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."
In this podcast, Steve Kunkel and Bill Smith, both from CBIZ Accounting, Tax & Advisory Services and Mayer Hoffman McCann, explain how the IRS may well turn FIN 48 into a roadmap and treasure map for audits, including:
– What are the latest FIN 48 developments?
– What is the most common uncertain tax position that you have seen?
– What is the best approach in addressing staffing needs for initial compliance for FIN 48? What is an “advisory accountant”? What role will our independent auditor play in evaluating tax positions for FIN 48 purposes?
– What do you anticipate the IRS will do with FIN 48 disclosures?
– How will FIN 48 affect tax positions that companies take in the future?
– How does a company determine a “unit of account”?
– What impact can FIN 48 have on a company’s banking covenants?
More Serious Thoughts about Avvo
A few weeks ago, I poked a little fun about Avvo in this blog. But what do I really think? I believe Avvo gets it “right” in that some aspects of practicing law are on the verge of being revolutionized. Too many industries are being transformed to think that the legal field will go unscathed. Exhibit A are the web sites we have launched, they are unique – and to be honest, I think they merely scratch the surface of where I think they can evolve to in the not-too-distinct future. With Dave Lynn on board here, there is now room for the creative juices to flow.
I predict that Avvo will listen to what their audience wants – and that the end product could be truly something breathtaking. It might end up being a Facebook for lawyers; who among us would ever think that something like that would happen so fast? If you check the legal blogosphere, Avvo became a household name overnight. That alone would be unthinkable a decade ago.
In today’s world, each lawyer should be branding and marketing themselves as much as they can. That probably was always true, but real opportunities weren’t there for most of us. Now, someone can make their “name” on the Web even before they graduate from law school. It’s truly every man and woman for themselves, as job-hopping is not frowned upon as it was in the not-too-distant past.
And trust me, all these changes are gonna be for the “good” as hopefully the traditional lawyer lifestyle will become more balanced and away from billable hours and tedious meetings.
Note that Avvo isn’t alone, it appears that LawDragon.com has a similar goal to allow folks to endorse lawyers, with one feature that I am surprised hasn’t created more of a buzz – the site allows evaluators to identify how much per hour the lawyer charged them (not too many lawyers have endorsements that identify rates but I did find a few). In theory, this feature could put downward pressure on billing rates. As expected from a relatively new site (been up little more than a year), this one has bugs too (e.g. Alan Beller listed as Corp Fin Director).
If you followed the SEC’s recent proxy process roundtables, you heard a bit of debate over the electronic shareholder forum idea. This is an idea that has been floated for a while – and even tried a few years back at MCI, as forced upon that company by the Breeden Report and called a “Town Hall.” This idea is described in this SEC roundtable briefing paper.
A Verizon shareholder/retiree recently created an electronic shareholder forum for that company to facilitate a discussion of that company’s pay-for-performance policies. This development was written up in Sunday’s NY Times.
The idea that all-year-round forums can replace the existing Rule 14a-8 shareholder proposal process was criticized by some during the SEC’s roundtables, by both management and investor representatives. In my mind, companies shouldn’t like the idea because of the expense – and manpower necessary to – maintain and respond to shareholder initiatives all year round. Investors shouldn’t like it because many proposals are submitted as part of a broader strategy that involves getting management behind closed doors.
[Another Corp Fin Retirement: Madeline Booker ends decades of service this week as the principal administrative contact in the Division. Thanks for everything Madeline!]
Catching Up to Nasdaq’s Changes
Keith Bishop notes: Transitions are always tough, but it seems that the regulators don’t want to catch up with the name and other changes at the Nasdaq Stock Stock Market, Inc. In a recent blog, you noted that the SEC has amended Rule 146 to include the Nasdaq Capital Market as a “covered security” for purposes of Section 18 of the Securities Act of 1933. The SEC also said that it was amending Rule 146 to reflect the name change of the National Market System of the Nasdaq Stock Market LLC. Nasdaq renamed the National Market to the Global Market on July 1, 2006. At the same time, Nasdaq created the Global Select Market as a segment within the Global Market. Despite the SEC’s stated intent to reflect the name changes at Nasdaq, the rule still refers to the “National Market System of the Nasdaq Stock Market”, which it incongruously now defines as the “Nasdaq/NGM”.
I am embarrassed to say that the California Department of Corporations still hasn’t reacted to the conversion Nasdaq and the renaming of its markets. As Broc blogged way back in August, California has an exemption for listed securities that includes any warrant and other right to purchase the listed security. Corp. Code Section 25100(o). The statute refers to securities listed on a national securities exchange or the “National Market System of the Nasdaq Stock Market” if the exchange or Nasdaq Stock Market (or its successor) has been certified by rule or order of the Commissioner of Corporations. Corporations Code Section 25101(a) contains a similar exemption with respect to nonissuer transactions for listed securities if certified by the Commissioner. Finally, California has a usury exemption in Corporations Code Section 25117 that is dependent upon the Commissioner’s certification of the exchange.
It should be noted that the addition of the Nasdaq Capital Market to the list of “covered securities” in Rule 146 doesn’t mean that the California exemptions discussed above are now available to Nasdaq Capital Market securities. In particular, the NSMIA did not clearly preempt state qualification requirements for options or warrants to acquire covered securities, as discussed in May-June 2003 issue of The Corporate Counsel. Cal. Corp. Code Section 25100(o) provides an exemption for listed securities but only if the securities are listed on a certified exchange. While the Nasdaq Global Market is the successor to the Nasdaq National Market, the Nasdaq Capital Market is not.
May-June 2007 Issue: The Corporate Counsel
We just mailed the May-June 2007 issue of The Corporate Counsel. Try a no-risk trial for half-price for the rest of the year.
The May-June issue includes analysis of:
– Deep (1933 Act) Thoughts on Google’s TSO Program
– The CDI—The Staff’s New Guidance Format
– The Coming Internal Control Disclosures by Non-Accelerated Filers—Staff Clarifies Scope and Effective Date of 10-Q Temporary Item 4T
– Issuer Private Placement While There is Undisclosed Material Information—Rule 10b-5 Concerns (Waiver?)
– Goldman Sachs Belatedly Adds Shareholder Proposal to Annual Meeting
– Why So Many Forms 4 Cluttering Edgar?
– Internet Proxy Solicitation—State Law Compliance?
– S-K Item 403 Follow-Up—Staff Now Says Deceased NEO May Be Excluded Completely From Beneficial Ownership Table
– Reporting Standalone Stock Appreciation Rights in the Beneficial Ownership Table—What Number of Shares?
– Post-Termination Rule 144 Cutoff for Control Stock—Waiting Period!@#$%
– Staff No Longer Allows Adding Shares to Form 144 by Amendment—Ramifications
– New Backdating Investigation Numbers
Expires This Friday! Our Early Bird Discount for the “Member Appreciation Package” to attend our three special Conferences via video webcast expires this Friday. Act now to save $300; the Package includes:
Late Friday, the SEC posted the proposing release regarding changes to Rules 144 and 145. As these rules are some of the “bread and butter” issues that we have been writing about in The Corporate Counsel for over 30 years, rest assured that we will be analyzing these proposals in upcoming issues…
[What’s the story with this dramatic chipmunk? Make sure you see the “director’s cut” version too…]
Outside Counsel Serving as In-House Counsel
In this podcast, Margaret Rosenfeld of Smith, Anderson explains what’s it’s like for someone at a law firm to serve as in-house counsel, including:
– Is it necessary for a public company to have an in-house lawyer with knowledge of the securities laws?
– If there is no in-house securities lawyer, who do you usually work with at a company?
– What do you do to ensure that a client’s legal or finance staff has sufficient knowledge to be able to interface appropriately on securities law issues?
– What risks does a company face that tries to handle its compliance, disclosure and corporate governance work internally alone (even if they have the internal expertise)?
– Is it cost-effective for a public company to have only outside securities counsel?
Survey Results: Board Evaluations
We have wrapped up our quick survey on board evaluations; below are the results:
1. When is your company’s board evaluation typically conducted:
– During the fiscal year in which board performance is evaluated – 52.5%
– Following the fiscal year, but before the proxy statement is filed – 39.0%
– Between the filing of the proxy statement and the annual meeting of shareholders – 6.8%
– We do not perform annual board evaluations – 1.7%
2. In conducting board evaluations, some boards use written questionnaires and some use oral interviews (or both). At our company, we use:
– Written questionnaires only – 60.0%
– Oral interviews only – 13.3%
– Both written questionnaires and oral interviews – 26.7%
3. If written questionnaires are used in the board evaluation process, are copies retained:
– Yes – 44.4%
– No – 55.6%
4. Who manages the board evaluation process:
– Non-executive board chair or lead director – 11.9%
– Chair of governance/nominating committee – 42.4%
– All members of the governance/nominating committee – 6.8%
– General counsel/other in-house counsel – 25.4%
– Outside counsel/consultant – 6.8%
– CEO – 0.0%
– Other – 6.8%
5. Is a written report produced based upon the results of the board evaluation:
– Yes – 67.8%
– No – 32.2%
6. How do the minutes reflect the board evaluation results:
– Brief summary of results, without including conclusions – 26.3%
– Brief summary of results, including conclusions – 43.9%
– In-depth details of the results – 0.0%
– Minutes do not reflect results – 29.8%
The Art of the Cross-Border Deal
We have posted the transcript from our recent DealLawyers.com webcast: “The Art of the Cross-Border Deal.”
Last year, I blogged about late SEC filings serving as bond defaults and, more specifically, a New York decision in BearingPoint. Now, a recent decision in Texas – Cyberonics, Inc. v. Wells Fargo – seems to have come to a contrary conclusion. Cyberonics recently filed a Form 8-K about this case – and both of these court opinions are posted in our “Late SEC Filings” Practice Area.
Here is some analysis about Cyberonics from Davis Polk: As a result of the large number of delayed SEC filings in the last several years due to option back-dating and other accounting problems, investors and companies have focused significant attention on whether a failure to file SEC reports will trigger a default under a company’s indenture that will permit acceleration of the Company’s debt. Last year, a New York state court, in a decision regarding BearingPoint, Inc., interpreted standard indenture language to require the timely filing of SEC reports and held that a failure to file was a default. Recently, a U.S. District Court in Texas held, contrary to the New York court, that similar language did not impose such an obligation.
In the BearingPoint case decided by the Supreme Court of New York, New York County, on September 18, 2006, the covenant in the indenture called for reports to be filed with the trustee by the company “15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC.” BearingPoint argued that, so long as the documents were not filed with the SEC, there was no obligation to provide them to the trustee and hence no default. However, the court ruled that the company’s failure to file reports with the trustee when such reports were required to be filed with the SEC constituted an event of default under the indenture.
The court also found that, aside from the language in the indenture itself, the language in Section 314(a) of the Trust Indenture Act “specifically obligates” an issuer of bonds to provide the trustee with “current filings,” meaning filings made in accordance with the time frames prescribed by the SEC. Section 314(a) of the TIA provides that an issuer must “file with the indenture trustee copies of the annual reports and of the information, documents, and other reports (or copies of such portion of any of the foregoing as the Commission may by rules and regulations prescribe), which such obligor is required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.”
Last week, the U.S. District Court for the Southern District of Texas, in litigation brought by the trustee for bonds issued by Cyberonics, Inc., took the opposite view of the BearingPoint court. First, the Cyberonics court held that the language of the reporting covenant itself (which was substantially identical to the language in the Bearingpoint indenture) clearly only required Cyberonics to file Exchange Act reports with the Trustee 15 days after actually filing them with the SEC (not 15 days after when they were due).
Second, the court rejected the trustee’s argument that Section 314(a) of the TIA required the reports to be filed with the trustee in accordance with the SEC’s deadlines. The Cyberonics court stated that Section 314(a)(1) is virtually identical to the reporting covenant itself but is “less stringent” because it does not specify a time frame for providing the reports to the Trustee.
The opinion is a significant victory for Cyberonics and for other issuers that are subject to indentures with similar reporting covenants (the opinion is largely irrelevant to issuers with reporting covenants that provide explicit SEC filing deadlines).
By interpreting the Cyberonics reporting covenant to require that Exchange Act reports be filed with the trustee only after being filed with the SEC and stating that Section 314(a) of the TIA does not provide a deadline for filing such reports with the SEC, the Cyberonics opinion provides issuers that are facing restatements or are otherwise delinquent in their SEC filings a bit more leverage against bondholders threatening default or acceleration as a result of such delinquency. The Cyberonics court emphasized, however, that during the period that Cyberonics was delinquent in filing its Form 10-K, Cyberonics kept “the trustee informed of company developments” by filing Form 8-Ks containing information about its operations.
Accordingly, we recommend that delinquent issuers continue to provide as much operating information to bondholders and the trustee as possible. Issuers should also take note that this opinion, like the BearingPoint opinion, is by a single trial court and is not binding on other courts.
[Cowabunga! These big wave videos get me antzy. 100 foot waves!]
Tellabs: Another Blow to Securities Fraud Lawsuits
Yesterday, the US Supreme Court – in Tellabs, Inc. v. Makor Issues & Rights, Ltd. – enforced a strict pleading standard for private securities actions. This case dealt with the issue of what a plaintiff is required to plead under the Private Securities Litigation Reform Act in order to establish a “strong inference” that the defendant acted with the requisite mental state. This issue has long split the lower courts.
In a 8-1 decision (Justice Stevens dissenting), the Court found that to qualify as a strong inference of scienter within the meaning of the PSLRA, the inference must be more than merely plausible or reasonable – it must be “cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” The Court found that when determining whether a Rule 10b-5 claim meets that requirement, a court must consider plausible opposing inferences – although the inference of scienter need not be irrefutable.
Yesterday’s WSJ’s Law Blog included some interesting commentary from participants in the case. This case comes on the heels of another important Supreme Court case dealing with private lawsuits: Credit Suisse Securities (USA) LLC v. Billing. A copy of the opinion – and a bunch of related memos – are posted in our “Securities Litigation” Practice Area.
Opening Up the Shelf: The SEC’s Proposals to Benefit Smaller Public Companies
From Dave: On Wednesday, the SEC published its proposed amendments to Forms S-3 and F-3, seeking to open up those forms for primary offerings (on a limited basis) by companies with less than $75 million of public float. Under the proposals, these smaller companies (as well as companies selling below-investment grade debt) could sell securities off the shelf in an amount up to 20% of their public float over any 12 calendar month period. The proposed limited primary offering provisions would be available to companies quoted on the OTCBB and Pink Sheets.
For the purposes of calculating whether an issuer could do a takedown under this proposed new instruction, you would compute 20% of the public float immediately prior to the intended sale, and compare that number to the aggregate amount (gross proceeds) of sales of securities in primary offerings under the S-3 instruction over the past 12 calendar months, including the amount of the intended sale. The SEC’s rationale for limiting sales to 20% of public float is to strike a balance between the issuers’ need to raise capital with the potential effect of primary offerings on the markets in relatively thinly-traded securities.
In the proposals, the SEC specifies that, for convertible securities, the amount that could be sold off the shelf would be based on the aggregate market value of the maximum amount of underlying securities, rather than the market value of the convertible securities themselves. The proposals would specifically prohibit otherwise S-3 eligible shell companies from utilizing the new shelf flexibility – until 12 calendar months after it ceases to be a shell company, the shell company has filed all of the Form 10-like information required and the shell company has been timely reporting for 12 calendar months.
One of the nice features in these proposals is that the 20% threshold is calculated by reference to public float just before the contemplated takedown (rather than, say, at the time of filing the registration statement), so the amount of securities that an issuer is able to sell increases if the issuer’s public float increases. Further, the 20% restriction on sales goes away if an issuer crosses the $75 million public float threshold and reaches the promised land of unlimited shelf offerings. When the Section 10(a)(3) update time next rolls around, the issuer would then have to re-evaluate its public float and, if the float is less than $75 million, the issuer would drop back into the 20%-limited shelf offering instruction.
While these proposals don’t go as far as the Advisory Committee on Smaller Public Companies had hoped, they do go a long way toward improving the capital formation picture for smaller companies. With the prospect of at-the-market direct public offerings done off the shelf, issuers may be less inclined to seek financing through the PIPEs and equity lines markets, where terms may not be as advantageous for the issuers.
Corp Fin No-Action Letter: A New 409A Option Repricing Twist
For those with 409A option repricing exchanges on the brain, I blogged about a new Corp Fin no-action letter yesterday on the DealLawyers.com Blog…
Yesterday, the SEC posted its management report guidance regarding Section 404 of Sarbanes-Oxley – as well as its adopting release regarding amended rules. The SEC also posted the proposing release regarding the definition of a “significant deficiency.”
The SEC also has posted the proposing release regarding the Smaller Company Capital-Raising Reform, which will be analyzed more in tomorrow’s blog.
The SEC “Really” Wants Comments
Last week, the SEC posted an atypical “Notice of Additional Solicitation of Comments” relating to the PCAOB’s AS #5, seeking comment on seven specific questions. This notice seeks “additional” comments in addition to those solicited by the SEC’s notice from the prior week. My guess is that the SEC might not get much in response – how many times have folks had to comment on internal controls over the past five years? There’s gotta be some burnout from comment writers…comments are due July 12th.
SEC Adopts Universal E-Proxy
Also at yesterday’s open Commission meeting, the SEC adopted “universal” notice-and-access model of proxy distribution (commonly known as “mandatory e-proxy”) as well as amendments to Rule 105 of Regulation M to prohibit abusive short selling in the context of public offerings (here is Reg M press release). From Paul Weiss, here are notes from that portion of the open meeting (note the reference to a California conflict, as raised in Monday’s blog and teased out in our Q&A Forum further, specifically #2881 and #2889).
Regarding mandatory e-proxy, here is the opening statement from the Corp Fin Staff. For universal e-proxy, the new requirement will be phased in over two years, with large accelerated filers starting in 2008 and smaller companies and mutual funds beginning in 2009.
You may recall the Staff has been avoiding using the term “mandatory” with this rulemaking because that term implies that a company would have to deliver electronically. This is not true, companies can still deliver in paper under universal e-proxy – the only thing mandatory about it really is that companies will have to post their proxy materials on their website. And most companies already do that. The other change wrought by universal e-proxy is that the proxy materials would have to include another half-page worth of content, the “Notice of Internet Availability of Proxy Materials.”
SEC Proposes Elimination of Reconciliation of US GAAP for Foreign Issuers
At yesterday’s open Commission meeting, the SEC proposed to eliminate the requirement for foreign issuers to reconcile their financial statements with US GAAP if they are prepared in accordance with International Financial Reporting Standards (IFRS). Here are some opening remarks from the Corp Fin Staff.
Under the proposal, a foreign private issuer that presents financial statements in accordance with IFRS as adopted by the International Accounting Standards Board (IASB) will no longer be required to present a reconciliation to US GAAP. Such a reconciliation is currently required for audited financial statements, and in particular in an annual report on Form 20-F. It is also currently required for interim financial statements used in a registered offering of securities when the audited financial statements are more than nine months old.
Here are notes from this portion of the open meeting, courtesy of Cleary Gottlieb:
– The proposal will only apply to IFRS as adopted by the IASB. IFRS have been adopted with variations in particular jurisdictions, and notably in the European Union. The SEC, however, would only eliminate reconciliation if the issuer uses IASB IFRS, and the auditor opines on conformity with IASB IFRS. The technical implications of this approach were the subject of extensive discussion at the meeting and will be a focus for comments, since European issuers are required to prepare financial statements in accordance with IFRS as approved by the European Union.
– The proposal will refer to the English-language version of IFRS. The staff explained that IFRS are published in many languages, but under the proposal an issuer and its auditors will be required to refer to the English-language version.
– The proposal will apply only to foreign private issuers. As previously announced, the SEC staff is working on a concept release concerning whether U.S. domestic issuers should also be permitted to report under IFRS rather than US GAAP. That release was reported to be forthcoming later this summer.
– The proposal would affect Form 20-F and several other SEC forms and rules. The staff announced that the proposal would amend Securities Act Rule 701, which permits companies to issue shares and stock options to employees in the United States without SEC registration. Rule 701 currently requires a company to reconcile its financial statements to U.S. GAAP when it sells more than $5 million of securities per year to employees.
– It is too early to say when the rule changes might be effective, but it would appear that the process is on track for them to apply to calendar 2008 reports. The commissioners mentioned the importance of the European Commission’s deadline to decide by January 1, 2009 whether to allow U.S. issuers to file US GAAP financial statements in Europe.
The SEC said that the proposing release will also seek comment on whether to shorten the deadline for a foreign private issuer to file its annual report on Form 20-F, which is currently six months from the end of the fiscal year. The SEC has considered changing this deadline in the past, and the time required for the US GAAP reconciliation has been one reason it has not done so.
The SEC staff announced at the meeting that it plans to create an area on its website where the public can readily locate the reports of foreign private issuers using IFRS and the comment letter correspondence on those reports.
The proposal will be open for comment for 75 days from the date of publication in the Federal Register.
With the five-year anniversary of the Sarbanes-Oxley Act arriving next month, Dave and I thought we would use that memorable event to kick off our weekly vidcast series entitled “The Sarbanes-Oxley Report,” featuring “Billy Broc” Oxley and Dave “The Animal” Sarbanes.
The first installment is entitled “Happy 5th Anniversary SOX! Sweet and Beautiful” – and is only 15 seconds long. Future installments will tackle the tough issues of the day – and we eventually hope to interview guests (basically anyone game to wear a wig).
Here is a Quick Survey to consider after you review the video. Feel free to e-mail us your comments or story ideas. I’ve already heard “it just looks like two guys and a six pack”…
More Thoughts on the SEC’s IBM Enforcement Action
A few weeks ago, I blogged about a SEC enforcement settlement regarding IBM’s violation of the Form 8-K reporting requirements (and Rule 12b-20’s requirement) to disclose additional material information so as to make required statements not misleading.
One member notes: Do you think this case may have a chilling effect on voluntary 8-K filings? [See this new quick survey on earnings releases and earnings calls.] It seems to me that since IBM’s April 5, 2005 call was publicly webcast, it was already Regulation FD compliant – and thus, there was no requirement for IBM to file the transcript and slides on an 8-K. Voluntarily filing the slides on an 8-K when they didn’t have to seems to be what got IBM into trouble.
Another member notes: My view is that this was a tenuous case by the SEC; IBM told people the ’04 impact of stock comp expense in the call/their filings, told people ’05 would be lower, without quantifying, but people got confused and thought a chart was ’05 – not ’04 – even though reading the 10-K would have made clear these were the same numbers as ’04 and IBM had said ’05 will be lower! The only thing I’d fault IBM for is not calling analysts to make clear they misunderstood, but I’m not sure that should be the basis for an SEC action.
Kicking the Earnings Guidance Habit?
A few days ago, a coalition issued a set of recommendations in these Aspen Principles, including one that companies cease providing quarterly earnings guidance or projections. And this Associated Press article from a while back describes how fewer companies are providing earnings guidance – and then, CFO.com ran this article describing how CFOs are eagerly awaiting the tipping point that will spell the death of earnings guidance altogether.
Quick Survey: Earnings Releases and Earnings Calls
We have posted a quick survey on earnings releases and earnings calls.
There are some interesting questions posed in this survey. For example, the last one asks whether companies are posting their earnings call archives on iTunes or in the form of a “podcast.” Some companies are doing this, such as Johnson & Johnson.
On CompensationStandards.com, tune in tomorrow for this webcast – “The Latest Compensation Disclosures: A Proxy Season Post-Mortem” – during which Dave Lynn, Mark Borges, Mike Andresino and Mike Kesner will analyze what was disclosed this proxy season. This 90-minute webcast is a “must” to get a handle on what the latest disclosure trends. Please print off these course materials before the webcast.
If you are not a member of CompensationStandards.com, take advantage of our half-price for the rest of 2007 no-risk trial today!
[Recommendation for SEC Staffers: Don’t include an opening joke in your published speech; I like the idea of a joke to start a speech, but I don’t see the need to include it in your permanent record. Paris Hilton simply doesn’t need the publicity. Then again, VC Strine mentioned Paris in his “must-read” Topps decision (a case I blogged about yesterday in the DealLawyers.com Blog. Crikey, now I have given Paris more publicity by mentioning her in this blog…]
Analyzing Mutual Fund Voting on CEO Pay
In this CompensationStandards.com podcast, Beth Young of The Corporate Library and Rich Ferlauto of AFSCME go over a new study – “Failed Fiduciaries: Mutual Fund Proxy Voting on CEO Compensation” – which was jointly conducted by AFSCME, The Corporate Library, Shareowner Education Group, including:
– Why have you done this study for two years?
– What were the major findings of the study?
– What were the biggest surprises of the findings?
– How hard is to find the N-PX filings for this study and decipher them?
– What do you think mutual funds that are “Pay Enablers” should do?
Underwriters Win Supreme Court “IPO Laddering” Antitrust Case
Yesterday, the US Supreme Court held – in Credit Suisse Securities (USA) LLC v. Billing, No. 05-1157 – that the securities laws preclude application of the antitrust laws. It establishes clearer guidelines for the application of the implied antitrust immunity doctrine in the securities field – and clarifies that private antitrust lawsuits should not be allowed to discourage IPO activity. We will be posting memos regarding this case in our “Underwriting Arrangements” Practice Area (and many blogs have already covered the decision, including: Scotus; Legal Pad; D&O Diary).
Below is a case summary from Mayer, Brown, Rowe & Maw (who represented the petitioners): Conduct is impliedly immune from suit under the antitrust laws if application of those laws would conflict with the operation of another statutory scheme. Yesterday the Supreme Court held, in the context of antitrust suits challenging underwriter conduct during IPOs, that there was a conflict between the federal securities laws and antitrust laws that prevented the antitrust suits from going forward.
Credit Suisse involved antitrust class actions in which investors brought suit against ten leading underwriters, alleging that they agreed to engage in anticompetitive tactics involving some 900 technology-related IPOs during the market “bubble” of the late 1990s. Plaintiffs claimed that the underwriters required investors, in order to obtain IPO allocations, to agree to purchase additional shares of the IPO stock in the aftermarket and to pay excessive commissions on other transactions.
The underwriters argued, and the district court held, that the antitrust claims were precluded by the securities laws. The Second Circuit reversed the dismissal of the plaintiffs’ complaints. The Court granted the underwriters’ petition for certiorari.
In a 7-1 decision authored by Justice Breyer, the Supreme Court reversed. The Court recognized that three “critical” factors for implied immunity were easily satisfied: the existence of SEC authority over the alleged IPO conduct, evidence that the “responsible regulatory entities exercise that authority,” and practices at issue that constitute “heartland securities activity.” The Court then held that there was a conflict between securities regulation and application of the antitrust laws that rises to the level of “incompatibility.”
Private antitrust litigation would require “dozens of different courts with different nonexpert judges and different nonexpert juries” to evaluate conduct in an area of the Nation’s economy in which the SEC has drawn fine and nuanced lines between activities that are essential to the operation of the capital markets and activities that are unlawful. The Court pointed out that if that were allowed to occur, courts and juries would inevitably reach decisions inconsistent with SEC regulation.
To avoid the risk of massive liability in a private antitrust treble damages suit, underwriters would have to “act in ways that will avoid not simply conduct that the securities law forbids . . . but also a wide range of joint conduct that the securities law permits or encourages.” That would interfere with “the effective functioning of capital markets” and “‘disrupt the full range of the [SEC’s] ability to exercise its regulatory authority.'” The Court rejected the Solicitor General’s suggestion that the case be remanded to determine whether alleged conduct prohibited by the SEC could be separated from conduct permitted by the SEC. The risk of inconsistent and incorrect results by judges and juries making such a determination would undermine the securities regulatory regime.
The holding in Credit Suisse is a resounding victory for the business community. It establishes clearer guidelines for the application of the implied antitrust immunity doctrine in the securities field, and clarifies that private antitrust lawsuits should not be allowed to discourage beneficial IPO activity.
Following up on last week’s 2-hour webcast on the new e-proxy rules (audio archive available now), you should consider a potential state law conflict that may exist for a large number of companies. Keith Bishop explains: “California Corporations Code Section 1501(a) requires that the board send an annual report to shareholders not later than 120 days after the close of the fiscal year.
There is an exception in the case of corporations with less than 100 shareholders of record that have expressly waived the requirement in the bylaws. Section 1501(a) applies not only to California corporations but also foreign corporations that either have their principal executive offices in California or customarily hold meetings of the board in California. The statute was amended in 2004 to permit sending of the report by “electronic transmission by the corporation.”
Although this would seem to have solved any problem, the term “electronic transmission by the corporation” is defined quite specifically in Corp. Code Sec. 20. One requirement of that section is that the recipient must provide an unrevoked consent. Moreover, if the communication is to an individual, the transmission must satisfy the requirements applicable to consumer consent under the federal E-SIGN Act.
Of course, California’s extension of the requirement to foreign corporations may raise questions about constitutionality ala Vantagepoint v. Examen. Note that the adopting release for the e-proxy rules states that the rules are not intended any applicable state law requirement for the delivery of a document related to a shareholder meeting or proxy solicitation.”
Learn more about California’s regulation of electronic communications by – and to – companies in Keith Bishop’s article posted in our “E-Proxy” Practice Area.
The Battle over the US Supreme Court’s Stoneridge (aka Charter) Case
Leading up to the Supreme Court’s “scheme” (aiding & abetting) Stoneridge (aka Charter Communications) case – which will be heard next term in the Fall – there have been a number of interesting developments, one of which is that the SEC apparently has “split” with the Republicans and voted to recommend filing an amicus brief in favor of investors. Although the SEC recommended that the Solicitor General file the brief – see this Bloomberg article – it appears that the recommendation was not been acted on by the Solicitor General.
In response, President Bush (and others in the government, like the Treasury Secretary) have interceded with the Department of Justice to prevent the filing of the SEC’s amicus brief. Remember that the SEC is an independent agency, whose primary mission is the protection of investors. The President’s move has been criticized by Rep. Frank and others, including the AFL-CIO.
The Nasdaq Speaks: Latest Developments and Interpretations
We have posted the transcript from the popular webcast: “The Nasdaq Speaks: Latest Developments and Interpretations.”
Early Bird Discount: Upcoming 3rd Edition of Romeo & Dye Section 16 Treatise
Peter Romeo and Alan Dye are hard at work updating their two-volume Section 16 Treatise. Order your set by July 15th to receive a pre-publication discount now – you can order online or by fax/mail with this order form. The Treatise will be completed and delivered to you in the Fall.
Earlier this week, SEC Chairman Cox gave an interview for this article where he talked briefly about the Staff’s executive compensation rules and more.
And on Monday’s “Nightline,” AFLAC’s CEO Dan Amos talked about why the company is the first one to adopt “say on pay” in the US, allowing his company’s shareholders to have a non-binding vote on the CEO’s pay package starting in 2009.
Finally, no surprise that a majority of Americans believe that CEOs are unethical and overpaid, as noted in a new survey discussed in this Bloomberg article. Here is an excerpt:
“More than six in 10 people surveyed say CEOs are ‘not too ethical’ or ‘not ethical at all,’ versus 33 percent who call them ‘mostly ethical.’ An overwhelming majority, more than eight in 10, say executives are paid too much. At the same time, Americans remain upbeat about the state of the
economy.”
By the way, the SEC will hold an open Commission meeting next Wednesday to consider adopting universal e-Proxy and propose rules that would permit foreign private issuers to file in the US using IFRS without having to provide a reconciliation to US GAAP.
[Congrats to Herb Scholl: Herb celebrated his retirement yesterday at the SEC after four decades of public service. Herb started working at the SEC in 1967. If you have ever had Edgar problems, you likely spoke to Herb – whose “claim to fame” is picking the name of “Edgar.” We will miss ya Herb!]
SEC Acts on Short Selling; Coming Soon? Demystifying Vote Lending Practices
This week, the SEC voted to adopt changes that will rein in naked short selling, which in turn should help prevent inappropriate vote lending. These changes are important; remember that one of the arguments made to slow down the SEC on a possible path towards shareholder access is that the entire voting system needs to be better understood – these changes should simplify the system (albeit this issue is just one of many issues that need demystifying). I tend to agree with this argument – the voting system is complex, with numerous moving parts and layers of intermediaries.
We may soon know more about the world of stock lending. Here is an excerpt from a recent Business Week article:
“Sources say authorities from the U.S. Attorney’s office are looking into allegations that some employees on the stock loan desks received kickbacks or other improper cash payments from so-called stock-loan finders, independent middlemen who sometimes track down shares for Wall Street firms to lend to investors. It is anticipated that the prosecutors will likely claim that some employees on the stock loan desk unnecessarily referred work to the finders, who did little to justify their fees and only added to the cost of arranging a stock loan.”
From Clearly Gottlieb, below are notes about what the SEC acted on during Wednesday’s open Commission meeting:
– Remove Rule 10a-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and amend Regulation SHO to provide that no tick test or other price test, including any price tests of any self-regulatory organization (“SRO”), shall apply to short sales of any securities;
– Amend Regulation SHO to eliminate the “grandfather provision” so that fail to deliver positions existing at the time a security became a “threshold security” would no longer be exempted from Regulation SHO’s close-out requirement;
– Amend Regulation SHO to extend the grace period before a broker-dealer is required to close out fail to deliver positions resulting from sales of threshold securities pursuant to Rule 144 under the Securities Act of 1933 (the “Securities Act”) to 35 settlement days (from the otherwise applicable settlement grace period of 13 days);
– Re-propose for comment the elimination of the options market maker exception to Regulation SHO’s close-out requirement, along with two alternatives providing for the close-out of options market makers’ fail to deliver positions in threshold securities within specified time frames; and
– Propose for comment amendments to Regulation SHO to require that broker-dealers marking a sale as “long” document the present location of the securities being sold.
Although the agenda for the Open Meeting also listed consideration of a pending proposal to amend Rule 105 of Regulation M (which applies to short sales in connection with public offerings), that topic was not addressed at the meeting and, we understand, will instead be discussed at the Commission’s next open meeting scheduled for June 20, 2007.
A new service from Avvo is creating a stir, a new site that rates and profiles lawyers. The site’s purpose is to allow consumers to easily obtain information about lawyers. The ratings are “unbiased,” culled from publicly available data. Here is the ratings formula (don’t look too hard as not much is revealed). As noted in this article, lawyers are not happy about their ratings or the process – and an examination of other reviews show that the primary beefs with Avvo are: numeric scoring, incorrect/missing data and poor functionality.
At first, I was miffed by my rating of 6.3 out of 10; after all, I graduated in ’88 and have learned a thing or two since then. But then I saw that some of my favorite lawyers got similar ratings – folks that I know are among the smartest securities lawyers out there. For example, Ron Mueller is only a 6.4 – and Amy Goodman a 6.0. Alan Dye and Mark Borges topped them with a 6.5. Hey, I’m proud of my 6.3! [Note the Avvo rating default falls somewhere between 6.1-6.5, until you input your credit card information to update your “profile” on the site.]
Full disclosure: Avvo’s founder, Mark Britton, is a dear friend of mine (but I have not discussed his site with him, it was in stealth mode until this week’s launch). Personally, I’ve gotten away from benchmarking against peers; I hear it’s a bad practice…
Some (Silly) Thoughts about Avvo’s Rating Service
Maybe my rating was so low because I got into a flap with the DC Bar and I’m “suspended” because I now refuse to pay dues to them? [My rating is higher now because I updated my profile yesterday.] Or maybe Avvo got wind of my intention to assume a new fabulous alter ego: “Captain XBRL.” Based on my distinguished awards (click “Recognition” tab), I feel entitled to an alter ego. Feel free to give me a whacky peer endorsement on my profile if you wish; the whackier, the better.
The funny thing about my Avvo profile is that I didn’t manipulate it to list me as a DUI lawyer in Seattle, it did that by itself. Genius! On the other hand, my parents tagged me at birth with the legal name of “Barak,” a story for another day.
Below are two of many comments posted on a WSJ Blog (these commentors appear to be imposters):
– “I only got a 6.5! I invented the poison pill!” – Comment by Marty Lipton – June 12, 2007 at 8:17 pm
– “Tell me about it Marty! I represented the VO of the United States, who shoulda been president, and all I got was a lousy 6.5!” – Comment by David Boies – June 12, 2007 at 8:19 pm
And here are some other thoughts I’ve heard:
– I think that a more fair way to rate us is by height (wasn’t that Chevy Chase’s methodology for measuring himself against other golfers?)
– Maybe ISS will develop a service to help lawyers increase their rating scores
– I guess I’ll continue to use Martindale, since they are kinder and gentler to me
[Note to Avvo Censors: Please don’t kill my profile; there’s no risk of me being hired because I won a “Tiny” Dancer award. My Avvo profile is the closest thing I will get to Facebook at my age.]
