After nearly a decade of battle, the SEC adopted proxy access during an open Commission meeting by a 3-2 vote – and then promptly posted the 451-page adopting release. Here’s a press release – and Chair Schapiro’s opening remarks (and commentary from Harvey Pitt on Bloomberg News). Here are dissenting remarks from Commissioners Casey and Paredes – and supporting remarks from Commissioners Walter and Aguilar.
Here are the basics:
– What are the thresholds for a Rule 14a-11 access right? – Shareholders (or groups) must have 3% of the voting power (so it doesn’t vary by company size as proposed) and have have held their shares for three years (up from one year as proposed) when they give notice of the nomination on Schedule 14N. When calculating the 3%, shareholders will be able to pool assets and include securities loaned to a third party as long as they can be called back – but securities sold, shorted or not held through the company’s annual meeting will need to be deducted.
– Who can be nominated as a shareholder candidate? – Shareholder nominees must satisfy the applicable stock exchange’s independence standards – and the shareholder exercising the right must not have the intent of changing control of the company. If a company wants to challenge a nominee’s qualification, it can use the Staff’s no-action process.
– How many nominees can be placed on the ballot by shareholders? – Greater of one director or 25% of the entire board. If the number of shareholder nominees exceeds the number permitted under Rule 14a-11, then preference will be given to the larger holder – not the first to nominate as the SEC had proposed.
– Is there any “opt-out” of the process rules? – Nope, it’s mandatory and neither companies nor shareholders are not permitted to opt out or select a more restrictive mechanism. Rule 14a-8 was amended so that companies may not exclude shareholder proposals that seek to establish less restrictive proxy access procedures.
– When do the new rules take effect? – 60 days after their publication in the Federal Register, which is expected to happen next week. However, the deadline for submitting a nominee is120 days before the anniversary of this year’s proxy mailing. So access essentially applies to an annual meeting next year only if the first anniversary of the mailing of this year’s proxy materials occurs 120 days or more after effectiveness. The example given during the open meeting: if the rules are effective on November 1st, then shareholders have a proxy access right if the company mailed their proxy materials on or after March 1st during 2010.
– How are smaller companies treated? – They get a three-year delay in effectiveness if the company has a public float of less than $75 million.
– How are foreign private issuers treated? – They aren’t subject to the new access rules, just like the other proxy rules.
A few weeks ago, the SEC approved FINRA’s proposal to renumber NASD Rule 2720 – relating to public offerings of securities with certain conflicts of interest – to FINRA Rule 5121 as part of the process of FINRA’s development of a consolidated rulebook.
Third Circuit Rejects A “Fraud Created The Market” Theory for Presumption of Reliance
As noted in this Edwards Angell Palmer & Dodgememo, a ruling last week – Malack v. BDO Seidman LLP, No. 09-4475 (3d Cir.; 8/16/10) – by the US Court of Appeals for the Third Circuit should help to limit federal securities fraud class actions. The 3rd Circuit court squarely rejected use of the “fraud created the market” theory to establish presumption of the essential element of reliance in securities fraud claims.
A few weeks ago, the SEC issued two releases seeking comment on three of the six topics related to its work plan to consider incorporating IFRS into the financial reporting system for US companies. As you will recall, the work plan is designed to help the SEC determine whether – and if so, how and when – IFRS should be incorporated (and because this is that type of a baby step, that’s why technically they’re not “proposing” releases – but they do seek public comment). Comments are due by October 18th.
This release requests comments on a number of potential contractual and corporate governance issues, such as: how would companies deal with contracts which require or rely on financial statements prepared in accordance with GAAP (e.g., requirement to deliver financial statements audited in accordance with GAAP, covenants based on GAAP financials, earn-outs based on GAAP financials)? How would companies comply with the requirements to have an “audit committee financial expert”? How would companies deal with state statutes that use GAAP concepts for matters such as determining the ability to declare a dividend or determining when a shareholder vote is required for a disposition of assets?
And the other release seeks comment on: US investors’ current knowledge of IFRS and preparedness for incorporation of IFRS into the financial reporting system for US companies; how investors educate themselves on changes in accounting standards and the timeliness of such education; and the extent of, logistics for, and estimated time necessary to undertake changes to improve investor understanding of IFRS and the related education process to ensure investors have a sufficient understanding of IFRS prior to potential incorporation.
The questions raised by these two releases are far-reaching and illustrate a number of potential “traps for the unwary” for US companies after implementation of IFRS for financial reporting purposes. This KPMG memo in our “IFRS” Practice Area explains more…
The FASB’s Growth Spurt; Chair Bob Herz Retires
As noted in this press release, the FASB intends to grow from five to seven members (which is the size it had from ’73-’08; the reduction to five a few years ago was widely criticized). And Chair Bob Herz will soon retire, replaced by Leslie Seidman on an interim basis starting on October 1st.
Six Senators Seek Improved Off-Balance Sheet Disclosure
A few weeks ago, six Senators sent a letter to the SEC, asking the agency to consider adopting new rules governing off-balance sheet disclosures as noted in this Reuters article.
The “Going Concern Blog” recently wrote this piece on how the Dodd-Frank Act may soon exempt companies with market caps of less than $75 million from complying with the SOX requirement to have an audit of their internal control system and how that smaller companies that have voluntarily complied with Section 404 may soon scrap their efforts (the piece was written before Dodd-Frank was passed obviously – but is still an interesting read).
In comparison, at least one company has gone to great – and manipulative – lengths to avoid falling with the grasps of Section 404 as noted in this recent SEC Enforcement action against Ephraim Fields brought recently…
The Latest US GAAP-IFRS Convergence Schedule
A few weeks ago, CFO.com published a nice schedule of expected events concerning the convergence of US GAAP and IFRS, including deadlines for the submission of comments on exposure drafts.
Recently, the FASB made available the “pre-release public view” of the 2011 US GAAP Financial Reporting Taxonomy. An updated taxonomy will be released in September, kicking off the official 60-day public comment period.
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:
– Disclosures to Independent Auditors: What’s the Risk of Waiver?
– Denny’s Removes Director Who “Fails” to Resign
– A New Approach to Catching Insider Trading?
– It’s Time for a Change: Let’s Unleash the Power of the Web for Disclosures
– Who is a Director’s Lawyer When Disputes Arise in the Boardroom?
Recently, I blogged about how at least one Senator wants a review of the “revolving door” of the SEC. In the “Legal History” Blog, Dan Ernst recently wrote about how the issue is as old as the SEC is – that is over 75 years old.
For me, it’s a non-issue in most cases as rules already exist that address those folks that most likely need a “cooling off” period (ie. former senior Staffers). But it’s fascinating to read about the topic with a historical perspective…
How to Handle Mini-Tender Offers
In this DealLawyers.com podcast, Bob Kuhns of Dorsey & Whitney explains how to handle mini-tender offers conducted by others, including:
– What is a “mini tender offer”?
– What do parties conducting mini tender offers file with the SEC?
– How can companies become aware that a mini tender is happening with their stock?
– What can companies do to combat mini tenders?
Exploring the New World of Web Disclosure
We have posted the transcript from our recent webcast: “Exploring the New World of Web Disclosure.”
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. Topics include:
– Getting ready for the Dodd-Frank Act’s Say-on-Pay requirements
– The latest on the Dodd-Frank Act’s disclosure provisions
– Favorite vacation spots
Another Judicial Roadblock: Judge Won’t Approve Citi-SEC Settlement
A few weeks ago, the SEC and Citigroup entered into a settlement regarding allegations that the company misled investors over subprime investments. Citigroup agreed to pay a $75 million penalty and two former executives agreed to pay $100k and $75k, respectively. Earlier this week, Judge Ellen Segal Huvelle of the SD-NY refused to approve the settlement in this order (here’s a motion for a shareholder to submit an amicus curiae brief); just like Judge Rakoff did in the SEC-Bank of America settlement earlier this year. Here is some commentary on this situation:
Even with the proxy season wound up, we are still 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:
– US Proxy Season Review: Environmental/Social
– Action by Written Consent: A New Focus for Shareholder Activism
– You Think You Have Problems? How About 13,000 Attendees for an Annual Meeting
– The ISS Preliminary U.S. Postseason Report
– Less Support for Independent Chair Proposals
As I blogged a few weeks ago, the SEC will consider adopting its proxy access rules next Wednesday, August 25th at an open Commission meeting. No word on how the big question marks – the ownership threshold and holding period – will be resolved.
There has been a flurry of last minute lobbying by a number of groups and I wonder how much of a spectacle the meeting will be. My guess is “not much” as open Commission meetings tend to be fairly mellow, but you never know. But there could be fireworks shortly afterwards. As noted in this Bloomberg article, the US Chamber of Commerce may be gearing up to sue if the SEC approves access.
30 More Days for Comments: FASB’s Disclosure of Contingencies Proposal
Yesterday, the FASB extended the comment period on its proposal to revise the disclosure requirements for loss contingencies by 30 days so that it now ends on September 20th rather than August 20th. Note that the FASB has not changed the proposed effective date (at least not yet). The proposal continues to be controversial, as reflected by this US Chamber editorial yesterday in the WSJ (here is the Chamber’s letter).
Overcoming the Challenges: Integration Issues & Merger of Equal Issues
We have posted the transcript for our recent DealLawyers.com webcast: “Overcoming the Challenges: Integration Issues & Merger of Equal Issues.”
For dog lovers only: Back in ’81, Jimmy Stewart delivered this memorable poem about a dog named “Beau” on the Johnny Carson show. It’s quite moving if you watch it to the end…
Recently, SEC Chair Schapiro testified that 374 professionals would be hired over the next year to help the agency carry out it’s new duties (bringing the total number of Staffers to 4200), with a total of perhaps 800 over a longer period of time. Given the poor existing job market for lawyers, there are a lot of folks whose ears perked up over this news. Here’s the SEC’s “Job Center” for those that fall into this category. You may want to review my tips for getting hired by the SEC, as noted in this blog.
Dodd-Frank: How Did Self-Funding for the SEC Fare?
Not well. The budget requests from President Obama to Congress to support the SEC are noted in Chair Schapiro’s testimony. Section 991 of Dodd-Frank didn’t survive in the form originally desired by the Senate (ie. self-funding for the SEC) – rather the final Act reaches a middle ground in Section 991(e), under which the SEC can establish a $100 million reserve fund with the Section 6(b) registration fees it collects, which it can dip into without going through the normal Congressional appropriations process (as noted in this Reuters article).
This “Securities & Exchange Commission Reserve Fund” is held by the Treasury – and the SEC has 10 days after dipping into the fund to notify Congress of the date, purpose and amount drawn. Under the terms of the Act, it looks like the SEC has wide latitude as it is limited to “necessary to carry out the functions of the Commission” – but of course, Congress may decide to interpret that phrase strictly. Any funds drawn by the SEC can be replenished by more fee collections, but no more than $50 million can be deposited in any one year.
Otherwise, it’s business as usual where the independent SEC is required to go to Congress annually to get funded. Not the best framework in my opinion…
What if the Act had authorized the SEC to put penalties from enforcement proceedings into the fund? It likely would raise constitutional questions. See Tumey v. Ohio, 273 U.S. 510 (1927); see also Caperton v. A.T. Massey Coal Co., No. 08-22 (U.S. June 8, 2009).
The SEC’s New Ethical Requirements
Recently, the SEC adopted supplemental standards of ethical conduct for its employees, mainly to respond to the SEC’s Inspector General report that contained allegations of insider trading by some of the attorneys in the Enforcement Division made back in May.
The “supplemental” standards give guidance on permitted, prohibited and restricted financial interests and transactions, as well as engaging in outside employment (yes, some Staffers have been known to moonlight on occasion in unrelated fields). Once these standards take effect in mid-August, SEC Staffers won’t be able to trade securities if they have possession of material nonpublic information nor trade in one “directly regulated” by the SEC. I don’t think that includes public companies making filings through Edgar. There is a requirement now for Staffers to clear trades through a computer system and hold any purchases for six months (unless they are sold at a 10% loss or more).
Over the past year, we have recorded much angst on this blog over a new power of attorney law in New York as it didn’t appear to take into consideration how the law impacted many corporate & securities law transactions. As noted in this Sullivan & Cromwellmemo, the New York Legislature has now passed – and the Governor has signed – amendments to the New York Power of Attorney Law, Sections 5-1501-5-1514 of the General Obligations Law, which became effective on September 1, 2009. The amendments will become effective on September 13, 2010 and will then be deemed to have been in effect on and after September 1, 2009, in effect amending the prior law retroactively. The amendments will alleviate the concerns about the effect of the prior law on business and commercial transactions and the automatic revocation of prior powers of attorney.
Books & Records: Investigations Into Rejections of a Director’s Resignation
John Grossbauer of Potter Anderson notes: Recently, the Delaware Supreme Court issued this opinion – in City of Westland Police v. Axcelis Technologies – affirming the dismissal of a books and records demand against Axcelis Technologies made for the purpose of investigating alleged wrongdoing in connection with the rejection of a takeover proposal and the refusal to accept the resignation of three directors who had failed to receive a majority vote in the election of directors under a board-adopted “plurality plus” system.
The Court found the failure to respond affirmatively to the offer was a matter of business judgment absent additional facts suggesting some wrongdoing by the directors. With regard to the demand for information related to the decision not to accept the resignations, the Supreme Court affirmed the Court of Chancery’s decision that a challenge to the failure to accept the resignations would not be governed by the Blasius standard of review.
However, in rejecting the claim, the Supreme Court provided a roadmap for future plaintiffs who desire to inquire into a board’s decision not to accept resignations under a plurality-plus system. The Court cited with approval the Court of Chancery’s decision in Pershing Square, LP v. Ceridian Corp., 923 A.2d 810 (Del. Ch. 2007), in which the Chancery Court found an inquiry into particular persons’ “suitability” to be directors to constitute a proper purpose. The Supreme Court stated that the failure receive a majority vote, at least under a board-adopted majority vote system, would constitute a “credible basis to infer that the director is unsuitable, thereby warranting further investigation” in the event the board fails to accept a resignation of one or more directors who failed to receive the required vote.
Section16.net: Combination of Our Q&A Forums
For the many of you that are members of Section16.net, you will notice that we just folded our “Electronic Filing Issues Q&A Forum” into our primary “Q&A Forum” on that site. The combined Q&As were integrated so that they are listed chronologically. We had created the “Electronic Filing Issues Q&A Forum” in 2003 after the SEC adopted rules that mandated electronic filing of Forms 3, 4 and 5. Now that time is passed, there had been relatively few new questions being added as the 2000 Q&As in that old Forum covered the waterfront pretty well. We figure the combination of the Forums will help simplify your searches of the treasure trove of past Q&As (now a combined 6300!) – since you will now only have to conduct a search once rather than twice…
As noted in this press release, on Friday, the SEC and CFTC jointly issued an “advance notice of proposed rulemaking” that requests public comment on defining certain key terms and prescribing regulations regarding “mixed swaps” as required by Title VII of Dodd-Frank. In other words, they issued a concept release.
Why did this project start with a concept release? I’m not sure, but I’m guessing it is part of the overall process to be “super duper” open about the Dodd-Frank rulemaking – and because it is being conducted jointly with the SEC and CFTC, this early input will help the agencies coordinate and get some kinks worked out prior to actually going out with proposals.
Trends in Going Concern Opinions
Recently, Audit Analytics released its annual “Going Concern” report – here’s some of the highlights:
– It is estimated that 19.8% of auditor opinions filed for year end 2009 will contain a qualification regarding the company’s ability to continue as a going concern.
– Year end 2007 received the highest number of going concerns for the decade (3284) with 2008 coming in at a close second (3275) and 2009 estimated to experience a drop (3007), mostly due to company attrition from the 2008 going concerns.
– An analysis of the 3,275 companies that filed a going concern in 2008 found that 205 of these companies filed a termination of registration with the SEC.
Use of ESOPs in Deals
In this DealLawyers.com podcast, Jude Carluccio of Barnes & Thornburg explains how ESOPs are being used in deals these days, including:
– How are ESOPs considered a special type of shareholder?
– What are recent examples of ESOPs being used in deals?
– What factors might lead an acquiror to consider using an ESOP in a deal?
– What are the types of issues that companies should consider before using an ESOP?
Last month, the SEC approved new FINRA Rule 5141, which will replace the current NASD rules collectively referred to as the “Papilsky” rules. As noted in this alert from Latham & Watkins, the new rule will simplify and eliminate some provisions of the Papilsky rules, which seek to prevent broker-dealers participating in fixed price securities offerings from offering to favored clients any securities at a price that is at a discount to the public offering price.
The Papilsky rules originally came about as a result of the decision in Papilsky v. Berndt, which was a case where a shareholder of an investment company brought a derivative suit against the directors of the investment company and its advisor, alleging violations of fiduciary duties in failing to “recapture” brokerage commissions, underwriting commissions and tender offer fees for the investment company and its shareholders. The court held that, in the absence of an SEC or self regulatory organization rule to the contrary, recapture of the commissions and fees was legal and therefore the failure of the advisor to bring the potential for recapture to the attention of the independent directors of the fund constituted a breach of fiduciary duty. In the wake of this decision, the SEC and NASD worked to clarify the regulatory position on such “recapture” and other arrangements, resulting in NASD Rules 2730, 2740 and 2750.
The new Rule 5141 continues to prohibit FINRA members from selling securities in fixed priced offerings at other than the public offering price. FINRA intends to issue a Regulatory Notice announcing approval of the rule and announcing an effective date, which must take place within 90 days of SEC approval. The effective date will be no more than 180 days following the Regulatory Notice.
The change to the Papilsky rules will require some changes to underwriting agreements to reflect the new requirements specified in Rule 5141.
More FINRA Stuff: IPO Allocations
FINRA recently filed an amendment to its proposal to amend FINRA Rule 5131 with the SEC. The rule changes seek to regulate conflicts-of-interest and other abuses in the allocation of securities in initial public offerings. The SEC Is expected to publish the proposal for comment very soon.
Is a CEO Pledge of Allegiance the Answer?
The SEC has taken the very admirable step of opening up the comment process on Dodd-Frank Act implementation ahead of time, and hopefully the pace at which comments are submitted will increase, given that the SEC is going to need to act very soon on many of the rules it needs to implement. With respect to the corporate governance and compensation provisions of the Act that affect public companies, it seems that probably the first rulemaking out of the box (other than proxy access adoption) will be rule proposals to implement Say-on-Pay, Say-on-Frequency and Say-on-Parachutes. In order to have those rules in place for the proxy season, we would expect to see proposals within the next 30 days or so. It seems likely that those rule proposals will look much like the implementing rules adopted for the TARP Say-on-Pay votes, with additional rules necessary to address the quirks of the Dodd-Frank Act, such as the Say-on-Frequency vote (or rather should I say “poll,” because it sounds like that is how it will be structured).
Some comments have already trickled in, including this note from an experienced investor who has a truly novel idea in these times of many recycled ideas: require CEOs to swear to protect and defend the interests of the company along with an annual certification as to their fairness, honesty and integrity. You never know, this one might get some traction.
