens an opinion column for WSJ. Egads.]
Disclosing Spousal “Leisure Activities”
Mark Borges continues to do excellent work in his CompensationStandards.com blog. Here is an item he blogged about on Tuesday: Joann Lublin had an interesting article in Saturday’s Wall Street Journal on executive spouses who get to enjoy corporate perquisites (see “For CEO Spouses, Corporate Jets are the Perfect Perk” (subscription required)). Using the disclosures in this year’s proxy statements, she writes about how the families of top corporate officials often get to indulge in many of the perquisites and other personal benefits provided to the executives.
One particular item – leisure activities – caught my eye since Alan Dye and I had spoken about this in our session about perquisites at last year’s Proxy Disclosure Conference. This is one of those tricky areas, where the disclosure decision often turns on the tiniest of details.
As I recall, we highlighted several of the challenges in determining whether the ancillary activities (such as spa treatments or sightseeing trips) provided to spouses who attend a business-related function are disclosable perquisites. Take, for example, a typical situation where a company’s senior executives attend a Board of Directors’ retreat at which golf and other recreational events are paid for by the company. Frequently, the executives’ spouses also attend the retreat, with the company incurring expenses for their airfare, meals with the directors, and “leisure activities.”
To me, these events raise two questions: are the executives’ recreational activities considered a perquisite and, even if not, what about the activities for the spouses?
While any perquisites analysis is going to be situation-specific, I typically start with the assumption that the executives’ leisure activities are related to the business purpose for the event. In the case of spousal activities, I start from the opposite end of the spectrum, and assume that they should be considered perquisites. Of course, in both cases, I have to apply the SEC’s “directly and integrally related” test to the specific facts. If, ultimately, I conclude that the activities constitute a personal benefit to the named executive officer then they will need to be included as part of his or her total compensation if aggregate perquisites exceed the $10,000 disclosure threshold, and quantified if their incremental cost to the company is $25,000 or more (which is highly unlikely). For an example of a company that included spousal “leisure activities” as part of its executives’ perquisites disclosure, see the Rockwell Automation proxy statement (see footnote 1).
The other question that comes up here is whether describing a spa experience as a “leisure activity” is sufficient for disclosure purposes. I think it is. The Adopting Release only requires that a company’s perquisite description give investors a sense of the particular nature benefit received – it doesn’t seem necessary to me to disclose whether the spouse spent an hour in the amethyst steam room or received a hot stone massage.
For those of you that deal with shareholder proposals, you undoubtedly have heard about the “nuns” that are shareholder activists. A recent Washington Post article prompted me to call upon one of the more active nuns to discuss what led her into this field.
In this podcast, Sister Valerie Heinonen draws upon her experiences from three decades of shareholder activism to give us a perspective on the shareholder proposal process from the proponent’s viewpoint, including:
– How did you get started in the shareholder proposal arena?
– What do you find most challenging about the shareholder proposal process? What do you find the most frustrating?
– If you could change the shareholder proposal process, what would you change?
– In terms of communicating with proponents, what do you recommend to companies that they do?
[Personal Note: My family and I walked in the DC “4th of July” parade yesterday carrying a large 5-point fabric star. Quite a trip marching past thousands and thousands. Next year, we graduate to manning the ropes on a big balloon.]
A Director “Retirement”: Two Tales
Below is a stark example of the differences between why a director really resigns from a board and what a company is willing to disclose about it:
“Last night, CVS/Caremark shareholders succeeded in removing embattled director Roger Headrick from the company’s board of directors and, in so doing, holding him accountable for his past failures to protect Caremark shareholders. As lead independent director and audit committee chair at Caremark, Mr. Headrick bears principal responsibility for approving a sweetheart deal with CVS that nearly cost shareholders $3.3 billion and for the ongoing DOJ and SEC investigations into possible stock option backdating.
Mr. Headrick’s resignation required extraordinary efforts after the CVS/Caremark board initially failed to respect the shareholder vote in its May 9 director election. In addition to communications from major institutional shareholders—including the California Public Employees’ Retirement System, New York City Comptroller William C. Thompson, Jr. and North Carolina State Treasurer Richard H. Moore—members of the House Committee on Financial Services questioned SEC Chairman Christopher Cox regarding the impact of the broker vote on Mr. Headrick’s tainted election during last Tuesday’s hearing on investor protection and market oversight.
The adoption of majority vote standards in director elections by hundreds of companies, including CVS/Caremark, should finally make director elections meaningful. The extraordinary measures required to remove Mr. Headrick, however, underscore the need for swift SEC approval of the NYSE proposal to eliminate the broker vote in all director elections to ensure their integrity going forward.”
2. Here is CVS/Caremark’s version of the director departure, as disclosed in the company’s Form 8-K:
“CVS Caremark Corporation has announced that Roger L. Headrick has decided to retire from its Board of Directors, effective immediately. The Company also announced that its Board of Directors has designated William H. Joyce to succeed Mr. Headrick as Chairman of its Audit Committee.
‘We are enormously grateful to Roger Headrick for the many years of distinguished service he has provided to Caremark,’ said Mac Crawford, Chairman of the Board of Directors of CVS Caremark Corporation. ‘During his tenure on the Caremark board, Roger helped guide Caremark through a series of large and successful transactions that rewarded Caremark shareholders and transformed our company into the nation’s leading pharmacy services provider. He will be greatly missed by me and his fellow directors of CVS Caremark.’
‘We thank Roger Headrick for his service to CVS Caremark and will miss his wise counsel and stewardship,” added Tom Ryan, President and Chief Executive Officer of CVS Caremark. “We wish him well in his retirement. We are also grateful to Bill Joyce for agreeing to succeed Roger as Chairman of our Audit Committee.’”
Survey Results: Blogging Anniversary
With five years of blogging under my belt (and now, a new partner-in-crime), I asked a few questions last month about how you might want to see the direction of this blog change. Here are the results:
1. I have been reading Broc’s blog since:
– Way back when Broc was blogging on RealCorporateLawyer.com (ie. 2002) – 41.5%
– For two-three years – 38.5%
– Just the past year – 20.0%
2. If I had my druthers, Broc would:
– Never mention his personal life again – 6.6%
– Mention his personal life occasionally, just as he does now – 83.8%
– Blog more about his personal life (because it makes my life appear so much better in comparison) – 9.6%
3. On TheCorporateCounsel.net, I wish Broc would do more of these types of podcasts:
– More podcasts about offering techniques – 34.7%
– More podcasts about governance practices – 64.5%
– More podcasts about disclosure analysis – 69.4%
– More podcasts about latest legal developments – 62.9%
– More podcasts of a human interest nature – 8.1%
Thanks for the feedback; Dave and I will heed your wishes about podcast topics – and letting our personal lives only occasionally pop up in our daily musings…
A tripleshot blog from our California law expert, Keith Bishop: I get many questions regarding the status of the proposed changes to the California Department of Corporations’ proposed stock option regulations. These were proposed last September and have been winding their way through the notice and comment process. Recently, this proposal has begun to move.
The proposal was filed with the California Office of Administrative Law (OAL) on May 30th. OAL is the office in California charged with reviewing regulations for compliance with California’s Administrative Procedure Act. Thus, OAL review is a technical review – not a policy review. OAL has 30 working days to review the proposed regulations. If OAL approves the regulations, it files the regulations with the Secretary of State.
Although regulations in most cases become effective 30 days after filing with the Secretary of State (Cal. Gov. Code Section 11343.4), I’ve been told that the Department has requested immediate effectiveness on filing with the Secretary of State. As a caveat, OAL does have the power to disapprove regulations. Although this is rare, it does happen occasionally. If OAL does so, the regulations go back to the department or an appeal is made to the Governor. I would be very surprised if OAL disapproves of these regulations; regardless, I think that many people are anxiously awaiting the effectiveness of these rules.
What is the California’s Proposal on Options?
More from Keith: The proposed regulations perform double duty. Originally, they served as guidelines for the exercise of the California Commissioner’s discretion in applying the fair, just and equitable standards for qualification purposes. Although they still perform this function, they began serving an additional purpose in 1996 when California enacted Corp. Code Section 25102(o).
That section exempted offers and sale of securities that, among other things, are exempt under Rule 701 and meet the Commissioner’s rules for qualification of stock option plans. While it was good to have a new exemption for stock option plans, the Commissioner’s rules were out of sync with many plans. In 1999, the Department proposed amendments to the rules.
However, these proposals went nowhere. In 2001, the legislature enacted SB 1837 to extend the statutory exemption to limited liability companies. Consequently, the Department amended its rules but only to account for options granted by limited liability companies. At the time, I had recommended that the amendments proposed by the Department in 1999 be included. However, the Department limited its amendments to the issue of limited liability company options. In 2002, the Department issued an invitation for comment on changing the rules. Although many comments were received, the Department took no action.
Now, at long last, the Department has finally addressed some of the issues that have been bedeviling issuers for the last ten years.
How Might the California Option Proposal Impact Public Companies?
I asked Keith: “If companies that have registered their plan on Form S-8 (which are just about all public companies), do they need to worry about these rules?”
Keith noted: These rules are of concern to many public companies. Smaller public companies with securities listed on a national securities exchange designated by the Commissioner (basically, the Nasdaq Global Market, NYSE, AMEX and Tier I of the Philadelphia Stock Exchange) are exempt because Cal. Corp. Code Section 25100(o) exempts both the listed securities and options to acquire listed securities.
Public companies whose securities are not listed on these exchanges cannot rely on the 25102(o) exemption because the exemption is conditioned on the availability of Rule 701 (for Rule 701 to be available, the company must not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act). Thus, public companies whose securities are quoted in the OTCBB or Pink Sheets are cannot use the exemption. Also, it is not clear to me that companies with securities listed on the Nasdaq Capital Market are exempt because although the SEC has now designated the listed securities as “covered securities” under Section 18 of the Securities Act, their options are not covered securities.
Unless relying on some other exemption, options granted by these companies would be subject to qualification. In that case, the rules would perform their original function – standards for qualification. Sometimes, the stock option qualification issue can be a surprise and a problem for those companies that fall of the exchange. In those cases, the plan was not likely to have been drafted with the Commissioner’s standards in mind.
