Over a 30-year career at the SEC, Bill Morley served as Corp Fin’s Chief Counsel for many years and hired many generations of Staffers in the Division before he retired in ’99. In this podcast, Bill provides some insight into what it was like to work in the Division of Corporation Finance, including:
– How did you wind up at the SEC?
– How do you recall the shareholder proposal process?
– Did you enjoy recruiting and hiring?
– What are among your fondest memories?
– What are you doing now?
IPOs: Rare Case of Poison Pill for Newly Public Company
John Laide of FactSet notes that “Lone Pine Resources went public recently. Lone Pine is a subsidiary of Forest Oil Corp. that is based in Canada but is incorporated in Delaware. Lone Pine is the first U.S. incorporated company to IPO with a poison pill in place since 2007. It used to not be uncommon for companies to go public with a pre-adopted poison pill – but no company had done so since Ulta Salon, Cosmetics & Fragrance in October 2007.”
Federal Debt Ceiling & Another Government Shutdown? Securities Law Considerations
We’ve seen it before. Our team is out of time outs. There’s very little time left on the clock, and, absent a miraculous play, the home team is going down in defeat.
That’s where the nation was on April 8, 2011. Many went home late that Friday night fully expecting to wake up Saturday morning to the first federal government shutdown since 1996 and wondering what would happen next. We all know what happened. Very late that evening – at literally the 11th hour – congressional leaders and the Obama Administration forged an agreement that prevented a federal government shutdown.
In March 2011, many government contractors were preparing their businesses, employees, subcontractors and team members for the looming shutdown. Even though the nation has a budget for fiscal year 2011, that doesn’t mean that government contractors can put those contingency plans away until next September. The reality is that we may face another shutdown sooner than expected.
May 16, 2011, came and went without much fanfare, but it was nonetheless an important day. The Treasury issued about $72 billion in securities that day which would have eclipsed the federal debt ceiling – a statutorily imposed maximum amount the government may borrow at any one time – absent some maneuvers by the Treasury to suspend certain federal retirement fund payments to use that money to finance the nation’s general obligations.
Trick plays sometimes work, but Administration officials will have exhausted their play book by the time the clock expires on August 2, 2011, which is when Treasury Department officials believe they no longer can suspend those payments. Absent an agreement to raise the federal debt ceiling by then, the United States would begin to default on its interest payments for the first time in our nation’s history. The consequences could include an initial slow down in payments to federal government contractors. Delayed payments to government contractors could expose the government to interest charges under the Prompt Payment Act or other statutes. Government agencies may then need to refrain from making new contract awards or ordering additional work under existing contracts and, at some point, the government may need to terminate or significantly downsize some of its existing contracts. A slow trickle eventually could lead to turning the faucet off completely, and the nation could again face a government shutdown – even during a budget year.
In light of another looming federal government shutdown, public company government contractors need to examine their businesses and their disclosure and consider whether, and to what extent, they need to include disclosure about a government shutdown in filings they make with the Securities and Exchange Commission (SEC). Reporting companies should consider whether (i) as a result of a shutdown they should file new disclosure in order to correct material misstatements or to make what they said not misleading, and (ii) the government shutdown will trigger any new disclosure required by federal securities law.
A while back, I conducted a poll on this blog asking whether people thought companies that allow the CEO to be held by multiple persons at once was a good idea. In response, 3% said “yes”; 18% said maybe in certain circumstances; and 77% said no (3% said “what me worry?).
I agree with the folks that said “no” – but maybe the poll awoke the CEO gods as articles came out right around when the poll was posted on this topic. First, there was this news about Warner Bros. creating a team-approach to the President role. They have three people sharing the “Office of the President.” Possible issues to ponder: Do they share a single office? Do they take turns depending the day of the week? Perhaps they need a marital relations lawyer rather than a corporate lawyer to work out the schedule? Just having fun here.
Then, a few weeks later, this WSJ article described how UniCredit SpA’s board is considering splitting the CEO position in two, with a general manager in charge of managing the bank’s operations and a chief executive in charge of strategy.
The Bizarre Filing Cabinet: Lawyer Acts Without Company’s Knowledge
Once in a while you come across a strange SEC filing that makes you chuckle (eg. the classic is the fake Form F-1 filed by Apollo Corporation; more recent is this fake Form 8-K filing). Here’s a Form RW filed by American Restaurant Concepts a few weeks ago seeking the withdrawal of a post-effective amendment filed by the company’s lawyer – one that was not authorized by the company. Here’s an excerpt from the request:
The Amendment was not filed at the direction of the Company. It was filed without our knowledge or consent by an attorney previously retained by the Company.
More on our “Proxy Season Blog”
With the proxy season in full swing, we are posting new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
Yesterday, new PCAOB Chair Jim Doty delivered this speech that should be considered the most profound public policy speech ever made by a PCAOB Chair. Jim talks about cultural challenges that still impede auditor independence and skepticism – and then calls for a broad public policy debate to repair the credibility and transparency of the audit. Jim lays out four areas that this debate should touch – auditor’s reporting model, auditor independence, more context for audit committees and audit transparency – all of which have several items within them. But the one item that surely will get people talking is this excerpt from his speech:
The PCAOB’s efforts to address these problems through inspections and enforcement are ongoing. But considering the disturbing lack of skepticism we continue to see, and because of the fundamental importance of independence to the performance of quality audit work, the Board is prepared to consider all possible methods of addressing the problem of audit quality — including whether mandatory audit firm rotation would help address the inherent conflict created because the auditor is paid by the client.
The idea of a regulatory limit on auditor tenure is not new. Over the years, it has been considered by a variety of commentators and organizations. Through this public debate, the basic arguments both for and against mandatory term limits have been fairly well described.
I won’t revisit all the history now. But most recently, in 2002, Congress considered requiring firm term limits during the debates that led to the Sarbanes-Oxley Act. It ultimately decided that the idea required more study and directed the GAO to prepare a report. That report, issued in 2003, noted that the SEC and the Board would need several years to evaluate whether the Sarbanes-Oxley reforms — including audit partner rotation — were sufficient, or whether further independence measures are necessary to protect investors.
The PCAOB has now conducted annual inspections of the largest audit firms for eight years. Our inspectors have reviewed more than 2,800 engagements of such firms and discovered and analyzed hundreds of cases involving what they determined to be audit failures. We have conducted more than 1,500 inspections of smaller domestic firms and of non-U.S. firms. These include multiple inspections of hundreds of those firms. And our inspectors have identified hundreds more cases involving what they determined to be audit failures.
Based on this work, I believe it is incumbent on the PCAOB to take up the debate about firm tenure and examine it, with rigorous analysis and the weight of evidence in support and against. I don’t have a predetermined idea as to whether the PCAOB ultimately should adopt term limits. My only predilection is that the PCAOB deepen the analysis of how we can better insulate auditors from client pressure and shift their mindset to protecting the investing public.
As such, the Board plans to issue another concept release to explore whether there are other approaches we could take that could more systematically insulate auditors from the forces that pull them away from the necessary mindset. We expect to issue this concept release around the same time that we issue the concept release on the auditor’s reporting model, in order that they can be considered together in a holistic manner.
Proxy Access: What If the SEC Loses the Lawsuit?
As we breathlessly wait for a decision in the proxy access lawsuit brought by the Chamber of Commerce and Business Roundtable in the US Court of Appeals for the DC Circuit, it is fair to consider what might happen in the wake of the decision – which is expected sometime over the next few months. As I blogged last month, the SEC was questioned pretty hard during oral argument by the three judges – giving some indication that the SEC may lose the case.
If the SEC loses, Brian Breheny of Skadden Arps notes that the agency’s three options are:
1. Reapprove the Rule 14a-11 provisions and then have the 14a-11 rules and 14a-8 amendments become effective at the same time;
2. Lift the stay on Rule 14a-8 and allow those amendments to go into effect for the ’12 proxy season and then approve the Rule 14a-11 amendments later; and
3. Do nothing.
It’s possible that the SEC could hold off on lifting the stay on Rule 14a-8 at any time because the SEC imposed the stay on those amendments even though they were not the subject of the lawsuit. They could lift this part of the stay regardless if they win or lose. Meaning, if they lose, they could say “we are letting the 14a-8 amendments become effective while we consider what, if anything, we will do with the 14a-11 rules after the decision.”
But they could also lift the 14a-8 stay if they win because of the timing of the decision. For instance, if the decision is issued after the deadlines for filing the Schedule 14N or other 14a-11 deadlines, the SEC may think it would be better to wait until next year. This scenario is highly unlikely – but anything is possible…
Poll: When Will the Proxy Access Lawsuit Be Decided?
It’s expected that the US Court of Appeals for the DC Circuit will deliver its decision sometime this summer, but we don’t know if that indeed will happen – or when within the summer it will take place. Take a moment for this anonymous poll to provide your own input on this hot topic:
As I recently blogged, there has been a trend of companies that fail to garner majority support for their say-on-pay getting sued – a trend that started last year. In his “D&O Diary Blog,” Kevin LaCroix provides details about a fifth say-on-pay related lawsuit – this one filed against Umpqua in a federal district court in Portland. We continue to post pleadings from these cases in CompensationStandards.com’s “Say-on-Pay” Practice Area.
Dodd-Frank: 3rd Rulemaking Progress Report
Here is the 3rd progress report from Davis Polk regarding all of the various agencies engaged in Dodd-Frank rulemaking. This month, rules meeting 3 Dodd-Frank requirements were finalized and rules meeting 18 requirements were proposed. This report also details the 87 studies required under Dodd-Frank, two of which are overdue.
May-June Issue: Deal Lawyers Print Newsletter
This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Appraisal Rights: The Complicated World of Corporate Law’s Consolation Prize
– The Deal Lawyer’s Guide to Hidden Employee Benefit Issues: An Update Regarding Successor Liability
– Delaware Case Highlights Need for Additional Due Diligence in Merger Acquisitions
– The Art of Written Consent Solicitations
– Helping Parties to Mergers Assess Risk and Negotiate Smarter Deals
– Proposed Reform of U.K. Takeover Regulation
We are excited to announce that SEC Chair Mary Schapiro will open the second day of our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: “Tackling Your 2012 Compensation Disclosures: 6th Annual Proxy Disclosure Conference” and “The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference.” Save by registering by June 24th at our early-bird discount rates. Note this early-bird discount will not be extended.
For those attending, take a moment to RSVP on this LinkedIn Event – in the upper right corner – so your friends can know you are going…
Recently, Equilar released this report on CFO pay strategies in the S&P 500 finding that:
– Median total compensation for S&P 500 CFOs grew by 26.1% from 2009 to 2010. In 2010, median total compensation for S&P 500 CFOs was approximately $3.0 million, up from approximately $2.4 million in 2009.
– Median total bonus payouts for S&P 500 CFOs increased to $710,864 in 2010, up 32.7% from the 2009 median of $535,625.
– Healthcare CFOs received the most compensation, having a median total pay of $3.5 million in 2010.
Our June Eminders is Posted!
We have posted the June issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
As noted in FEI’s “Financial Reporting Blog,” the SEC’s Office of Chief Accountant posted this “Staff Paper” last week that seeks comments regarding how to incorporate IFRS into US GAAP, including the “condorsement” approach (which is a process by which the FASB would gradually adopt specific parts of IFRS over a transitional period). The paper makes clear that the SEC hasn’t yet decided whether to incorporate IFRS – or highlight a preferred method to do so. Instead, it seems comments on alternative approaches in case it does. Comments are due by July 31st.
FINRA: IPO Spinning Rule Delayed
Suzanne Rothwell reports the SEC recently approved an amendment to FINRA’s new Rule 5131 – which will regulate IPO allocation abuses – to delay the new spinning and acceptance of aftermarket orders provisions to September 26th and delete a provision that would have required that broker/dealers have procedures that prevent investment banking personnel from influencing a new issue allocation. The latter requirement would have been problematic because it’s the investment banking personnel that are often also engaged in the syndicate allocation activities – it may be impossible to separate them. The rest of the rule was implemented last Friday. We have posted memos on Rule 5131 in our “Underwriting Arrangements” Practice Area.
Webcast Transcript: “Nuts & Bolts of Bank M&A”
We have posted the transcript from the DealLawyers.com webcast: “Nuts & Bolts of Bank M&A.”
Yesterday, the SEC adopted rules – by a 3-2 vote – to implement Section 922 of Dodd-Frank, which added Section 21F to the Exchange Act. Here’s the 305-page adopting release – and here’s the press release and SEC Chair opening remarks.
Despite much criticism and lobbying, in the end, the SEC didn’t change its proposed framework to require whistleblowers to use a company’s internal reporting system as a condition to receiving a SEC bounty – although the final rules do include more incentives for whistleblowers to “blow” internally first. This controversial rulemaking will produce a torrent of memos and opinion pieces – we’ll post them in our “Whistleblowers” Practice Area as they come in. Here’s memos from Cooley, Morgan Lewis and Morrison & Foerster. The final rules become effective 60 days from Federal Register publication.
House Bill: Attacking Dodd-Frank’s Whistleblower Provision
Meanwhile, House Representative Michael Grimm (R-NY) has introduced a bill that seeks to change the whistleblower provision in Dodd-Frank. Some believe the bill was introduced to put pressure on the SEC ahead of its rulemaking. This May 24th letter from a group of groups asks Congress to leave the whistleblower provision intact.
SEC Proposal: Changes to Rule 506’s “Bad Actor” Disqualification
Yesterday, also by a 3-2 vote, the SEC proposed amendments to Rule 506 of Regulation D to implement Section 926 of Dodd-Frank, which would disqualify offerings by companies involving persons covered by the rule if they were subject to a “bad actor” order from the SEC (formerly known as “bad boys” in a less-politically correct world). Here’s the proposing release – and the press release. As this Skadden memo notes: “With more than 90% of the offerings made under Regulation D seeking exemption pursuant to Rule 506, these proposed rules could have a significant impact on the applicability of the exemption.”
As I blogged back in January, I’ve come around to realize that the importance of Twitter has grown immensely over the past six months. I see broad acceptance by investors and investor relations departments. I see it growing as a mainstream news source. Although I still don’t see as many corporate lawyers on it, I know that day will come soon – soon I will revise my periodic blog about how Twitter is not yet critical for our corporate law community.
Meanwhile, I have been having fun getting back on the road preaching how social media is changing how we get information – and how the nature of it is different than just “push” or “pull,” rather it’s both since it’s supposed to be a “conversation.” And how ultimately social media can change your career if you take advantage of its opportunities.
The best part is that these social media panels give attendees an opportunity to do something they might not have done before – dance at a conference! Here is the MidAtlantic Chapter of the Society of Corporate Secretaries dancing in Philly yesterday before Doug Chia and I spoke on a social media panel. We were bewildered when what was left of the crowd – we were the last panel of the day – asked hordes of questions at the end. Far too many for us to answer in the time allotted. The entire panel should have been just Q&A!:
And here’s the Southeastern Chapter of the Society in Atlanta thinking about dancing before my solo presentation. They probably thought conference dancing was a little strange – but that’s okay as my stated primary goal was scaring folks into dipping their toes into workforce use of social media (ie. trying something new):
Can a Tweet Meet a Company’s Regulation FD Obligations?
During our recent “Tackling Social Media Issues” webcast, the panel tackled many tough issues that many of us will be facing in the near future. One issue not covered much during the program was the issue of whether a tweet can comply with Regulation FD. Dominic Jones provides his analysis – partly drawn from the comments made during the webcast – in this great piece on his “IR Web Report.”
Webcast Transcript: “Tackling Social Media Issues”
We have posted the transcript for the webcast “Tackling Social Media Issues.”
By the way, here’s a 4-minute video interview where I discuss social media after I spoke about the topic at a PLI conference recently:
Last week, the American Federation of State, County, and Municipal Employees released its annual report regarding how mutual funds vote on compensation agenda items. The report reviews how 26 large fund groups voted on 10 specific items, including the voluntary “say on pay” votes at Motorola and Occidental Petroleum, compensation committee members at Nabors and Abercrombie & Fitch, and a shareholder proposal to end “golden coffin” benefits at Verizon Communications. The report doesn’t include any 2011 votes, as mutual funds aren’t required to disclose those votes until this August.
As noted in their press release, the report criticizes four mutual fund groups as “pay enablers” (Vanguard, BlackRock, ING and Lord Abbett). On average, these four fund groups supported over 90 percent of management proposals. In comparison, AFSCME praises four other fund families for being “pay constrainers” (Dimensional, Dreyfus, Oppenheimer and Wells Fargo).
Risk Realized? What Happens When the Regulators Go Public?
Way back when the NYSE and Nasdaq went public a few years ago, one of the biggest concerns was how they would regulate their listed companies when they had the pressure of being public on their shoulders. In his “IR Web Report,” Dominic Jones analyzes how the NYSE may be changing their rulebook to favor one of their side businesses in his recent piece entitled “Alarm as NYSE seeks to add IR services to rulebook.”
Our “Q&A Forum”: The Big 6500!
In our “Q&A Forum,” we have blown by query #6500 (although the “real” number is much higher since many of these have follow-up queries). I know this is patting ourselves on the back, but it’s over eight years of sharing expert knowledge and is quite a resource. Combined with the Q&A Forums on our other sites, there have been over 20,000 questions answered. It’s pretty cool now that the Q&A format is all the rage in Silicon Valley (eg. Quora) – we’ve been in this space for a decade!
You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply (or a question). And of course, remember the disclaimer that you need to conduct your own analysis and that any answers don’t contain legal advice.
One of the oddest provisions of Sarbanes-Oxley was Congress creating the PCAOB with a dotted line to the SEC. I’m not sure that this was an obligation that the SEC wanted, particularly after a lawsuit involving this unusual regulatory framework (ie. one regulator reporting to another) wound up in the Supreme Court. After its SCOTUS victory, the SEC posted written procedures for appointment of a member or chair of the PCAOB in November.
Now that the SEC is actively seeking a PCAOB board member with a CPA background, it has taken another new step – posting information about this job search and even posting “sample letters” that it sent on Friday to 14 leaders in the financial industry seeking their input (egs. Ben Bernanke, Timothy Geithner, Jim Doty).
The SEC’s New Chief Economist and Risk Fin Director
On Friday, the SEC announced it had hired Vandy Professor Craig Lewis to serve the twin roles of Chief Economist and Risk Fin Director. Craig has some awkward shoes to fill in the new Risk Fin Division in the wake of this Reuters article about the inaugural Director Henry Hu’s perceived lack of accomplishments and his unusual reimbursement arrangement with the agency.
The LinkedIn IPO: A Favorable Comparison to the Internet Bubble Years
An anonymous member sent in these thoughts on last week’s IPO by LinkedIn:
In the LinkedIn IPO, I was glad to see that:
1. a rational pricing of the security;
2. the company’s CEO down-played the market performance of the stock on the first day; and
3. the prospectus disclosure made clear that it won’t be profitable in 2011 – although still running a profit for the first quarter.
I also note that, unlike so many of the tech companies going public during the “IPO Internet Bubble,” this is a company that had a profit last year and that the underwriters and their affiliates did not purchase LinkedIn securities in a pre-IPO private placement or extend a credit facility to the company. Such pre-IPO private placements by the underwriting firms had the effect of enhancing the company’s stockholder’s equity and also adding to the underwriting entity’s risk because the firm was also, directly or indirectly, an investor in the company.
My view is that so long as Wall Street can restrain itself from engaging in pre-IPO investments in the companies they take public and otherwise “fixing” the aftermarket in some new way not already addressed by the SEC’s expansion of the prohibitions of Regulation M to aftermarket trading, the “irrational exuberance” of the public to purchase shares in these kinds of companies will not cause broader economic problems when the trading price falls back to more rational levels in line with the IPO price and the value of the company.
The quality underwriting firms in the “good old days” required at least three years of profits before taking a company public. It would be good if the WSJ tended to indicate disfavor about the secondary market hysteria in acquiring the shares of an IPO company with just one year of profits – in order to inject a voice of reason – and not appear to encourage “Bubble” mentality. The run-up in the aftermarket price is irrational – and maybe at least partially the result of too many ordinary folks having the ability to trade for themselves directly.
Nonetheless, this is a better situation than the ’90s IPO Bubble because if the public wants to overpay for the stock in the secondary market (as noted in this NY Times article today), then each person takes that risk and their individual loss should not have far-reaching consequences because the broker-dealer firms are not taking a position in the company and the secondary market price is not the result of fraud and manipulation.
Broc’s note: I love how Dominic Jones has put together this “story” of how LinkedIn’s IPO played out over social media channels. It’s a brilliant idea to tell the story like that. And I also love Mark Suster’s look at how LinkedIn compares to all the other hot start-ups in Silicon Valley right now.
