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."
Wow! The preliminary withhold vote on Michael Eisner, based on voting prior to the meeting (of course subject to final count and confirmation of inspector of election, and all the other disclaimers announced by Disney) was 43% yesterday. This is an extremely high number considering the highest withhold vote on a Fortune 100 director last year was in the mid-20s (for an “Enron” director who still sits on Lockheed Martin’s board).
Considering that roughly a quarter of the votes cast were broker non-votes – who routinely support management – more votes were actively cast against Eisner than for him. And this is all due to a media/Internet campaign against Eisner – with no proxy solicitator involved, a remarkable achievement. Also noteworthy is that three other “targeted” directors of Disney also received withheld votes in the low-20% range.
It will be interesting to see how these historic results are used to make arguments at next week’s SEC roundtable on shareholder access (eg. an argument that the proposed trigger thresholds can be easily reached and thus don’t need to be lowered versus an argument how investors would bother to actively vote if they knew their votes had consequences).
The NASD has sent out its Notice to Members 04-13 announcing the adoption of major amendments to the NASD’s Corporate Financing Rule–Rule 2710. The amendments were approved by the SEC on December 23, 2003 and the SEC approval order was published in the Federal Register on December 31, 2003.
As more fully explained in my interview with Suzanne Rothwell, these rule changes effect a new approach to underwriting arrangements. The Notice to Members summarizes the amendments and provides clarification regarding the application of Rule 2710 to straight debt and derivative securities. The Notice also includes the text of the amendments.
At last week’s Institutional Shareholder Services conference, Corp Fin Deputy Director Marty Dunn noted that the staff is on pace to receive about the same number of exclusion requests as last year (and last year was a record). However, it was also noted that more proposals were either being negotiated out of the proxy statement or placed on the ballot without opposition (in fact, over 30 proposals were withdrawn while the SEC staff was processing an exclusion request just during the past month).
So, it appears that this year likely will see a new record number of proposals. In fact, Carol Bowie of IRRC states in today’s NY Times that the number of proposals dealing with corporate governance topics will be over 900 this year, up from 500 last year. That 900 corporate governance proposals nearly equals the record-setting number of overall proposals set last year of just over 1000. So I wouldn’t be surprised if this year’s number of overall proposals falls at well over 1300.
Marty did confirm that the sole “opt-in” trigger proposal so far is the Marsh & McLennan one. The staff did allow the exclusion of a proposal – Verizon Communications (2004 Lexis 200 Jan. 18, 2004 – and rejection on reconsideration, 2004 Lexis 271, Feb. 10, 2004) – that was similar to an opt-in proposal – but the proposal changed the definition of “qualifed shareholder” from what the SEC proposed in its shareholder access framework. So, the staff allowed exclusion under Rule 14a-8(i)(8) regarding election of directors.
By the way, hats off to Marty for always making his panels as entertaining as possible. He never disappoints.
SEC to Consider Adopting 8-K Proposal
Next Thursday, the SEC is holding an open Commission meeting to adopt the 8-K proposals that have been outstanding for nearly two years (see this bunch of law firm memos on the outstanding proposal). The SEC will also propose changes to 20-F to lighten the financial reporting load for certain non-US issuers.
Demise of Poison Pills?
Yesterday, the Wall Street Journal ran an article illustrating how shareholder activism has caused an increasing number of companies to dismantling poison pills – and preventing companies from installing new pills. For a number of years now, shareholder proposals asking companies to either dismantle a pill or adopt a policy to not adopt pills have received majority votes. The article notes that 12 companies have dismantled pills so far this year – compared with 29 in all of ’03 and 18 in all of ’02.
In response to a number of requests regarding what controlled companies are disclosing in the wake of the new SRO standards – from which controlled companies can “opt out” of certain provisions – I have created a new “Controlled Companies” Practice Area which links to a dozen proxy statements filed recently by controlled companies.
“Shortest 8-K Ever” Contest
Just to have a little fun in our mundane legal lives, I have commenced a contest to find the shortest 8-K ever filed – or furnished – with the SEC. The first entrant is this recent 8-K furnished by Global Crossing that announces the hiring of an advisor to explore alternatives regarding one of its business units – it consists of one sentence with about 35 words. I know there are shorter ones out there, so please forward your entrants!
SEC Proposes Changes to Regulation of Stock Exchanges
Last week, the SEC proposed Regulation NMS applicable to the National Market System. One proposal in particular would establish a uniform trade-through rule for all market centers, with certain exceptions. There is a 75-day comment period. The SEC has now posted the proposing release – but it’s a monster of a PDF at 346 pages.
To get you in the mood for our Wednesday webcast – “Conduct of the Annual Meeting” – which will include two panelists reporting from the Disney annual meeting (including one who is Disney’s Delaware lawyer), here is the recently unsealed 1996 letter from Michael Eisner to Michael Ovitz as well as the recent letter from Comcast’s CEO to Eisner regarding Comcast’s proposed acquisition.
Corp Fin’s Advice to Oil & Gas Industries
Last week, Corp Fin advised they had sent out an accounting advice letter – sort of a “global comment letter” – to all companies that they have identified as being in the oil and gas production business. In posting this letter on the SEC’s website, the staff noted that companies that did not receive the letter – but which have subsidiaries or operations in oil and gas production – should nevertheless consult the letter in preparing their filings.
FAS 69 requires specific, unique disclosures about oil and gas production; some uncertainty was thrown in, however, by the recent adoption of FAS 143 (re: asset retirement obligations) and how that affects the FAS 69 disclosures. (FAS 143 did not amend FAS 69.) This new letter gives the staff’s views on how the recognition of a liability for an asset retirement obligation and the related depreciation of the asset and accretion of the liability under FAS 143 interplay with four specific disclosure areas mandated by FAS 69: Capitalized Costs; Results of Operations; Costs Incurred; and Standardized Measures. I wonder if this is the start of the staff periodically posting global comments applicable to specific industries – a concept that has been kicked around in Corp Fin for over 5 years.
Understanding the Impact of Forensic Accounting on Fraud Investigations
From my days as the enforcement liaison from Corp Fin (on an interim basis when the guru in this area, Mary Kosterlitz, was out on maternity leave – Mary now leads a team of staffers in Corp Fin in this function), I have always known that forensic accounting is necessary to parse accounting fraud – and that these investigations are very complex.
In a no-action response dated February 9th, Corp Fin denied relief to Agristar Global Networks. Agristar hoped to use an existing database it maintained to mine for accredited investors in a private placement.
After speaking to John Jenkins at Calfee Halter & Griswold, I don’t view this as a significant development for private placements and general solicitation under Rule 502(c). On the other hand, it is a very interesting letter because it implicates one of the unresolved theoretical questions about private offerings – at what point do sheer numbers of offerees overwhelm the words of Reg D itself, and result in a proposed offering not being regarded as a private placement?
On the merits, Agristar appears to have a pretty decent argument about general solicitation. But it’s clear that Agristar’s original proposal to send invitations to complete questionnaires to “no more than 3%” of the top 250,000 Farm Principals would have resulted in the solicitation of 7,500 potential investors. Many of us have worked on public offerings with smaller red herring press runs than that. It’s interesting to see that Agristar cut it back to about 2,000 people in their second request to the staff, but that’s still a large number of potential offerees. Given the numbers, John was not surprised that the SEC didn’t want to give no-action relief on this issue, especially when the accredited investors in question were likely to be almost exclusively retail investors, and not institutions.
The Agristar letter is not likely intended to pare back existing interpretations of Reg D’s prohibition on general solicitation – it’s more of a case of the numbers of people potentially involved just getting too big for comfort. In dealing with small companies, general solicitation is ordinarily more of a theoretical than a practical concern. For most small companies, the only realistic sources of financing are friends and family or participants in local “angel networks” identified through the issuer’s lawyers and accountants. In these circumstances, general solicitation isn’t usually much of a concern. You should worry more about general solicitation when a placement agent is involved in the transaction or the client is a little too media friendly.
It would have been interesting to see what the response might have been if Agristar had asked the SEC to allow it to use this database to identify “Qualified Institutional Buyers” only. There are several no-action letters allowing the establishment of commercial databases to identify QIBs, and allowing sellers to rely on those lists for purposes of Rule 144A offerings.
IBM Adopts Premium-Priced Option Plan
On Tuesday, IBM restructured its option plans so that the 300 top executives will be denied a payoff unless the stock rises at least 10 percent. A second initiative will reward them for putting some of their own money at risk.
According to news reports, the changes drew a tepid response from institutional investors because IBM set the performance bar too low and limited it to only the top 300 of the 85,000 IBM employees who get options or restricted stock.
Blow Against Sharing Information with SEC and Attorney General
Last Friday, the California 1st District Court of Appeals held that McKesson waived the protections of the attorney-client privilege and the work product doctrine when it shared protected documents with the SEC and the U.S. Attorney. The case, McKesson v. San Francisco Superior Court, A103055, had been closely watched by the plaintiff’s bar.
The SEC and the Securities Industry Association filed amicus curiae briefs supporting McKesson. A similar case, also closely watched, is winding its way through federal courts. Fortunately, a bill is winding its way through the U.S. House of Representatives that would permit companies to share documents with the SEC and the DOJ without waiving the attorney-client privilege or the protection of the work product doctrine. See yesterday’s blog by Mike O’Sullivan for more on this bill.
On TheCorporateCounsel.net, we have kicked off an online survey regarding how companies are dealing with compensation committees and compensation consultants. Go ahead and participate now!
We have posted the final results on our recent survey about how shareholders are allowed to contact directors. Among the results from 74 respondents, at 64% of the companies, corporate secretaries handle shareholder communications – it’s the GC at 15% of the companies responding. Of these companies, 62% allow shareholder communication via regular mail; 32% allow emails and 21% allow telephone calls.
Chewing the Fat about Martha Stewart
As Martha’s trial winds up, Alan Dye and I were discussing how the Martha Stewart case raises interesting issues about news of an insider’s trades. The first question is whether an insider’s planned or even completed – but not reported – sales are material information. In a Waksal-style panic dump, it seems the information would likely be considered material. A small sale of an insignificant percentage of the insider’s stock, on the other hand, might not be viewed as material.
If the news is material, trading on it violates Rule 10b-5 only if trading breaches a duty (as the S.Ct. said in Dirks). In the Martha Stewart case, the government’s theory is that Bacanovic breached a contractual duty to his employer, Merrill Lynch, by tipping Martha – and that Martha was a knowing tippee (ie., she knew she was getting the information in violation of Bacanovic’s duty). Query what the breach of duty would have been if Sam had told Martha himself.
The Martha Stewart case also raises interesting issues regarding an issuer’s obligations when it knows an insider plans to sell stock. Consider this: the company has a pre-clearance policy and a ten day quarterly window period for trading. The window is open, and no material company news is pending. Several of the executives sit around and decide that this would be a good time to sell some stock. They all pre-clear through the GC, who also plans to sell some stock. Would you tell any of the execs, or the GC, that they can’t sell unless they publicly announce, in advance, that they plan to sell? A group of ABA members are going to get together to brainstorm these issues at the ABA’s Business Law Section Spring Meeting in April.
IASB Requires Expensing in ’05
Last week, the International Accounting Standards Board (IASB) adopted International Reporting Standard 2 that will require issuers in the European Union to treat the costs of providing stock options as an expense on their financial statements. This new standard becomes effective on January 1, 2005.
In the United States, the Financial Accounting Standards Board is expected to issue its own exposure draft in March. The FASB has indicated that it will recommend not only the Black-Scholes method but also a binomial or similar method for valuing the stock options.
The IASB is selling copies of the new standard from its website – so much for regulatory transparency. They should follow the FASB’s lead, who started posting its standards for free a few months ago.
SEC Proposes Mutual Fund Mandatory Redemption Fee/ 401(k) Plans
Yesterday, the SEC proposed Rule 22c-2 under the Investment Company Act to require open-end investment companies to impose a 2% redemption fee on the proceeds of shares that an investor redeems within 5 business days after purchasing the shares. The vote by the Commission for putting the proposal out for comment was 4 in favor with Commissioner Atkins voting no.
From our roving reporter Mike Holliday comes this summary – based on brief notes from the meeting and subject to the actual wording of the proposed rule and the proposing release:
The proposed redemption fee is aimed at the costs created by market timers in mutual funds. The proposal would affect and impose requirements on 401k plans, and 401k plans were included in the discussion at the meeting. For example, Ch Donaldson referred to the reported market timing by certain members of a Boilermakers Union Local in the union’s 401k-type retirement plan. Paul Royce, Director of the Division of Investment Management, referred to market timing in accounts without fees and tax consequences through retirement plans.
Much of the investment in funds is held through financial intermediaries such as banks, broker-dealers, insurance companies and retirement savings plans. Financial intermediaries would be required to participate in implementation of the rule. The financial intermediaries would have to assess the fees and forward the proceeds to the fund, or provide enough information to the funds so they could assess the fees.
There will be three “exceptions” to the fee:
1. The fee will be calculated against the shares held the longest, which would be considered the shares redeemed first – similar to the FIFO accounting concept – so that any shares held more than five business days would be used up first before any fee would be imposed.
2. There would be a di minimus exception of $2,500
3. There would be a provision for a fee waiver for financial emergencies (with a $10,000 limit).
In addition, certain funds would be exempt such as money market funds, exchange traded funds, and funds geared to attract market timers if they provide adequate disclosure.
The financial intermediaries would be required to deliver enough information to funds to permit the funds to oversee the intermediaries’ efforts to collect the fees, and to permit fund managers to bar frequent traders from the fund.
The Commission will also seek comments on fair value pricing and seek other solutions to combat abusive market timing activity.
As hoped, the SEC finally issued a release extending the compliance date regarding management’s report on internal control over financial reporting and the related attestation requirement.
The effective date of the rulemaking remains August 14, 2003 – but some of the compliance dates have changed. For accelerated filers, the compliance date was the first fiscal year ending on or after June 15, 2004 – the new compliance date is the first fiscal year ending on or after November 15, 2004. There are other dates for non-accelerated filers, foreign private issuers and related requirements applicable to registered investment companies.
For accelerated filers, the extension provides relief for June 30 and September 30 companies, and companies with other fiscal years ending prior to November 15. However, it does not provide an extension for calendar year companies who, in the case of accelerated filers, will have to comply for the 2004 fiscal year.
In addition, on March 9th, the PCAOB will consider adopting rules under Section 404 of SOX in a meeting at 9 am at the Mayflower Hotel in DC. It also will be webcast.
NYSE Posts New Forms
Last night, the New York Stock Exchange posted a bunch of forms related to its new corporate governance standards – including the CEO’s annual certification as well as an annual written affirmation and an interim affirmation regarding compliance with these corporate governance standards (and related instructions).
The Annual Written Affirmation and the separate 303A.12(a) CEO certification must be filed no later than 30 days after a listed company’s 2004 annual meeting. For those companies who have already held their 2004 annual meetings, and would therefore have less than the requisite 30 days, these must be filed 30 days from Tuesday.
An Interim Written Affirmation is required to be filed subsequent to the Annual Written Affirmation at any time that the independence status of a director changes – or when certain other changes are made to a company’s board or committees. Instructions are provided which list all circumstances that would require an Interim Written Affirmation.
This webcast falls on the same date of Disney’s annual meeting – and two of our panelists will be participating in Disney’s meeting (and will be sharing the interesting developments). This program promises to be one of the most practical ones we have – chock full of common sense advice from hardened veterans John Grossbauer of Potter Anderson & Corroon LLP; Carl Hagberg, Independent Inspector of Elections; and Kathleen Salmas of Northrop Grumman.
Over the weekend, California’s Secretary of State Kevin Shelley sponsored shareholder access legislation – introduced by Assemblymember Judy Chu – that would go a few steps further than the SEC’s proposal in this area. The California bill – Assembly Bill 2752 – would require companies to hold elections that meet certain requirements, such as:
– Number of shareholder nominees – Not less than 40% of the total number of directors must be eligible for election by shareholders.
– Shareholder eligibility – Shareholder or group must have more than 2% of the company’s stock held for 2 years to make a nomination.
– Soliciting support – Companies required to make information available to shareholders no less than once per year.
– Deadlines and candidate information – Proxy statements shall include statements provided by candidates of no less than 250 words in length.
– Disclosure and notice – Nominating shareholder or group must provide notice to company no later than 80 days before the mail date and the proxy card shall identify any shareholder nominees and present them in an impartial manner. Each candidate must be voted on separately. If a company includes statements in its proxy statement supporting company nominees or opposing the nominating shareholder’s nominee or nominees, the nominating shareholder or nominating group shall be given the opportunity to include a statement not to exceed 500 words per nominee.
– Website info – Companies would be required to make information regarding the process and deadlines to nominate and elect an individual to the board available on their website and in their annual report. The California Secretary of State will must create an online database by the end of ’05.
– Reach of bill – Corporations doing business in California that provide for shareholders to submit and vote on proposals on an annual ballot shall implement any proposal that passes by a majority vote unless the proposal clearly states it is advisory. If a corporation establishes a means to place an advisory shareholder proposal on the ballot, it shall also establish a means to place shareholder proposals on the ballot that are required be implemented.
Obviously, this is one to watch carefully – and hopefully won’t moot the thousands of comment letters submitted to the SEC. Letters should be directed to: Assemblywoman Judy Chu, State Capitol Room 2114, Sacramento, CA 95814 and Willie Guerrero, Assistant Secretary of State, 1500 – 11th Street, Executive Office, Sacramento, CA 95814.
“Opt-In” Shareholder Access No-Action Request
In our “Shareholder Access Portal,” we have posted a copy of the no-action request filed with the SEC by Marsh & McClennan in its efforts to exclude the “opt-in” triggering shareholder proposal that I blogged about back on February 9th.
Fairness Opinions from I-Banker’s Perspective
On TheCorporateCounsel.net, I have posted my interview with Joel Johnson on Fairness Opinions. Joel is President of Orchard Partners which provides fairness opinions, advises clients in mergers and acquisitions and provides business valuation services.
Where Does that Equity Compensation Plan Table Go?
Recently I have had a number of questions in this area, many of which have been nicely addressed in past issues of The Corporate Counsel and The Corporate Executive over a year ago (search the Electronic Back Issues for “201(d)”). As discussed in the Mar/Apr issue of The Corporate Executive – and just clarified by the SEC staff in its no-action response to the ABA – even if not required in the proxy statement (because the company is not proposing any compensation plan for shareholder approval), this disclosure can be deferred for a month via incorporation by reference from the proxy statement to Item 12 the 10-K, as its in Part III of the 10-K (and per General Instruction G(3)). On the other hand, it’s okay to present this stock plan disclosure in the 10-K only and not include in the proxy statement (so long as it’s not required in the proxy statement because a plan is up for a vote).
What appears to be tripping up folks is that some companies are placing the table under Item 5 of 10-K (which generally calls for the information required by S-K Item 201), instead of Item 12 of 10-K (which specifically calls for this table under S-K Item 201(d)). For companies that place it under Item 5 and also include it in their proxy statement – which then incorporates it into Item 12 of 10-K – they effectively have put the table in their 10-K twice!
Even if the table is not duplicated in the proxy statement, the ABA no-action letter confirms that it belongs in Item 12, not Item 5. Even before the ABA letter, this could have been implied from the SEC’s adopting release and from the legal principles that (i) the “specific” trumps the “general” and (ii) the SEC doesn’t generally expect us to include the same information in two non-financial sections.
“Securities Law and the City”
As Carrie Bradshaw goes off into that sweet, dark night, I wonder whether I should pick up her mantle and blog about relationships rather than securities law. Alas, a loud booming voice in my head keeps saying “Stick to what you know, son. Stick to what you know.” So I blog about “Reg A” rather than “reggae” and other peculiar topics that the “man on the street” doesn’t have to understand.
In addition, we have updated our list of links to the Twenty Most Widely Held Proxy Statements and 10-Ks in our “Proxy Season Resource Center.” Among others, new documents have been filed by Agere, Avaya and Lucent.
Doonesbury and Cheney Redux
I stand corrected on my blog from Wednesday as a loyal reader points out that Halliburton does indeed list Cheney as a risk factor. Halliburton’s Form 8-K dated January 21, 2004 provided risk factors in a senior notes offering, including:
“Our government contracts work has been the focus of numerous allegations and inquiries, and there can be no assurance that additional allegations and inquiries will not be made or that our government contract business will not be adversely affected. […]
To the extent we or our subcontractors make mistakes in our government contracts operations, even if unintentional, insignificant or subsequently self-reported to the applicable government agency, we will likely be subject to intense scrutiny. Some of this scrutiny is as a result of the Vice President of the United States being a former chief executive officer of Halliburton. Since his nomination as Vice President, Halliburton has been and continues to be the focus of allegations, some of which appear to be made for political reasons by political adversaries of the Vice President and the current Bush administration. We expect that this focus and these allegations will continue and possibly intensify as the 2004 elections draw nearer. These allegations have recently centered on our government contracts work, especially in Iraq and the Middle East. In part because of the heightened level of scrutiny under which we operate, audit issues between us and government auditors like the DCAA or the inspector general of the Department of Defense are more likely to arise, are more likely to become public and may be more difficult to resolve. As a result, we could lose future government contracts business or renewals of current government contracts business in the Middle East or elsewhere. We could also be asked to reimburse material payments made to or through us or be asked to accept lesser compensation than provided in our contracts. In certain circumstances, we could be subject to fines and penalties under the U.S. False Claims Act, under which treble damages could be sought. In addition, we may be required to expend a significant amount of resources explaining and/or defending actions we have taken under our government contracts. There can be no assurance that these and any additional allegations made under our government contracts would not have a material adverse effect on our business and results of operations.”
I don’t find this to be an indictment of Cheney (a departure from Doonesbury’s view, I’m sure) – to me it is more of an indictment of the ignorance of his attackers about Halliburton’s business.
