Ever since e-proxy’s implementation has dramatically reduced voter participation rates, practitioners have been trying to figure out new ways to encourage shareholders to vote. Although I don’t think the SEC would like kindly on companies paying shareholders to vote – not necessarily to vote with management, just to vote period to ensure quorum is reached – I’m sure that conversation has been had more than once.
But what might this look like if it was tried? A member emailed in this: I just happened to come across pages 3-4 of this proxy statement for an incorporated village in Alaska that is somehow subject to the securities laws and involved in a contested solicitation. The solicitation offers a chance to win cash prizes for those that send in their proxy including an “Early Bird Special.” Pretty wild.
Green Bay Packers: More Stock Sold
In tune with all my recent blogs about crowdfunding and novel stock offerings comes this article noting that the Green Bay Packers conducted their fifth offering in their 92-year history last week. This offering had to be approved by NFL and it’s good timing considering that the Packers may well go undefeated this year. 28,000 shares were sold in first 2.5 hours at $250 per pop (plus a $25 handling charge). This article notes how this stock has no resale value and thus is bordering on shady…
Alan Singer of Morgan Lewis notes: In connection with its last offering of common stock, the Packers submitted a no-action request, asking the staff to confirm that it would not recommend enforcement action if the Packers sold the stock without registration under the Securities Act or the Exchange Act. (Green Bay Packers, Inc.,11/13/97). The SEC Staff granted the no-action request.
I have not read the most recent offering document, although I noted the following legend on the cover:
COMMON STOCK DOES NOT CONSTITUTE AN INVESTMENT IN “STOCK” IN THE COMMON SENSE OF THE TERM. PURCHASERS SHOULD NOT PURCHASE COMMON STOCK WITH THE PURPOSE OF MAKING A PROFIT.
Two pages back, another legend adds the following:
PARTICULARITY (sic) IN LIGHT OF THE TRANSFER RESTRICTIONS AND REDEMPTION RIGHTS OF THE CORPORATION DESCRIBED IN THIS OFFERING DOCUMENT, IT IS VIRTUALLY IMPOSSIBLE FOR ANYONE TO REALIZE A PROFIT ON A PURCHASE OF COMMON STOCK OR EVEN TO RECOUP THE AMOUNT INITIALLY PAID TO ACQUIRE SUCH COMMON STOCK.
I read the prior offering document when it came out, and my impression at that time was that a loyal fan who read the document would understand that while a purchaser would receive a stock certificate that was suitable for framing, he or she could not expect to get much else out of his or her purchase.
Transcript: “Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies”
We have posted the transcript for our recent webcast: “Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies.”
Historically, Corp Fin has allowed foreign private issuers (FPIs) to submit initial drafts of registration statements – for their IPO or other first-time filings – on a “draft” confidential basis. Yesterday, Corp Fin released this new policy that notes its position is being changed, effective immediately. Yes, immediately – there is language in the new policy that addresses those FPIs that have already filed and what it means for their amendments.
Here’s analysis from Alex Cohen of Latham & Watkins:
Under the new policy, FPIs that are only listing securities in the United States – as opposed to FPIs that are listed or concurrently listing outside the United States – will in most cases no longer be able to submit confidentially. So, to take an example, a Chinese company doing an IPO on Nasdaq only will from now on likely have to file its F-1 registration statement publicly on EDGAR, and will not be able to submit initial rounds of the F-1 on a confidential basis.
According to the new policy, confidential submission is still allowed under the following circumstances:
– Foreign government that is registering its debt securities;
– FPI that is listed or is concurrently listing its securities on a non-U.S. securities exchange;
– FPI that is being privatized by a foreign government; or
– FPI that can “demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.”
Under certain circumstances, Corp Fin may request a non-US issuer to publicly file its registration statement even though it would otherwise fall within the new policy. Also note that shell companies, blank check companies and “issuers with no or substantially no business operations” will also not be permitted to use confidential submission.
How does this affect ongoing deals? Let’s say you are currently in the middle of the confidential submission process but don’t meet the new policy — e.g., you are working on a Form F-1 for an FPI listing only in the United States. In that case, the SEC Staff will require the next draft of the F-1 to be filed publicly on EDGAR.
As for my thoughts, I suspect this new policy operating in conjunction with the new reverse merger limitations will limit the number of ‘not ready for prime time’ companies seeking to access the U.S. markets (and may disproportionately affect companies from certain countries). I imagine some foreign companies typically have more substantial comments and revisions in response to SEC comments than a comparable US company. Multiple rounds of F-1/As with heavy revisions to the financials will probably not instill potential IPO investors with a lot of confidence and, also, comment letters would eventually become public – whereas, I am not sure they did before with a confidential review. Extensive comments probably don’t look good in the eyes of creditors even if a FPI decided to withdraw its registration statement which I think quite a few of the foreign confidential filers eventually do.
So this change in Staff’s prior policy, which allowed FPIs to get ready for an IPO without publicly revealing their plans until they were ready to solicit, may affect whether non-US issuers decide to list their shares in the United States…
A Delicate Situation: Stock Buybacks and Meeting Executive Pay Targets
With a down market and companies sitting on boatloads of cash, many are already think stock repurchases as noted in this recent NY Times article entitled “As Layoffs Rise, Stock Buybacks Consume Cash.” As intimated by the title of this article, buyback programs likely will be subject to more scrutiny than in the past. In particular, the purpose the buyback may be called into question – is there a relationship to achievement of an executive compensation target? The optics of a buyback are important these days.
Here’s an excerpt from the NY Times article to consider:
The principle behind buybacks is simple. With fewer shares in circulation, earnings per share can rise smartly even if the company’s underlying growth is lackluster. In many cases, like that of the medical device maker Zimmer Holdings, executives are able to meet goals for profit growth and earn bigger bonuses despite poor stock performance.
“It’s clear there’s a conflict of interest,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Unless earnings per share are adjusted to reflect the buyback, then to base a bonus on raw earnings per share is problematic. It doesn’t purely reflect performance.” In addition, executives, who are often large shareholders, stand to benefit from even a small, short-term jump in stock prices.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Post-Proxy Access Decision: Which Way Forward? Part II
– Delaware: Settlement of Multi-Forum Litigation & Fee Negotiations
– Avoid Monoculture. Travel. Read Widely. Let Experience be Your Compass.
– Oil & Gas: SEC Doubts Ability to Book PUDs Beyond 5 Years
– Post-Proxy Access Decision: Which Way Forward?
I felt honored to sit down and tape a podcast with Mike Mayo, now a Banking Analyst for CLSA, who is widely recognized as one of the few honest analysts on Wall Street, a trait that has cost him a half dozen jobs over the years. In this podcast, Mike provides some insight into his new book “Exile on Wall Street – One Analysts Fight to Save the Big Banks from Themselves,” including:
– Why did you write this book?
– Any surprises in reactions to it so far?
– What are your thoughts about executive compensation?
– Any advice for corporate & securities lawyers in general?
Notes from the ABA’s FINRA Corporate Financing Rules Subcommittee Meeting
Here is a Skadden memo with notes from the recent meeting of the ABA’s Business Law Section’s FINRA Corporate Financing Rules Subcommittee, during which a member of FINRA Corporate Financing Department covered the latest rulemakings, interpretations, etc.
Dave Lynn and Mark Borges just wrapped up the Lynn, Borges & Romanek’s “2012 Executive Compensation Disclosure Treatise & Reporting Guide.” For those that want to access it online, it’s now posted on CompensationStandards.com. For those that like a hard copy, it will be finished being printed in a few weeks.
How to Order a Hard-Copy: Remember that a hard copy of the 2012 Treatise is not part of a CompensationStandards.com membership so it must be purchased separately – however, CompensationStandards.com members can obtain a 40% discount by trying a no-risk trial now. This will ensure delivery of this 1200-plus page comprehensive Treatise as soon as it’s done being printed.
Yesterday, Ted Allen of ISS blogged about how Norges Bank Investment Management (NBIM) became the first institutional investor to submit proxy access shareholder proposals this proxy season. NBIM filed them at Wells Fargo, Charles Schwab, Western Union, Staples, Pioneer Natural Resources and CME Group as noted in its press release. Rumor has it that these proposals are in the form of a binding bylaw.
– What sorts of proxy access alternatives do companies have now?
– What is the optimal time for companies to implement something in response to private ordering?
– How complex is your model form of access bylaw?
Last week, CII issued this statement about access proposals.
Compensation Lawsuits: They Keep Coming
Here is something that I blogged on CompensationStandards.com’s “The Advisors’ Blog“: Recently, I blogged about the spate of Section 162(m)-based lawsuits that increasingly are in vogue. The latest one of those was filed against Allergan in Delaware last week (here’s the complaint).
Now we have a new breed of lawsuit – or perhaps it’s more accurate to call it a retread of a vein of old-fashioned pay suits – because it’s not a say-on-pay or Section 162(m) lawsuit, but rather a breach of fiduciary duty – with a helping of alleged self-dealing – suit filed against Ralph Lauren last week in the New York Supreme Court. Even though there was a negative ISS recommendation, the company’s say-on-pay received 96% support (84% when backing out management’s ownership) Founder Ralph Lauren has voting control of the company though Class B shares and it’s deemed a “controlled company” under NYSE rules. The complaint is posted in our “Comp Litigation” Portal. Steven Kittrell notes these allegations in his “Just Compensation” Blog:
– Ralph Lauren Company made a large donation to a charity “affiliated” with a member of the compensation committee;
– One compensation committee member is a “Class B” director. Class B directors are elected solely by Class B stock that is owned only by Ralph Lauren and his family;
– The compensation committee did not hire a compensation consultant in the last year, but got recommendations from management’s compensation consultant for review.
Steven concludes that this case is unlikely to go to trial – and while that is always the best assumption because these cases rarely do, the complaint has a load of allegations that don’t pass the “stink” test giving this case somewhat of a “Disney-esque” quality to it…
Tune in tomorrow for the webcast – “iPads in the Boardroom: 20 Issues to Consider” – to hear Jennifer McGarey of Northrop Grumman, Gina Merritt-Epps of South Jersey Industries, Alicia Myara of Freddie Mac and Kerry Radich of Chevron provide practical guidance about issues to consider and obstacles to overcome involving the use of iPads in the boardroom.
Here’s news from Lynn Turner: On Wednesday, the European Commission proposed new legislation that would result in much greater oversight of the auditing profession within the European Union. Much of the legislation catches Europe up to the current status of regulation of the profession in the U.S. This is interesting in that ten years ago, politicians, Ambassadors, businesses, audit firms, etc. from the EU vehemently opposed Sarbanes-Oxley. Now in many regards, they are embracing it – but only after their investors have paid a very serious price for past lack of action.
The “devil is in the details” of the proposal, such as:
– While in the US investors have been asking for a separate report from the auditors providing information the auditors know, the EC would require such a report but prohibit it from being made available to investors.
– The EC proposal discusses the “client” of the auditor being the company, rather than investors.
– The EC would require substantial expansion of the audit report, in what appears to be a very positive development, including requiring the auditor to set forth how they assessed materiality. The PCAOB has also taken up this topic, but not yet issued a proposal.
– The EC would require auditors to disclose financial information. But that information is very, very limited such as to revenues, which the firms already disclose. It does not require disclosure of basic financial information necessary for any regulator to assess the financial stability, liquidity, viability or performance of the firms they are charged with regulating. In 2008, The U.S. Treasury Committee made a recommendation with respect to increasing transparency of the audit firms, which the PCAOB has yet to act on.
– While mandatory rotation is proposed every 6 years, there are mechanisms put in place to extend this out for up to 12 years. The PCAOB has previously taken up this topic in the US and issued a concept release, but has not yet issued a proposal.
– The EC proposes that non-CPA’s be allowed to own audit firms. This is a change the large audit firms have been requesting for over a decade, as a way to monetize their stock and let the older partners reap the benefit. This is a very dangerous proposal as it would allow for outside investors, or allow the firm to go public, putting the profit motive far ahead of the public interest obligation, and likely resulting in significantly lower audit quality. This idea has been debated and rejected here in the US. It also raises very serious independence issues, for example, when a private equity or hedge fund invests in a CPA audit firm, would the audit firm be able to audit other companies the investment firm holds? If so, could investors ever believe the audit firm would ever bring to light a problem in the company, such as an Olympus, if it would have negative consequences for the investment fund?
Ultimately, the real problem is the fact the company being audited still pays the bill. That is not changing under the EC proposal and will remain as the real problem, just as it is for credit rating companies. Until that problem is directly addressed it is likely audits will remain problematic, although some of the proposals may be beneficial.
EU Proposes Disclosure Requirements for Payments to Governments for Natural Resources Development
It’s not only Sarbanes-Oxley that is being somewhat cloned in Europe. As this memo summarizes, the EU recently issued two proposals to amend the European Union Transparency Directive that together contain new requirements for the disclosure of payments to governments by certain companies engaged in natural resource extraction or logging. This is a big deal for companies in the extractive industry with operations in the EU a la Dodd-Frank.
In the “Dodd-Frank Blog,” Jill Radloff of Leonard Street & Deinard provides an update on the OECD Conflict Minerals Project, including this new OECD report that establishes a baseline of current due-diligence practices of downstream companies.
EU Summarizes Comments on its Governance Green Paper
Recently, the European Union issued a summary of the 400+ comments submitted in response to its corporate governance green paper that it proposed back in April.
As expected, SIFMA and International Swaps and Derivatives Association filed this complaint on Friday in US District Court for DC to challenge the CFTC’s new rule that seeks to curb excessive speculation (like proxy access, this rule was approved 3-2 by the CFTC Commissioners). The groups have petitioned the higher US Court of Appeals for the DC Circuit to hear the case – which is the court that ruled against the SEC in the proxy access lawsuit filed by the Business Roundtable and US Chamber of Commerce a few months back. And like that lawsuit, this one claims the CFTC didn’t conduct a proper cost-benefit analysis. Here’s a Reuters article – and here’s a NY Times’ DealBook article.
Senate Bill to Encourage Small Company Capital Formation
Catching up to the House activity in this area, Senators Charles Schumer (D-N.Y.) and Pat Toomey (R-Pa.) issued this press release last week about their new bill that would establish a new category of issuers – “emerging growth companies” – that would have less than $1 billion in revenues before the IPO and less than $700 million in public float after the IPO, along with scaled regulatory burdens – egs. freed from say-on-pay and just two years of financials rather than three – as part of a transitional “on-ramp” status that could last as long as 5 years, and more.
Auditor Tenure, Financial Officer Turnover and Financial Reporting Trends
Audit Analytics just wrapped up this study that provides data that should help to facilitate commentary on the PCAOB’s concept release regarding auditor independence and rotation. Highlights from the research include the following:
– Both the Russell 1000 and the Russell 2000 companies with auditor tenure of five years or less paid more in audit fees (per million dollars in revenue) than companies with longer tenure.
– 16.1% of the Russell 1000 companies have engaged the same auditor for 40 or more years. This percentage drops to 4.1% for the Russell 2000.
– About 50% of both the Russell 1000 and Russell 2000 companies experienced a CFO departure during the six-year period from 2005 to 2010.
– Over 96% of both the Russell 1000 and Russell 2000 companies with 40 or more years of auditor tenure experienced a turnover in an audit committee member during the six years under review.
– US accelerated filers were first required to provide SOX 404 certifications in annual reports for fiscal years ending on or after November 15, 2004. Ineffective ICFRs (SOX 404) for the Russell 1000 have significantly declined, from 8.21% in 2005 down to .83% in 2010. Adverse SOX 302 disclosures have declined in a similar fashion.
– During the six years under review, quantitative data concerning restatements and late filings (NT disclosures) reflect a steady and substantial improvement in financial reporting.
– Pursuant to Section 408(c) of Sarbanes-Oxley, the SEC is reviewing a company’s filings every three years; an analysis of SEC comment letters, however, show a more frequent oversight of the larger companies, particularly in the last three years, with over 65% of the Russell 1000 receiving a letter in each calendar years and over 50% of the Russell 2000 receiving a letter.
Last week, the PCAOB approved its 2011-2015 Strategic Plan and 2012 fiscal-year budget of approximately $227.7 million, which is a 11.4% hike from last year. Now the budget must be approved by the SEC…
Yesterday, the SEC gave us a little holiday present when it announced that the releasing of comment letters and response letters would be reduced to “no earlier than 20 business days” from when Staff review is complete from the “no earlier than 45 days” standard that has been in effect since these types of documents were first made public in ’05. The new standard commences on January 1st.
Note that the new standard uses “business days” rather than mere “days” in it – so the reduction is roughly a third, not a half as might appear at first blush. Yes, I’m a lawyer who loves the fine print…
Three interesting pieces of Senate testimony yesterday:
We are grateful that our blog has made the ABA Journal’s Blawg 100 for the fourth year in a row. You may recall that our blog won the voting contest among the 100 two years ago (the first year that the Journal put the Blawg 100 head-to-head in a round of voting) and we were winning it last year until the last day when two other blogs mysteriously received a huge number of votes. This year, we aren’t actively campaigning – but if you care to vote, here are the steps you need to take:
a. If you voted last year:
1. You likely need to recover your password by simply inputting your email address. You will promptly receive an email with your password and screen name in it.
2. Once you have your password, you should login to their site
3. Once logged in, go to the “Business Law” category and scroll down to TheCorporateCounsel.net Blog (it’s at the 3rd from the top) and click on the blue “Vote Now” symbol to the left of that.
b. If you didn’t vote last year:
1. Register to vote – it’s free (if you’re an ABA member, your ABA id/password won’t work for the ABA Journal’s site unfortunately as they are separate)
3. Once logged in, go to the “Business Law” category and scroll down to TheCorporateCounsel.net Blog (it’s at the 3rd from the top) and click on the blue “Vote Now” symbol to the left of that.
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture, including:
– ISS Policy on Say-on-Pay Voting Results
– ISS Policy on Choice of Venue Proposals
– The SEC’s Latest Capital Formation Initiatives
– Marty’s Volt
By the way, ISS is holding webcasts next week to discuss the updates to its US and European policies.
SEC’s Inspector General Being Investigated by SEC’s General Counsel
Last week, Bloomberg ran this article noting that the SEC’s general counsel is investigating whether the SEC’s Inspector General David Kotz acted appropriately when he gave a 75-minute video interview to CrashProofRetirement.com, which was also uploaded on YouTube in 12 different segments (here is one segment for example). Kotz claims he cleared his appearance with the SEC’s Ethics Office – but questions have been asked about whether his appearance should be considered “investment advice.”
Our December Eminders is Posted!
We have posted the December issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Last week, the SEC announced a settlement with Fifth Third Bancorp over some Reg FD violation allegations. No civil penalty was imposed upon Fifth Third based on its cooperation with the investigation. Here’s the SEC’s order. And here’s a Wachtell Lipton’s memo from Edward Herlihy and Matthew Guest about the action:
Last week, the SEC instituted a cease-and-desist order against Fifth Third Bancorp in connection with its redemption of trust preferred securities (TruPS) in May 2011. The SEC charged that in effecting the redemption Fifth Third “selectively disclosed,” in violation of Regulation FD, that it would redeem a class of its TruPS for about $25 per share. At the time the securities were trading at about $26.50 per share. The SEC stated Fifth Third did not issue a Form 8-K or other public notice of the redemption until it became aware that investors who appeared to have learned of the redemption had been selling the securities to buyers who appeared to be unaware of the redemption. Fifth Third, which compensated harmed investors and agreed to adoption and implementation of various additional policies and procedures, settled the SEC’s enforcement action without admitting or denying the allegations.
Fifth Third’s early redemption of their TruPS in May 2011 was triggered through Dodd-Frank’s phasing out of Tier 1 Capital treatment for TruPS generally. As indicated in our July 2010 memo “Potential Opportunities for Issuers of Trust Preferred Securities under the Collins Amendment,” bank holding companies have taken the opportunity presented by Dodd-Frank to redeem relatively costly TruPS under the regulatory capital provisions of their particular issuances where applicable. As noted in that memo, employing this redemption strategy requires careful coordination with regulators and consideration of all applicable circumstances, importantly including disclosure obligations.
Apart from their changing capital treatment and related redemptions, TruPS have frequently been a sort of fulcrum security in acquisitions of troubled institutions. Several notable transactions, including Ford Financial’s recapitalization of Pacific Capital in 2010, included conditions around effecting discounted tender offers of TruPS which have often proven difficult in execution. Several other deals, including BB&T’s recently announced BankAtlantic transaction, have attempted to solve the issue of TruPS at the holding company level by focusing on bank-level transactions.
It is clear that in the coming months TruPS will continue to be a focus in numerous capital and strategic transactions. Companies considering redemptions or other transactions involving their TruPS, while coordinating closely with their bank regulators and other relevant constituencies, should not lose sight of the various “capital treatment events” in the underlying trust documents as well as related corporate and securities law issues.
It’s been over a year since the SEC last brought a Reg FD enforcement case…
Study: Consequences of Private Meetings with Investors
In the “IR Web Report Blog” today, Pam Agnew summarizes how a new study has found significant evidence that hedge funds benefit from information they obtain in private meetings with company executives, adding to mounting research suggesting that selective access to management undermines regulators’ fair disclosure objectives. Check it out.
Poll: Which Development is More Crazy?
As we stare into the abyss of another financial crisis – and thus gear up for more reform down the road – below is an anonymous poll:
As expected given his 9 specific questions that he wanted covered during a recent hearing, Southern District of New York Judge Jed Rakoff rejected the proposed $285 million settlement between the SEC and Citigroup related to the sale of mortgage securities yesterday. This Dealbook Blog includes the Judge’s 15-page order – and here’s a statement from SEC Enforcement Director Rob Khuzami. As noted in this WSJ article, the Judge is not kind to the SEC in his order – he has set a July 16th trial date.
Whistleblowers Coming Out of the Woodwork: To Both the SEC and Internally
As I blogged recently, the SEC’s Office of Whistleblower issued its first annual report in which it disclosed that it already had received over 300 tips in just a few months. Then there is this recent CFO.com article noting that employees are reporting internally at a higher clip. It will be interesting to see if these trends continue – I think they will given that employees now have greater awareness about whistleblowing generally since companies are conducting campaigns for folks to blow the whistle internally first. We have posted memos analyzing this new report in our “Whistleblowers” Practice Area.
Updating Your Whistleblower Procedures: How to Apply Six Sigma and Lean Methodologies
