FINRA’s Corporate Financing Department is responsible for the pre-offering review of public offerings of securities for compliance with FINRA’s regulations governing underwriting terms and arrangements. In most cases, in order for a shelf takedown to be completed in compliance with FINRA Rule 5110, participating broker/dealers must rely on FINRA’s prior issuance of a “conditional no objections” opinion with respect to the base shelf prospectus and also obtain FINRA’s opinion of “no objections” with respect to the takedown prospectus.
In an effort to address the timing issues related to shelf offerings, FINRA has announced that on March 1st, it will implement a new “Same-Day Clearance Option” for the issuer’s base shelf prospectus and the takedown prospectus for those offerings where counsel can make a number of representations. The FINRA “conditional no objections” opinion on the base shelf prospectus and the “no objections” opinion on the takedown prospectus will be issued automatically once a filing that relies on the Same-Day Clearance Option is accepted by the FINRA’s electronic COBRADesk filing system. The base shelf prospectus and the takedown prospectus can be filed separately or simultaneously under the new procedure.
FINRA has not yet issued explanatory materials related to the new procedure. These materials should be available some time next week and will be distributed. However, based on information made available at a FINRA Roundtable on Shelf Offering Review, it is my understanding that, in order to qualify for Same-Day Clearance Option in the case of a shelf takedown, counsel will be required to represent on behalf of participating members that underwriting compensation will not exceed 8% of the gross offering proceeds, the offering does not include any arrangements specifically prohibited by FINRA Rule 5110(f), all items of underwriting compensation are disclosed in the prospectus supplement, and participating broker/dealers have not received securities that are treated as underwriting compensation (except for fair priced derivatives).
More limited representations are required from issuer’s counsel with respect to FINRA filing of the base prospectus. This process will be available for shelf offerings subject to FINRA’s conflict of interest rule (NASD Rule 2720) in most circumstances. In such case, an additional representation regarding compliance with Rule 2720 will be required. FINRA staff initially discussed that they will conduct a post-clearance review as to the accuracy of the representations submitted. FINRA materials may further clarify the scope of this review.
More on “New York Law: ‘Abstentions’ as ‘Votes Cast'”
Some members were confused by the member statement that I included in this blog regarding the NYSE’s view of “abstentions.” Here is my attempt to clarify the NYSE’s position:
Rule 312.07 contains two requirements with respect to the shareholder approval of transactions or compensation plans under Sections 312.03 and 303A.08 of the NYSE Listed Company Manual: (a) a majority of votes cast must approve the proposal and (b) total votes cast must represent over 50% in interest of all securities entitled to vote.
The NYSE counts votes “for”, “against” and “abstain” as votes cast in determining the numerator used in the calculation to determine (b). Broker non-votes are not treated as votes cast, but are included as “securities entitled to vote” for purposes of determining the denominator in the calculation to determine (b), as are all voting securities whether or not they are represented at the meeting. Then, (a) is a majority of the shares counted as present at the meeting for purposes of (b).
Put another way, (b) is “for”+”against”+”abstain” divided by outstanding shares (whether or not represented at the meeting), while (a) is 50% plus one of or”+”against”+”abstain”. Using an example, if there are 100 shares outstanding, at least 51 shares must be cast in total as “for”, “against” or “abstain” votes. This satisfies (b). To satisfy (a), at least 26 shares must be voted “for” the proposal (assuming, for purposes of our example, that exactly 26 shares are represented at the meeting).
So in the NYSE’s view, an “abstain” has the same effect as an “against” vote. It’s a totally different standard from the “majority of votes cast” requirements of state law (at least in Delaware, New York and Pennsylvania as far as I know).
Some Thoughts on Pre-IPO Acquisitions
In this podcast, David Westenberg of WilmerHale discusses pre-IPO acquisitions, including:
– What “business” issues arise for a private company when making an acquisition, especially if the acquisition is concurrent with its IPO?
– Can you provide an overview of the unique legal issues that arise when a private company pursues an acquisition?
– What advice do you have for private companies that are contemplating an acquisition?
As I blogged a few months ago, this blog was placed in the ABA Law Journal’s “Blawg 100” for the second year in a row. The ABA then pitted the top 100 blogs against each other in a voting contest – and I’m proud to say that we easily emerged as #1! Thanks to those that bothered to navigate a difficult voting system – registration was required and only one vote was permitted per person (even though many offered to vote as many times as permitted).
Here is a breakdown of the top 10 blogs as voted upon in the contest (culled from these results; here are the vote counts):
1. TheCorporateCounsel.net Blog – 426 votes
2. TechnoLawyer Blog – 388 votes (has an asterisk because cash prizes were offered for votes!)
3. Above the Law – 355 votes
4. The Legal Satyricon – 266 votes
5. E-Lessons Learned – 233 votes
6. Jonathan Turley – 216 votes
7. Patently-O – 204 votes
8. China Law Blog – 158 votes
9. The Volokh Conspiracy – 149 votes
10. Social Media Law Student – 148 votes
Although I’m not a big believer in “lists,” the honor is humbling and I’m glad we were able to prove the widespread loyalty of those who read this blog. All too often I see this blog surprisingly not on the top of the few lists that compare the relative popularity of legal blogs, when I know that this blog is more widely read than “JohnnyBoy’s Kansas Farmlaw Blog.” I’m not disparaging farm law at all – it’s just that I know many thousands get this blog pushed out to them via email and RSS feeds (as well as Securities Mosaic’s Blogwatch) and there can’t be that many farm lawyers in Kansas (another example – we are below the “Biker Law Blog” in this list; in fact, we are not even on that list!). Those lists use metrics that don’t account for all the pushing out that this blog does – over 20,000 get this blog pushed out to them in one form or another.
In the “small world” category, I grew up in the same Chicago apartment complex as Professor Jonathan Turley – who has the #6 blog and is an international legal giant. Maybe now he’ll buy me a lunch.
Former General Counsels as Directors
In this podcast, Craig Nordlund, former General Counsel of Agilent Technologies, discusses his career path, including:
– What has been your career path?
– What are your plans for your new retirement?
– What attributes would someone with your type of background bring to a boardroom?
How to Implement E-Proxy in Year Three
We have posted the transcript of our popular webcast: “How to Implement E-Proxy in Year Three.”
With the federal government finally open yesterday (albeit two hours late) in DC, Corp Fin issued six more Compliance & Disclosure Interpretations on the SEC’s new rules. They include:
More Samples: Companies Complying with the SEC’s New Rules
Last Thursday’s blog listing companies that have filed proxy materials under the SEC’s new rules was popular – here are some more samples that either members informed me about or that I dug up myself:
Thanks to Ken Wagner of Peabody Energy Corp. and Matt Tolland of Wilson Sonsini for pointing some of these new ones out! We should be seeing a lot more proxy statements filed going forward. One member notes that in reading the first batch of filers, it is interesting how companies define “diversity.” Some don’t include gender in that definition, some do. I’m sure we will see surveys on this point at the end of the proxy season.
In his “Proxy Disclosure Blog,” Mark Borges continues to provide detailed analysis of the new proxy statements as they roll in.
Proxy Access: Where Are We?
Last Friday, I blogged about the 50,000-plus comment letters the SEC has received on proxy access over the years. That led a number of members to ask if the SEC was still considering their current access proposal. I believe the answer is “yes,” as all recent statement publicly made by folks from the SEC indicate that they are still “hopeful” that they are on track to consider voting on something this Spring.
Of course, we still don’t have any idea what a final rule may look like. This recent Reuters interview with Commission Aguilar indicates that he is not in favor of watering down the existing proposal by allowing companies to opt out.
Farewell to Loretta Griffin
I’m sad to inform you that Loretta Griffin, beloved secretary in Corp Fin for many years recently passed away. Loretta served in the Office of Chief Counsel and always had a smile on her face. Many of you don’t realize it, but you interacted with Loretta whenever you left a voicemail for OCC as she was one of the folks that assigned your call to one of the attorneys in the group. We will miss you Loretta – our condolences to her family and friends.
Last week, RiskMetrics posted three FAQs to address how their voting policies apply to the SEC’s new rules. These FAQs address:
– What will RiskMetrics be looking for in the new disclosure requirement on risks raised by compensation programs? In particular, how will RMG react to non-disclosure?
– How will RMG analyze compensation consultant fee disclosures? Will RMG apply some type of formula where concerns will be raised if fees for other services exceed fees for compensation consulting?
– Regarding the new disclosures on director qualifications, diversity policies, and board leadership and oversight of risk management, what are RMG’s views and the prospects for related voting recommendations?
Last Tuesday, Delaware Vice Chancellor Laster delivered a potentially important opinion in Kurz v. Holbrook. In it, VC Laster finds valid consents delivered without the consenting party having obtained an omnibus proxy from DTC. The Vice Chancellor held this did not invalidate the consents, because the Cede breakdown is part of the stocklist for Section 219 purposes. In other words, brokers are now “record holders” of Delaware corporations for all purposes. This has potentially significant consequences for consent practice and compliance with notice requirements.
He also invalidates a bylaw that purported to reduce the size of the board and to call a special meeting to elect the single remaining common director, finding this would not comport with any of the valid methods for ending the term of an incumbent director. He does say that a bylaw that would reduce the size of the board at an annual meeting could effectively end the term of directors not reelected at that meeting.
Below is some recent commentary from RiskMetrics’ Ted Allen:
More than a dozen U.S. companies plan to offer management proposals this year to give shareholders the right to call special meetings. While one might expect that investors would welcome these reforms, shareholder activists are crying foul because these management bylaw (or charter amendment) proposals have higher ownership thresholds than those that many investors say they prefer.
In virtually all of these cases, the companies are acting in response to a recently filed shareholder proposal that requests a 10 percent (of outstanding shares) threshold, and/or a similar investor resolution that received majority support in 2009. Most of the companies are seeking a 25 percent threshold, although a few issuers have proposed different percentages such as Honeywell International (20 percent), and Medco Health Solutions (40 percent).
Companies have offered various arguments in support of a 25 percent threshold. Some issuers point out that 25 percent is more appropriate for their circumstances because there are several institutions that own more than 5 percent of their shares. They contend that a higher threshold would deter nuisance requests and force a hedge fund to seek broader support before requiring a company to incur the expense of holding a special meeting.
However, most shareholders won’t have an opportunity this year to choose between the competing thresholds because many issuers are obtaining permission from the staff of Securities and Exchange Commission’s Corporation Finance Division to omit the investor resolutions. In their no-action requests, the companies are successfully citing SEC Rule 14a-8 (i)(9), which bars a shareholder proposal that would directly conflict with a management resolution that the company plans to present at the same meeting.
Under that rule, an investor resolution may be excluded if it and the management agenda item present “alternative and conflicting decisions for shareholders.” In a 1998 rulemaking release, the SEC explained that the proposals don’t have to be “identical in scope or focus” for a company to exclude the shareholder resolution.
Among the companies that have successfully used the (i)(9) argument recently to exclude special meeting proposals are: CVS Caremark, Medco, Honeywell, NiSource, Baker Hughes, Becton Dickinson & Co., Eastman Chemical, and Safeway. In addition, Time Warner, Genzyme, Bristol-Myers Squibb, International Paper, Pinnacle West Capital, and Liz Claiborne Inc. have filed similar no-action requests to exclude proposals with a 10 percent threshold, according to investors.
Meanwhile, AT&T is trying to exclude a 10 percent special meeting resolution under a different SEC rule–14a-8(i)(10)–by arguing that it has “substantially implemented” that proposal. The company’s board approved a 15 percent bylaw on Dec. 18.
The special meeting proposals are part of a successful multi-year campaign by Nick Rossi, William Steiner, and other retail investors affiliated with John Chevedden, a long-time shareholder activist based in southern California. Overall, 31 special meeting proposals filed by investors received majority support in 2009, according to RiskMetrics Group data. Of the 14 companies that so far have sought to exclude proposals under Rule 14a-8 (i)(9), 10 had special meeting proposals that earned majority support last year.
Until last year, not many companies had tried to use (i)(9) to knock out shareholder proposals. In the past, companies often have responded to broadly supported shareholder resolutions by adopting governance policies or bylaws (that may be more restrictive on investors) and then arguing under Rule 14a-8 (i)(10) that they had “substantially implemented” those proposals. However, corporate lawyers shifted their strategy last season after the SEC staff rejected (i)(10) arguments by AMN Healthcare, Allegheny Energy, and Becton Dickinson to exclude special meeting proposals. After switching to (i)(9) arguments later in the proposal filing season, lawyers for H.J. Heinz, International Paper, and EMC successfully won no-action relief.
In letters to the SEC opposing the recent wave of no-action requests, Chevedden argues that the management and shareholder proposals do not directly conflict because they would allow investors to choose between two different thresholds. “Management should not be allowed to short-circuit that sort of dialogue between shareholders and the board by letting a defensive maneuver trap an otherwise legitimate shareholder proposal,” he wrote in a Dec. 30 letter in response to Medco’s no-action petition.
He also complains that the SEC staff is allowing companies to mislead investors, who may logically assume that the management proposal will enhance their rights. “When shareholders are given the ‘opportunity’ to vote on a weak management version of this topic in order to prevent them from voting on a stronger shareholder proposal on the same topic, the shareholders who learn of this context may view this as a subtraction from their rights,” he wrote in a Dec. 18 letter on Medco’s no-action request.
Chevedden contends that some companies (where the board may adopt bylaws without shareholder consent) are holding unnecessary investor votes on special meeting bylaws just to thwart the 10 percent proposals filed by investors. He also expresses concern that companies will be able to avoid votes on future investor resolutions on special meetings by offering management proposals with different (such as 35 or 50 percent) percentages each year.
Cornish Hitchcock, a Washington-based attorney who represents the Amalgamated Bank and other labor investors in no-action matters, said the volume of exclusion requests under (i)(9) this season has been a “little surprising.” He recalled that the SEC staff has rejected a few no-action petitions based on that provision, such as last year when the staff concluded that a retail investor’s “say on pay” proposal at Bank of America did not directly conflict with the company’s federally mandated advisory vote, because the shareholder resolution sought an advisory vote every year.”Some clarification [from the SEC staff] would be useful about what companies can and cannot do under (i)(9),” Hitchcock said.
So far, the SEC staff has not provided a detailed explanation on how it is interpreting Rule 14a-8(i)(9) this season. In ruling on no-action requests, the agency staff typically issues a one-page memorandum stating whether it concurs with any of the issuer’s arguments. Chevedden and his fellow investors have asked the SEC staff to reconsider its rulings on the CVS, Medco, Honeywell, and Safeway no-action petitions. On Dec. 22, the staff rejected his request to reverse its Becton Dickinson decision.
It remains to be seen how institutional investors will react to the companies that have proposed a 25 percent threshold for special meetings in response to majority-supported 10 percent provisions. Based on responses to a recent policy survey, RiskMetrics’ institutional investor clients were divided over what shareholders should do. Of the approximately 100 institutions that responded, just 33.7 percent of endorsed the management approach by saying they would support the management proposal and not withhold support from directors.
However, a majority of the respondents indicated that there should be some negative consequences for management, but they split over how to express their concern: 34.7 percent said they would oppose the management proposal and the board; 16.3 percent said they would support the management proposal but oppose the board; and 15.3 percent said they would oppose the management proposal but support the board.
In a recent speech, SEC Chair Schapiro said “we are nearing a vote” on proxy access rule, but she did not provide a timetable. Last month, I conducted a poll on this blog regarding how many comment letters have been submitted to the SEC on its various reiterations of proxy access proposals since 2003 (the total does include form letters). The poll results were:
– 5% thought there were between 100-500
– 4% between 500-1000
– 18% between 1000-3000
– 28% between 3000-10,000
– 26% between 10,000- 50,000
– 20% over 50,000
Well, the last category is the winner. There have been over 50,000 comment letters submitted to the SEC on proxy access over the past 7 years. Unbelievable. That’s a lot of hard labor.
Here is the math that leads us to this conclusion:
1. 2003 proposal – The SEC received approximately 500 individually signed comments plus form letters from 12,500 others. The SEC held a roundtable in February 2004, after which it received approximately 200 additional individually-signed comments, plus an additional 2,000 form letters.
2. 2007 proposal (alternative 1) – The SEC received approximately 200 comments on this alternative, plus 9,300 form letters.
3. 2007 proposal (alternative 2) – The SEC received approximately 600 comments on this alternative, plus 26,000 form letters.
4. 2009 proposal – The SEC has received over 500 comments so far, but not much in the way of form letters this time around. The latest extension for this proposal has brought in more than 40 letters.
So the total of these is roughly 51,800 comment letters. And counting…
– I always thought that investor relations was like advertising – very difficult to measure in its impact. How have people attempted to gauge what investor relations officers do?
– What does the research say about the impact of investor relations?
– Other than making sure investors understand the company’s financial measures, what can investor relations officers do?
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:
– Rule 163 Proposal: Some Have a Beef
– Canadian Companies Show Renewed Interest in US Capital Markets
– Regulation FD: Can You Walk Analysts Down From Too Much Optimism?
– Survey: Corporate Governance and IPOS
– Jail Time: SEC Goes After Scofflaw
Numerous members are asking daily about which companies have filed proxy materials under the SEC’s new rules so that they can see how they addressed the new disclosure requirements related to board qualifications, leadership structure, risk oversight, etc. Here are a few samples we found so far – the first four have been truly filed under the new rules; the last three have not but have some attributes that address some of the new requirements:
Note that we present these samples just because they are the first ones filed; we haven’t analyzed them to determine if they adequately comply with the new rules nor don’t necessarily endorse their approach. Thanks to Dave, Mark Borges and Nick Varsam of Thermadyne Holdings for pointing these out. If you spot a new one, please drop me a line…
Proxy Disclosure: How to Explain the Impact of a Failure to Vote
The decrease in the level of voting in recent years by retaiI shareholders (particularly at those companies using e-proxy) – combined with the increasing likelihood of close votes at annual meetings for a variety of reasons – has pushed more companies to realize that they are involved in “real” campaigns this proxy season. This is a topic that I have repeatedly warned you about. I recently received the following from an in-house member:
“Due to the loss of the broker vote in director elections, we’re probably going to include the following paragraph in the “General Instructions” section of our upcoming proxy statement:
Effect of Not Casting Your Vote. If you hold your shares in street name it is critical that you cast your vote if you want it to count in the election of Directors (Item 1 of this Proxy Statement). In the past, if you held your shares in street name and you did not indicate how you wanted your shares voted in the election of Directors, your bank or broker was allowed to vote those shares on your behalf in the election of Directors as they felt appropriate.
Recent changes in regulation were made to take away the ability of your bank or broker to vote your uninstructed shares in the election of Directors on a discretionary basis. Thus, if you hold your shares in street name and you do not instruct your bank or broker how to vote in the election of Directors, no votes will be cast on your behalf. Your bank or broker will, however, continue to have discretion to vote any uninstructed shares on the ratification of the appointment of the Company’s independent registered public accounting firm (Item 2 of this Proxy Statement). They will not have discretion to vote uninstructed shares on shareholder proposals (Items 3 and 4 of this Proxy Statement). If you are a shareholder of record and you do not cast your vote, no votes will be cast on your behalf on any of the items of business at the Annual Meeting.
Broadridge has a standardized buckslip on this subject that they are offering to include – for an additional cost – in full set mailings. Some brokers (egs, Goldman Sachs and Morgan Stanley) are sending similar messages to clients – and some law firms and proxy solicitors have been pushing the idea that companies need to be proactive in educating shareholders (eg. see page 3 of this memo).”
Broc’s note: This is a good start on the road to real campaigning. However, since many shareholders ignore their proxy materials, companies will need to do more to get the attention of shareholders and communicate the importance of voting. Another cheap and easy step is to build an “annual meeting” home page, as I wrote about in the Spring 2008 issue of InvestorRelationships.com (still available for free).
New York Law: “Abstentions” as “Votes Cast”
Yesterday, in our “Proxy Season Blog,” I noted some feedback from a member about how abstentions and broker non-votes are counted in Delaware. Below is some information that a member recently added to the discussion in our “Q&A Forum” (ie. #4642) about how abstentions may be treated under New York law:
I recently spoke with a NYSE representative who told me that despite the fact that abstentions are not considered a “vote cast” under New York law, the NYSE takes the position that for purposes of shareholder approval of an equity plan, under NYSE rules an abstention will nevertheless be considered a vote cast on the proposal. That is consistent with the NYSE Staff’s long-standing interpretation of 312.07.
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:
– The Staff’s new Non-GAAP measure C&DIs
– Shareholder education about the loss of discretionary voting
– An analysis of the SEC’s climate change release
– Snow stories
Clarification: “Lightning Fast” Arbitration in Delaware Chancery Court
Here is a clarification on my recent blog about Delaware’s new arbitration process from a member:
Unless folks read Francis’ alert closely, I think it might confuse people, as I know it confused me. This new development is about bringing arbitration of contract claims to Delaware Chancery Court, with the Chancellors serving as arbitrators. It seems like a good idea and one that is noteworthy. But the blog post incorrectly suggests this new development is for all suits in Chancery (where the state pretty much already has a “rocket docket” whenever needed) – and misses the important point that the new rules allow the Chancellors to get involved in cases that normally wouldn’t be in Chancery to begin with.
More on our “Proxy Season Blog”
With the proxy season in full gear, 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:
– Determining Number of NEOs: Not as Easy as 1, 2, 3
– Examples: Disclosure of Director Nominee Selection Criteria
– Disclosing Pending Litigation: The Challenges
– Australian Companies to Disclose Gender Diversity
– Registered Holders: Broadridge vs. Transfer Agent?
– Shareholder Choice in a World of Proxy Access
– SEC Reverses Omission of Antibiotics Shareholder Proposal
I won’t whine since I grew up in Chicago, but a second blizzard is expected today in Washington as federal government offices are closed here for a second straight day as we dig out from the first. As I blogged on Friday, federal government closings due to weather doesn’t shut down EDGAR – so filings can continue to be made despite the snow storm (so yes, Form 10-Qs are still due today).
But has “snowpocalypse” panic spread to underwriters and the securities bar as they wonder whether there will be any bodies in Corp Fin to declare their deals effective? The markets are still open and having registration statements declared effective is particularly important this week, as the staleness date for calendar year-end financial statements fast approaches.
Fortunately, the answer is “yes.” Corp Fin has procedures in place to help as Staffers are available to assist with filings even though the government is shut down by the storm. When OPM shuts down the government in DC, emergency personnel (ie. “essential”) still must show up for work – and as a result there will be Corp Fin staffers available to ensure that essential operations continue.
The most important thing when faced with this situation is getting in touch with someone at the SEC – leaving a message with the examiner assigned to your filing probably isn’t going to be sufficient. Rather, you will need to work the phones to get in touch with (or leave a message for) the Assistant Director of the group that is handling your filing, or call the Corp Fin Front Office. These numbers are available in our constantly-updated “Corp Fin Staff Organization Chart.” To play it safe, you should attempt to make contact with the Staff as soon as possible if you anticipate a need to go effective this week so that any last minute issues can be resolved.
If you are expecting comments from Corp Fin and there is no urgent need to go effective, you may experience some delay in the processing of your filing thanks to the snow. There is no need to contact the limited Staff available to ask about the status of your comments, because they probably won’t be able to step in and move the process along, particularly right now. The Staffers that are available during the government shutdown are really there to deal with the most urgent situations, so bogging them down with less urgent matters is not the best idea…
Thanks to Dave who wrote the bulk of this entry, as he fondly remembers being “essential” himself and trudging to be one of the few folks in the government at work during a snow day…
Feedback: SEC’s Settlement with BofA
Below is some feedback on my recent blog regarding the SEC’s settlement with Bank of America from Brink Dickerson of Troutman Sanders:
Interesting settlement between BOA and the SEC, but I think that it reflects some worrisome practices by the SEC:
– The concept of “effectiveness,” which is the standard that the SEC proposes for the auditor attestation report, is not directly applicable to disclosure controls. It is uniquely a SOX 404 concept. Rather, for disclosure controls the test is whether they “are designed” to assure compliance, not whether they are effective. See Rule 13a-15(e). While the effectiveness determination is only one of five items that he auditor is to review, it is the one that stands out as not being mandated by the 1934 Act and, more critically, is almost impossible to fulfill.
– I doubt that an audit firm is qualified to assess disclosure controls without relying on a report from special counsel. If anyone could do the report solo, it would be a law firm, and for an audit firm to do it, it is going to have to rely on someone with the necessary disclosure expertise. In the Sony settlement the SEC did require that an audit firm “audit” Sony’s MD&A, but that is a much easier requirement.
– Having management certify as to the accuracy of a proxy statement, although understandable in the context of the disclaimers by BOA management with respect to their familiarity with the document, seems a bit odd, particularly given the absolute liability – i.e., no scienter required – provisions of Section 14(a). In the Tyco litigation, the SEC thought that Section 14(a), on its own, was strong enough to go after a CEO for misstatements in a proxy statement. I do not think that anything has changed, and worry from a policy perspective whether the SEC should be suggesting that a certification is necessary in order for there to be liability of the part of a CEO.
– Requiring “super” independence for the compensation committee members and their advisors seems little more than window dressing given the progression toward that independence standard by most large companies for all purposes and the new compensation advisor disclosure rules. But at least this one will not cost the shareholders anything.
– Most of our larger clients already have well-considered, written compensation principles. It is increasingly hard to write a good CD&A without them. So, again, hopefully something this is something that will not cost the shareholders anything.
– Requiring a “say on pay” advisory vote, even though just advisory, appears to be meddling by the SEC in corporate governance (again!), rather than their sticking to their disclosure mandate. I find the proposed order’s comments on the governance implications of advisory votes – “shall not be binding on the BAC Board of Directors and shall not be construed as overruling a decision by such Board, nor will it create or imply any additional fiduciary duty by such Board” – interesting, and hope that the plaintiffs’ bar believes them too.
In short, in order to craft an outcome that will get Court approval (this time), I think that the SEC may have gone a bit too far down the wrong path.
Dave & Marty on Capital Raising, Rule 163 Proposal, and Conference Hot Spots
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion regarding capital raising, Rule 163 proposal and conference hot spots.
Below is some news from Francis Pileggi of Fox Rothschild, as excerpted from this alert:
A new voluntary expedited procedure for new cases – under these new rules – is coming to the Delaware Court of Chancery. It will provide a new streamlined, “lightning fast” litigation timetable for the adjudication of certain types of business disputes that fit within the parameters of the new rules. Highlights of the new rules were presented last month by Chancellor William Chandler to the Delaware Bar.
This new procedure gives new meaning to the term “alacrity.” It is designed to provide another option to litigants seeking expedited or summary proceedings for certain business disputes that fit the new “streamlined” process provided for in the new rules that will become effective on February 1, 2010. Learn more in this memo.
Treasury Releases First Quarterly PPIP Report
A few weeks ago, Treasury released its initial quarterly report for the Legacy Securities Public-Private Investment Program. The report includes a summary of PPIP capital activity, portfolio holdings and current pricing, and fund performance.
In addition,Treasury has released a TARP Warrant Disposition Report, which provides an overview of the warrants received by Treasury under TARP and an explanation of the warrant disposition process and the results achieved.
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Now is the Time for a True Walkaway Number: Model Disclosure for Your CD&A
– Our Model CD&A Walkaway Disclosure
– RiskMetrics Revises Poison Pill Policy; On-the-Shelf Rights Plans on the Rise
– Defining the Rules of the Road for Differential Consideration in M&A Transactions
– SEC Staff’s New Guidance: Facilitating Lock-Up Agreements with Registered Exchange Offers
– Earnouts: A Siren Song?
If you’re not yet a subscriber, try a 2010 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Yesterday, the SEC announced that it has settled its two actions against Bank of America regarding alleged disclosure deficiencies in connection with BofA’s acquisition of Merrill Lynch (one action regarding bonus amounts; the other over operating losses). Not only will BofA pay $150 million to the SEC (to be distributed to harmed shareholders), it will adopt seven governance reforms – if Judge Rakoff approves the settlement (he rejected a $33 million settlement last September). The settlement doesn’t levy any penalties on current or former executives. Here’s the SEC’s litigation release – and here is the SEC’s brief supporting the settlement and notice of motion (with Exhibit A to that).
Here are the seven governance reforms that BofA would be required to implement for a period of three years:
– Provide shareholders with an annual non-binding “say on pay” on executive compensation
– Retain an independent auditor to perform an audit of the company’s internal disclosure controls
– Have the CEO and CFO certify they have reviewed all proxy statements
– Retain disclosure counsel who will report to the audit committee on the company’s disclosures
– Adopt a “super-independence” standard for the compensation committee that prohibits them from accepting other compensation
– Hire a “super-independent” consultant for the compensation committee
– Implement incentive compensation principles & procedures and prominently post them on the company’s site
While BofA’s problems with the SEC may be coming to a close, it’s problems with NY Attorney General Andrew Cuomo may just be starting over these alleged disclosure deficiencies. Yesterday, Cuomo announced that he had filed a civil suit against Bank of America, Lewis and former CFO Joe Price.
The SEC Enforcement Division’s Use of Governance Reforms: Something New?
I know there have been a number of “governance by gunpoint” settlements driven by judges over the past decade, where institutional investor plaintiffs obtained governance reforms from companies whom they had sued and then settled. But is this something new for the SEC?
Going back in time a little bit, it’s fair to say the SEC has somewhat engaged in this type of practice, but I had trouble digging up examples from the past few years. And there certainly hasn’t been a prior instance of the SEC requiring an advisory say-on-pay vote or imposing “”super-independent” criteria as part of a settlement. It’s certainly an interesting way to remediate what was essentially a disclosure issue (how about the one where an outside law firm will report to the audit committee on disclosure!).
Here are the few precedents I could think of where the SEC has used the settlement process to obtain some type of quasi-governance reform from a company: requiring the company to hire an independent consultant to review and recommend improved policies on things like accounting (e.g., Xerox and others) and FCPA compliance (many FCPA settlements in the 2002-2006 time frame), etc. Can any of you Enforcement gurus out there think of others?
It will be interesting to see if this is a one-off type of settlement or a new Enforcement trend. Come hear a panel of former SEC Enforcement Staffers discuss this topic during our upcoming webcast: “Big Changes Afoot: How to Handle a SEC Enforcement Inquiry Now.”
A huge snowfall is expected in DC today. Remember that EDGAR remains open as usual as it does not shut down even if the government closes.
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:
– Delaware Court of Chancery Addresses Critical Advancement/Indemnification Question
– SEC v. Cuban: SEC Files Appeals Brief
– Travel Tips: DOT Now Helping Those with Airline Beefs
– Corp Fin’s “Common Financial Reporting Issues for Smaller Companies”
– Lessons Learned: Initial Submissions of XBRL Filings
