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."
On Sunday, the NY Times ran this article about conflicts of interest in M&A transactions, with a particular focus on fairness opinions as the NASD is in the process of reviewing comments on its proposed reform. Author Andrew Sorkin concludes, “Wall Street may initially blanch at these reforms, but they could turn out to be a boon for business: companies are more likely to ask for second and third opinions from different banks just to cover themselves – and that could produce fairness opinions that are really fair.”
Don’t forget that on April 20th, our star-studded panel will cover fairness opinions and much more in this DealLawyers.com webcast – “Conflicts of Interest and Dicey Engagements” – featuring Peter Douglas of Davis Polk; Brian McCarthy of Skadden, Arps; Kevin Miller of Credit Suisse First Boston; and Morton Pierce of Dewey Ballantine.
Confidential Treatment Requests for Material Contracts
Members tell me that the SEC Staff continues to take a proactive approach in its review of confidential treatment requests for information contained in material contracts and arguably has recently enhanced its scrutiny in determining what may be kept confidential. Learn more in this interview with Jim Ball and Ellie Kwack on CT Requests for Material Contracts.
Time Warner Pays $300 Million to Settle SEC Fraud Action
Yesterday, the SEC charged Time Warner with materially overstating online advertising revenue and the number of its Internet subscribers, and with aiding and abetting three other securities frauds. The SEC also charged that the company violated a Commission cease-and-desist order issued against AOL in 2000. In a separate administrative proceeding, the SEC charged Time Warner’s CFO, Controller, and Deputy Controller with causing violations of the reporting provisions of the federal securities laws.
Time Warner settled its charges for a whopping $300 million (which is in addition to a separate $210 million settlement reached in December with the Justice Department) and the 3 officers entered into cease & desist orders, while the investigation continues into other entities and persons. The company also agreed to restate its financials and engage an independent examiner to determine whether the company’s historical accounting for certain transactions was in conformity with GAAP.
As predicted, the number of companies filing Form 12b-25s in order to delay their 10-Ks past the March 16th due date reached a record level this proxy season. Here are some stats derived by Brink Dickerson and his team over at Troutman Sanders:
– Form 12b-25s filed between 3/1 and 3/17: 395 this year; 116 last year
– Form 10-Ks filed between 3/1 and 3/17: 2469 this year; 2607 last year
– Percentage of late filers: 16.0% this year; 4.4% last year
These stats do not reflect companies who were able to complete their traditional audit work and therefore file on time – but are taking advantage of the extension for their 404 work. As a result, the 395 number probably slightly understates the magnitude of the problem, which is amazing as the numbers above already indicate a 250% increase!
Deja Vu – WorldCom Directors Settle Again
On Friday, a new $55.25 million settlement with 11 former directors (including one estate) in the WorldCom class action lawsuit was announced, following settlements entered into with the underwriter defendants. If approved, the settlement calls for settling directors to pay $20.25 million of their own money and insurers to pay $35 million.
The prior proposed settlement with directors included a so-called “ability-to-pay” provision that would have limited the amount by which any verdict or judgment against a non-settling defendant would be reduced with respect to the responsibility of settling defendants had there been no settlement, by the financial capability of settling directors to pay. The lead plaintiff terminated the proposed settlement because the Court rejected that provision as being inconsistent with the PSLRA. The new proposed settlement does not have such a provision, reflecting the fact that the lead plaintiff has now reached settlement with all of the underwriter defendants.
The settlement provides that the payment made by each settling director will equal or exceed the compensation received for service as a board member since January 1, 1999, unless the parties otherwise agree based upon unique circumstances. Here is a related NY Times article.
AFL-CIO “Key Votes” Scorecard
Last week, the AFL-CIO released this key votes scorecard. The 28 shareholder proposals on the scorecard from 28 different annual meetings will be used to grade the voting performances of mutual fund managers. See how the AFL-CIO graded managers last year in this report, as well as this special report grading how the 10 largest managers voted on compensation-related shareholder proposals.
The “Bloggies”
Last week, the 5th Annual “Bloggies” were held, with winners in 30 different categories. Here is the site where the principal winners are noted. Here is a Washington Post article about the awards.
Speaking of blogging, lots of press recently about CEOs and directors blogging, such as this Washington Post article from Saturday. As I mentioned in this article from Corporate Board Member, what a nightmare for in-house counsel to ensure that these corporate bloggers are not violating Reg FD, etc. Leave the blogging for the unattached…
Last week, the SEC proposed amendments from the NASD and NYSE that would revise their research analyst conflict-of-interest rules (NASD Rule 2711 and NYSE Rule 472) that would go further than the terms of the ’03 Wall Street Global Settlement. Specifically, the proposed rules would:
– prohibit a research analyst from participating in road shows and communicating with a customer in the presence of investment banking department personnel or company management about an investment banking
services transaction;
– prohibit investment banking personnel from directing a research analyst to engage in sales or marketing of an investment banking transaction or to engage in communicating with a customer about an investment banking services transaction; and
– require that any written or oral communication by a research analyst with a customer or internal personnel related to an investment banking transaction must be fair, balanced and not misleading.
Transcript for “The Evolution of Due Diligence Practices”
We have posted the transcript for the webcast: “The Evolution of Due Diligence Practices (and Securities Act Liability).”
More Cowbell!
With the 10-K deadline behind us, I couldn’t resist a little humor. I am not a big Saturday Night Live fan, but the old SNL skit with Will Ferrell and Christopher Walken is one of the funniest I have ever seen! “I got a fever… and the only prescription is more cowbell.”
If your company is considering participating in the SEC’s XBRL pilot program – or you want to just learn more about XBRL – check out this interview with Michael Ohata, who is Director, Business Reporting of Microsoft Corporation.
Microsoft is one of the few companies that has been making filings with the SEC using quasi-XBRL; “quasi” since EDGAR doesn’t accept XBRL until April 4th (which is the new start-date that was recently pushed back) but Microsoft and a few others were able to manevuer to accomplish this feat. Recently, the SEC posted this announcement regarding support for XBRL filers.
Survey on Pre-Approval of Non-Audit Services
To help answer some member questions regarding the level of detail provided to audit committees to support non-audit service decisions, we have posted a new survey on pre-approval of non-audit services. Please weigh in by going to TheCorporateCounsel.net home page and clicking on the survey in the middle column.
Are Gross-Ups Appropriate?
Yesterday, the WSJ ran this article analyzing existing gross-up practices related to executive severance payouts. I respect former SEC Commissioner Wallman as much as I respect anyone – but have to politely disagree with the sentiment attributed to him that “gross-ups are a necessary means of attracting top executives and have become a common feature of compensation agreements at Fortune 500 companies.”
Isn’t that the type of “herd” mentality that got the accounting and investment banking industries into all the hot water (i.e. billions paid in settlements) they can bear? Aren’t phenomenal severance payouts a questionable enticement for CEOs to do bad deals? What valid purpose do gross-ups serve?
I agree with a lot of the investor guidelines that urge compensation committees to limit severance payouts to one-times salary – NOT including all the other components of compensation that often make these gross-ups “necessary.” And investors typically feel the same way that the Council of Institutional Investors do about gross-ups – here is what CII’s comp policy states: “Companies should not compensate executives for any excise or additional taxes payable upon the receipt of severance, change-in-control or similar payments.”
Former WorldCom CEO Bernie Ebbers was finally found guilty for his role in the massive fraud on his watch, as a slow-moving jury found him guilty yesterday on all counts. The verdict was a major victory for Justice Department prosecutors who spent nearly three years investigating the $11 billion fraud. Here is a Reuters article that includes my over-the-top quote on this important conviction.
Many of you will remember that the desire for reform legislation had all but died in Congress in mid-summer ’02 until WorldCom collapsed. Then, within a few short weeks Sarbanes-Oxley was enacted, capped by an unanimous vote in the Senate. All of us can thank Bernie for the job security and late nights in the office…
CalPERS Changes Its Voting Policies
As they indicated they would do late last year, CalPERS modifed its proxy voting guidelines regarding non-audit services. Under last year’s controversial guidelines, CalPERS automatically withheld its proxy votes from all members of audit committees that hired outside auditors to perform non-audit services.
Under the new guidelines, effective for this proxy season, CalPERS intends to withhold support for audit firms, rather than individual directors. However, CalPERS would retain power to seek the removal of a director in cases where “egregious” conflicts of interest have occurred.
This LA Times article states, “Switching to the new criteria should lead CalPERS to withhold votes against auditors at only about 5% of the companies in which it owns stock, CalPERS staff estimated. Auditors would be opposed by CalPERS if they were found to violate protocols outlined in proposed audit independence rules being drafted by the Public Company Accounting Oversight Board set up by the Sarbanes-Oxley Act of 2002.”
Job Choice & Changes
With my unique background (trifecta experience of law firm, inhouse and government), I often get asked for my advice about job changes and opportunities. To help those mulling their prospects – either within their present organization or outside – I have compiled some materials in our new “Job Choices/Changes” Practice Area.
Thanks to Bob Dow, who has been indispensable during these trying internal control times!
The Recapture of Bonuses
The article in Sunday’s NY Times did a great job questioning the wisdom of so many companies not having clawbacks in their employment arrangements so that companies (and their shareholders to whom managers and boards owe fiduciary duties!) can reclaim any incentive awards paid out to managers who inflated the company’s results so that targets were met.
It is refreshing that at least one company – see this 8-K from International Paper – recently has revisited its long term incentive compensation plan to make it clear that the company can “recover compensation paid to a participant in cases of a restatement of the company’s financial statements due to errors, omissions or fraud.” I would love to hear of more examples if you see them!
Tears Shed for John Chevedden
On the other hand, I wasn’t enthusiastic about this article in Sunday’s NY Times that was sympathetic to frequent proponent John Chevedden because his holdings at some companies dipped below the requisite $2000 eligibility level found in Rule 14a-8 (so those companies were able to successfully exclude his shareholder proposals because he was not eligible to submit proposals).
The $2,000 floor is meant to relieve companies from bearing the burden of time and expense of dealing with shareholders with nominal holdings; many that have dealt with Mr. Chevedden know that their shareholders would not be happy if they knew how much of a burden he can be (despite the fact that he selects proposal topics that often receive majority votes).
Analysis of SEC’s Section 21(a) Report in Titan
I am excited to see how others fare in the “Nuggets” format, as Rick Climan of Cooley Godward, Joel Greenberg of Kaye Scholer, and Wilson Chu of Haynes and Boone work their magic during tomorrow’s DealLawyers.com webcast: “30 M&A Nuggets in 60 Minutes.”
And I have received a number of questions for Brian Breheny, Chief of the SEC’s Office of Merger & Acquisitions, who will open this webcast by explaining the SEC’s Section 21(a) Report regarding Titan, which asserts that potential liability exists under the Exchange Act for publication of false or misleading material disclosures regarding material contractual provisions such as representations.
As the appetite for internal control disclosure samples seems insatiable, here we go:
– Glenayre Technologies’ 10-K – uses the 45-day extension, hints that it may not be able to meet the extended date, and gives an extensive risk factor.
– Calvary Bancorp’s 10-K – uses the 45-day extension indicating that management is not aware of a problem
– Gorman Rupp’s 10-K – gave itself a “not effective” opinion based on a material weakness related to one of its subsidiaries
– Maxtor Corporation’s 10-K – has ineffective internal controls and as a result, ineffective disclosure controls (also has a risk factor re: the control problems)
– Bassett Furniture’s 10-K – Here’s a good sample using the 45-day extension for non-accelerated filers (there are a few bad ones out there, with no conclusions. Be careful!)
“Steps to Take” Transcript is Up!
On CompensationStandards.com, we have posted the transcript from the popular webcast: “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney.”
ISS Announces Position on Shareholder Proposals Re: Majority Vote Requirements
Late last week, ISS issued a new voting policy outlining how they intend to generally support non-binding proposals seeking majority vote requirements in boardroom elections. The overarching rationale for the change was that “implications of ‘Majority Vote’ proposals are potentially far-reaching, as they could recast the way in which directors are elected.”
ISS has created a resource center on majority-vote proposals, that contains its new policy on this issue and a transcript from a roundtable on the topic from last month.
It is notable that the Carpenter’s union recently withdraw its majority-vote proposal at ten companies because they all agreed to sit down with union representatives in a work group to study the feasibility of majority elections for corporate directors. This development follows the formation of the related ABA Majority/Plurality Voting Task Force that I blogged about on February 25th. In addition, we have just posted Marty Lipton’s memo on majority vote provisions in our “Shareholder Access” Practice Area.
Disney’s Succession
Although CEO succession is one of the board’s primary tasks, I would argue that its the least understood – and most challenging – of the board’s duties. This is reflected during the recent controversy over Eisner’s successor at Disney, who was selected over the weekend to be inhouse candidate Robert Iger. Now, dissidents Stanley Gold and Roy Disney believe that Eisner railroaded the succession process and have released this statement calling for removal of the entire board and saying “Mr. Mitchell’s approach to good governance is no better than a carny at the fair, enticing words but in the end the game is rigged.”
The lack of understanding is also reflected in the fact that I have only seen one article written about CEO succession in my five years as editor of the Corporate Governance Advisor and managing all these websites. Learn more about CEO succession in our “CEO Sucession” Practice Area.
I’ve heard that the Big 4 may be split on the issue of whether restatements caused by lease accounting are an indication of a material weakness, with two firms saying that they were going to look at this on a case by case basis applying a SAB 99 type materiality analysis to the impact of the restatement on the periods restated (apparently taking the view that while it would be material if taken all in one period, it was not material to any restated period and therefore not a material weakness) and the other two firms seem like they are inclined to take the view that essentially any lease accounting restatement results in a determination of a material weakness.
Here are two companies that just filed their 10-Ks with lease accounting restatements and clean 404 opinions: Office Depot and J Jill.
The restaurant industry is one of the industries impacted by issues raised in the SEC Chief Accountant’s letter on lease accounting (see my “SEC Speaks” notes regarding how OCA views its letter), as reflected by a recent letter from the National Restaurant Association to the SEC that I have heard about through the grapevine.
I have been getting quite a few questions on what to do about exhibits to the 10-K relating to compensation events/data – such as director compensation, setting of NEOs salary (both for those NEOs with and without employment agreements), bonus related items, etc. So I have pulled some examples from 10-Ks filed recently and put them in a new “Form 10-K Disclosure” Practice Area on CompensationStandards.com.
’33 Act Reform
At last week’s “SEC Speaks,” the Staff indicated that the vast majority of the comments received on the ’33 Act reform were supportive. Here are the comment letters, including the one from the ABA submitted last week. The biggest areas of comment fall into three categories: (1) liabilities; (2) electronic road shows; and (3) disclosure of outstanding comments in ’34 Act reports.
Learn more about the reform in this interview with Valerie Ford Jacob on Securities Act Reform.
In the Nov-Dec issue of The Corporate Counsel (p.8), Mike Gettelman suggested that companies use their Audit Committee Report to discuss their internal controls’ process and costs. Below are some companies that have made such disclosure in their Audit Committee Reports, but none of these go as far as Mike recommends (i.e. none of these examples disclose the level of time and money spent):
I am surprised that not more companies are making this disclosure so far, particularly given Linda Griggs observations on this topic made at the end of her interview with me conducted a few weeks back.
Here are a sampling of this samples: In its Form 10-K, Informatica voluntarily discloses a signficant deficiency in its report, but its controls are still effective. And Mim Corporation discloses in its Form 10-K that it has an adverse opinion because its internal controls aren’t effective due to material weaknesses, including an ineffective audit committee!
Trust Preferred Developments
Last week, the Federal Reserve Board released its final rules on the capital treatment of trust preferred securities and other capital instruments. The rule largely reflects the Fed’s May 2004 rule proposal and comprehensively integrates prior Fed guidance on capital instruments, particularly those issued by bank holding company subsidiaries.
The Evolution of Due Diligence Practices (and Securities Act Liability)
Don’t forget tomorrow’s webcast – “The Evolution of Due Diligence Practices (and Securities Act Liability)” – during which Bob Buckholz of Sullivan & Cromwell; Joe McLaughlin of Sidley Austin; and Michael Kaplan of Davis Polk will analyze how diligence practices are evolving in the wake of the WorldCom, the first major court opinion to affect diligence practices in decades.
Each year, this proxy is chock full of interesting and innovative disclosures, and this year is no exception. Some of the highlights from my initial pass through the report:
– A thorough description of the compensation and benefits for non-employee directors, including charitable gifts and the use of GE appliances under the company’s Executive Products Program. (The proxy statement also describes the company’s liability insurance coverage for directors, which is rarely, if ever, mentioned by companies in their director compensation disclosure.)
– Comprehensive disclosure of all related-party transactions, including a statement by the company that it believes the disclosed transactions were reasonable and in the best interests of the company.
– A description in the Board Compensation Committee Report of all of the components of executive compensation considered in reaching decisions about the specific compensation elements and total compensation paid or awarded to GE’s senior executive officers.
– A discussion of each element of the company’s executive compensation program, broken out by compensation type – base salary, annual bonus, stock options/restricted stock units, career retention RSUs, performance share units, contingent long-term performance awards, and perquisites.
– Extensive disclosure of the various perquisites and other personal benefits for executive officers. The discussion includes the following statement on the company’s executive security program:
“We believe the security costs described in this paragraph are legitimate business expenses, but we also recognize that all of these costs can be viewed as personal benefits. In the interests of full disclosure, we are treating all of these costs as personal benefits for these executives and have reported them as such in the “Other Annual Compensation” column in the {Summary Compensation] table . . . .”
I like the way GE handles this issue. While the company’s stance is at odds with the SEC staff’s position, it avoids a dispute by providing the disclosure anyway (which conforms with its past treatment of security-related benefits). I suspect that some companies that consider security-related travel to be a business expense opt not to provide the disclosure.
– The BCCR also contains specific discussions of (i) the company’s stock ownership requirements for senior executives, (ii) the company’s stock holding period requirements, (iii) the company’s position on stock option expensing (it has expensed options since 2002), (iv) the company’s policy prohibiting stock option repricing, (v) the disposition of outstanding stock appreciation rights in anticipation of the American Jobs Creation Act and new Section 409A, (vi) the company’s policy on the use of employment and severance agreements, (vii) the company’s policy to seek shareholder approval of severance arrangements for any of the Named Executive Officers under certain circumstances, and (viii) the company’s Section 162(m) policy.
– The Summary Compensation Table is very easy to read, extending over two full pages and includes several features seen in prior years’ proxy statements, including a “Total Annual Compensation” column and a break out of the “All Other Compensation” amounts in the table itself (rather than in a footnote).
– A statement in the footnote on executive perquisites indicating that the amounts reported for personal use of corporate aircraft for 2002 and 2003 differ from the amounts reported in prior proxy statements because the company has changed the way it calculates the incremental cost for personal use of the aircraft. Starting in 2004, the company now includes only those variable costs incurred as a result of personal flight activity in the calculation, and excludes non-variable costs, such as exterior paint and interior refurbishment, which would have been incurred regardless of whether there was any such personal use.
– Disclosure of the range of above-market interest rates contingently credited on salary deferred by the NEOs.
While some of the items listed above were first introduced in last year’s proxy statement, GE continues to refine and improve its disclosure each year. They really do a good job of taking the compensation program of a truly complex company and making it readable and informative.
