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 the transcript from our recent webcast: “Understanding Overvoting and Other Tricky Voting Issues.” The webcast panelists went beyond the “big picture” – but this big picture is noteworthy, including:
– there are a lot more close votes than many of us realize (in other words, there’s a lot more overvoting than meets the eye)
– overvoting is on the rise
– over-voters are almost always short-termers and not even “owners” at all
– there are a number of unresolved legal issues and/or ambiguities
Bush ‘Astounded’ by CEO Pay, Urges Link to Performance
According to the following excerpt from a Boston Globe article from Tuesday, President Bush said he is “astounded” by the size of some executive pay packages and urged companies to tie salaries to performance, while stopping short of advocating government action.
“These compensation packages can get out of hand,” he said in an interview on CNBC. While incentives for performance are necessary, he said, companies should “make sure the incentive pay is rational.” The president, who didn’t mention any executives or companies by name, encouraged investors to pressure corporate boards on compensation. “I don’t think government should control salaries,” Bush said, “but I would hope shareholders would take a close look at some of these compensation packages.”
“Paulson Committee” May Soon Recommend Dramatic Limits on Securities Class Actions
The Boston Globe article then went on to note: “The president also said he and Treasury Secretary Henry Paulson are looking at ways the Sarbanes-Oxley Act can be “fine tuned” to make sure it’s not driving capital away from US public markets. Congress passed the legislation, which subjects companies to stricter auditing rules and stiffer penalties for financial crime, in 2002 after accounting frauds at Enron Corp. and WorldCom Inc. eroded investor confidence. ‘One way you become less competitive is through overregulation,’ Bush said. ‘Secretary Paulson and I have spent a lot of time talking about this issue.'”
Here is more on a related topic from the “Securities Litigation Watch Blog“: Since early September 2006, a committee composed of “independent … U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders” has fairly quietly been conducting a study into how to improve the competitiveness of the U.S. public capital markets. Next month this committee (The Committee on Capital Markets Regulation, also referred as the “Paulson Committee” because it will present its recommendations to US Treasury Secretary Henry Paulson), will issue an interim report with recommendations on several topics. Most notably for this blog, these topics include “Liability issues affecting public companies and gatekeepers (such as auditors and directors) with a focus on securities class action litigation….”
John Coffee, a professor at Columbia University School of Law, said at a recent ALI-ABA conference that he is an adviser to the panel and has suggested several reforms designed to mitigate the threat of securities litigation. According to the article, Coffee believes that in the “near future,” the Paulson Committee can be expected to make recommendations “to impose limits on securities class actions” and that the “SEC could take some action to change the role of [the] securities class action” in the next 6 months.
Among the possible changes that could result, Coffee said, were the eye-opening ideas that:
1. The SEC could “dis-imply” a private cause of action under Rule 10b-5 against corporations, leaving enforcement of that rule to the government, not private plaintiffs. The SEC might also “dis-imply” such a private cause of action with respect to the corporation only when the SEC has sued the corporation. Coffee states in the article that “That idea does have some support”; or
2. “Stock drop” cases could be moved out of the courts and into the arbitration arena.
The Paulson Committee’s recommendations are due out by the end of November 2006. If either of these ideas are among them, look for a barrage of deafeningly loud disapproval from the plaintiffs’ bar and consumer groups…. Stay tuned.
Yesterday, the NYSE filed this proposal with the SEC to amend Rule 452 and eliminate broker discretionary voting for director elections (as such elections would no longer be considered “routine”) for any shareholder meetings held on – or after – January 1, 2008. The proposal is subject to approval by the SEC.
The NYSE’s proposal dovetails with a set of recommendations from its Proxy Working Group issued in June. Surprisingly, the proposal notes that the NYSE didn’t receive any comments on the Proxy Working Group’s recommendations (although the NYSE Staff only had solicited comments back in June to share with the SEC, not the public). Interesting that the NYSE acted so soon, given that it was reported that this proposal would be postponed just a month ago.
As our perk survey continues, we have posted a new quick survey regarding meetings of the compensation committee and disclosure committee, including:
– In the wake of the SEC’s new compensation disclosure rules, our compensation committee has the following people attend their meetings
– Does someone from your independent auditor attend your disclosure committee meetings
– If someone from your independent auditor attends some or all of your disclosure committee meetings, does that person
– If someone from your independent auditor attends some or all of your disclosure committee meetings, what is the purpose for attendance
Please take a moment to participate in both these surveys.
NYSE’s Elimination of Annual Report Delivery: What to Do Now
As I blogged a few months back, the NYSE amended Section 203.01 of its Listed Company Manual regarding the provision of annual financial reports to shareholders. The amended rule is intended to allow listed companies to satisfy the NYSE’s annual financial statement distribution requirement by a website posting of a company’s Form 10-K (but this only benefits foreign private issuers until the SEC adopts e-Proxy and amends Rule 14a-3).
As a follow-up to its revised 203.01, the NYSE Staff recently issued this message:
“Companies have asked whether they can still satisfy the NYSE’s requirements by traditional physical delivery of the annual financial statements, without the necessity of making the website postings and simultaneously issuing a press release as provided for in the amended rule. The answer is yes.
As the NYSE stated in its rule filing with the SEC, the rule amendment was intended to “provide significant efficiencies to listed foreign private issuers exempt from the proxy rules under Exchange Act Rule 3a12-3.” The NYSE recognized in the filing that “the proposed rule changes will have minimal effect on domestic companies subject to the proxy rules”, and as noted above, the entire proposal was presented as a mechanism by which companies would be allowed to achieve compliance with NYSE requirements to provide annual financials to shareholders. Accordingly, the NYSE will deem companies that distribute annual financials to shareholders in compliance with the SEC’s proxy rules to be in compliance with the requirements of Section 203.01.”
1. Our company posts information on its corporate website and takes the position that this is sufficient to satisfy Reg FD:
– Yes, our company takes this position for anything posted on its corporate website – 3.8%
– It depends, our company takes this position for certain items posted on its corporate website (but not all) – 28.3%
– No, our company does not yet take this position – 67.9%
2. Our company has a written policy addressing Reg FD practices:
– Yes, and it is publicly available on our website – 5.6%
– Yes, but it is not publicly available on our website – 60.4%
– No, but we are in the process of drafting such a policy – 15.1%
– No, and we do not intend to adopt such a policy in the near future – 18.9%
3. Regarding reaffirmation of earning announcements, our company uses one of the following rules of thumb regarding private reaffirmations:
– We do not allow private reaffirmation – 60.8%
– Rule of thumb allowing for private reaffirmations of one week or less – 7.8%
– Rule of thumb allowing for private reaffirmations of one to two weeks – 13.7%
– Rule of thumb allowing for private reaffirmations of two to three weeks – 9.8%
– We permit private reaffirmations – but never use a rule of thumb, instead we require confirmation of no material change with CEO, GC, etc. – 7.8%
4. At our company, our CEO and other senior managers: (multiple answers apply, may total more than 100%):
– Are not permitted to meet privately with analysts – 6.7%
– Are only permitted to meet privately with analysts so long as someone else accompanies them (such as general counsel or IR officer) – 35.0%
– Are permitted to meet privately with analysts after briefing by IR officer, general counsel, etc. – 18.3%
– Are only permitted to meet privately with analysts during certain designated times – 18.3%
– Are not permitted to talk about certain topics – 33.3%
Regulation FD Dissemination: The Blogging of Material Information
On the heels of our survey on whether dissemination of material information through the Web satisfies a company’s Regulation FD obligations, Sun Microsystems CEO Jonathan Schwartz – who is one of those rare CEO bloggers – has asked the SEC to allow companies to disclose significant financial information through blogs. Mr. Schwartz’ letter to the SEC is copied in his blog.
Here are some thoughts from Stan Keller on this topic: “Absent definitive guidance from the SEC, I believe that if you want to disseminate information by means of your website to satisfy Regulation FD, you should file a Form 8-K (or issue a press release) saying you have done so. The 8-K should be descriptive enough so that investors will know the subject matter – like a release noticing an FD compliant call.”
SPACs: How to Use a Special-Purpose Acquisition Company
We have posted a transcript from our recent DealLawyers.com webcast: “SPACs: How to Use a Special-Purpose Acquisition Company.” And today, catch Jim Freund, Mediator and former Partner of Skadden Arps Slate, Meagher & Flom LLP – and one of the foremost M&A lawyers of any generation – on the DealLawyers.com webcast: “M&A Dispute Resolution: Getting Deal Lawyers Into the Game.”
Reading the latest details about how H-P’s hired gumshoes closely followed a WSJ reporter gave me the shivers. Folks, feel free to sift through my trash anytime – trust me, there’s nothing in there too interesting save maybe some old boxers (my wife is now applying a one-year rule).
Another member asked me recently: “On the issue of director confidentiality, because of some of the “defects” with regard to common law duties of confidentiality, we ask directors to sign a confidentiality agreement. We’ve purposely made it as benign as possible, under the theory that it supplements, rather than supplants, common law director duties and it is too difficult to negotiate with prospective directors over the terms of their confidentiality agreements. So far, we’ve had no issues with directors signing it. We’ve wondered about the types of things that would cause concern and the only context we could come up with is in the case of some sort of investigation—would a director be compelled by the terms of the agreement to not disclose something to a regulator?”
This question will be posed to the panel during our upcoming webcast, “The Art of Boardroom Etiquette and Confidentiality.” During a recent prep call I held with the panel, most agreed that entering into confidentiality agreements with directors is a bad idea – because directors already are bound by their fiduciary duties and thus there is no reason to bind them with contractual obligations. On the other hand, the use of agreements can be useful to remind directors that their obligations to the company are very real. This issue will be discussed during the webcast, but I’d be interested to hear your own thoughts on this practice.
A Record-Breaking IPO
Did you catch the numbers for Friday’s record-breaking IPO of Industrial & Commercial Bank of China? Not only did the IPO raise $21.9 billion, the total volume of orders was $430 billion! $350 billion of demand from global investors and $80 billion within China. Mind-boggling! And according to this WSJ article, demand for Chinese IPOs has been stimulated all year; last month, China Merchants Bank had $100 billion of demand for its $2.4 billion IPO.
With the ICBC deal under its belt, the Hong Kong Stock Exchange surpassed the London Stock Exchange for the highest aggregate volume of IPOs for 2007 so far (with the NYSE way back behind both). A global shift seems to have occurred…
First Shareholder Access Proposal Submitted for this Proxy Season
As Pat McGurn of ISS notes, investors are chanting “I want my MTV,” meaning majority threshold voting standards. He predicts that over 200 companies will receive shareholder proposals calling for majority vote standards to be adopted; over 150 were submitted this year and they garned average support levels of 47%. As noted below, and as will be discussed during our upcoming webcast: “Shareholder Access and By-Law Amendments: What to Expect Now” – the first proposals seeking shareholder access have been submitted (as well as the first letters to the SEC opposing access, see this Business Roundtable letter that I just posted in our “Shareholder Access” Practice Area).
From the ISS Corporate Governance Blog: “Four pension funds this week submitted a resolution that seeks to allow shareholder-nominated candidates to run for seats on Hewlett-Packard’s board of directors. This was the first proxy access proposal filed after a Sept. 5 federal court ruling that the Securities and Exchange Commission improperly allowed American International Group to omit a 2005 access resolution by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME).
The proposal at H-P was filed Sept. 25 by AFSCME, the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds, and the North Carolina Retirement Systems. The resolution asks the company to change its bylaws to allow any shareholder group holding 3 percent of the shares outstanding for at least two years to nominate one or more directors. Collectively, the pension funds own more than 30 million H-P shares with a market value of $675.9 million, according to their press release.
“Proxy access is critical to insuring shareholder rights,” New York State Comptroller Alan G. Hevesi said in a press release. “While we wait for the SEC to rule on this topic regarding all corporations, we are moving forward on a case-by-case basis to establish what should be a basic right for all shareholders.”
H-P had no immediate comment on the shareholder proposal. The Palo Alto, California-based computer manufacturer has been embroiled in a controversy over a boardroom leak investigation authorized by former Chairman Patricia Dunn. Dunn resigned Sept. 22, two weeks after the company acknowledged that it hired a private investigator to obtain the phone records of directors and journalists. The SEC, federal prosecutors, and California Attorney General Bill Lockyer are investigating the company’s handling of the leak probe, while U.S. lawmakers are holding hearings on the matter.
“The H-P board is completely dysfunctional and has been for a long time, which is an example of why shareholders have fought so hard for proxy access,” Richard Ferlauto, AFSCME’s director of pension investment policy, told Governance Weekly. “We seek to nominate directors at H-P who will make the board do its job better through an election process that is not stacked against investor interests.”
I know I can’t hide my grin today. Yesterday’s partial summary judgment from New York State Justice Ramos validates a lot of what our mission has been about on CompensationStandards.com over the past three years – at many companies, the process of setting pay levels has been broken for years. The fixes are relatively simple; the hard part is convincing CEOs and boards that the gravy train is over.
True, the NYSE is a New York non-profit and the circumstances are fairly unique – but the real message for me here is that the courts are “loaded for bear” when evaluating pay packages. Interestingly, Justice Ramos is presiding over the In re Viacom Inc. Shareholder Litigation case slated for trial in a few months.
Here is an excerpt from an article in today’s WSJ:
“Among Justice Ramos’s findings: that the NYSE board wasn’t made aware of a huge chunk of the retirement pay Mr. Grasso was due and that Mr. Grasso had a duty to disclose that pay to the board. The justice also had harsh words for the board.
“That a fiduciary of any institution, profit or not for profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care,” Justice Ramos wrote in a partial summary judgment, a pretrial ruling on certain aspects of a case. The case is particularly striking because the Big Board boasted an all-star roster of directors, including the chiefs of some of Wall Street’s largest financial companies, each of whom made tens of millions of dollars in annual pay.
Jim Barrall, head of the global executive-compensation and benefits practice at Latham & Watkins LLP in Los Angeles, described the findings as “stunning.” “I have never heard of a court decision finding a breach of fiduciary duty based on the failure to disclose all the numbers” about the size of a supplemental pension. At a minimum, Mr. Barrall suggested, corporate CEOs will have to make sure “the board understands the numbers and all the elements of the [leader’s] pay package and how they work together.” At many companies, the size of an executive’s supplemental pension swells along with the magnitude of bonuses and equity awards.”
Act Now: We continue to receive numerous requests for access to the video archive of last week’s “3rd Annual Executive Compensation Conference.” Apparently word is spreading – particularly about the need to take specific actions now – including implementing the three key analytic tools that need to be discussed in your upcoming CD&A.
You should watch the three separate panels on how to implement tally sheets, wealth accumulation, and internal pay equity – so that you will know how to disclose what your company is doing in these areas.
Market-Valued Employee Stock Options
In this podcast, Ben Stradley of Towers Perrin provides some insight into what the new financial instrument that mimics an employee stock option, the employee stock option appreciation right (also known as an “ESOAR”), including:
– What are ESOARs?
– Why would a company want to issue ESOARs?
– What are potential problems?
– What were the results of the Zions’ auction?
– What issues should companies consider regarding ESOARs?
– Are there other market-based approaches companies could consider?
At Last, There Goes My Innocence…
…guess I’m finally a grown-up now. The latest report from The Corporate Library on backdated options claims that director interlocks played a big role in the backdating scandal. Here is an excerpt from their press release:
“A new study by The Corporate Library of the 120 companies now implicated in the options backdating scandal finds new evidence that the practice of backdating stock options may have been spread by word of mouth through the network of directors sitting on the boards of more than one company. Director interlocking relationships now appear to be the most important governance characteristic and indicator of backdating problems.
The number of companies implicated in the options backdating scandal has more than doubled since The Corporate Library’s first report on this subject, rising from 51 at the end of June 2006 to 120 companies at the end of September 2006. At the same time, the number of companies with directors sitting on other companies implicated in the scandal has risen almost fivefold, from 11 to 51. The most important relationships involve several directors who served on boards prior to 2002, when most backdating activity occurred, and continue to serve now, including Scott Kriens and Stratton Sclavos. Kriens and Sclavos, for example, are responsible for the central position of Juniper Networks within the network of linked companies, and between them sit on four other implicated boards.
In analyzing the director network, the authors of the report also found a wealth of intertwined relationships involving the Silicon Valley law firm of Wilson Sonsini Goodrich & Rosati. A number of the firm’s senior partners, including Larry Sonsini, played multiple roles at many companies implicated in the backdating stock option scandal.”
Yesterday, the SEC adopted long-awaited amendments to the best-price rule, Rule 14d-10, which brings the M&A world back to “normal” in the wake of conflicting decisions among the US Circuit Courts in this area during the past few years. Here is an opening statement from Corp Fin – and here is an opening statement from Chairman Cox.
As expected, the amendments:
– clarify that the rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer
– clearly exclude compensation arrangements, so long as they meet certain requirements
– provide a safe harbor for compensation arrangements that are approved by independent directors
– include an exemption that contains specific substantive standards that must be satisfied
Join two of the SEC Staffers who drafted the rule amendments – as well as two former SEC Staffers who served in Corp Fin’s Office of Mergers & Acquisitions – in this newly announced DealLawyers.com webcast: “The Evolving ‘Best Price’ Rule.”
Good News for Section16.net Members!
For the many of you that are members of Section16.net, we have just tweaked our database so that you can use your ID and password for Section16.net to access the thousands of pages of content on Section16Treatise.net.
We have made this switch now, since the two sites will be combined next year – creating an even more comprehensive resource for all your Section 16 needs. Try a no-risk trial for 2007 if you are not yet a member (and get the rest of 2006 for free) – or if you already are a member, renew your membership today (as all memberships are on a calendar-year basis).
Watch Out for those “Stealth” Restatements II
A few members reacted to my blog on “stealth” restatements. Here is one of those reactions: “I saw the WSJ article on “stealth restatements” and pulled the Form 8-Ks referenced in the article. My take on it is that the SEC Staff, through the comment letter process, is “informally” changing its policy on when an Item 4.02 Form 8-K is required.
The crux of an Item 4.02 filing is that a company’s Board, or the chief accounting officer, or the company’s external auditor concludes that previously issued financial statements “should no longer be relied upon because of an error in such financial statements” as addressed in APB No. 20. There are lots of situations – including, it would appear, the Sun Microsystems and Inter-Tel restatements – where a company restates its financial statements to correct and error, but the restatement does not cause the company or the external auditors to conclude that the prior financial statements cannot be relied upon. My reading of Item 4.02 is that a Form 8-K would not be required in those instances. By their comment letters, the SEC Staff seems to be expanding Item 4.02 to reach restatements where that critical conclusion has not been made. I don’t see any basis for that in the instructions to Item 4.02 or in the FAQ’s. Am I missing something in this analysis?”
Feel free to weigh in with your own analysis or experiences on this one by shooting me an email.
Yesterday, the PCAOB Staff issued a set of 22 FAQs entitled “Auditing the Fair Value of Share Options Granted to Employees.” The FAQs address auditing the fair value measurements associated with determining compensation cost. It highlights risk factors that auditors should be aware of and addresses the auditor’s consideration of the process for developing a fair value estimate, significant assumptions used in options pricing models, and the role of specialists in fair value measurements.
M&A Dispute Resolution: Getting Deal Lawyers Into the Game
Next Tuesday, catch Jim Freund, Mediator and former Partner of Skadden Arps Slate, Meagher & Flom LLP – and one of the foremost M&A lawyers of any generation – in the DealLawyers.com webcast: “M&A Dispute Resolution: Getting Deal Lawyers Into the Game.” Settling the all-too-frequent post-closing disputes spawned by M&A deals is too important to be left solely to the litigators! Transactional lawyers should step up to the plate to help achieve commercially-sound solutions through negotiation or mediation.
Among other topics, Jim will cover:
– Why is resolving disputes such tough work
– How deal lawyers can add real value for their clients in the mediation process
– What are some common pitfalls in M&A disputes – and how to overcome them
– What are the keys to persuading a mediator as to the merits of your cause
And now you can catch this program at no cost if you take advantage of our no-risk trial for 2007 (and get access to DealLawyers.com for the rest of 2006 for free).
Sovereign Bancorp: “I Pity the Fools”
Last week, Sovereign Bancorp “fired” its CEO. You may recall that Sovereign Bancorp was last year’s “governance posterchild of the year” in my humble opinion. Of course, I use the term “fired” loosely since the company’s board didn’t remove the CEO “for cause” – why do that when you can pay the guy a bushel of the shareholder’s money on the way out the door? I pity Sovereign Bancorp’s shareholders.
“By all appearances, Jay S. Sidhu was forced out in the past week as chairman and chief executive of Sovereign Bancorp Inc. Under his employment agreement, that could allow him to walk away with a severance package valued at tens of millions of dollars.
Several board members at the Philadelphia bank had been pressing for Mr. Sidhu’s dismissal due to concerns about the company’s earnings outlook, its stock performance – it trades at a discount to peers – and about deals he has engineered. But there is a catch: Sovereign’s official explanation for his departure didn’t match what was happening behind the scenes. The company said Wednesday that Mr. Sidhu “resigned and retired…for family health related reasons.”
If he jumped from the plane on his own volition as Sovereign says, compensation experts argue, Mr. Sidhu isn’t entitled to the golden parachute he appears to have gotten.
Nobody expected this to keep Mr. Sidhu from securing a rich goodbye package. His contract doesn’t include poor performance as a reason to deny him severance, so pay experts say he deserves the money if he was effectively fired. And Sovereign is hardly the first company to gloss over the reasons for an executive departure. But critics in the corporate-governance community say the company’s story should match its actions.
“It isn’t acceptable if he is being terminated to say that he is leaving voluntarily, nor is it acceptable for the company to pay him severance if he is leaving without good reason,” says Paul Hodgson of research firm Corporate Library. A Sovereign spokesman declined to comment. Mr. Sidhu didn’t respond to requests for comment.
Late Friday, Sovereign disclosed in a regulatory filing that Mr. Sidhu would, in fact, collect more than $40 million in payments stemming from his departure. And the company acknowledged that “the resignation and retirement came in the face of a threatened termination by the company.”
As the mainstream media drools over the imminent departure of UnitedHealth’s CEO for option backdating, I was stunned to see that one of the company’s directors, William Spears, resigned in the wake of revelations that Mr. Spears was handling some of Dr. McGuire’s financial investments at the same time he was presiding over the company’s compensation committee. The details of the financial entanglements are laid bare in this 14-page Special Committee Report prepared by Wilmer Hale (but this relationship was not disclosed in the company’s latest proxy statement).
One area where the plaintiffs’ bar continues to press in lawsuits is the lack of director independence. For example, the In re Viacom Inc. Shareholder Litigation case is scheduled to go to trial in January after New York Supreme Court Justice Charles Ramos denied Viacom’s motion to dismiss this past June. As you might recall from an earlier blog, this case is different than Disney because a finding that the board wasn’t independent likely would change the standard against which to measure the board’s conduct – from a “business judgment” standard to the more challenging “entire fairness” standard. An entire fairness standard would put the onus on Viacom’s directors to prove that they acted fairly in determining the amount of compensation.
And even if directors are not conflicted, they might be treated as a conflicted persons if they are “dominated” by someone who has a conflict, including an executive or another director. Based on recent caselaw, a court would probably investigate the extent to which other directors were dominated by Mr. Spears or Dr. McGuire – and perhaps apply a “director-by-director” analysis as done in Emerging Communications and Emerald Partners.
What about personal liability for those directors who went along with Mr. Spears, as head of the compensation committee? Personal liability requires greater culpability than a mere lack of independence. However, there are claims that could be brought (for example, corporate waste) that could give rise to personal liability – at which point, tricky indemnification and D&O insurance issues are raised. And remember that other issues are raised by lack of a compensation committee’s independence, such as the loss of the exemption under Section 16(b) – see our “Director Independence” Practice Area for more analysis.
Yesterday, the UnitedHealth board announced this series of actions it intends to take (including a pat on the rump for Director Spears). After the plaintiffs’ bar is through with them, me thinks this list will grow a wee bit longer…
A Conference Recap
I was pleased to be quoted in Sunday’s NY Times article by Gretchen Morgenson (who also cited both last week’s “3rd Annual Executive Compensation Conference” and our 2nd Annual Conference as well), but I didn’t agree with the characterization of Fred Cook as someone who has caused many of the compensation problems that we now face. At a time when quite a few compensation consultants are still afraid to step up to the plate and provide responsible advice to their clients, Fred Cook remains a bright beacon who is not afraid to say what he thinks is right, regardless of what those that defend the status quo might think.
For example, Fred has spoken about internal pay equity as an alternative benchmark at our past two conferences. Very few consultants are willing to speak on the topic, perhaps because they view it as an admission that their long-standing reliance on peer benchmarking was in error.
I was happy to speak to a few consultants in our audience who said that they were “coming around” and now recognize the utility of internal pay equity. I wouldn’t be surprised for internal pay equity to become as ubiquitous as tally sheets over the next few years.
Mourning for Larry the Mailroom Guy
The SEC is mourning the loss of one of the true great characters on the Staff. I had countless conversations with Larry during my two tenures at the SEC and he always brightened my day. Below is a note from Chairman Cox to the Staff:
“This is a grim day for the SEC, because we are mourning the loss of one of our community. Larry Levine, whose passing late Tuesday has saddened all of us, in many ways exemplified what is best about our organization.
At death we remember and celebrate life — and there was much about Larry’s life worthy of remembrance and celebration.
Despite being born with a developmental disability and being legally blind as an adult, Larry earned an AA degree at Montgomery College. He then made a career here at the SEC, for 28 years. Larry didn’t just put in his time here, but reveled in the fact that he was part of our mission. Like all of us, he was honored to wear the SEC badge. At times when the agency had early departure — whether because of inclement weather or building malfunction — Larry wouldn’t leave. He would just say to a supervisor or colleague, “brother, I have work to get out.”
Larry was a dedicated worker who never lost sight of how important his task was. In nearly three decades his sense of duty never wavered. His excitement carried over to his personal life — including a love of horse racing, and the Dallas Cowboys. He loved his family, and was a loyal son to his parents Frances and Albert, a dedicated brother to sister Cindy and brother Rusty, and an adoring uncle to his niece.
Larry overcame the odds and served his country, and America’s investors, with distinction. His example of transcending difficulty and meeting life’s challenges with enthusiasm will remain an example to us all.”
Back on September 30th, California Governor Schwarzenegger did signed SB 1207 into law (a topic that has been the subject of several blogs). Here are a few thoughts from Keith Bishop:
1. The amendments allows a “domestic corporation” that is also a “listed corporation” to amend either its articles of incorporation or bylaws.
2. Not every publicly-traded corporation is a “listed corporation”. A “listed corporation” is defined as a corporation with outstanding “shares” listed on the NYSE or the AMEX or a corporation with outstanding “securities” listed on the National Market System of the Nasdaq Stock Market (or any successor to that entity). Cal. Corp. Code Section 301.5(d).
Note that California has not yet amended Section 301.5(d) to take into account the recent change in status and name of the Nasdaq markets. Publicly traded companies with only debt securities listed on the NYSE or AMEX, shares traded on the OTC Bulletin Board or the Pink Sheets will not be affected by the new law.
3. The new law doesn’t require a majority vote – it requires “approval of the shareholders” which is defined a little bit differently. Under California law, “approval of the shareholders” requires the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present. This requirement is similar to a majority of the votes cast (i.e., abstentions don’t have a negative effect).
However, California adds an additional requirement that the shares voting affirmatively must also constitute at least a majority of the required quorum. For example, assume that a corporation has 100 shares issued and outstanding and 51 shares are present at a meeting. If 25 votes are cast FOR, 24 votes are cast against and 2 votes are abstention, the first part of the test will be met. 25 votes represents a majority of the shares represented and voting (25/25+24 = 51%). However, the second part of the California test will not be met. The required quorum is 51 and 26 votes would be required to constitute at least a majority of the required quorum.
4. The new law does not limit the right of the board appoint a candidate who fails be reelected to special circumstances. The bill simply provides that a vacancy may be filled in accordance with existing Section 305 of the Corporations Code. That section generally allows vacancies (other than by removal) to be filled by “approval of board” or if the number of directors then in office are less than a quorum by (i) the unanimous written consent of the directors then in office; or (ii) the affirmative vote of a majority of the directors then in office.
This rule may be abrogated by the articles or bylaws. Thus, it is important to check them. If the vacancy is the result of a removal, the directors may not fill a vacancy unless the articles or a bylaw adopted by the shareholders so provides. Although the failure to be reelected has the effect of a removal, I don’t believe that a vacancy occurring by reason of a failure to be reelected should be treated as a removal for purposes of Section 305. I hope that this and other drafting problems with the new law will be corrected in the future.
5. As a result of the enactment of SB 1207, California domestic corporations that are listed corporations must now decide whether to retain (or even re-adopt) cumulative voting (in which case the provisions of the new law won’t be available). If they elect to opt out of cumulative voting or have already done so, the board (unless the power to amend or adopt bylaws has been restricted or eliminated) or the shareholders could choose to adopt the new voting procedures.
Wave of Class Actions Filed Against Sponsors of 401(k) Plans
From a recent Gibson Dunn memo (which is included in our “ERISA Securities Litigation” Practice Area): “A wave of putative class action lawsuits were filed last week against sponsors of 401(k) plans and other defined contribution retirement plans. The lawsuits were filed in federal courts throughout the country against some of the largest and best known companies in the U.S. The lawsuits, alleging violations of the Employee Retirement Income Security Act of 1974 (“ERISA”), target the fee structures found in some plans that offer mutual fund investments as well as plans that permit participants to invest in a fund comprised solely of the sponsor’s stock. Several observers have predicted that additional similar lawsuits will be filed in the future against other companies and their 401(k) plans or other defined contribution retirement plans.
While each lawsuit is founded on the specific terms of the plans in question, they all have several common characteristics:
1. The named defendants are the corporate plan sponsors, the administrative committees for each plan, and, in some instances, the individual members of the board of directors for the corporate sponsor.
2. Each lawsuit asserts that the compensation paid to investment managers and other service providers is excessive, thereby violating the prohibited transaction rules of ERISA. The complaints allege that, in addition to “hard dollar” forms of compensation, many of the investment managers and/or administrative service providers are compensated by undisclosed revenue sharing for having steered plan investments to a particular investment vehicle. These allegations echo complaints made by investors and others in the past few years against brokerages and mutual funds for not disclosing certain fees and compensation paid to the broker for making the fund available to investors.
3. Several of the plans in question are ERISA § 404(c) plans that permit participants to select the investment fund in which their account balances will be invested. The class action suits allege that the failure to disclose the true compensation arrangement for service providers constitutes a violation of the disclosure rules under ERISA.
4. Some of the lawsuits challenge the fees charged participants in connection with funds in which the participant can invest in the sponsor’s stock.
On Wednesday, the SEC announced that it will take action on a number of items, including:
– adopting changes to the tender offer best price rule next Wednesday, October 18th
– delaying a proposal to amend Rule 14a-8 from next Wednesday to December 13th (remember this is the AFSCME case response from the SEC)
– proposing guidance on internal controls on December 13th (part of the SEC’s recommended package of 404 relief announced by the SEC a few months ago)
– adopting rules for foreign private issuer deregistration on December 13th
– adopting rules for e-Proxy (i.e., Internet proxy delivery) on December 13th
Based on the SEC’s notice about next week’s “best-price” rule consideration, it appears that the SEC will apply the amendments to both issuer and third-party tender offers and will clarify that the best-price rule (i) does not apply to securities that are not tendered in a tender offer; and (ii) does not apply to consideration paid according to employment compensation, severance or other employee benefit arrangements with securityholders. It does not appear that the amendments will provide similar exemptive relief or a safe harbor with respect to other agreements with securityholders (e.g., commercial arrangements) or that they will include a de minimus exception.
And as the shareholder proposal rule amendment quickly became a political issue – and potentially a 3-2 vote along partisan lines if shareholder access was not included as part of the SEC’s proposal – my guess is that the delay might have been to move it to a post-election date…
SEC Issues NYSE’s Proposal to Eliminate Treasury Stock Exception
Last week, the SEC issued the NYSE’s proposal to eliminate the treasury stock exception from the requirements for shareholder approval under Section 312.03. Under current rules, listed companies have to calculate the number of shares issued to determine whether the shareholder approval requirement is triggered. This calculation may be affected if the company reissues treasury stock. Historically, this rule has not applied to any issuance of treasury shares. Under the NYSE’s proposal, listed companies would be required to include treasury stock in that calculation. There is a 21-day comment period for the proposal.
If adopted as proposed, the NYSE’s proposal would also:
– require listed companies to notify the NYSE when they issue treasury stock
– clarify that the shareholder approval requirement for related-party issuances to a “series of related transactions”
– clarify that “market value” means the official closing price as reported to the Consolidated Tape immediately before entering into a binding agreement selling securities
The NYSE also put companies on notice that any agreements entered into after 5 business days from the date the SEC publishes notice of this proposal in the Federal Register will not be grandfathered. Not much of a transition period and something to be aware of as this window period will close shortly.
You Ain’t Really Done Vegas…
…until you can say you have done time in her emergency rooms. I spent Wednesday night in a Vegas emergency room. Food poisoning or food allegery. Started puking at noon and by 9 pm, I thought I was gonna die. Couldn’t breathe nor swallow.
The ER was a trip; no proof of insurance required – so standing room only and folks appeared to be near death left and right. So my case was just like anyone else and the wait was loooong. So now I can say I have really done Vegas! I’m so happy to be alive!
