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 the “Hot Box” on the home page of TheCorporateCounsel.net, we promptly posted notes shortly after yesterday’s SEC’s open Commission meeting (Chair Cox’s 1st meeting – a 3 hour doozy) – these notes are more extensive than the following bullet points:
– Smaller Companies – A company that is not an “accelerated filer” can now wait to comply with the internal control over financial reporting requirements until their first fiscal year ending on or after July 15, 2007.
– Foreign Private Issuers – The delay above includes foreign private issuers that don’t meet the definition of “accelerated filer.” Note that a foreign private issuer that is an “accelerated filer – a concept never before applied to FPIs – will stay on its current course to comply with 404 for fiscal years after July 15, 2006.
– Large Accelerated Filers – A new category of issuers was proposed: “Large Accelerated Filers,” who would be issuers that meet the current definition of “accelerated filer,” except that their public float is $700 million or more. As proposed, Large Accelerated Filers would need to file their 10-Ks within 60 days after fiscal year-end and their 10-Qs within 40 days after quarter end, for year-ends after December 15, 2005. See the notes for a discussion of the overlap between WKSIs and LAFs.
– Accelerated Filers – Companies that meet the traditional definition of “accelerated filer” will still need to comply with 404, but it is proposed to give them 75 days as the deadline for their 10-Ks and 40 days for their 10-Qs (and to modify exiting of accelerated filer status by permitting an accelerated filer whose public float has dropped below $25 million to file an annual report on a non-accelerated basis for the same fiscal year that the determination of public float is made).
Here is the SEC’s press release regarding its actions. There is a short 30-day comment period for the proposals.
Correction About the NASD’s “New Issue” Rule Amendments
Last Thursday, I blogged that the amendments to Rule 2790 would become effective Monday, September 19th – I was wrong! I forgot about the SEC’s Release No. 34-52209A issued August 22nd that made the Rule 2790 amendments effective upon announcement by the NASD in a Notice to Members to be published no later than 60 days following SEC approval. The effective date will be not more than 30 days following publication of the Notice to Members according to the amended order. It doesn’t appear that a Notice to Members has yet been issued, which means the old rule is still in effect at this time. Thanks to Eric Graham of Goodwin Procter for the heads up!
Fraud Prevention and Management
In this podcast, Jim Persing, a former lawyer who is now a life coach, delves into how to deal with an employee engaged in fraudulent conduct, including:
– Are companies seeing more cases of fraud and questionable ethics?
– When discovered, how do companies typically deal with the employee and the related issues, particularly if the employee is valued and productive?
– What are the pros and cons to these actions from the company’s perspective?
– Could the company turn to an unbiased outsider to help? How?
– What monitoring would be needed? What if it doesn’t work – then what?
Today’s WSJ tackles a topic dear to our hearts with this article – “New SEC Chief Tackles A Big One: CEO Pay.” Here is how that article kicks off: “Chris Cox isn’t starting out as the capitalists’ tool his critics made him out to be. The new head of the Securities and Exchange Commission is smart. He’s got good political instincts. And those instincts have led him to the biggest piece of unfinished business on the corporate reform agenda: CEO pay.”
In addition, the title above and the following excerpt is from yesterday’s Times of London: “Christopher Cox, the new chairman of the Securities and Exchange Commission, has declared war against excessive executive pay amid claims that many American companies try to hide big remuneration deals from investors.
Mr Cox, who has been in the job for little more than a month, has set a specialist team of SEC investigators to the task of discovering how American companies disguise executive pay or special bonuses. “This is one of the first things he (Cox) has prioritised,” a spokesman for the SEC said. “Executive compensation can be opaque and this is what the commission aims to find out about.”
The September-October Issue of The Corporate Counsel
In our effort to encourage more responsible behavior in the area of executive compensation, we have made the Sept-Oct 2005 issue of The Corporate Counsel freely available on CompensationStandards.com. This issue follows up on our 12-Step Roadmap to Responsible Pay Practices, laid out in two issues from last year (those two issues are also freely available on CompensationStandards.com at the right side of the home page).
Hurricane Katrina Delays Guidance on Deferred Compensation Plans
From a recent Mullin Consulting alert: “Speaking to the Bureau of National Affairs on September 14, IRS Chief Counsel Donald Korb stated that the agency’s effort to provide hurricane relief has further delayed guidance on deferred compensation plans.
While there was speculation that guidance would be released in time for the mid-September meeting of the American Bar Association Section of Taxation, the devastation caused by Katrina put the agency’s release on hold. Immediate tax relief to Katrina victims has included lifting restrictions on low-income housing nationwide and extending tax-filing deadlines along the Gulf Coast. Korb said additional tax relief for hurricane victims will be forthcoming.
In a telephone call, Daniel Hogans, an Attorney-Advisor in the Office of Benefits Tax Counsel, told Mullin that Section 409A guidance “is in the clearance process right now. It comes down to when the people who sign off will have time to look at it. I’m hoping we’ll see it in the next few weeks, but something like Katrina takes a lot more time than people realize.”
Last week, California State Treasurer Phil Angelides called for the state’s two big pension funds – CalPERS and CalSTRS – to oppose the proposed acquisition of Pacificare by UnitedHealth Group unless certain payments to executives were rescinded. Angelides (who recently announced he is running for California Governor) claims that $315 million in payouts to the top tier of management is excessive. I agree that it sounds excessive – but some of this amount reflects acceleration of vesting of stock options (in which case perhaps the option grants were excessive but not the severance arrangements – without knowing more, my hunch is that both were more than enough as I intimated in this article).
Even though no Form S-4 has yet been filed, a regulatory hearing was held last week by the Department of Managed Health Care – but the Department doesn’t have the authority to regulate executive compensation levels. The transaction will also require approvals from the U.S. and California Departments of Justice, the California Department of Insurance and nine other states, including Texas, Nevada and Colorado.
The Treasurer’s move does illustrate the fact that executive pay can become a political football – particularly when it involves a controversial industry such as health care. The transaction will have an effect on about 3.5 million California enrollees. Thanks to Keith Bishop for helping to sort this one out!
We have posted the transcript of our popular webcast: “Drilling Down: Doing a WKSI Offering After the ’33 Act Reform.”
Winning Strategies in Auctions
Don’t forget tomorrow’s webcast on DealLawyers.com – “Winning Strategies in Auctions” – featuring Mark Gordon of Wachtell Lipton, Eileen Nugent of Skadden Arps, John Grossbauer of Potter Anderson – and for the banker’s perspective, Jill Goodman of Lazard. Learn steps to reduce the impact of the “Winner’s Curse” and more, including analysis of the recent Toys ‘R Us decision.
More on the Most Bizarre Registration Statement of All-Time
Following up on last week’s blog about the bogus Apollo Publication Corp. registration statement, one member asked how EDGAR accepted the filing if there wasn’t a filing fee? This question presumed the prankster wasn’t willing to pay something for the publicity the scheme has generated.
I believe that a fee – albeit a small one – was paid through Mellon for this filing. David Copenhafer of Bowne explains that the SEC Staff double checks to ensure that the system-approved fee is what was actually due, and that was one of the things that triggered the SEC’s identification of a problem in this case.
David notes this “filer” went to a lot of trouble to light up EDGAR functions. He took a quick look at the HTML of the filing and thinks the fraudster made an effort to see what was possible and how things work within the EDGAR system. So this might be the handicraft of a fraudster with “skills.” [Finally saw Napoleon Dynamite – my favorite scene is where Pedro and Napoleon are conspiring to blend their “skills” in Pedro’s pursuit of the class presidency.]
We have posted a new quick survey on disclosure controls and disclosure committees. Please take a moment and fill out the 4 questions. This new survey supplements last year’s quick survey on disclosure committees.
Survey Results: Audit Committees and Earnings Releases
Here are the results from last month’s quick survey on audit committees and earnings releases:
1. Does your Audit Committee review your company’s earnings releases prior to their release to the media? Yes – 90%; No – 10%
2. If the answer to #1 is “Yes,” how many days prior to public issuance of the earnings release is a draft typically sent to the Audit Committee?
– One day or less – 15%
– Two days – 31%
– Three days – 25%
– Four days or more – 29%
3. If the answer to #1 is “Yes,” does the Audit Committee hold a meeting for the purpose of discussing each earnings release?
– Yes, and mostly (or all) by telephone meetings – 81%
– Yes, and mostly (or all) by face-to-face meetings – 13%
– No – 6%
4. If the answer to #3 is “No,” is the Audit Committee informed about issues that will be discussed in the related earnings release?
– Yes, in writing – 7%
– Yes, at a meeting – 72%
– No – 21%
5. Does your Audit Committee hold a separate meeting to review draft Forms 10-Q and 10-K (and at the same meeting, review the CEO’s and CFO’s certification of the Forms 10-Q and 10-K)? Yes – 68%; No – 32%
The Executive Compensation Revolution
Below is an interesting excerpt from my interview with Paul Hodgson of The Corporate Library. Paul says: “In the U.K. there was a real groundswell of protest against excessive executive pay during the early 1990s. This was primarily caused by the government privatizing utilities at a price well below their market value. Stock prices for these utilities exploded once they hit the market, and the executives – who had all been awarded substantial stock option awards in line with typical practice – were millionaires overnight. And these were people who had been public servants up until this point.
Well, the press just had a field day. There were pictures of pigs dressed up in pin striped suits, headlines like “Snouts in the trough”. You know what the British press is like. Anyway, it was a disaster for corporate Britain.
In response to the protest, there was a corporate governance revolution. The government set up a series of corporate governance committees, and put them in charge of solving the crisis in executive compensation. These committees did not look to the institutions or to the regulators for what should be done. They looked to those companies which they felt had already introduced best practices.
More important, they looked to those companies that had already introduced best practice compensation policies without any negative impact on their ability to recruit talented executives or any negative impact on the performance and commitment of their existing executives. These best practices were then enshrined in a series of corporate governance codes. But the inspiration for these codes came from business, not regulators.”
Paul is part of the panel – “The Institutional Investors’ New Focus on Executive Compensation: What It Means For You” – during the “2nd Annual Executive Compensation Conference.”
S&P Exits Governance Rating Field in US
As expected, the shakeout in the governance rating industry continues as S&P has dropped out. S&P’s “pay-to-play” model never made sense (ie. companies had to pay in order for S&P to rate them) and it didn’t help that S&P’s marketing efforts centered on its voluntary rating of Fannie Mae (to which it gave a high rating before Fannie’s bottom fell out).
S&P remains active in providing ratings in other markets around the world -primarily emerging markets – where governance concerns remain strong and where stand alone governance analysis continues to have merit.
In the US (and elsewhere), S&P also remains focused on applying corporate governance analytics in the context of their credit ratings. Specific feedback from investors was that S&P needs to continue to monitor corporate governance as a risk factor, but investor preference is to factor this into credit ratings rather than provide it as a separate service. This is what Moody’s does also.
SEC Posts New Periodic Report Forms
To add in the new shell company disclosure items, the SEC posted this new Form 8-K, Form 10-K and Form 10-Q on its website last week. Besides shell company changes, the Form 8-K changes relate to Item 6 for extensive asset-backed issuer disclosure provisions (previously Item 6 was “reserved”).
You can tell they are new by the date in the lower left corner of the first page – check those against the forms you might be using.
At next Wednesday’s open Commission meeting, the SEC will consider pushing back the 404 deadline so that companies that are not accelerated filers then can wait to comply with the internal control over financial reporting requirements until their first fiscal year ending on or after July 15, 2007. Not sure how I missed that item for yesterday’s blog. Must be working too hard…
During our October 3rd webcast – “Internal Controls Update: The Big 4 Speak” – there will be discussion about what non-accelerated filers should still be doing in the 404 area despite the pushback of the internal controls deadline.
FASB to Issue Guidance on Option Grant Date Issue
On Wednesday, the FASB met to discuss providing further guidance on the determination of grant dates under FAS 123(R). The FASB decided to treat the date the board approves an award as the grant date, provided that:
• employees are not able to negotiate the terms of their grants after the board has approved them, and
• the terms of the grants are communicated to employees within a reasonable period of time. The determination of what is considered a reasonable period of time depends on the circumstances of the grant (e.g., the size of the company, number of grant recipients, and other considerations)
The FASB staff has proposed a FASB Staff Position, subject to a 15-day comment period. The FASB’s intention is to issue the final FSP in time for companies that are required to adopt FAS 123(R) on July 1, 2005 to rely on it in their first quarter financial statements.
Listen to the audio archive of the FASB meeting (see agenda item #4) and read the Board Meeting Handout (see pages 12-13). More information on this issue, along the NASPP comment letter and memos from leading practitioners, is included in the NASPP’s full analysis of this development.
Evelyn Y. Davis Update: Fourth Time A Charm?
According to this article, Evelyn Y. Davis, 76, recently got married to someone 26 years her junior. For those of us that have dealt with Evelyn, here’s wishing her the best on her fourth marriage (and maybe now she will be too busy to push her shareholder proponent agenda).
Here is an excerpt from the article: “He sent me three fan letters,” said Davis in a phone interview Thursday from her home in Washington’s Watergate building. “I was very reluctant to meet him at first, because I get so many fan letters from all over the country, and I never answer them. But what caught my eye was that he was in my neighborhood.” For more on Evelyn, here is an interview with her from a few years back.
SEC Formalizes Hurricane Relief
Yesterday, the SEC issued an exemptive order that provides an array of relief for companies directly impacted by Hurricane Katrina, including relief related to periodic reporting deadlines, proxy delivery obligations and S-3 eligibility, among other items.
What’s In Your Press Release?
From Lyle Robert’s “The 10b-5 Daily Blog“: The content of the disclosure that led to a stock price drop continues to be the focal point of post-Dura loss causation analyses. In Sekuk Global Enterprises v. KVH Industries, Inc., 2005 WL 1924202 (D.R.I. Aug. 11, 2005), the plaintiffs claimed that the company engaged in improper accounting practices related to the sales of a key product. The plaintiffs’ alleged losses occurred after the company issued a press release announcing reduced quarterly revenue based on lower than expected sales.
In their motion to dismiss, the defendants argued that “the press release and the resulting drop in the price of KVH common stock fails to establish loss caustion because the press release does not attribute the declining revenue to the sales of the [key product].” The court found, however, that the key product was a possible contributor to the lower than expected sales, even if it was not expressly discussed in the press release. Accordingly, the plaintiffs adequately plead loss causation.
Holding: Motion to dismiss denied (except for the claims based on a limited number of inactionable statements).
New SEC Chair Chris Cox has his first open Commission meeting scheduled for next Wednesday, September 21st at 10 am eastern. It’s always interesting to observe the style of how a new Chair presides over Commission meetings.
Among the items on the agenda is a proposal to narrow the definition of “accelerated filer” to include reporting companies with a public float of $700 million or more and a proposal to ease some of the current restrictions on the exit of companies from accelerated filer status.
In addition, the Commission will consider amending the final phase-in of the Form 10-K and Form 10-Q accelerated filing deadlines that are scheduled to take effect next year. As of now, accelerated filers are scheduled to become subject to a 60-day filing deadline for their Form 10-K filed for fiscal years ending on or after December 15, 2005, and a 35-day deadline for the three subsequently filed Form 10-Qs – that will be proposed to be changed, but their is no indication yet what that proposal will be.
The SEC: Cracks the Top Five!
According to this press release, the SEC is now in the Top Five of federal agencies to work for (I guess FEMA has dropped a few notches). The ranking of federal agencies is based on a scoring system explained on this “Best Places to Work” site.
I loved working on the SEC Staff – only thing holding me back from a third tour of duty is the lack of a cafeteria – but I have to admit the competition isn’t too strong for the SEC. Ever been in the ancient building that houses the Department of Agriculture? It’s spooky; you can hear a pin drop – no phones ringing anywhere.
Amendments to the NASD’s “New Issue” Rule
As noted on yesterday’s webcast, the SEC approved a NASD rule filing on August 4th that amends the “new issue” rule, Rule 2790. The adoption of these amendments follows the 2004 implementation of the New Issue Rule, which itself was a successor to the “Hot Issue” interpretation.
The Most Bizarre Registration Statement of All-Time?
Tearing a page from “Ripley’s Believe It or Not,” the SEC has scheduled an administrative law judge hearing under Section 8(d) to take action regarding this fraudulent registration statement filed by Apollo Publication Corp.
The only reason this isn’t an immediate emergency injunctive action in federal court is because the person who filed the registration statement appears to be insane – no one could possibly take it seriously. As noted in this article, Apollo’s board allegedly includes former Presidents Bush and Jimmy Carter, along with numerous other past and present world leaders. Overall, it reads like a pro se complaint from an insane prisoner.
If I were to file a bogus registration statement, I would go with a little more humor – by including Captain Kangaroo, George Costanza, Wonder Woman and Colonel Klink on my board. One member emailed me about how easy it must be to procure a set of EDGAR codes to perpetuate a scheme like this – but note that there will be some very real consequences for this tomfoolery. So please don’t try this at home…
As I blogged yesterday, the SEC has issued the much-anticipated transitional guidance about ’33 Act reform in the form of 14 FAQs.
So What Should You Do Now With Your Outstanding Shelfs?
Transitional issues for all types of companies – such as “what you should do now with your outstanding shelfs” – will be covered during next Thursday’s webcast. For example, according to FAQ 5, WKSI companies can’t convert their outstanding shelfs to an automatic shelf via post-effective amendment (but they can carry over unused filing fees to a new shelf). So what should WKSIs do now? Tune in next Thursday to find out.
Hurricane Katrina: Sample Disclosures About the Impact and Thoughts on MAC Clauses
On the DealLawyers.com blog, Cliff Neimeth of Greenberg Traurig provides some interesting thoughts about the “material adverse change” clause and other aspects of the pending Capital One/Hibernia merger.
Understanding Cooperative Conversions
Recently, a number of cooperative associations have converted into publicly-traded companies. Having worked on similar types of deals many moons ago myself (eg. conversion of mutual savings banks into public companies), I recognize that it takes special expertise to get these complicated deals done.
Learn more about cooperative association conversions – including potential pitfalls to avoid – in this text interview with Scott Ortwein and Harvey Hill of Alston & Bird LLP.
Join us for tomorrow’s webcast – “Drilling Down: Doing an IPO After the ’33 Act Reform” – featuring Justin Bastian of Morrison & Foerster; Steve Bochner of Wilson Sonsini, Goodrich & Rosati; and Michael Wishart of Goldman Sachs. With the help of a banker on this panel, there will be a discussion on recent developments in the IPO market beyond just the impact of the ’33 Act Reform.
As an indication that executive pay will play a prominent role in the majority vote movement, Fidelity Investments opposed the reelection of the board at Clear Channel Communications after the company renewed about $90 million in severance arrangements for the Chair, CEO and CFO.
This action came to light when Fidelity recently disclosed in one of its many Form N-PXs that its mutual funds withheld their votes for all 10 directors at the company’s annual meeting in April (starting last year, mutual funds are required to annually disclose their voting records). Fidelity ranked as the largest shareholder at the time with a 15.5% stake. This resulted in at least 18% of the total votes being withheld for each director.
Many of you will recall that it was not too long ago that Fidelity traditionally sided with management when casting ballots – here they opposed management even though ISS had recommended votes in favor of 9 of the 10 Clear Channel directors!
Fidelity withheld its support for the Clear Channel board after the company renewed employment agreements in March with the founder (who is the board chair) and his sons (who serve as the CEO and CFO). The new agreements retained provisions from their former contracts that provide each officer with a cash severance payment of 7 times their base salary and highest annual bonus during the prior three years, as well as 1 million options. Under its voting policy, Fidelity casts its ballots against directors who permit severance payments exceeding three times annual salary and bonus without obtaining a shareholder vote.
Fidelity also administers Clear Channel’s 401(k) retirement plan – at least three of the funds offered in the Clear Channel 401(k) plan withheld votes for the company’s board. In other words, Clear Channel employees who invested in these funds ended up siding against their own company’s board. The company was not aware of Fidelity’s vote until published reports came out last week.
Besides this obvious lack of communcation between the company and its largest shareholder, there are enough lessons learned in this story to fill up my blog for a week. I will save it for the many experts, who are better qualified than me, who will speak at the “2nd Annual Executive Compensation Conference.” For those of you planning to attend live in Chicago – rather than by video webcast – I understand that the hotel is nearly sold out, so you might want to reserve rooms now.
On Friday, the SEC issued a press release with a statement by Chairman Cox regarding the use of market instruments to value employee stock options, along with a Statement from the SEC’s Chief Accountant and an Office of Economic Analysis Memo.
According to this NY Times article on Saturday, the SEC rejected Cisco’s proposal to issue exchange-traded employee options – but stated that it was open to other ideas about how market instruments could be used to value employee options (and the SEC’s OEA even suggested two alternatives, albeit the SEC’s Chief Accountant expressed skepticism about whether companies would quickly embrace them).
In the article, the Cisco CFO is quoted as saying that the company would continue to explore ways of using market instruments to value its options. Cisco’s dead proposal received investor backlash because it was seen as an attempt to avoid disclosing the true value of options in its financials.
At the NASPP’s “13th Annual Conference,” there will be eight panels – plus an address by the FASB Chair Bob Herz – that will deal with option expensing. Plus the NASPP just announced that it has enhanced its “Option Expensing Portal” to include a FAS 123(R) Q&A Forum that is manned by a special 123(R) Task Force.
Disney Case Appealed
Last week, Milberg Weiss Bershad & Schulman filed a notice of appeal with the Delaware Supreme Court over the August 9th opinion by Delaware Chancery Chancellor William Chandler that the Disney board did not breach its fiduciary duties over the firing of Ovitz and paying a severance package of $130 for the “non-cause” termination.
More on the Meaning of the Federal Court Dismissing the SEC’s Reg FD Lawsuit Against Siebel
In this podcast, Stan Keller, Partner of Palmer & Dodge, explains the implications of the federal court dismissing the SEC’s Regulation FD lawsuit against Siebel Systems and two of its officers, including:
– What is the background of the Siebel case?
– What did Judge Daniels decide in dismissing the SEC’s lawsuit?
– What is the meaning of this case for company spokespersons?
– Do you think the SEC will appeal the case?
Many thanks to Robyn Manos and Heather Maples – the dynamic duo in Corp Fin’s Office of Chief Counsel that will be handling interpretive questions on the ’33 Act reform – for joining yesterday’s webcast: “Drilling Down: Doing a WKSI Offering After the ’33 Act Reform.” Of course, Jack Bostleman, John Huber and David Martin did a great job of trying to predict and analyze what WKSI deals will look like after the December 1st effective date. The audio archive of the webcast is available now – a transcript won’t be ready until late next week at the earliest.
You can direct any interpretive questions to Robyn and Heather via the special ’33 Act reform hotline that Corp Fin has established at 202.551.3200.
More on SEC v. Smyth
Following up on Jay Dubow’s “Future of the SEC’s Civil Injunction Authority” podcast, a member had this question: Are “obey the laws” injunctions issued by the SEC for companies residing in the 11th circuit still enforceable?
Jay responds: “Yes, injunctions within the 11th Circuit are enforceable until a court orders them otherwise. Even if the court in Georgia, on remand, issues an order that the specific injunction is not enforceable – until the 11th Circuit issues an order that is not dicta to the contrary – one should assume that other such injunctions are still enforceable.”
Changes to ISS’ CGQ Rating Criteria
Effective Monday, the most recent changes to ISS’s CGQ rating criteria will be used to calculate a company’s CGQ governance rating. These changes were announced in July.
I have endlessly debated in my head whether it was appropriate for me to blog about this terrible tragedy that has impacted all of us; some more than most of course. Even though I will continue to focus on our professional life, I just wanted you to know that I have been affected too and thanks to those members who have shared personal stories and urged me to help (here is a basic list of links). We have donated to the Red Cross as well as more directly to others in need that we know personally or through friends.
I do hope the Administration and the applicable governments now get their act together and spend time helping those that need it rather than wasting resources avoiding blame. The recent stories about how the media is being kept at arms’ length from reporting on what is happening in New Orleans is disturbing to me. The First Amendment is the bedrock of our society.
There are many blogs and other resources to help us understand what has happened and what is happening. I enjoy NBC anchor Brian William’s blog for unbiased coverage and the Technorati blog search tool is useful to find other voices.
