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."
Unfortunately, I couldn’t get that American Idol song out of my head on Friday – you know, the one that is now omnipresent on the radio: “so you had a bad day…” (not that I ever would admit to watching American Idol). Anyways, some SEC Staffers were probably humming that tune Friday after the US Court of Appeals for the District of Columbia Circuit vacated the SEC’s controversial rule – in Goldstein v. SEC – that had required most hedge fund advisers to register with the SEC. We have posted a copy of the court opinion under “Latest Developments” of our home page.
Based on this ambiguous statement from SEC Chairman Cox, it looks like the SEC will take some time to mull over its choices about how to best regulate hedge funds going forward: either appeal to the full Court of Appeals or the US Supreme Court; come back with a new proposal to regulate hedge funds that would satisfy the Court’s concerns (or lobby Congress to amend the Advisers Act); or do nothing.
Interesting, the Court’s decision hinged on fairly technical grounds, as it found that the SEC rules – which just became effective in February – treated investors in hedge funds as “clients” of the advisor, instead of treating each hedge fund as a single “client” for purposes of the statutory exemption from registration for advisors which advise fewer than 15 clients and meet certain other conditions. The last sentence of the decision is telling for the SEC: “This is an arbitrary rule.”
The SEC’s rulemaking process has been taking it on the chin lately, with the SEC recently submitting a status report to the same court regarding its mutual funds/director independence rules after the court forced the SEC to partially re-do that rulemaking. And other challenges impacting the SEC are looming, such as the challenge to the constitutionality of the PCAOB.
The SEC’s Bad Day: Part II
On Friday, the SEC also had to stare down this NY Times article, which alleges that a SEC lawyer involved in an investigation of insider trading allegations at a prominent hedge fund was fired because he wanted to subpoena a bigwig at one of Wall Street’s firms. This article was at the top of the NY Time’s front page – page A1 – even though the SEC’s inspector general said in an April report to Congress that his office had reviewed the SEC lawyer’s claims and “failed to substantiate the allegations”! See this Washington Post article for that seemingly important IG tidbit.
So until we know the full story here, I will take the NY Times article with more than a grain of salt. Let me explain: it is very hard to get fired from the government. That’s why people go work for the government; it has great job security. Once you are past the one-year probationary period, you have to get caught doing drugs at your desk or having inappropriate relations in the stairwell to get fired (other than high level Staffers who work much more “at will”).
In fact, in my combined 5+ years at the SEC, I can only think of two Staffers who were fired – and both of them were fired right before the end of their probationary period – same as the guy who served as the basis for the NY Times article. So that is traditionally how the SEC’s probationary period works: someone who performs poorly or who doesn’t fit in is shown the door right before they essentially become eligible to be a “lifer.”
Now, this guy’s beef really might be legitimate – and it’s clearly odd that he got a merit pay increase before he was let go – but my gut told me there might be other circumstances at play when I got to the end of the NY Times’ lengthy article, which states:
“Before joining the S.E.C., Mr. Aguirre had a reputation as an innovative plaintiffs’ lawyer in Southern California, representing victims of shoddy home construction. A 1992 article in California Lawyer magazine said he used “aggressive — some say temperamental” courtroom tactics to win several big cases.”
Of course, that blurb sounds like the SEC should have known that it hired itself some trouble, as “aggresive” tactics don’t mix well within the mold of a government agency. Then again, the SEC might have known that – as it looks like it dragged its feet hiring this guy, as the end of the article notes:
“Mr. Aguirre had been at odds from time to time with the S.E.C. When there was a delay in his hiring, he suspected that his age — he was then in his 60’s — was the reason and he filed an administrative complaint with the Equal Employment Opportunity Commission.”
Cross-Border Acquisitions: A Buyer’s Perspective
The second installment of DealLawyers.com’s M&A Boot Camp for this summer is now available: “Cross-Border Acquisitions: A Buyer’s Perspective.” Join Elizabeth (“Libby”) Kitslaar and Phil Stamatakos of Jones Day as they walk us through the special issues that you will face in a cross-border deal.
If you are not a DealLawyers.com member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!
Way back on April 20th, the Boston Globe ran an article about a shareholder activist who was arrested at State Street’s annual meeting because of the questions he was asking. Not much attention was paid to it at the time, because in the few instances where a shareholder has been arrested at a shareholders’ meeting, the company doesn’t normally doesn’t press charges in the end.
Incredulously, I am told that State Street is pressing charges here – a clear message that shareholder input is not welcome. Although the excerpt from the Boston Globe article below highlights the fact that David Smith might have an axe to grind with State Street, it is absurd that a company would bring criminal charges for “trespass” against a shareholder who had a legitimate right to attend a meeting:
“David Smith has been many things at State Street over the past decade. He has been an employee, a corporate critic, and a shareholder activist. Yesterday, he was under arrest.
Smith’s beefs with State Street go back to 1998, when he was fired. Smith said he was canned after complaining that a colleague revealed he was gay. He launched a public relations war that featured a website posting documents embarrassing to State Street and has dogged the company ever since.
Smith and his partner, Patrick Jorgstad, took front-row seats at the company’s annual meeting yesterday. They rose to ask more than a dozen pointed questions, most of which seemed designed to bait the chief executive.
As the questions went on, comments from both sides grew increasingly snarky. Eventually, Smith dared Logue: ”Arrest me!” He complied.
Officers in the audience arrested Smith without incident and charged him with trespassing, a Boston police spokeswoman said. Stockholders applauded as he was led out.
Smith and Jorgstad have used many bombastic tactics with State Street; they also have advanced important shareholder interests. Jorgstad’s proposal recommending the elimination of State Street’s poison-pill defense was overwhelmingly approved by shareholders yesterday.”
Meeting Notes: The SEC’s Chief of M&A Speaks
Here is a recent blog from the “DealLawyers.com Blog”: Last Friday, Brian Breheny, Chief of Corp Fin’s Office of Mergers and Acquisitions was the guest speaker at a meeting of the Association of the Bar of the City of New York Special Committee on Mergers, Acquisitions and Corporate Control Contests. Brian discussed a number of topics of interest; following is a brief summary of those issues (as is always the case, Brian noted that his views were his own views and not the views of the Commission or his fellow staff members):
1. SEC proposed amendments to the tender offer best-price rule:
– the amendments to the tender offer best-price rule remain the office’s top priority;
– it is unclear as to when the Commission may adopt the final rule amendments, although Brian thought it was possible that the amendments might be adopted this year;
– the staff is in the process of considering the comments received to the proposed amendments;
– Brian noted that it is likely that changes will be made before adoption to address some of the comments;
– he noted that expanding the proposed compensation exemption and compensation committee safe harbor to issuer tender offers was uniformly recommended and that he thought those changes would be consistent with the Commission’s intention for proposing the amendments;
– he also noted, however, that certain of the other proposed changes, such as providing a carve out from the best-price rule for commercial arrangements or a de minimus ownership exemption, were given serious consideration during the proposing stage; and
– finally, Brian noted that he was keenly aware of the concerns raised by commentators about the need for the changes to result in an effective exemption and safe harbor.
2. Study of the cross-border tender offer rules:
– the office of mergers and acquisition continues to study whether recommendations should be made to the Commission to change certain of the cross-border tender offer rules;
– the data provided by bidders to date is that certain of the rules, such as the 30-day look back to determine share ownership levels, are difficult to comply with; and
– the office and, for purposes of Rule 14e-5, the staff of the Division of Market Regulation, is considering whether certain consistent relief granted since the adoption of the cross-border rules could be handled in a global exemptive order.
3. NASD proposed fairness opinion disclosure and policy/procedure rules:
– the staff of the office of mergers and acquisitions and the Division of Market Regulation is considering the comments received by the Commission to the NASD’s proposed Rule 2290;
– the comment period closed in May 2006;
– 7 comments were received;
– certain language changes to the proposed rules may be necessary to address potential inconsistencies in the proposed language of the rule; and
– the ABCNY Committee reiterated concerns regarding requirement for policy/procedure re: differential compensation to officers, directors and other employees.
– the staff continues to view compliance with the beneficial ownership reporting rules as a high priority;
– the staff has heard concerns that hedge funds and/or others may knowingly be crossing the line and acting in concert pursuant to an agreement or arrangement without filing a Schedule 13D to reflect the Group’s beneficial ownership and plans, etc.; and
– the staff will aggressively pursue willful violations of Section 13(d) if it becomes a aware of such conduct.
5. Fairness opinion disclosure:
– there may be a need to revisit the disclosure practices related to fairness opinions;
– the ABCNY Committee questioned the staff policy related to including a risk factor regarding contingent financial advisory fees and requesting (in a non Rule 13e-3 transaction) that filers provide the staff on a supplemental basis, copies of board materials not referenced in background section of the proxy/registration statement so that the staff could consider the need to refer to just board materials; and
– Brian and the Committee agreed to maintain a dialogue about these issues.
The articles just keep coming as the media is loving this backdating scandal. And it looks like the plaintiff’s bar is gonna love it too according to this Red Herring article, which quotes a lawyer from Lerach’s firm observing: “He sees the damages to investors reaching billions of dollars and plans to press for the replacement of board directors who allowed the backdating of options to go on.” The D&O Diary Blog contains some good “food for thought” on possible statutes of limitations defenses.
And according to this article and this article (and this WSJ article from Tuesday), D&O insurers might refuse to renew policies with implicated companies.
In addition, members of Congress are calling for the SEC and the DOJ to step up with their enforcement actions on this issue – see this article – which is now approaching 50 companies under investigation. As the accounting industry begins to come under fire, the SEC’s acting Chief Accountant, Scott Taub stated last week that the PCAOB needs to give guidance to auditors on when a grant of options may be considered suspicious.
And the Council of Institutional Investors has sent this letter to 1500 companies, asking them to disclose whether they are under investigation (and the AFL-CIO and CalPERS are doing something similar – here is a copy of CalPERS’ letter, which was sent to 24 companies).
Coming soon! We provide more guidance on the issues implicated by options misdating in the May-June issue of The Corporate Counsel, which just went to the printers (this nicely complements what we wrote in the March-April issue) – and we continue to upload articles and research reports about option timing unto our “Timing of Stock Option Grants” Practice Area on CompensationStandards.com.
A Different Kind of Backdating Witch Hunt
In his op-ed yesterday, the WSJ’s Holman Jenkins joins me in using the term “witch hunt” to describe some of the attention being paid to the options backdating scandal. The source of this op-ed is curious given that the WSJ has been running at least one article per day on the topic (e.g. yesterday’s article was about Microsoft).
But Holman’s rationale for using the term is a far cry from my rationale. I am just worried that innocent companies might be caught up in the sweep to find out who the next culprit might be. Holman thinks that backdating in itself is no big deal. He thinks that folks are caught up in bunches because of “ever-shifting accounting, regulatory and tax standards.” In other words, I think he is saying that those standards shouldn’t really matter – instead, he believe that “overseeing CEO incentives is among the most important board responsibilities, and boards should keep control of it and do it clearheadedly.”
I obviously agree with Holman’s point – who doesn’t? – but I would argue that Holman contradicts himself somewhat because if a board doesn’t realize that options were backdated (or that proxy statements were misleading because they erroneously disclosed that boards granted options with exercise prices set on the grant date), that might illustrate that the board wasn’t in control and was lacking that whole “tone at the top” thing that is so easy to say, but so tough to do…
The Shrinking SEC
While Congress is asking the SEC to do more investigating about options backdating, Congress also is cutting the SEC’s budget from total program costs of $917.7 million (for the year ending September 30, 2005) to $888.1 for this year – with a budget request of $904.8 for the next fiscal year. The SEC staffing levels for the Division of Enforcement are down to 1216 this year from 1232, with a budget request of 1187 for fiscal 2007 (see page 53 of the SEC’s 2005 Annual Report – and pages 1-3 of the 2007 budget request).
As has been happening in Corp Fin for nearly two years, I understand that quite a few enforcement positions are not being filled as staffers leave. Given Chairman Cox’s connections on the Hill, I imagine that trend could be reversed if he pushed hard for more money…
Mavs Owner Invests in Stock Fraud News Website
Given that the Dallas Mavs just tanked, I thought it was appropriate to blog about their owner’s – Mark Cuban – latest adventure: ShareSleuth.com (not yet launched) that will employ investigative journalists to ferret out and blow the whistle on corporate fraud. For those that don’t follow sports, Mark is the most zany sports owner since Bill Veeck, who hired a midget to play baseball as a gag in the ’50s. And Mark maintains his own blog – “blog maverick” – and even allows fans to e-mail him. Clearly a New Age sports team owner, who has already accrued over $1.5 million in fines from the NBA for his conduct. Bruce Carton blogged at length about this new development recently in his “Securities Litigation Watch.”
Yesterday, the ABA issued a press release containing final amendments to the Model Business Corporation Act adopted by the ABA’s Committee on Corporate Laws relating to Voting by Shareholders for the Election of Directors. We have posted these amendments in our “Majority Vote Movement” Practice Area.
3rd Annual Executive Compensation Conference: Early Bird Expiration
Yesterday, I got many frantic e-mails and calls from members rushing to get a check cut for the Early Bird Discount rate available for the “3rd Annual Executive Compensation Conference.”
Even though the deadline ended last night, we will still process any last minute takers of our “firmwide for $995” offer for qualifying members of CompensationStandards.com. Just call our HQ at 925.685.5111 – or email info@compensationstandards.com (or use the online registration mechanism as the old pricing will still be up there for the next day or two).
Audit Committees in Action: The Latest Developments
Check out tomorrow’s webcast entitled “Audit Committees in Action: The Latest Developments” featuring Amy Goodman of Gibson Dunn; Lydia Beebe of Chevron; Susan Wolf and Steve Koehler of Schering Plough; Jennifer McCarey of MCI; Amy Corn of Pitney Bowes; and Linda Wackwitz of Quovadx. Among the topics of this program are:
– What are the latest developments for audit committee charters, agendas and meetings
– How should the audit committee manage its relationship with the independent auditor, including conducting an evaluation of the auditor
– What issues should be considered when changing independent auditors, reporting a material weakness in internal controls and restating financials
– When should audit committees hire their own experts – and what should be considered before hiring those experts
– How should an audit committee interact with the internal auditor – and ensure management cooperates with the internal auditor
In this podcast, Alice Peterson, President of Syrus Global, provides some insight how whistleblower hotlines work, including:
– How does your hotline work?
– What are the most common queries asked by potential clients?
– What characteristics should a company look for from a third-party hotline provider?
Yesterday, SEC Chairman Cox named Mark Olson as the new Chair of the PCAOB, replacing Acting Chair Bill Gradison (who continues on as a Board Member). In addition, Kayla Gillan got her wish and was reappointed for a second term as a Board Member (after waiting more than six months for the news!).
As this press release indicates, Mark has served as a Federal Reserve Governor since 2001 – before that he served as the Staff Director of the US Senate Securities Subcommittee of the Banking, Housing, and Urban Affairs Committee for two years, was a Partner at E&Y for 11 years and a CEO of a state bank for over a decade. It must feel peculiar for the SEC Chairman to appoint someone to a position that pays over 3x what he makes…
A few weeks back, the PCAOB’s Chief Auditor, Tom Ray, delivered this speech with a notable message: hop onto that learning curve, auditors. His speech directly addressed the “over-documentation” complaints making the rounds. Learn more about the speech from the AAO Weblog.
More on Harmonization (Or Lack Thereof) of Global Regulations
Not soon after I blogged on Friday, the SEC issued this warm and fuzzy fact sheet that globalization and merger of exchanges would not ultimately lead to mandatory registration of non-US exchanges (here is a related WSJ article from yesterday). Not surprising given SEC Commissioner Nazareth’s recent comments on this topic.
What is curious about this development is that the SEC put out its message via a “fact sheet.” This “fact sheet” is posted on the SEC’s website under “Press Releases” rather than the seemingly more appropriate “Other Commission Orders, Notices, and Information.” The question remains: do we now add “fact sheets” to the dozen or so other vehicles by which the SEC provides guidance to market participants?
DOL Panel Backs Order of Whistleblower Reinstatement
As noted in this Washington Post article, the Cardinal Bankshares whistleblower saga continues as the Department of Labor’s Administrative Review Board ruled that the company must reinstate its former CFO. The DOL panel denied a request by the company to stay a Labor Department judge’s earlier order that it take the CFO back – and afterwards, the company said it would not bring the CFO back until it is compelled to do so by the US District Court for the Eastern District of Virginia (ie. Welch v. Cardinal Bankshares Corp, as I first blogged about well over a year ago; see these law firm memos to follow the saga to date). So this is not over until it’s over.
In my mind, a reinstatement remedy is simply unworkable; there has got to be some other way. Can you imagine firing your CFO and then being forced to rehire him? That wouldn’t seem to bode well for overall company morale, not to mention collegiality among senior officers…
[Will you still read me…when I’m 64? So much craziness over Paul McCartney’s 64th birthday. That’s twenty years away for me – God willing – and if I’m still blogging at 64, I vow to do something spectacular for those of you still reading this dribble…not sure what, but I promise it will be glorious and you will be thankful for having patiently waited. Maybe something that Nacho would do…]
Last week, the SEC issued a Nasdaq proposal that would lengthen – in certain circumstances – the cure periods available to listed companies that lose an independent director or an audit committee member that causes the company to fall out of compliance with Nasdaq’s director independence rules (ie. a majority of the board must be independent and there must be at least three independent directors on the audit committee).
Under current rules, a company must cure any deficiency by the earlier of the next annual shareholders meeting or within one year of the event that caused the deficiency. The Nasdaq proposal would change the cure periods so that a company would have at least have 180 days from the date of a deficiency event to cure the deficiency.
Companies can’t rely yet on this proposed rule change, but the Nasdaq proposal states that, upon SEC approval of the rule change, Nasdaq will allow any company still within the prior cure period to use the new minimum 180-day cure period from the date of the deficiency, even if the deficiency occurred before the date of SEC approval.
Conducting Due Diligence: Through the Eyes of the Associate
The first installment of DealLawyers.com’s M&A Boot Camp for this summer is now available: “Conducting Due Diligence: Through the Eyes of the Associate.” Join Deborah Bentley Herzog and Mike Woodard of McGuire Woods for an entertaining session that teaches the basics of what you need to know about conducting due diligence, with an emphasis on what issues and traps associates should seek to spot and resolve.
If you are not a DealLawyers.com member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!
[Congrats to my boss, Jesse Brill, for being named one of the “100 Most Influential People in Finance” in this Treasury & Risk Management article for his executive pay reform efforts! I don’t think many lawyers would ever imagine landing on a finance list…]
“Passive Voice Press Releases” and the “Vigorous Defense”
Last month, I blogged about “passive voice press releases” by noting an entry from Adam Savett, a plaintiff’s lawyer. The following is some of his latest work: You’ve seen them discussed separately, but now we have them together. A complaint about a so-called “passive voice press release” and a vigorous defense proclamation by a defendant.
Passive voice press releases are those issued by law firms that have not yet filed a complaint. They typically announce that a securities class action “has been filed.” This is distinguished from the active voice releases, which state things such as “[the firm] filed a complaint” or “[the firm] has filed a complaint.”
The practice is most often pointed out by one of the firms that filed a complaint, not by the defendant corporation, as we have here. Earlier this week, InfoSonics Corporation issued a press release, stating:
“While at least seven law firms have publicly disseminated press releases over the past few days implying that they have filed lawsuits against InfoSonics Corporation, the Company’s preliminary investigation has revealed that two lawsuits seeking class action status have been filed (by three of the firms that issued press releases this week). The remaining four law firms that implied in their press releases that they also filed lawsuits had not done so at the time of their releases and the Company has no knowledge that they have since filed actual lawsuits.”
This is the classic passive voice press release issue, discussed by The 10b-5 Daily here and here and by Securities Litigation Watch here and here.
InfoSonics couldn’t resist the lure of the vigorous defense language having read in these pages earlier in the week about a recent successful use of that phrase, and went on to state:
“The Company believes its actions raised in the lawsuits were appropriate and intends to vigorously defend them.”
Now if only we could find a passive voice press release that indicated the law firm intended to “vigorously pursue” the claims that they have not yet alleged.
As so well illustrated during yesterday’s popular webcast (audio archive now available) – “The Evolving Relationship Between Lawyers and Auditors” – the tension between lawyers and accountants has never been greater and there has been a lot of understandable confusion as old relationships have suddenly evolved.
In this podcast, Todd David and Jessica Corley of Alston & Bird provide some insight into this court order from the recent case – Polymedica Securities Litigation – dealing with the protection of audit documents in internal investigations, including:
– What did Judge Young find in the Polymedica case?
– What were the facts of that case?
– In the wake of the decision, what guidance would you provide you companies regarding their audit documents?
DOJ Seeks Dismissal of Sarbanes-Oxley Lawsuit
A few weeks back – even though the US was not a party to the case brought by the Free Enterprise Fund – the DOJ weighed in on the lawsuit seeking to overturn Sarbanes-Oxley by seeking of dismissal of the case on procedural grounds. The DOJ said the challenge was “brought at the wrong time, in the wrong court” as part of its statement of interest in support of the PCAOB. Arguments are scheduled to be heard soon. We have posted all the pleadings filed in this case – Free Enterprise Fund and and Beckstead & Watts vs. Public Company Accounting Oversight Board – in our “Sarbanes-Oxley” Practice Area under “5. Debate of Legal Authority of SOX”.
Debate over the Impact of Sarbanes-Oxley on World Markets Intensifies
Speaking of Sarbanes-Oxley, the House Subcommittee on Regulatory Affairs will hold a hearing on Monday, June 19th in New York City to examine the impact that the SEC’s implementation of Sarbanes-Oxley has had on US markets. The hearing is entitled: “A Balancing Act: Cost, Compliance, and Competitiveness After Sarbanes Oxley” and will be held at the U.S. Customs House at 10 am (oddly, I can’t find any information about this hearing on the Web).
This topic is likely to continue to gather momentum. The pending merger of the NYSE and Euronext has raised the profile of the impact of SOX to high levels all over the world. Yesterday’s NY Times listed all the European market leaders that have expressed concerns that the merger could result in applying Sarbanes-Oxley to foreign issues. In the same article, SEC Commissioner Nazareth countered that “the notion that this is a backdoor means of exporting Sarbanes-Oxley requirements internationally is completely misguided.”
The topic of the impact of Sarbanes-Oxley on listing on US exchanges even took up a big chunk of time during this week’s “Past Enforcement Directors’ Roundtable” at the SEC, as noted in FEI’s “Section 404″ Blog. I’m sure we haven’t heard the last word on this topic – globalization ain’t easy…
With SEC Chairman Cox quoted widely in yesterday’s papers about the SEC planning to adopt the executive compensation disclosures rules by the end of the Summer (see this WSJ article and Wash Post article), we have moved up our conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – by two weeks so that it will be held on September 13-14th.
We recognize that two weeks matters when your directors and clients are clammering for the practical consequences of the new rules – so we have bumped up the conference dates to meet your needs. Of course, if the SEC doesn’t act that fast, we can easily push back the dates – that’s the beauty of the videoconference format as I blogged about a few days ago.
If you have questions about the Conference, check out our FAQs, e-mail me or contact our HQ. I will continue to flesh out the FAQs as I am getting many good queries, such as how long will the video archive be up? (answer: the end of ’07, which is roughly 15 months) or will the video archive be posted in modules? (answer: yes, each panel will have its own archive, so it will be easy to refer to later when you are drafting and reviewing disclosures).
[By the way, quite a few members have already submitted their vote for “Most Outdated Photo” in our Speaker Bios – hands down winner is Alan Kailer. Alan wins a full body massage and facelift after the Conference to maintain that youthful glow.]
Analysis of the Delaware Supreme Court’s Disney Decision
As I blogged last week, the Delaware Supreme Court has delivered its long-awaited opinion – written by Justice Jacobs – affirming the Chancery Court’s decision in the Disney litigation. Clearly affirming the business judgment rule, the Supreme Court flatly rejected the notion that a lack of good faith could be equated with gross negligence, which is the standard for finding a violation of the duty of care.
Most observers were not surprised by the outcome as the embattled plaintiffs’ counsel – Steven Schulman, the Milberg Weiss lawyer who was recently indicted for allegedly paying plaintiffs in class action cases – did a poor job of trying the case and basically failed to prove their claims factually.
Moreover, it is quite difficult to win a compensation case where the directors are not self-interested. Some commentators view the Valeant v. Panic case as a much more winnable compensation case compared to Disney. The decision in this case is expected sometime in the Summer of ’06.
A lot has been written about the duty of good faith since Chancellor Chandler’s opinion last year in the Disney litigation. In its opinion, the Delaware Supreme Court acknowledged that the contours of the duty of good faith remained “relatively uncharted” and were not well developed.
Addressing this hot topic, the Supreme Court identified two categories of fiduciary behavior that do constitute a breach of the duty of good faith. The first category is the so-called “subjective bad faith,” which is evidenced by “fiduciary conduct motivated by an actual intent to do harm” to the company or its stockholders.
The other category has been a focal point of the Disney litigation: “intentional dereliction of duty, a conscious disregard for one’s responsibilities.” In concurring with the Chancellor and determining that such conduct was neither exculpable nor indemnifiable, the Supreme Court explained as follows:
“The universe of fiduciary misconduct is not limited to either disloyalty in the classic sense … or gross negligence. Cases have arisen where corporate directors have no conflicting self-interest in a decision, yet engage in misconduct that is more culpable than simple inattention or failure to be informed of all facts material to the decision. To protect the interests of the corporation and its shareholders, fiduciary conduct of this kind, which does not involve disloyalty (as traditionally defined) but is qualitatively more culpable than gross negligence, should be proscribed. A vehicle is needed to address such violations doctrinally, and that doctrinal vehicle is the duty to act in good faith.”
The Court left open the possibility that the duties of good faith and due care could overlap – and the Court also pointed out that its opinion did not address the issue of whether the duty of good faith can serve as an independent basis for imposing liability on directors or officers. As evident from the law firm memos written so far – and the blogs from academics – there are many issues that will continue to be debated. For example, here is a list of issues to consider from Professor Larry Ribstein:
1. The future of due care and Van Gorkom. What does this case say about the nature of gross negligence?
2. What are the case’s implications for bad faith and the application of 102(b)(7)? What kinds of facts might constitute bad faith? Given the court’s view of bad faith, is there any longer a meaningful role for gross negligence?
3. What, if anything, does the case say about how it might address the undecided questions, such as the application of the bjr to officers.
4. What does the case imply about Roe’s thesis concerning federal law’s impact on Delaware?
5. What can be said now about the relation between Delaware and the federal law of corporate governance? Has federal law taken over the Caremark business just as it has disclosure?
6. What, if any, role do theories of “good governance” and best practices have on directors’ liabilities after Disney?
7. What are the decision’s implications for the executive compensation debate?
8. What’s likely to be the single biggest effect of this decision?
SEC to Push Ahead on Considering Mutual Fund Governance Rules
On Tuesday, the SEC filed a status report with the US Court of Appeals for DC in connection with its embattled board independence and independent chair rules. In April, that court held that the SEC violated the Administrative Procedure Act by failing to seeks comments on the cost estimates of those two rules – but instead of vacating the rules, the Court ordered the SEC to file a status report within 90 days and reopen the rulemaking record for comments on the costs.
With a month to spare, the SEC issued this proposal, with comments due by August 21st. The five Commissioners unanimously voted to solicit comment – but reportedly are split on whether to finalize the rules again (here are the dissents by two Commissioners from the last go around; although we will soon have Commissioner Casey in the mix, replacing Commissioner Glassman). No doubt the US Chamber of Commerce and other commentators will be furiously battling this rulemaking again…
As I blogged about recently, there are big things brewing in the Delaware courts that could shake up shareholder proposals and Rule 14a-8 as we so fondly know it.
Keir Gumbs of Covington & Burling notes: “Corp Fin has put the issue of shareholder-proposed bylaw amendments squarely in the lap of Delaware courts. Last Monday, the Division declined to address Computer Associates’ arguments that a mandatory by-law proposal submitted by Lucian Bebchuk could be excluded as contrary to state law. Although not unprecedented, this may be the first time that the Division has followed the “pending litigation” exception to its general practice of responding to shareholder proposal-related no-action requests when the proposal was a mandatory by-law proposal currently being litigated in a Delaware court.
The stakes are pretty high. With Hilton’s recent experience with shareholder proposed by-law amendments, Computer Associates’ may be faced with the tough choice of including the proposal in its proxy materials and risking shareholder approval of a by-law amendment it does not support – or waiting out the Delaware court and hoping that a decision is made before it mails its proxy materials. Not an enviable position, but other companies that are watching the development should be holding their breath as well. If the Delaware court sides with Professor Bebchuk, the floodgates for mandatory by-law proposals may soon open.
Interestingly, Grant and Eisenhofer, the firm that is representing Bebchuk in the case, already has tasted victory in this arena. Last year, it represented a group of shareholder-plaintiffs in Unisuper v. News Corporation, a case in which a Delaware Chancery court upheld the validity of terms of a contested agreement which would have required shareholder approval of the decision to adopt a poison pill. This case suggests that a by-law such as that proposed by Professor Bebchuk may not be invalid under Section 141 of the DGCL.”
On Sunday, the NY Times carried this column that touched on Computer Associates’ recent Rule 14a-8 request – but oddly, the column stated that the Staff had not yet made its decision even though it appears that it had…
Round Two: Market-Valued Employee Stock Options
Last September, you may recall that the SEC rejected Cisco’s proposal to issue exchange-traded employee options. At that time, the SEC stated that it was open to other ideas about how market instruments could be used to value employee options (and the SEC’s Office of Economic Analysis even suggested two alternatives, although the SEC’s Chief Accountant expressed skepticism about whether companies would quickly embrace them).
Last Thursday, the WSJ ran an article that Zions Bancorp planned to register securities that would mimic employee stock options for public auction – and the price fetched at auction would become a “market” value for the securities that the company could use to determine the expense it must book for awarding options to its employees. I don’t believe the registration statement is filed yet.
Here is an excerpt from the article:
“Buyers of the securities receive payments from Zions when employees exercise their options. If the options expire worthless or aren’t exercised by employees, holders of the securities receive no payments and lose the entire value of their investment. Essentially, Zions is creating what looks and feels like a so-called asset-backed security, with the underlying asset in this case being the options. The bank expects high-net-worth individuals and sophisticated investors to buy the securities. Among other things, these investors would be betting Zions’s stock will continue to rise and thus push Zions employees’ options “into the money.”
The bank hopes the auction will produce a truer — read: lower — value for employee stock options than would be derived from valuation methods such as Black-Scholes, the standard formula that has been used for years. That would happen, Zions argues, because investors would take into account factors unique to each company’s employee options program that aren’t reflected in most pricing models.”
It will be interesting to see if the SEC will approve Zions’s method – one key difference from Cisco’s rejected proposal: Zions will sell the securities at the highest, “market-clearing” price it receives at the auction rather than sales through private placements. And if the SEC approve’s Zion’s deal, it remains to be seen whether there will be enough competition among bidders to ensure a real market emerges. I don’t much about Zions Bancorp but I can’t imagine the appetite for a security based on its options would be anywhere near the level of a company like Cisco…
The Evolving Relationship Between Lawyers and Auditors
Join us tomorrow for the first in a webcast series dealing with audit committees and their advisors: “The Evolving Relationship Between Lawyers and Auditors.” Among other topics, Stan Keller of Edwards Angell Palmer & Dodge; Dick Rowe of Proskauer Rose; and Stacey Geer of BellSouth will address:
– What are the latest developments for auditor engagement letters and how do they affect independence
– What are the latest developments for audit inquiry/response letters, including how to handle non-conforming requests
– What issues arise from Interpretation 47 of FAS 143 regarding Conditional Asset Retirement Obligations (essentially environmental contingencies) – and why you should care
– How are comfort letter procedures changing – and how do these changes impact legal opinions and other aspects of deals
– How do the efforts of the ABA Task Force on Attorney-Client Privilege impact audit matters
Vonage’s IPO Travails Continue
Over the past few weeks, I have blogged about the challenges faced by Vonage’s recent IPO, including the disclosures about possible securities law violations involving the lack of links to a prospectus from a Directed Share Program solicitation. The inevitable class action lawsuits have now been filed in the US District Court for New Jersey; so far, three of them have been filed.
We have posted a copy of the complaint from one of these lawsuits in the “Rescission Offering” Practice Area. I’m always looking for content from our members, but I particularly would like to enhance the content in this Practice Area if you have something hidden in a drawer that could benefit the community…please email me if you do…
As I blogged yesterday, the SEC seems to be “on target” with adopting executive compensation rules by the end of the summer. For the past few months, I have been jamming to put together what I promise will be the most practical conference on how to implement these executive compensation rules. In fact, we are so confident that this Conference will meet your implementation needs, we are offering a money-back guarantee – see these “Five Good Reasons” why you should attend the conference.
As you should be able to tell from this detailed conference agenda, we have worked hard to ensure that you will be able to hit the ground running once the new rules are adopted – and we have worked hard to produce a remarkable line-up of panelists, including the SEC Staffers who are slaving over the rules right now. You probably even can use our detailed agenda as a checklist of issues that you will need to master. We obviously will tweak the agenda once the rules are finalized to adapt to any changes the SEC makes from its proposals (eg. I am still working on one panel).
Your Budget Will Not Take a Beating
As a “thank you” to our members, this Conference is priced at a fraction of what other conferences cost these days. By taking advantage of our “Early-Bird Discount,” you can attend this conference for only $495 if you are a member of TheCorporateCounsel.net or CompensationStandards.com.
And the savings are much greater if more than one person from your organization plans to attend – in fact, everyone in you entire company or firm can attend (and have ongoing access to the video archive and critical course materials) for only $1495! This is lower than what some conference providers charge today for just one attendee. You must act by July 20th to get these special Early-Bird rates!
Why You Will Benefit from the Videoconference Format
We have decided to conduct this Conference by video webcast primarily for two reasons. One reason is to provide you with guidance right away – so that you will be on top of the new rules right after they are adopted (ie. right when your CEO and directors and clients will be asking about them in the wake of the inevitable widespread media coverage).
Another reason for this format is to provide you with an archive of the entire videoconference (and the related practical course materials) so that they will be right there at your desktop to refer to – and refresh your memory – when you are actually grappling with drafting or reviewing the disclosures during the proxy season and beyond. Of course, this format also spares you the time and expense of traveling, etc. Register today and take advantage of the Early Bird discount!
