Below are the results from a recent survey we conducted on the topic of your company’s plans for this year’s D&O questionnaire in the area of related-party transactions:
1. Regarding the level of related-party information that we request from directors and officers:
– We ask each D&O to inform us of any related-party transaction – 55.7%
– We ask each D&O to inform us of only those related-party transactions over $120,000 – 40.2%
– We ask each D&O to inform us of only those related-party transactions over $50,000 – 1.0%
– We ask each D&O to inform us of only those related-party transactions over $25,000 – 0.0%
– Other – 3.1%
2. Regarding the level of related-party information that we request from directors and officers:
– We ask each D&O to submit an annual list of their entire immediate family – 9.3%
– We ask each D&O to submit an annual list of their entire immediate family, including place of employment and any entities in which they own more than a specified amount – 21.7%
– We define “immediate family members” and provide a list of the company’s subsidiaries and then ask each D&O to list any immediate family members doing business with these entities – 53.6%
– Other – 15.5%
3. Regarding how “complete” we require the list of immediate family members:
– We require each D&O to provide a complete list of each individual that falls under the definition of “immediate family members,” regardless if there has ever been any contact with them (e.g., in-law living in another country) – 29.2%
– We request that each D&O provide a list of immediate family members they are in contact with and require an affidavit that there is no contact with other known “immediate family members” (egs. estranged child or hostile father-in-law) – 2.1%
– We do not require each D&O to provide a list of immediate family members; instead, we rely on the directors to self-report related-party transactions – 65.6%
– Other – 3.1%
4. Regarding the method(s) of due diligence review that we perform for related-party transactions:
– We rely solely on each D&O to alert us to any potential transactions – 32.0%
– We conduct a periodic review of SEC filings, Web search engines, and relevant web sites to update the lists of immediate family members provided by our D&Os – 0.0%
– We conduct a periodic review of our accounts payable and receivable for transactions with individuals on the list of immediate family members provided by our D&Os – 25.8%
– We distribute the lists of immediate family members to our business unit heads and require them to monitor for related party transactions – 2.1%
– All – or some combination – of the above – 27.8%
– Other – 12.4%
Please take a moment to respond anonymously to our “Quick Survey on Impact of Loss of Broker Nonvotes for ’10 Proxy Season.”
Profile: SEC Chair Schapiro’s First Year
Here is a Bloomberg article that profiles SEC Chair Schapiro’s first year in office.
Mailed: November-December Issue of The Corporate Counsel
The November-December issue of The Corporate Counsel includes pieces on:
– 2010 Proxy Season Items
– New SLAB Narrows 14a–8(i)(7) Ordinary Business “Risk” Exclusion
– Staff Says It Won’t Necessarily Settle for Futures–Only Comments on Executive Compensation Disclosures–What That Will Mean For Issuers
– Other SLAB 14E Items
– A Few Thoughts on Proxy Access
– Can No Disclosure Be Good Disclosure?
– CFOCA Update
– More on Obtaining CFOCA Waiver Letters for Separate Financials of Acquired Businesses, Subsidiaries and Guarantors
– ABA Committee’s Statement of Effect of the FASB Codification on Audit Response Letters
– The Staff’s New Section 13(d)/(g) CDIs
Act Now: Get this issue on a complimentary basis when you try a 2010 no-risk trial today.
Tune in tomorrow for our CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Compensation Disclosures – What You Need to Do Now!” – featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller as they cover the new SEC rules that relate to executive compensation disclosures. Here is an outline of what will be discussed that you can print out in advance and take notes on.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
Don’t forget today’s TheCorporateCounsel.net webcast – “How to Implement the SEC’s New Rules for This Proxy Season” – during which Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn will provide practical guidance on how to handle the new SEC rules that don’t deal with compensation issues.
Sample Model D&O Questions for the New SEC Rules
In response to the SEC’s new proxy disclosure requirements, Dave Lynn and Mark Borges have just finished sample model questions for your D&O questionnaire (and much more analysis) as part of the Winter 2010 issue of “Proxy Disclosure Updates.” Here is a blurred copy of that 20-page issue to give you a sense of it.
You will receive a full copy of this issue, which is posted on CompensationDisclosure.com, immediately upon taking advantage of a no-risk trial to Lynn, Borges & Romanek’s “Executive Compensation Service” for 2010 (which includes the just-mailed 2010 version of Lynn, Borges & Romanek’s “Executive Compensation Disclosure Treatise and Reporting Guide”).
FINRA Adopts New Private Offering Rule on Use of Proceeds
And here is one from Allen Matkins: “Private offerings of securities by a FINRA member firm or a control entity must comply with new disclosure and filing requirements and limitations on the use of proceeds. FINRA adopted new Rule 5122 to require FINRA member firms, and associated persons that engage in certain private placements of its own securities or the securities of a control entity, to comply with certain disclosure and filing requirements and limitations on the use of proceeds. The private placements subject to the new rule are known as Member Private Offerings or MPOs. FINRA adopted Rule 5122 to address concerns with regard to conflicts of interest in MPOs. Traditionally, MPOs have been excluded from the scope of existing FINRA rules that generally applied to public offerings.”
Tune in tomorrow for our webcast – “How to Implement the SEC’s New Rules for This Proxy Season” – during which Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn will provide practical guidance on how to handle the new SEC rules that don’t deal with compensation issues.
Renew Today: Since all memberships are on a calendar-year basis and expired at the end of December, if you don’t renew today, you will be unable to access this webcast. Renew now for ’10! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
Recently, Cisco shareholders narrowly supported a say-on-pay proposal by a majority. In this CompensationStandards.com podcast, Julie Tanner of Christian Brothers Investment Services discusses the recent Cisco vote on say-on-pay and other CBIS activities, including:
– What were the results of your say-on-pay proposal on Cisco’s ballot? How did that compare to last year?
– How does Christian Brothers select which companies to which it will submit shareholder proposals?
– What types of proposals has Christian Brothers submitted for the 2010 proxy season?
– Does Christian Brothers engage with companies before – or after – it submits shareholder proposals?
In this CompensationStandards.com podcast, Greg Taxin discusses Soundboard Review Services activities, including:
– Why was Soundboard founded?
– What opportunities for boards does Soundboard provide? How does it differ from what advisors do today?
– What is the diligence process that Soundboard undertakes to understand a company’s executive compensation processes?
– What is the “opinion letter” that Soundboard provides at the end of its evaluation?
Heads Up: Change in Edgar Search Functionality
A while back, I blogged that the SEC had decided to name its “IDEA” tool so that it would become “Next-Generation EDGAR.” The SEC has now posted a notice – which appears on their “Company Search” page – indicating that as of August 19th, Edgar filings will be accessed only by an Edgar script as the Idea script will no longer be operational. This change will be transparent to most users, but bookmarked links to previous filing searches or RSS feeds may be broken and will need to be recreated. As Jim Brashear of Haynes & Boone remarked to me: “What’s comes after the “Next-Generation EDGAR System”? “Next-Next Generation”?
As an aside, now that XBRL has been mandated for some larger companies, sites that display SEC filings in a more user-friendly way than the SEC are springing up. For example, check out XBRLCloud.com, which includes a list of the number of errors in each XBRL filing. And this “SEC Data Guy” Blog is helping to further explain what “errors” really are in XBRL filings. I must say, this stuff is confusing…
Our January Eminders is Posted!
We have posted the January issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Built in the same simple format as our own “Blue Justice League,” I love this casual game – “Cheese or Font” – where a name pops up and you need to click on whether it’s a type of cheese or font. If you want to play something more “legal,” our “Blue Justice League” competition still goes on. It remains the only casual game for lawyers I’ve seen online.
This new “Alice in Wonderland” trailer starring Johnny Depp looks awesome.
An Inspirational Site for the New Year
My college bud, Dino, turned me onto this inspirational site: “The Fun Theory.”
Second Circuit: Investor Ceased to be 10% Owner 26 Minutes Before Purchase
In December of last year, I blogged about Donoghue v. Local.com Corp., 2008 WL 4539487 (S.D.N.Y.), in which the court held that an alleged ten percent owner’s simultaneous purchase and sale of issuer securities at 4:32 p.m. on August 1, 2007 were not subject to Section 16(b) because the issuer had issued common stock to a group of third party investors 26 minutes earlier, diluting the former ten percent owner’s ownership to 9.75%. The Second Circuit has now affirmed that decision. 2009 WL 4640653 (2d. Cir.).
The case involved a purchase of Local.com common stock and warrants by Hearst Communication, Inc., pursuant to a stock purchase agreement executed in February 2007, as a result of which Hearst became a ten percent owner subject to Section 16. The stock purchase agreement prohibited Local.com from selling any additional shares of common stock for the next 90 days without Hearst’s written consent. Within that time, Local.com entered into an agreement to sell common stock to a group of third party investors. One of the conditions to closing was that Local.com obtain all required consents to the transaction. Hearst agreed to consent to the transaction if Local.com would reduce the exercise price of Hearst’s warrants by $0.50 a share, provided that Local.com filed a Form 8-K disclosing the terms of the consent by 5:00 p.m. on August 1, the date of closing.
Here is the sequence in which the pertinent closing events occurred:
– 12:46 p.m.–Local.com notified its transfer agent to prepare the stock certificates to be delivered to the new investors, but to wait for final approval before releasing them
– 4:06 p.m.–the new investors wired payment for their shares
– 4:32 p.m.–Local.com filed the Form 8-K disclosing Hearst’s consent
– 4:45 p.m.–Local.com instructed its transfer agent to release the stock certificates
Once the new shares were issued to the third party investors, the number of shares outstanding was sufficient to dilute Hearst’s ownership to below 10%. The question was whether the warrant amendments, which the plaintiff alleged constituted a cancellation and re-grant (an issue the court found it unnecessary to address), occurred before or after the new shares were outstanding.
The Second Circuit affirmed the district court’s holding that the private placement shares were issued and outstanding at 4:06 p.m., when Local.com received payment for the shares. This was a case that could have gone either way, based on the technicalities of the closing conditions, but the outcome is appropriate and clearly supportable.
Investment banks spend a lot of time tailoring their M&A engagement letters to address the perceived risks involved in advising widely-held public companies. Those engagements are often perceived as presenting greater liability risks than M&A advisory engagements for private companies, and that’s probably true most of the time, but a recent Massachusetts federal court decision provides a sobering reminder to investment banks that this isn’t always the case.
What’s more, the Baker v. Goldman Sachs case – here is the opinion – also shows how some of the provisions of an engagement letter designed to protect bankers in public company deals can under certain circumstances have the opposite effect in a private company transaction.
The Baker case arose out of Goldman’s service as a financial advisor to Dragon Systems, Inc. in connection with its ill-fated sale to Lernout & Hauspie Speech Products, a Nasdaq-listed Belgian company that collapsed in the aftermath of an accounting scandal that surfaced shortly after the deal was completed. L&H acquired Dragon in an all stock deal, and the buyer’s subsequent collapse resulted in a loss to Dragon’s controlling shareholders of approximately $300 million.
Dragon’s two controlling shareholders filed a lawsuit against Goldman Sachs and related entities. The plaintiffs alleged that Goldman Sachs negligently advised Dragon to merge with L & H without adequately investigating the buyer’s value. The plaintiffs made a variety of contractual and other common law claims, including breach of fiduciary duty and negligent misrepresentation, and also alleged that Goldman’s conduct violated the Massachusetts Unfair Trade Practices statute.
With the exception of the novel statutory claim, most of the plaintiffs’ claims were consistent with what you typically see in investment banker liability cases. The most common legal theories used to sue bankers are the tort of negligent misrepresentation, and breach of contract claims premised on agency or third-party beneficiary principles. More recently, breach of fiduciary duty claims have become more prominently featured as well. With some high profile exceptions, investment bankers have generally been pretty successful in defending against these claims.
Plaintiffs relying on negligent misrepresentation or contract law principles premise their claims on allegations that they were intended beneficiaries of the contractual relationship between the banker and the company, and were thus entitled to rely upon the banker’s efforts. Since these claims depend on the contractual relationship between the bank and its client, investment bankers’ engagement letters have played a prominent role in their efforts to fend off such claims. Those letters typically include very specific statements about the parties to whom the investment bank is providing its services, together with broad disclaimers of liability to corporate shareholders or other third parties.
Interestingly, Goldman’s engagement letter with Dragon included customary language intended to accomplish this objective. The letter explicitly stated that “any written or oral advice provided by Goldman Sachs in connection with our engagement is exclusively for the information of the Board of Directors and senior management of the Company.” What’s even more interesting, however, is that the plaintiffs were able to use this language as the basis for their third party beneficiary and negligent misrepresentation claims.
What the plaintiffs did was to simply point out to the court that one of the two controlling shareholder-plaintiffs was a member of the Board, and was thus within the group entitled to the benefits of the agreement. Goldman argued that in using the quoted language, it was referring to the board in its representative capacity. However, the court looked at some other potentially ambiguous phrasing in the engagement letter, including the fact that the letter was addressed to the shareholder-director and the letter’s use of the personal pronoun “you” instead of “the company” in describing the persons to whom it was providing its services, to justify its conclusion that Goldman appreciated that others aside from the board in its representative capacity would benefit from its advice.
The treatment of the plaintiffs’ fiduciary duty claim is another area where the Company’s closely-held nature appears to have played a significant role in the court’s analysis. While the fact that the engagement letter did not include a disclaimer of fiduciary duties played an important role in the court’s decision not to dismiss these claims, the close contact that Goldman allegedly had with the plaintiffs throughout the course of the engagement was another important factor in leading the court to conclude that the plaintiffs sufficiently alleged that “special circumstances existed to create a fiduciary relationship apart from the terms of the contract.”
It is important to keep in mind that Baker involved a motion to dismiss, so this litigation is at a very preliminary stage and it is inappropriate to draw broad conclusions from it. Nevertheless, the Baker case drives home the point that although the risk profile in engagements involving widely-held public companies may generally be higher than private company engagements, private companies (and public companies with controlling shareholders) present distinct risks of their own that banks may want to take into account in drafting and negotiating engagement letters.
SEC Approves PCAOB’s 2010 Budget
Last week, the SEC issued this order approving the PCAOB’s budget and annual support fee for ’10. The PCAOB received a 16% increase for its 2010 budget, from $157.6 million to $183.3 million (raising the Staffing level to 636). The order includes three specific measures that the PCAOB should address during the year – one of which is that the PCAOB should consult with the SEC about any “plans to implement changes in response to legislative actions.” Between an active Congress and the pending Supreme Court case, it should be an interesting year for the PCAOB…
Taking it easy this week and re-running some of the best entries recently posted on some of our other blogs. This first one comes from Fred Whittlesey of the Hay Group. It ran on CompensationStandards.com’s “The Advisors’ Blog” earlier this month:
A company’s Compensation Committee decided to provide the CEO with a company car and asked what color car he wanted. The CEO wanted to ensure that his choice of color was consistent with market norms so he asked the HR department to research the car color of the CEOs of its ten peer companies.
The results were presented to the CEO, indicating that, on average, CEOs in the peer group drove a pink car. The CEO, who knew his peer CEOs well, commented that it was hard for him to believe that so many CEOs were driving pink cars (given the absence of any multi-level cosmetics marketing organizations in their peer group.) “Is that the average or the median?” he asked. “Both the average and the median are pink” was the reply. He asked to see the raw data which indicated that five of the CEOs drove a red car and the other five a white car.
Is this a silly parable? Would such a simplistic analytical shortcoming really occur? I recently spoke with the head of compensation for a technology company who was questioning the data for their peer group data cut from a well-known survey. The data indicated that equity grants at the executive level among the peer group companies were averaging a mix of 50% stock options and 50% RSUs. His anecdotal knowledge of the peer practices made him feel that this couldn’t possibly be correct. When the raw data was examined, however, it turned out that only two of their 20 peers had an options/RSU mix near the 50/50 average. Nine were granting all or almost all (80% to 100%) options and the other nine were granting all or almost all (80% to 100%) RSUs. The pink car problem.
At a time when more individuals and organizations than ever are collecting, analyzing, and opining on executive pay levels and practices, it is critical that the underlying data be collected, analyzed, and reported correctly. Could the CEO have identified the pink car problem without access to raw data? Of course. Simply looking at the 10th, 25th, 75th, and 90th percentiles would have told the story. And when n=10 (or any even number), after all, the median is a computed number in a spreadsheet. While “ratcheting” to the median is an oft-mentioned flaw with the benchmarking process, summary statistics can contribute to flawed decision-making even absent any such intent.
The three-legged analytical stool of collection, valuation, and reporting of data needs to receive more integrated attention. Accurate collection has been made more difficult over the past 18 months due to the prevalence of “special actions” taken during the economic crisis. Valuation continues to be a challenge as experts continue to disagree on how to measure pay. The reporting of pay reflects the turmoil in collection and valuation, sometimes exacerbated by the media. Compensation professionals cannot assume that push-button data provides the answer – that data only provides a starting point for questions.
In my next blog posting, I will provide an illustration of another variant of the Pink Car Problem which created a recent headline indicating that a CEO’s pay was “cut by about half.” (the perceived difference was not “about half” and pay was not “cut.”)
SEC’s IM Division Issues FAQs on Effective Date of New Rules
Last week, the SEC’s Division of Investment Management issued their own set of FAQs regarding the effective date of the new proxy disclosure enhancement rules as they apply to registered investment companies (Corp Fin had released their own set that apply to public operating companies).
Yesterday, Corp Fin issued five new Compliance and Disclosure Interpretations to deal with some of the transitional issues posed by the February 28th effective date of the new executive compensation and proxy disclosure enhancement rules adopted last week, thereby tackling the “big question” that I blogged about last week. Learn more in Mark Borges’ “Proxy Disclosure Blog.”
Our Practical Guidance to Help Implement the New Rules
As all memberships expire in a week, you need to renew for this site (and our other publications) now to obtain practical guidance on how to comply with the SEC’s new rules. We have two companion webcasts lined up for just after the new year begins – we pushed up our CompensationStandards.com webcast to January 7th – “The Latest Developments: Your Upcoming Compensation Disclosures – What You Need to Do Now!” – featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller.
And to handle the other new SEC rules that don’t deal with compensation issues, we have a webcast on TheCorporateCounsel.net – “How to Implement the SEC’s New Rules for This Proxy Season” – featuring Marty Dunn, Amy Goodman, Ning Chiu, Howard Dicker and Dave Lynn to be held on January 6th. Renew for both sites now (or try a no-risk trial if you are not a member).
Sample D&O Questionnaire Items
In response to the SEC’s new rules, Dave Lynn and Mark Borges are drafting up the new items you will need now in your D&O questionnaire as part of the Winter issue of “Proxy Disclosure Updates,” which will be delivered just after the new year begins. This issue will not just rehash the new rules – it will provide practical implementation guidance.
Remember that “Proxy Disclosure Updates” is a quarterly publication that is part of Lynn, Borges & Romanek’s “Executive Compensation Service (which includes the just-completed 2010 Executive Compensation Disclosure Treatise in both hard-copy and online on CompensationDisclosure.com). Try a no-risk trial now to obtain this important issue hot off the press when it’s done…
Even though the federal government was closed due to snow, the SEC issued a proposing release yesterday to amend Rule 163(c) so that it would allow a WKSI to authorize an underwriter to act as its agent to communicate about an offering before filing a registration statement (the press release came out a day later).
As noted in the release, the purpose of the proposed amendment is to remove some impediments to capital-raising since not as many WKSIs have automatic shelfs (or shelfs that don’t include all the types of securities the issuers may decide to offer) – this proposal would allow WKSIs to gauge investor interest without revealing confidential information about the issuer’s capital-raising plans.
PCAOB Reproposes Risk Assessment Standards
Last week, the PCAOB voted to repropose seven auditing standards relating to risk assessment and the auditor’s response to risk, including risk of fraud. Learn more from FEI’s “Financial Reporting Blog.”
More on “The Mentor Blog”
We continue to post new items daily on our new 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:
– Study: Larger Companies Less Likely to Have Independent Board Chairs
– Some Venture Capital Firms Lower Fees
– Launched: Google Scholar
– More On CalPERS and Placement Agents
– IROs: Use Single Investor RSS Feed
– FINRA’s “Social Networking Task Force”
– Promoting Issuer Stock on Product Labels
– Should Brokers Really Be Treated Like Advisers?
– Alan Dye’s Latest Thoughts on NY’s Power of Attorney Law
– Shareholders: Part of the Solution or Part of the Problem?
– Life Balance Issues for Executive Spouses
