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."
Effective today, the SEC has tweaked Edgar so that CEO/CFO certifications must be filed as Exhibits 31 (for Section 301 certs) and 32 (for 906 certs) – rather than under “signatures” and as exhibit 99. In addition, earnings releases and blackout period information must now be filed under the 8-K items that were originally intended (ie. the SEC’s interim fix of using Item 9 is no longer in effect).
Also, the SEC has commenced a 6-month trial to allow same-day Edgar filings to be received at 6 am EST – 2 hours earlier than the 8 am official start time. See http://www.sec.gov/info/edgar/ednews/edchanges728.htm.
This SEC press release is curiously silent about the changes to the Section 16 e-filing system that are supposed to take effect today (as noted in this SEC final release from last week adopting updated Edgar Manual 8.6 – http://www.sec.gov/rules/final/33-8255.htm).
Based on what we know, we expect the SEC’s changes to not fix all the snags that currently exist. As a result, we have added a session to this Wednesday’s webcast where Alan Dye will explain these traps and offer possible solutions – join us Wednesday for “50 Nuggets in 50 Minutes” at http://www.greatgovernance.com/programs.html#50nuggets.
On yesterday’s ABA webcast on “Reporting Up,” there was an interesting discussion on when in-house counsel can be considered the “supervisor” of outside counsel. Richard Humes, Associate General Counsel of the SEC (speaking on behalf of himself and not the Commission) expressed the view that this scenario could exist in certain circumstances.
In other words, if an in-house lawyer is acting as “supervisory attorney,” within the meaning of Rule 205.4, for all outside securities lawyers who are appearing and practicing before the Commission in the representation of the issuer, and one of those outside securities lawyers reports evidence of a material violation to the inhouse attorney, that outside lawyer is then relieved of any further Rule 205 obligations with respect to that evidence. [I will blog more after I listen to the program again – and note that more complete notes from this webcast will be in the upcoming August Eminders.]
This interpretation of Rule 205 could be quite problematic in practice – and create some unwieldly results as companies might be pressed to engage in active review of their outside counsel’s reporting up policies. Of course, it is unreasonable for both companies and their outside counsel to be negotiating policies on a “one-off” basis. And I can’t imagine how a mid-level in-house lawyer who has asked a senior partner in a firm to review his or her work would intuitively view themselves the “supervisor” of that partner. More to come…
As my blogging software gave me fits this week, I pondered “what if you blog and no one can hear you” – or as Don McLean put it “the day the blogging died.” Anyways, I am back in the saddle…
On July 28, 2003, EDGAR Release 8.6 will take effect. A list of the changes set forth in the Release is listed below. The two worth noting are:
1. Form 8-K will now permit the filing of Items 10, 11, 12 and 13. As you may recall, the SEC issued interpretive guidance indicating that issuers should file all earnings releases required to be filed under Item 12 under Item 9 until the EDGAR system was updated. Accordingly, all Item 12 filings (earnings releases and other releases of results of operations for completed fiscal periods) made on or after July 28, 2003 can be filed as Exhibit 12.
2. The EDGAR system will now recognize Exhibit 31 (302 certifications) and Exhibit 32 (906 certifications). Accordingly, for all 10-Ks and 10-Qs filed on or after July 28, 2003, the CEO/CFO certifications can be filed as Exhibits 31 and 32 (as opposed to filing to the 302 certifications after the “Signatures” section and filing the 906 certifications as Exhibit 99).
Note: Although the effective date will technically be the date of publication in the Federal Register, which should occur on or about July 28th (the final rules adopting Release 8.6 were just released yesterday), I think companies are safe implementing these changes on July 28th. Thanks to Amy Seidel of Faegre & Bensen!
Rumor has it that the SEC’s July 28th changes to the Section 16 e-filing system will not fix all the glitches. However, it is likely that the changes will start allowing CEO/CFO certifications to be filed under the new proper items. In other words, the EDGAR system will be reprogrammed to permit filing of 8-K Items 10, 11, 12 and 13. If correct, this will have a big effect on those making earnings announcements and filing second quarter 10-Qs.
Corporate Counsel magazine (not affiliated with our publications) has released its annual GC compensation survey that reveals that inhouse lawyer salaries are going up. Here are profiles of Top 10 inhouse lawyers that get paid the most – http://www.corpcounsel.com/other/3rd_party/GCProfiles.shtml.
In addition, the PCAOB has released a 12-page briefing paper for its upcoming July 29th roundtable on internal controls at http://www.pcaobus.org/rules/2003-07-10_Internal_Control_Briefing_Paper.pdf. The briefing paper lays out the status of the various internal control issues – and lists the discussion questions to be addressed at the roundtable.
One surprising note in the aftermath of Corp Fin’s shareholder access report is the apparent speed by which the Commission appears ready to act – a proposal on the disclosure component sometime in August and a proposal on shareholder access to the ballot in September. See the Washington Post interview with SEC chair Donaldson at http://www.washingtonpost.com/wp-dyn/articles/A61884-2003Jul15.html. Obviously, the magnitude of the shareholder access proposal should persuade the Commission to allow a lengthy comment period after its proposing release is issued.
Today, the Division of Corporation Finance delivered its report to the SEC on shareholder access – and should be commended for making its report public. The 33 page report is well-written and organized, with a series of pros and cons for the 5 alternatives presented – and a series of questions for the Commission to consider when it puts together an official proposal. See the staff report at http://www.sec.gov/news/studies/proxyreport.pdf. There is also a 55 page summary of comments at http://www.sec.gov/news/studies/proxycomsum.pdf.
I have yet to fully digest the report – but at first glance, it appears clear that the staff has considered the state law issues involved in what could be a complicated rulemaking project. Obviously, the Commission has the authority to require enhanced disclosure – and has some room to maneuver under the proxy rules regarding the nomination process.
However, state law dictates most of the nominating process – and the tension between those state laws and the staff’s alternatives that would allow major, long-term shareholders to nominate directors that will come under close scrutiny.
Here is an interesting observation from Sue Morgan, a partner at Perkins Coie: She thinks it is very interesting that Microsoft apparently is actually going to grant restricted stock units, not “stock awards” in the usual sense. While the references in the conference call and articles are to “stock awards,” the Microsoft press release makes this one reference:
“While many companies provide stock awards, commonly know as restricted stock units, to executives, Microsoft is one of the first major corporations in which every employee will be eligible to become a direct owner of the company through Stock Awards.”
Sue confirmed this with someone at Microsoft, who said that “we are doing units, but they will be referred to as stock awards.” According to Sue, while restricted stock is actually outstanding stock, restricted stock units are units of stock that are recorded in an account and paid out in shares as the units vest. As with other companies that have granted restricted stock units rather than restricted stock, one of the reasons is most likely to avoid the Section 83(b) election morass that comes with actual awards of restricted stock.
In anger over comments made about classification of non-audit services at HealthSouth, the SEC has sent a letter to E&Y. The letter states that not all attestation services can be treated as “audit-related” for purposes of the audit/non-audit fee table in the proxy statement. See the letter at http://www.sec.gov/info/accountants/staffletters/e-y070803.htm.
Thanks to John Jenkins at Calfee, Halter & Griswold for the following insightful analysis regarding the questions I posed on Wednesday regarding Microsoft’s underwater option arrangement with JP Morgan:
It’s hard to predict what Microsoft is going to do, but I’ll bet that from a 1933 Act standpoint, they’ll do something similar to what they did for their directors and executive committee members’ stock options back in December 1997, which is use the discretion provided under the plans to allow them to transfer the options, and then register the primary shares underlying them on an S-3 – http://www.sec.gov/Archives/edgar/data/789019/0001047469-97-009148.txt.
By doing it this way – instead of through the the re-offer prospectus approach contemplated by General Instruction C to Form S-8 – I guess Microsoft concluded that it could avoid having to name the transferors or transferees of the options as selling shareholders. I don’t think that works with whatever they’re doing here. If the transferees are JP Morgan or other identified investment banks and they’re purchasing the securities, I would imagine that the S-3 would have to identify the relevant investment banks in the plan of distribution section or in a prospectus supplement and that those folks would likely be subject to Section 11 liability.
The issue of shareholder approval came up when the SEC eliminated the restrictions on transferability back in the mid-1990s. I know that back then, the staff took an interpretive position that eliminating the transferability restrictions wasn’t a material modification requiring shareholder approval. It looks like Microsoft acted on that advice, like I think most people did. In the 1997 S-3, there’s language indicating that the option plans generally prohibit transfers by plan participants, but as with many of the plans put in place after transferability was first permitted, they allow the Board to “extend such transferability rules, on a general or specific basis, in its sole discretion.” I think most post-1995 plans have similar language, so even if Microsoft is dealing with newer plans than the ones covered here, my guess is that the ability of the board to allow transfer won’t be an issue under the plans or the agreements.
The transcript of Steve Ballmer’s press conference sheds some light on the accounting treatment Microsoft expects (the bottom line is that they’re going to expense all of their outstanding options and reflect that treatment in prior periods as well):
“Given that we are going to account for this under FAS 123, which is also the rule under which stock options must be expensed, it means we will also be expensing stock options that have been granted previously. For best comparability of our results going back and forward, we will reflect FAS 123 in our basic results for prior years in addition to our go forward results.”
Ballmer’s comments provide a few more details on how this is going to work (I’ve got no idea how they’re going to implement this, but it sort of sounds like a combination of a standby underwriting arrangement and some of the restricted stock hedging strategies that brokerages have been peddling for quite some time). It also looks like they’re trying to get some interpretative advice from the Commission (perhaps on the tender offer issue):
“The other thing which we are announcing to our employees today is the work that we are doing to implement a program that will allow them or give them the option, I should say, the choice, to sell their options that are, let’s say, quite a bit underwater, to a third party or a set of third parties. We are working through the details of that now, both with the Securities and Exchange Commission, who needs to review this kind of an offer, as well as with third parties. The goal here would be to allow the employees to make a sale of their underwater options, and to receive the proceeds from a third party on that sale on some schedule which vests into the future.”
As to the tender offer issue, Microsoft probably is arguing this isn’t like a repricing exchange offer, in that it involves the facilitation of the exercise of an option, which is best regarded as a compensation decision, and not an investment decision. Ballmer’s comment that the optionees are going to be paid “on some schedule which vests into the future” undercuts that argument, and also suggests to me that in addition to any Williams Act issues are associated with the deal, there may also be some 1933 Act issues associated with what the employees are receiving from JP Morgan (or whomever).
