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."
Yesterday, the NYSE modified some of its FAQs regarding shareholder approval of equity compensation plans and added new FAQs in Sections G, H and I regarding foreign plans.
The SEC’s Office of Global Security Risk?
Here is a wacky one – an interesting memo from Covington & Burling points out that a recent Congressional report directs the SEC to form an Office of Global Security Risk. This new office would be a part of Corp Fin – and require companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism. The memo explains the convoluted route by which this development arose (too convoluted for me to rehash here!).
This topic likely will be addressed during the SEC’s appropriation hearing set for March. As the memo notes, the SEC consistently has opposed efforts to mandate disclosure based on political or social concerns – so I would expect the SEC to push back on this one.
Securities Fraud Class Action Dismissal Rate Drops in Wake of SOX
This is from a Hale & Dorr alert: “Federal courts have been far less willing to dismiss securities fraud class actions since Congress enacted the Sarbanes-Oxley Act in July 2002. NERA Economic Consulting recently reported that, in the wake of Sarbanes-Oxley, the dismissal rate has fallen by as much as 30%, thereby subjecting many more public companies to the uncertainty of major-stakes litigation–and with it the lengthy discovery process in which plaintiffs’ lawyers seek to build a case by reviewing the issuer’s otherwise private internal records and deposing its directors and officers.
The marked drop in the dismissal rate and the heightened litigation risks facing public companies in the post-Sarbanes-Oxley climate cannot necessarily be attributed directly to the Act itself. (Although Congress dramatically expanded federal securities regulation with the enactment of Sarbanes-Oxley, for the most part the Act did not change the statutory provisions under which these class actions typically are brought.) The courts’ reluctance to dismiss cases outright more likely reveals evolving attitudes toward these cases, perhaps reflecting concern that shareholder claims should not be resolved at an early stage of the litigation process, and a greater skepticism of public companies and their management.
In other respects, the securities fraud landscape in 2003 resembled that of prior years. The volume of lawsuits slowed somewhat from 2002; last year, on average, a new class action was filed every 1.75 days, which was consistent with the pace of filings prior to Sarbanes-Oxley, excluding one-time waves of litigation, such as lawsuits alleging that research analysts compromised their objectivity to sell banking services. As in the past, of the twelve federal circuits, the greatest number of securities fraud lawsuits were filed in the Second Circuit (which includes New York) and the Ninth Circuit (West Coast), followed by the First, Third and Eleventh Circuits (New England, New Jersey/Pennsylvania and the Southeast, respectively).
More class actions were settled in 2003 than in 2002 (163 versus 122), which is not surprising given that fewer cases are being dismissed. The average settlement ($19.8 million) was lower than in 2002 ($23.3 million), but still substantially more expensive than in 2001 ($13.8 million), which was the last full year prior to enactment of Sarbanes-Oxley. Although it is difficult to predict settlement trends, which are driven by an array of factors (including the amount of investor losses, the nature of the allegations, the issuer’s industry and locale, and the attorneys involved), we take little comfort in the small decline in median settlement amounts last year. The statistics suggest that the overall time from filing to resolution of securities class actions may be increasing. The fact that many large cases that are time intensive for plaintiffs’ counsel have not been resolved (e.g., Enron) suggests that it is the smaller and weaker cases that are being resolved relatively quickly. If this is true, average and mean settlements will continue to increase over time, and the total transaction costs associated with these cases (which are directly proportional to the time necessary to resolve them) will also increase.
Public companies and their directors and officers continue to face a significant risk of shareholder class actions, and the costs associated with these cases are likely to increase. Assuming consistent filing rates, over a five-year period the average public company faces a 9% probability that it will be the subject of at least one securities class action. Those in certain industries (such as technology and life sciences) are exposed to even greater risk. Although the high volume of class action litigation has remained relatively stable, the marked decline in the dismissal rate since the passage of Sarbanes-Oxley suggests that these problems will become increasingly difficult to resolve.”
I have spent a bit of time blogging how shareholders can communicate with directors – but perhaps even more important is how the corporate secretary and other members of management communicate with directors.
Jeff Minton from Corp Fin’s Office of Rulemaking recently addressed an asset-backed audience at the American Securitization Forum conference in Arizona. As reported in this excellent Thacher Profitt memo, it appears that the SEC staff is actively working on its long-standing project to develop a registration & reporting framework that is tailored to the asset-backed industry (hey, this project is so old that I briefly worked on it back in ’97 when I was on the staff).
Based on Jeff’s comments, it appears that the SEC staff is leaning towards using S-3 rather than creating a new form for registration of securities – and that presently there is an unacceptably high level of ’34 Act reporting non-compliance by ABS issuers (e.g. over half of 10-Ks from ABS issuers that were reviewed by the staff were not timely filed).
Another common problem is the failure of ABS issuers to file under the correct EDGAR serial number – a byproduct of each depositor having multiple trusts, each with their own ’34 Act numbers. And all of this is partially due to the fact that securitization lawyers typically don’t know the securities law as well as securities lawyers, as could be expected.
Doonesbury Talks about “Risk Factors”
You know that SEC filings are becoming part of middle America when Doonesbury references annual reports and risk factors. Today’s cartoon notes that Halliburton lists Dick Cheney as a risk factor. However, this is not true – a recent S-3 mentions the SEC investigation as a risk factor but does not identify Cheney by name. Last year’s 10-K doesn’t even have a risk factor section.
In what will be welcome news to NYSE companies, here is what the NYSE staff sent to listed companies on Friday: “Following the release of the Section 303A FAQs on January 29th, the Exchange has been alerted that the interpretation of Section 303A.02(b)(ii) set out in FAQ C-12 was unexpected because in some cases it resulted in a “look-back” period in excess of 3 years. The Exchange agrees that the look-back period should not exceed 3 years, and accordingly is withdrawing the original response to FAQ C-12.
Below please find the original question and revised response which has also been updated in the FAQ document on our public web site.
C-12: What period must be used in applying Section 303A.02(b)(ii) relating to the payment of more than $100,000 per year in direct compensation and how does that interact with the three-year look-back requirement?
The appropriate inquiry under Section 303A.02(b)(ii) is whether a director or his or her immediate family member has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the listed company (other than director fees and pension or deferred compensation as specified in the rule).”
By the way, TheCorporateCounsel.net just announced an April 21st webcast on “The Many Faces of Director Independence,” during which our expert panel will analyze the best ways to determine independence – as well as the optimal frequency of determination – and analyze several dozen increasing complex fact patterns under both the NYSE and Nasdaq standards.
NY Judge Rules on Ability of Insurgent to Mail Management’s Proxy Card
Following up on my blog last Wednesday regarding the MONY merger, Judge Holwell (S.D.N.Y.) issued an important decision later that day regarding the applicability and scope of Rule 14a-2(b)(1), the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6.
In short, Judge Holwell denied plaintiff’s request for a preliminary injunction. In doing so he reaffirmed the ability of insurgents to circulate a copy of management’s proxy card without simultaneously triggering the requirement to independently file a proxy statement and card. I have posted a copy of the Judge’s opinion in our “Merger & Acquistions” Practice Area under “Proxy Fights/Hostile Takeovers.”
Today’s Wall Street Journal (on page A2) and the Financial Times are running stories that sources say the SEC is likely to delay the Section 404 deadline by a few months. ComplianceWeek.com has even more info on this. Yesterday, I called the SEC’s Office of Public Affairs and got this quote: “The Commission is aware of the deadline and they are prepared to move it if need be.” Let’s keep our fingers crossed.
Speaking of Deadlines
A number of SEC filing deadlines land on Saturday, February 14th – from 10-Qs and Schedule 13Gs to Form 5s and Schedule 13Fs. As many of you know, if a deadline falls on a weekend, Rule 0-3 under the Exchange Act moves the due date for ’34 Act filings to the next business day – which is Tuesday, February 17th in this case as Monday is a federal holiday. Don’t you hate how these deadlines always fall on Valentine’s Day! I know my wife does…
A New Trend – the Commissioner Enforcement Dissent
Last month, SEC Commissioner Campos dissented from an enforcement action because he felt the SEC should have taken stronger action. That may well have been the first time that a Commissioner has written a dissent to an enforcement matter (whereas its not uncommon for a Commissioner to vote against a matter in a closed Commission meeting).
Last week, Commissioner Glassman issued a dissent of her own in a different enforcement matter. Particularly since this dissent consisted of merely a few paragraphs, this could be the start of commissioners sharing their thoughts more often on enforcement matters with the public.
Yesterday, the FEI released a survey of 321 companies that finds that the largest U.S. companies expect to spend an average of 35,000 hours to implement Section 404 – and incur an increase of 38% over current audit fees. Companies expect to document an average of 79% of their processes – and expect external auditors will test an average of 57% of those processes.
The survey shows that companies with over $5 billion in revenue expect to spend an average of $4.7 million this year to implement 404 – and expect audit fees to top $1.5 million on average.
Governance Metrics Releases Global Governance Scores
This week, GMI released governance rating scores on 2100 multi-national companies. The accompanying press release included some interesting observations, such as:
– Canadian companies had the highest overall average rating of 7.6, followed by the United States (7.0), Australia (6.9) and the United Kingdom (6.7). Japanese companies had the lowest overall average rating at 3.0
– 414 out of the 1,835 companies with a compensation committee included an executive on this committee (59 had the CEO)
– While the total number of independent directors increased marginally from 56.1% to 57.5%, the number of combined Chairman and CEO positions fell from 47.3% to 41.6%, the number of independent chairman grew from 13.2% to 21.2% and the change in the number of lead directors jumped from 23.3% to 33.4%
Our New “Section 402” Portal
We have launched a new Section 402 Portal that contains guidance on a host of cashless exercise and Section 402 matters.
SEC Adopts Mutual Fund Disclosure Rules
Yesterday, the SEC adopted new rules requiring mutual funds to provide enhanced periodic disclosure.
This year, ISS has a competitor in the proxy advice business, Glass Lewis. Learn more about this new provider in my interview with the CEO of Glass Lewis – Greg Taxin on Glass Lewis and Proxy Advice.
NY Federal Judge Temporarily Blocks Ability of Shareholder to Mail Proxy Card in Proxy Fight
If you read Saturday’s NY Times, you know Judge Loretta Preska of Federal District Court in Manhattan issued a temporary restraining order against Highfields Capital Management (a shareholder that opposes a merger of MONY) on Wednesday night after a telephone hearing. On Friday, Judge Richard Holwell left the order in effect – but promised a written opinion today on whether the temporary order would stand.
At issue is whether shareholders can send out copies of a company’s proxy ballot card when they send letters recommending a vote against management in a proxy fight – that can make it easier for shareholders to change their vote (or to vote for the first time). MONY, which is seeking shareholder approval to be acquired by AXA Financial, filed this lawsuit against Highfields, which is trying to use the tactic to persuade shareholders to reject the deal because it considers the price too low.
Since Rule 14a-2(b)(1) was adopted in 1993, investors have been able to send communications to one another recommending votes without having to go through the proxy solicitation process. These investors have been able to send company proxy cards – though not their own – and have not been challenged in court.
Disclosure of CEO Succession Planning
Even though it’s near the top of the list of the most important tasks they undertake, boards rarely disclose developments related to succession planning. That is understandable if disclosure might undermine the board’s efforts (akin to preliminary discussions of a merger) – but in some cases, disclosure would be a good thing. As Walt Disney Co. is finding out, disclosure of succession planning is a good thing – as they filed a letter describing their planning as additional soliciting material yesterday.
FDA and SEC Agree to Cooperate
Last Friday, the SEC announced it had established a procedure for the FDA to refer to the SEC possible instances of securities laws violations by companies regulated by the FDA. This announcement included identification of contacts in the FDA and an FDA commitment to expedite the process.
As could be expected, we have been receiving a steady stream of questions to pose to our expert panelists for our February 11th webcast – “Cashless Exercises and Other Murky 402 Issues.” The panelists include Stephanie Adams, VP/Manager of Compliance & Restricted Stock Programs, Morgan Stanley Dean Witter; John Aguirre, Partner, Wilson Sonsini Goodrich & Rosati and Marc Trevino, Partner, Sullivan & Cromwell. Send your questions now to broc.romanek@thecorporatecounsel.net and listen in tomorrow!
If you are not yet a member, take advantage of a no-risk trial to see what you are missing. Here are 10 Good Reasons to try us now!
Audit Response Letters
A provocative discussion in the Jan/Feb 2004 issue of The Corporate Counsel (at pg 9) has prompted several reader inquiries on whether “claims or assessments” should follow “pending or threatened litigation” in the first request category. While, in fact, there hasn’t been a formal change in the ABA’s standard form of request letter, the actual practice here varies widely, especially in light of the similar language in the second request category (unasserted claims, etc.). Expect more on audit letters in the next issue of The Corporate Counsel.
SEC Announces Shareholder Access Roundtable
On March 10th, the SEC will hold an all-day roundtable at its DC headquarters regarding the proposed shareholder access rules (interestingly, the announcement says that the SEC will accept comments at the roundtable and thru the end of March!) The agenda and list of participants has not yet been posted. Should be a humdinger. First come, first serve – so show up early if you plan to attend in person.
Company Fights “Opt-In” Shareholder Proposal on False & Misleading Grounds
I reported last month that Marsh & McLennan had received the first “opt-in” shareholder proposal under the proposed shareholder access rules. IRRC now reports that the company has sought no-action relief on two different grounds – that the proposal is false and misleading under Rule 14a-8(i)(3) and that the proposal deals with election of directors under Rule 14a-8(i)(8).
Interestingly, the company argues that it is false and misleading because the shareholder access rules are not finalized yet and the shareholder proposal implies that they are. We will be keeping a close eye on this one…
What the Top Compensation Consultants Are NOW Telling Compensation Committees
If you didn’t see yesterday’s NY Times, Jesse Brill spoke out in an article by Gretchen Morgenstern about companies going beyond what is legally required to provide fuller disclosure of executive compensation arrangements, including deferred compensation and SERPs.
Come on, Antonin
Today, the Washington Post runs a interesting analysis of how US Supreme Court Justice Antonin Scalia refuses to recuse himself from a case in which VP Dick Cheney is a named defendent – Antonin had went on an extended duck hunting trip in January with Cheney after the court had agreed to hear the case (and flew to Louisiana for the trip on an official aircraft). Supreme Court Justices are able to determine their own impartiality. This smacks of one of the primary issues that governance reform is intended to fix – the elimination of the perception of conflicts.
The February edition of “Carl’s Corner” is up – and deals with analysis of boilerplate agreement provisions. If you haven’t checked out Carl Schneider’s musings before, you really should as he applies decades of practical wisdom to provisions that many of us take for granted.
Always Check the Rules Themselves
In law school, my administrative law professor admonished us to “always check the rules.” This is a useful warning as it is not uncommon to find law firm client memos that repeat mistaken law.
A perfect example is a handful of memos on the new SRO standards – some from the more prestigious firms – that state that the Nasdaq IPO transition period is 24 months – which was originally proposed but not adopted (only one year was adopted). The lesson learned when drafting a client memo is to always check the rules – and don’t necessarily rely on the client memos that hit the streets first.
Survey Results of Financial Experts for Small Cap Companies
In our “Audit Committee Portal,” we have posted a study from Haynes & Boone regarding how U.S. small cap issuers (i.e., exchange or Nasdaq-listed issuers with market caps below $75.0 million) are dealing with the new audit committee financial expert disclosure regulations adopted by the SEC.
The study finds that over 67% of U.S. small cap issuers expect to name a financial expert in their next annual report – and that over 82% of U.S. small cap issuers have at least one financial expert serving on their board of directors. I believe these numbers are generally higher than what most experts predicted – and are close to the results of a Fortune 1000 company survey conducted last year.
ISS Hires New CEO
Last week, ISS hired John Connolly, a veteran of IBM Corp. and a Cambridge high-tech start-up as CEO to replace Jamie Heard, who remains an investor in the privately held firm and who will stay on as vice chairman and focus on governance research, rather than day-to-day operations.
I attended an excellent DC Bar luncheon panel yesterday featuring some of the Nasdaq staffers that answer the many interpretive questions that continue to dribble in. Unfortunately, it does not appear that Nasdaq will be ready to issue more FAQs for a few more weeks. “The sooner, the better” as the proxy season is already in mid-swing.
SEC No-Action Letter on Equity Compensation Plan Disclosures
After a long wait, Corp Fin finally has issued a no-action response to the ABA – in a letter dated January 30th – regarding equity compensation plan disclosures. It covers 8 different topics – and is “must” reading for this proxy season.
How to Update Your Governance Practices
Learn how the NY Times is updating its corporate governance practices from their corporate secretary in my interview with Rhonda Brauer on Updating Governance Practices! I personally learn a lot when I dig into how each company is handling the new governance standards.
Big Four Shed Public Audit Clients in ’03
As reported by AccountingWeb.com, for the first time in at least a decade, each of Big 4 lost more public company audit clients in 2003 than it acquired (according to an analysis by Auditor-Trak). PwC lost 91 public clients, KPMG lost 51; Ernst & Young lost 76 and Deloitte & Touche lost 65 clients. As I have noted before, in many of these situations, the Big 4 firms are letting the clients go – rather than the converse…
