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."
A number of members have been sending me their complaints about the internal controls process. Here are a handful:
– There appears to be a lot of fuzziness on the part of independent auditors regarding the lines between what is a material weakness versus significant deficiency.
– We’ve had a number of clients try to get us involved in their disputes with the independent auditors – for example, asking us to call the SEC, PCAOB and other accounting firms to try to check the positions being taken by their current auditors.
– When we ask the independent auditors about the specific basis for a determination of specific significant deficiencies or material weaknesses, they reply that it is part of “best practices.” It gives us pause that a failure to follow someone’s notion of best practices might be tantamount to a significant deficiency or material weakness.
– We just had a client tell us that their auditor told them that using the company’s in-house legal department/counsel as the recipient of “whistleblower” complaints is a significant deficiency. This doesn’t make sense (and it would cause a large percentage of companies to have a significant deficiency, since many companies use their GC or other in house counsel as the clearinghouse for whistleblower complaints).
– Our independent auditor just told us that we have significant deficiencies for failing to run a background investigation (covering education, employment
history and criminal records) for all senior management as well as all
employees who will be involved in accounting or financial reporting
oversight. In addition, they cited us for failing to have an internal audit function.
I think companies are going to feel sandbagged by these and other positions the accounting firms take and that they will be particularly upset if there isn’t some measure of consistency among the firms about what constitutes a significant deficiency.
– Regarding audit committee evaluations, one of our clients has been asked by their auditor to review any notes made during the board meeting during which the evaluation was discussed as well as the responses to the questionnaires. The auditors seemed more focused on the thoroughness of the process than on the substantive results.
On Friday, the SEC posted 10 FAQs regarding its November 30th exemptive order that provided a 404 delay for certain smaller companies. At the same time, the PCAOB issued one related FAQ.
In particular, note FAQs 4-6, which discuss the effect of reliance on the SEC exemption on a company’s eligibility to register securities on Forms S-2 and S-3 – and FAQ 7 discusses Form S-8 eligibility.
Quick Survey: Internal Control Delays and Auditor’s Evaluation of Audit Committees
In response to members asking me whether I have heard much talk about companies delaying the schedule for their Q4 earning announcements because of 404 uncertainty, I have posted this quick survey. It also addresses filing 10-Ks belatedly and the process of independent auditors evaluating audit committees.
And here are the results from the just completed survey on timing of option grants.
In this speech that was just posted yesterday, Corp Fin Director Alan Beller weighs in on internal control disclosures. Here are is an excerpt from the speech:
“For their part, investors should remember that the internal control reporting provisions under Section 404 are disclosure provisions. Companies that complete their assessments and find material weaknesses and disclose them, and whose auditors complete the internal control audit and include the required report on internal controls, will be compliant with the reporting requirements of Section 404. Companies with internal control material weaknesses can also have financial statements and unqualified financial statement audit reports that meet our requirements, where the auditors are able to do substantive audit work that in effect overcomes those material weaknesses. Indeed, auditors have been doing that for a long time. Now investors will know and thus be better informed. And, importantly, material weaknesses in internal controls do not necessarily equate to deficient financial statements or financial statement audit reports.
Moreover, while we are and will be seeking appropriate disclosure through our rules and review and comment process, it is also incumbent on investors to demand from companies the disclosure they need to evaluate particular material weaknesses and to review and analyze that disclosure with particular care, in order to evaluate the implications of given material weaknesses for reliability of financial reporting and financial statements, and also to consider what remedial steps companies are taking. Any disclosure that a company has a material weakness is a serious matter for investors, but that disclosure should be the starting point rather than ending point for investors’ analysis. Further, understanding companies’ plans for remediation and their implications is particularly important in light of the fact that this is the first year that companies will be reporting under Section 404.
Also regarding remediation, where a company’s internal control report discloses that management identified a material weakness at the end of the company’s fiscal year (the time as of which the report must speak), but the company has remediated that material weakness by the time it files (or by the time of a subsequent filing), the report as of the end of the fiscal year must report the material weakness and the company must still include the necessary disclosures regarding the material weakness. The company may also further disclose (and may be required to disclose) that the material weakness subsequently was remediated. Indeed, some members of the advisory group established by the PCAOB have requested that the Board develop a standard for reviewing remediation, and the PCAOB staff has the matter under consideration.”
Grace Period Ends for Section16.net and TheCorporateCounsel.net
If you have not renewed your membership to Section16.net or TheCorporateCounsel.net (or the Romeo & Dye Section 16 Filer), today is the last day of the grace period. Starting Monday, you will no longer have access – so renew today!
Don’t forget Wednesday is the annual webcast on Section16.net – “Alan Dye on the Latest Section 16 Developments.” NASPP members also get access to this popular event! If you have renewal questions, call our HQ at 925.685.5111 or send them an email at info@thecorporatecounsel.net.
Ann Yerger to Head CII
Last week, Ann Yerger was named Executive Director of the Council of Institutional Investors. Yerger joined CII in early 1996 as the Director of the Council’s Research Service and was named Deputy Director in 2002. Before joining CII, Yerger was deputy director of the Corporate Governance Service of the Investor Responsibility Research Center. Ann is a great choice and I wish her well!
The Jan-Feb issue of The Corporate Counsel is being printed and will cover many timely topics, including what to consider if 404 will delay your 10-K. It also touches on how the SEC Staff is applying SLB 14B, the Staff Legal Bulletin that addresses Rule 14a-8 issues.
A number of practitioners are still griping about what SLB 14B didn’t cover, such as the lack of a requirement for proponents to send the company a copy of anything they send to the Staff (which means that a company has to keep calling the Staff asking if the proponent has submitted anything). And the failure to address John Chevedden’s assertion that if he has to revise his statements, he is not bound by the 500 word limitation (or rather, that it starts a new objection period – which by that time typically runs into the company’s printing deadline).
We encourage those of our members who have not yet discovered the essential practical resources of The Corporate Counsel (and The Corporate Executive) to try it on a no-risk trial basis to get this important issue!
In the local news category, today’s Presidential Inauguration is causing a fuss here in DC for its cost and scope. No one quite understands why there is a ban on puppets along the parade route today. Is that like Kramer’s fear of clowns?
As the grace period for those of you that have not renewed yet for TheCorporateCounsel.net expires in a few days, bear in mind these upcoming two webcasts: On Wednesday, February 2 – “Demystifying Internal Controls Disclosures” – featuring John Huber of Latham & Watkins; Linda Griggs of Morgan Lewis, Mike Hermsen of Mayer Brown and David Lynn, Chief Counsel, Division of Corporation Finance, SEC. Join them to learn how to cope and prepare new and complex disclosures as the new rules take effect!
And on Tuesday, February 8, check out – “Last Minute Planning for the Proxy Season” – featuring Amy Goodman of Gibson, Dunn, Karl Groskaufmanis of Fried Frank, David Katz of Wachtell Lipton, and Michael Ullman of Johnson & Johnson. By popular demand, guidance from the experts to make sure you haven’t overlooked anything this proxy season!
To avoid missing these webcasts, renew for TheCorporateCounsel.net today!
Big Four Seeks Protection From Legal Action
The Business Roundtable is urging regulators to limit the liability accounting firms face from potential negligence claims. And as reflected by proposals on proportionate liability currently under consideration in the United Kingdom, the Big Four also is seeking protection from legal action in other countries.
Right now, E&Y faces a mulit-billion dollar claim from Equitable – and Deloitte is being sued in the US courts by the administrators of Italian dairy Parmalat. The $10 billion lawsuit could destroy Deloitte if successful.
EDGAR Open; SEC Closed for Inauguration
Even though the SEC is closed for the Inauguration tomorrow, according to this press release, EDGAR is open since it is not an official federal holiday.
Aside from being the first Section 11 decision worth reading in 35 years, the December opinion in the WorldCom litigation is the first important decision on Section 11 and its application to shelf offerings. Learn more in this excellent interview with John Jenkins on Latest Developments for Underwriters’ Due Diligence Defense.
I haven’t seen anyone else talk about this important decision – so I consider this is a “must” read. I blogged about this 159-page opinion from Judge Cote a few weeks back.
Poison Pill Developments
On DealLawyers.com, I just posted this informative interview with Bill Lawlor on Poison Pill Developments. Among other developments, Bill analyzes what companies might consider when faced with shareholder opposition to provisions in their pills during the proxy season.
Small Business to Get Internal Controls Relief from COSO
Last week, the Committee of Sponsoring Organizations (COSO) announced that it will develop guidance that will help small companies follow the new internal control rules without breaking their budgets. The new guidance, which will be produced by PricewaterhouseCoopers, will be available online by June 30th. COSO estimates that 5,000 companies with annual sales of less than $200 million can be helped from the upcoming guidance.
Earlier this week, I held a prep call with panelists for next Wednesday’s webcast – “Impact of Internal Controls on M&A” – and I quickly became convinced that if you are involved with deals at all, you won’t want to miss this one! Among other topics, the panelists – including SEC Deputy Chief Accountant Andy Bailey, John Huber, Teri Iannaconi and more – will cover:
– How to determine the costs of a company’s buying a target that has known material weaknesses or has uncertainty as to whether there are material weaknesses? How do these costs differ pre-and post-404?
– What is the process of how dealmakers deal with internal controls diligence and related representations and warranties? What might acquirors – and their auditors- be looking for when they diligence a possible target’s internal controls?
– In what contexts – and why – can internal controls impact bid price?
– In what contexts – and why – can internal controls prejudice US public company bidders?
– What are the costs and benefits of taking advantage of the internal controls “M&A exemption” provided by the SEC Staff?
Google and Its GC Settle Enforcement Case Over Option Registration
Yesterday, the SEC Enforcement Division announced a settlement with Google and its General Counsel for a Section 5 violation – because $80 million in options were granted before the company’s IPO in a manner that triggered registration obligations which weren’t met by the company.
First, Google’s GC apparently tried to rely on the Rule 701 exemption even though no more than $5 million in options can be granted in a 12-month period under its terms. Then, according to the SEC’s administrative order, the GC concluded that a sufficient number of options had been issued to employees who were accredited investors under Rule 506 to avoid exceeding Rule 701’s $5 million threshold – and finally he tried to rely on a Section 4(2) exemption.
Apparently, this is the first time the SEC has brought an Enforcement action for violating Rule 701. Note that there was no 102(e) proceeding or Part 205 allegations (although Google wasn’t public at time of violations, SEC could have brought 205 allegation due to ongoing violations).
The damning aspect of the SEC’s settlement (which was a cease & desist with no fines) is summed up in this excerpt from the SEC’s press release:
“The Commission’s order further finds that Google’s General Counsel David Drummond, 41, of San Jose, Calif., was aware that the registration and related financial disclosure obligations had been triggered, but believed that Google could avoid providing the information to its employees by relying on an exemption from the law. According to the Commission, Drummond advised Google’s Board that it could continue to issue options, but failed to inform the Board that the registration and disclosure obligations had been triggered or that there were risks in relying on the exemption, which was in fact inapplicable.”
As SEC Enforcement Director Steve Cutler promised in a speech in late September, the SEC clearly is targeting securities lawyers at a pace that is unprecedented. Be careful out there.
Notes From The Dura Argument on Loss Causation
Below is an excellent blog from Wilson Sonsini’s Lyle Roberts who writes the excellent The 10b-5 Daily blog regarding Wednesday’s Supreme Court argument in the important Dura Pharmaceuticals v. Broudo case concerning loss causation:
Oral argument in the Dura Pharmaceuticals v. Broudo case took place in the U.S. Supreme Court this morning (links to all of the main briefs can be found here). The question presented was: “Whether a securities fraud plaintiff invoking the fraud-on-the-market theory must demonstrate loss causation by pleading and proving a causal connection between the alleged fraud and the investment’s subsequent decline in price.”
Chief Justice Rehnquist did not attend the hearing, but reserved his right to participate in the decision. Argument was heard from counsel for Dura Pharmaceuticals, the U.S. government (in support of Dura’s position), and Broudo. Here are a few notes on the main issues that were discussed:
Overall Impressions – Predicting how the Supreme Court will rule based on oral argument is a tricky business. That said, the Court appeared likely to reject the 9th Circuit’s price inflation theory of loss causation. Whether the Court will attempt to lay out what a plaintiff in a fraud-on-the-market case must plead as to loss causation to survive a motion to dismiss, however, was unclear.
Dura’s Position – Consistent with their briefs, Dura’s counsel argued that a loss only occurs when a corrective disclosure is made. Justice Breyer posed the following hypothetical – a company says it has found gold and its stock price is $60; the company later discloses that no gold has been discovered and the stock price declines to $10; the loss is clearly $50. But what if the gold never existed but the company finds platinum and the stock price rises to $200? Are plaintiffs permitted to show that the stock price would have been $250 if the company had also found gold? Dura’s counsel did not disagree that it might be possible to demonstrate loss causation under these circumstances, but argued that there would need to be a disclosure about the absence of gold.
Difference Between Dura And Government? – Justice Ginsburg, in particular, noted that there appeared to be a difference between Dura’s position and the one put forward by the government, because the government allowed for the possibility that something other than a corrective disclosure might be sufficient to establish loss causation. Justice Scalia emphasized that plaintiffs simply need to show that the market knows the truth, however that truth comes to be revealed.
Government’s Position – The government’s counsel then argued that to establish loss causation, plaintiffs must demonstrate that the price inflation caused by any misrepresentation was removed or reduced by the dissemination of corrective information (but there is no need for a formal disclosure from the company).
Rule 8 vs. Rule 9(b) – Having established its basic position, the government’s counsel found himself in the awkward position of spending most of his time defending a proposition of law that was not really briefed in the case. At least two justices, Ginsburg and Stevens, appeared to feel strongly that the pleading of loss causation is only subject to the notice pleading requirements of Fed. R. Civ. P. 8. The government’s counsel countered that, as an element of fraud, loss causation must be plead with particularity pursuant to Fed. R. Civ. P. 9(b) and it was important to make an assessment about loss causation at the pleading stage of a case before defendants are forced to pay millions in discovery costs or settlement of the claims.
Need A Viable Theory of Loss? – Even if Broudo was only required to engage in notice pleading on the issue of loss causation, Justice Breyer questioned whether the complaint still needed to articulate a viable theory of loss. Broudo’s counsel conceded that the complaint could have contained more on this point, but later noted that the pleading was in conformity with 9th Circuit law at the time it was filed.
When Does Loss Occur? – As expected, a large portion of the argument concerned whether the 9th Circuit’s price inflation theory of loss causation (i.e., that the loss occurs, and a viable claim exists, at the time the purchaser buys the stock at an artificially inflated price) is correct. Broudo’s counsel argued in favor of the 9th Circuit’s position, but conceded that to show recoverable damages the plaintiffs would eventually have to establish that the inflation in the stock price was reduced or eliminated. A number of justices expressed skepticism that there could be any cause of action for fraud prior to actual damages having been suffered. Justices Souter and Scalia suggested that the inflation in the stock price simply established the limit of the potential loss, not that any loss had occurred. Justice Scalia also wondered whether the entire case was simply a “great misunderstanding,” since the parties both agreed that plaintiffs would eventually have to establish that the inflation in the stock price was reduced or eliminated. Broudo’s counsel noted, however, that there was also an issue over what plaintiffs needed to plead in their complaint on this issue and it may be possible for “lowered expectations” to result in stock price drops that are related to the fraud, even though the fraud is not revealed.
Yesterday, the US Supreme Court issued its opinion and syllabus on the Federal Sentencing Guidelines in a decision on two drug cases (note this document is subject to formal revision before official publication). This is a complex opinion with dissents.
Mike Holliday reports that the Court found that the Sixth Amendment – regarding jury trials – as construed in the Blakely case applies to the Sentencing Guidelines and, in light of this holding, that two provisions of the Sentencing Reform Act that have the effect of making the Guidelines mandatory must be invalidated. The syllabus states that as so modified, “the Act makes the Guidelines effectively advisory, requiring a sentencing court to consider Guidelines ranges . . . but permitting it to tailor the sentence in light of other statutory concerns . . .”
Broader interest in the case has to do with companies having an “Effective Compliance and Ethics Program” as a mitigating factor in the sentencing of organizations under the Federal Sentencing Guidelines. Mike thinks that this decision does not change the desirability for companies to maintain these programs – but we are both interested to see what lawyers following the case think.
The Compensation Disclosure Blog
Very happy to announce that a panelist from today’s CompensationStandards.com webcast – Mark Borges of Mercer Consulting – has commenced blogging in “The Compensation Disclosure Blog.”
Through his blog, Mark will assist you to understand the evolving nature of compensation disclosure during this proxy season – and highlight examples as he sees them. Thus, the goal is to maintain this blog only for a few months – the first “limited time only” blog! Feels like I am seeding new bloggers on almost a daily basis now and loving every minute of it.
If you will participate in today’s webcast and plan on taking notes, print out these questions that the panelists will address.
NYSE Updates Equity Compensation FAQs
Yesterday, the NYSE posted updated FAQs regarding Section 303A.08, which requires shareholder approval for equity compensation plans. The updated FAQs relate to:
– whether amendments to equity compensation plans to comply with Section 409A of the Internal Revenue Code require shareholder approval (C-15)
– whether shares available under a plan of an acquired company may be used after the acquisition for grants to persons who were non-employee directors or consultants of the acquiring company or its subsidiaries prior to the acquisition (E-6)
– revised answer to clarify that references to consultants in the rule include anyone for whom the company uses or would be permitted to use a Form S-8 registration statement to register the equity granted (F-1)
The LA Times reports that a group of Wall Street banks has challenged the settlement announced last week between 10 former WorldCom directors and plaintiffs. The 16 banks were among the underwriters of WorldCom securities and are also defendants in the lawsuit, which is scheduled to go to trial on February 28th.
In a letter to U.S. District Judge Denise Cote, the banks argued that the settlement with the former directors was inappropriate, among other reasons, because it was reached too close to the scheduled trial date, could leave the remaining defendants to shoulder too much liability and could be scuttled by the insurance companies, which under certain circumstances could back out of the agreement.
In a brief hearing yesterday, the Judge declined to grant a request by plaintiffs that the 10 former directors be immediately excused from the case. Instead, she asked both sides to quickly submit briefs further detailing their arguments. She said the trial would begin as scheduled, whether the 10 former directors have been excused from the case at that point or not.
For more analysis on what the WorldCom settlement means for directors’ liability, read this interview with Andy Edison on the WorldCom Litigation Settlement.
Tomorrow’s CompensationStandards.com Webcast
It truly has been a madhouse as many folks have been signing up at the last minute for tomorrow’s webcast: “What NOW Needs to Be Disclosed in the Proxy Statement.” Don’t forget that the webcast is earlier than our typical webcasts – at noon eastern on Thursday – and the audio archive will be available soon after its complete in case you missed it live.
Our HQ has been swamped with so many requests that now, in order to ensure access, you are advised to sign up directly online.
And, to avoid user ID and password hassles, you can take advantage of the simple “Firmwide Rate” of $1995, by which everyone in your company or firm can access all the resources on the website (with exception of 10/20 conference archives which now only costs $95 per person). And all the 2005 rates for CompensationStandards.com entitle subscribers to 50% off for the 2005 compensation conference to be held in the Fall, either live or by video webcast.
Class Action Securities Fraud Lawsuits up in 2004
According to a report released last week by the Stanford Law School Securities Class Action Clearinghouse (in cooperation with Cornerstone Research), the number of federal securities fraud class actions filed in 2004 increased only moderately from 2003 levels, rising to 212 companies sued from 181 – but the decline in stock market capitalization corresponding to these actions increased dramatically.
The number of lawsuits alleging violations of GAAP remained relatively constant in 2004, declining to 102 (48%) in 2004 from 107 (59%) in 2003. Further, several of the large dollar losses observed this year arose as a consequence of product market developments that had material adverse stock market price effects.
The report found that the most active federal circuits as measured by the number of issuers sued in 2004 were: the Ninth Circuit (including California) with 64 filings, an 83 percent increase over 2003; the Second Circuit (including New York) with 45 filings; and the Eleventh Circuit (Alabama, Florida, and Georgia) with 20 filings.
Pension Reform On the Way
On Monday, Dept. of Labor Secretary Chao announced the administration’s plan to reform funding requirements for private, single employer defined benefit pension plans and to raise the premiums paid to the Pension Benefit Guaranty Corporation. Here is the DOL press release – and a fact sheet put out by the DOL.
The following outlines the Administration’s plan in general terms: It is based on three main principles: (1)Reforming the funding rules for private defined benefit pension plans to ensure that employers fully fund their retirement promises. (2) Reforming the premiums that private defined benefit plans pay to the federal insurance program to better reflect the real risks and costs. (3) Increasing the disclosure of information about private defined benefit pension plans to workers, investors and regulators to ensure greater transparency and accountability.
Some of the proposed changes are:
– Companies would be required to make up funding shortfalls within a reasonable period, e.g., 7 years.
– Pension liabilities would be determined using corporate bond rates, based on using bond durations that match the schedule of when pension benefits are to be paid.
– Premiums to the PBGC would initially be increased to $30 per worker from the current $19 and be indexed into the future, for flat rate premiums.
– Underfunded plans would pay risk-based premiums based on plan underfunding.
We have posted the 56-page settlement as an “Alert” on the home page of TheCorporateCounsel.net. And analysis of the settlement from Wachtell Lipton and Davis Polk are posted under “The Latest” on GreatGovernance.com.
Complimentary Special Supplement of The Corporate Counsel
On CompensationStandards.com, we have posted the Special Supplement to the Nov-Dec issue of The Corporate Counsel on a complimentary basis. It provides a great recap of our October 20th executive compensation conference.
Sarbanes-Oxley Q&A with Treasury Secretary John Snow
Last week, the Treasury Secretary did this interview with Business Week on corporate reform. He seems to suggest that regulators have gone too far in enforcing corporate reform and there is a need for more balanced enforcement – but he also believes SOX shouldn’t be modified.
Download Streaming Audio for Your Car
For those that wish to listen to one of our audio webcasts in your car – and I won’t make any “pinhead” jokes as I like to listen to legal mumbo jumbo in the car myself – you can burn a CD from streaming audio by using RecAll Pro, available on Sagebrush.com.
For folks with MP3 players, have you seen All Sound Recorder XP? You can record streaming audio (e.g., Sirius or XM radio, PLI or other webcasts) off your PC and save it as an MP3, which you can transfer to your MP3 player.
On the heels of the announcement that WorldCom directors agreed to pay $18 million out of their own pockets to settle a lawsuit, it was announced that Enron directors have agreed to pay $13 million personally as part of a settlement reached in October (like the WorldCom settlement, the Enron settlement still needs court approval).
We will be posting analyses of these settlements soon in the “Hot Topics” area of CompensationStandards.com. And we have launched a “Form 8-K Disclosure” Practice Area on that site that includes a number of recently filed 8-Ks that are relevant to the Bonus Segment of the January 13th webcast – “What NOW Needs to Be Disclosed in the Proxy Statement” – during which Alan Dye will cover the SEC Staff’s latest positions on 8-K compensation disclosures.
To gain access to this critical webcast, enter a No-Risk Trial today! If you are undecided, don’t forget our unconditional full refund policy: If at any time you are not completely satisfied with CompensationStandards.com, simply tell us and we will refund the entire cost of the year’s subscription.
Slow Death for CalPERS and CalSTERS?
Last week, it was reported that California Governor Schwarzenegger endorsed plans to partially phase out the California state defined-benefit public pension plans (e.g., CALPERS and California State Teachers’ Retirement System) to 401(k) type plans. A state lawmaker and a taxpayers group has filed a proposed ballot initiative that would require new hires to participate in 401(k) type defined-contribution plans, possibly as early as 2007. Also, current employees would be able to transfer their retirement benefits into a 401(k) type plan.
This movement towards defined contribution plans has profound implications for shareholder activism as state funds traditionally have been among the more active investors – and money managers for mutual funds have not been.
Another Day, Another Blog
On CompensationStandards.com, Mike Melbinger of Winston & Strawn has picked up the mantle and begun blogging on his Melbinger’s Compensation Blog. Below is one of Mike’s first entries:
Open Market Purchases Under Formula Plans
In drafting a new equity incentive plan for an NYSE-listed client, we encountered a question about the formula plan rules under FAQ D-1 of the shareholder approval rules. The company wants (and provides in its shareholder approved plan) to add back shares that are repurchased by the company using the cash paid upon the exercise of options. The question was: how closely do we need to match the open market purchases we make (or have made) with the cash we have received (or will receive) from option exercises?
Specifically, we wondered:
– whether there was some temporal requirement to match the proceeds with the purchases (i.e., could we get replenishment credit for shares purchased in the open market in the second quarter of 2004, even if there were no proceeds from option exercises until the third quarter of 2005)?
– Do we only look at this on a quarter-by-quarter basis, or a year-by-year basis, and match cash proceeds and purchases within the quarter (or year) without regard to the specific date on which the proceeds/purchases occurred?
– If there were excess cash proceeds for any quarter, could we carry those over to the next quarter? Could we carry over excess purchases?
– Could we take cash proceeds from a current quarter and match them against purchases made in a prior quarter?
We discussed these questions with an attorney for the NYSE, who advised that company can choose any logical, workable arrangement that it desires. We agreed that the company would want to include in the plan or committee procedures, some specifics about cash received during what period, purchases made during what period, etc. – so it can accurately ascertain how many shares are to be considered available under the plan at any given time.
We also considered that it might be difficult to match purchases made in a prior period with cash received in a subsequent period, because the company would be making purchases without knowing how much cash it had to fund them.
However, even in this situation, the company probably could create a formula that includes in the plan only such number of previously purchased shares as are covered by subsequently collected money.
The “formula” we would include in the plan is that there will be added to the plan a number of shares that can be purchased in the market by the company with the cash received from option exercises.
