On Tuesday, the SEC held its Roundtable on Short Selling (you can still catch the archive of the four hour session), where the Commission solicited the views of a variety of interested parties, including representatives of public companies, broker-dealers, SROs, funds and academics. In her opening remarks, Chairman Schapiro noted that short selling has outpaced any other issue “in terms of the number of inquiries, suggestions and expressions of concern.” Chairman Schapiro noted that an evaluation of short sale regulation is a priority for the Commission.
As could be expected, the views expressed on short selling were diverse and there was not necessarily a lot of common ground. The one exception is with respect to naked short selling, where the panelists lauded the SEC’s efforts in 2008 to try to address abusive naked short selling. As for other issues, representatives of the investment industry seemed to favor the less dramatic individual stock circuit breaker approach, while some issuer representatives seemed to favor market-wide measures. One of my favorite quotes from the session was from William O’Brien, CEO of the stock trading platform Direct Edge, who said of broad scale short selling restrictions: “Nobody likes being stung by a bee, but you don’t kill all the bees and then wonder why all the flowers have died.” Yet another issue that received some attention was the cost and time that would be necessary to implement any new short sale regulations.
With the Roundtable out of the way, now it is time for the SEC to start considering the comments and narrowing down the options to one workable approach. The comment period closes June 19.
If you are looking for a more “blow-by-blow” account of the Roundtable, then you should check out the tweets of SEC Investor Ed on twitter. Staff in the Office of Investor Education and Advocacy at the SEC are busy twittering away, including providing an account of the Roundtable in 140 character increments.
Short Sale Studies: Mixed Results from Last Year’s Emergency Actions
The SEC recently posted a study performed by its Office of Economic Analysis regarding the impact of last July’s ban on naked short selling of the securities of 19 large financial institutions. After comparing the performance of the securities subject to the ban to control groups of securities not subject to the ban, the SEC’s economists concluded that “imposing a pre-borrow requirement may have had the intended effect of reducing fails but may have resulted in significant costs on all short sellers even those whose actions were not related to fails.”
With another perspective, Abraham Lioui recently published an EDHEC-Risk Position Paper presenting a study of last year’s short sale bans. Lioui notes in the Summary:
“As a result, short sellers perhaps did not really merit the punishment that, by simply banning the shorting of the shares of financial institutions, the market authorities recently meted out. It also seems (and this study confirms it) that the shares that were the object of the ban were relatively unaffected by it. All the same, this drastic measure cast the market authorities in a particularly negative light. After all, the reasons for this measure are unclear, a lack of clarity that adds to the bewilderment of the market. The market, of course, reacted accordingly.
The ban on short selling was followed by a sharp rise in the volatility of the markets, and on the stock markets concerned the impact of the ban was systematic; the impact on volatility was greater than that of the financial crisis. In general, the risk/return possibilities of investors worsened. And although it is hard to substantiate the impact on the volatility of the shares, the rise in the volatility of these shares, which is undeniable, is a result of the rise in idiosyncratic risk and thus of the noise in the markets. As a consequence, share prices deviate yet more from their fundamental value. Finally, the desired effect on market trends has not been achieved (no reduction of the negative skewness of returns is being observed) and there is no evidence of the possible impact of this measure on extreme market movements. What is clear is that stock market indices now have components that are subject to different rules, differences that make them even less representative and relevant.”
New Delaware Decision: Reaffirmation of Pre-Suit Demand Precluding Challenge to Board Independence
Here is some commentary from Brad Aronstam of Connolly Bove Lodge & Hutz: Recently, the Delaware Court of Chancery issued this letter opinion in FLI Deep Marine LLC v. McKim (C.A. No. 4138-VCN) affirming the well-settled principle that shareholders making a demand upon a board of directors concede the independence of a majority of the board and, as such, will be precluded from later arguing that demand should be excused because the directors were conflicted. While this holding is far from revolutionary, the action involved atypical facts that warrant attention by practitioners counseling boards and shareholders in this common setting.
The minority shareholders of Deep Marine Technology alleged that the Company’s majority shareholders and their designees had looted the Company. Rather than pleading demand futility based upon the board’s lack of independence, the minority shareholders made a pre-suit demand requesting that the Company’s directors take immediate action to, among other things, investigate the alleged wrongdoing and bring appropriate action to recover the funds wrongfully diverted from the Company. The directors responded to the demand the following day by forming a special committee comprised of two directors – who themselves were accused of wrongdoing – to investigate the allegations of the demand. Three weeks later, “before the special committee had completed its investigation and before the Board took any action concerning the demand,” the minority shareholders filed suit alleging that demand was futile and should be excused.
As noted by Vice Chancellor Noble, “[t]he requirement of demand effectuates the ‘cardinal precept’ that directors manage the business and affairs of the corporation.” Delaware could “hardly be clearer” that a plaintiff’s pre-suit demand “conclusively concede[s] the independence of the Board, and . . . preclude[s] [the shareholder] from [later] arguing that demand should be excused because the directors are conflicted.”
The Court rejected the plaintiffs’ request for an exception to this “well-settled” rule on the grounds that “the Board and its special committee [we]re comprised of allegedly conflicted directors” and thus “the Board’s consideration of their demand [wa]s ‘a farce meant to giver the illusion of independence where none exists.'” While recognizing that the plaintiffs “might well be correct” concerning the alleged lack of independence and disinterestedness among the board given the Complaint’s allegations, the Court categorized the plaintiffs’ decision to make a demand as “inexplicable” and “improvident.” The Court refused to “grant the plaintiffs relief from a strategic decision they now regret,” as doing so would “part ways with established Delaware law.” The Court implied that it might have reached a different decision if the plaintiffs could establish that “their plea . . . [was] based on new information” concerning the Board’s lack of independence.
The decision reaffirms that shareholders who make a demand cannot later (absent new information) challenge director independence and wrestle control of potential claims from a special committee prior to that committee’s findings (if at all). Shareholders must therefore continue to think long and hard about whether to make a demand or allege demand futility.
Practitioners should also note that although the Court refused to endorse a specific timetable for a special committee to conduct and complete its investigation (see Op. at 11 noting that “whether the board has taken more than a reasonable amount of time to conduct its investigation is a fact question, and one for which no formula exists”), a committee should be prepared to offer a “persuasive reason” for the length of its investigation.
Before we all move on with the next phase of the SEC’s revived enforcement efforts, we still have occasion to review what may have helped get use into this mess. As reported in this Bloomberg story from yesterday, the GAO released a report at the end of March outlining the headwinds faced by the Enforcement Staff over the past several years. (Broc mentioned the report in the blog last month.) Today, the Senate Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs will hold a hearing on strengthening the SEC’s enforcement responsibilities.
The Bloomberg story points out how the GAO found that the SEC instituted policies that “slowed cases and led enforcement-unit lawyers to conclude commissioners opposed fining companies.” As one unidentified Staffer put it, there was a feeling that the Commissioners prevented Enforcement from “doing its job.” The findings of the GAO’s report bear out my own experience during those years, not only with respect to Enforcement but also with respect to all other regulatory matters – hostility toward the Staff and its recommendations became institutionalized, which served to not only demoralize the Staff but also to result bad decisions being made at all levels.
The report also notes the use of executive sessions during former Chairman Cox’s tenure, where some Enforcement Staff were barred from participating. The report indicates that executive sessions occurred on 40% of the days when the SEC met to vote in closed Commission meetings in 2008, more than three times the rate in 2005 when Cox was appointed Chairman (but equal to the rate from 2003 and 2004).
As for the future of Enforcement, Chairman Schapiro reiterated her agenda for the Division of Enforcement in an address last week to the Society of American Business Editors and Writers. She noted that she has streamlined SEC enforcement procedures by no longer requiring full Commission approval to launch an investigation, and eliminating the need for approval by the full Commission before negotiating a settlement. She stated “before these directives, enforcement attorneys will tell you that they worried about red lights at every turn — now they see green.” This is sure to mean many more inquiries and, in all likelihood, much speedier cases as the Enforcement Division ramps up again.
SEC Brings First Credit Default Swap Insider Trading Case
Earlier this week the SEC filed a complaint alleging insider trading in credit default swaps. The SEC noted in its Litigation Release that this case is the first of its kind – and I suspect that it is certainly not the last case we will see regarding the much-maligned credit default swap market. Not only is the case novel in the sense that the alleged insider trading and tipping occurred with respect to credit default swaps, but it is also another notable case of the SEC alleging insider trading in fixed income markets. The SEC’s interest in this area was highlighted two years ago in the settled case of SEC v. Barclays Bank PLC, Litigation Release No. 20132 (May 30, 2007). (For more on the implications of that case, check out our “Insider Trading” Practice Area.)
In terms of the SEC’s jurisdiction over the trading in the OTC derivatives, the SEC noted in the complaint that “[t]he CDSs at issue in this matter qualify as security-based swap agreements under the Gramm-Leach-Bliley Act of 2002 and are therefore subject to the antifraud provisions set forth in Section 10(b) of the Exchange Act and the rules promulgated thereunder.”
Cracking Down on an Opinion Mill
While on an Enforcement theme here, I note that the SEC brought an action earlier this week against the operators of what the SEC called a Rule 144 “opinion mill.” In its Litigation Release, the SEC notes that it has filed a complaint against the operators of 144 Opinions, Inc., which runs the website www.144opinions.com. They are alleged to have “issued fraudulent legal opinions used by promoters in a pump-and-dump scheme, and others, to sell securities in violation of the registration provisions of the federal securities laws.” Rule 144 opinions over the Internet – what will they think of next? Maybe we will have to start twittering Rule 144 opinions some day…
As noted in this CFO.com article, FASB Chair Bob Herz noted in a recent Financial Crisis Advisory Group meeting, consisting of accounting regulators from around the world, how hard it would be to push the convergence of global accounting standards in the US, mainly due to politics in the wake of the financial crisis. Herz’ statement that it make take 10-15 years to pull it off surprised the room since the so-called Norwalk Agreement, a memorandum of understanding between the FASB and IASB, calls for the completion of all “major joint projects” by 2011.
And who knows, that might be conservative when you read this other CFO.com article in which it notes that CFOs are urging the SEC to drop a proposal mandating US companies to adopt IFRS. Here are the comments made on the SEC’s IFRS proposal; the extended deadline ended last Monday.
IASB: IFRS Rules Are Freely Available
It’s good to see that the International Accounting Standards Board is following the FASB’s lead and allowing free access to summaries of its core International Financial Reporting Standards. Unfortunately, the IASB’s additional guidance – which includes its rationale for its conclusions – are still subscription-based.
An IFRS’ E-Learning Website: This can be useful for those of you struggling to get up to speed on IFRS: Deloitte has an IFRS’s e-learning website. The site contains a series of IFRS training modules which are offered free once you register.
More Proxy Season Developments
If you haven’t signed up to get our new “Proxy Season Blog” pushed out to you, here are a few of the items you’ve missed during the past week or so:
– Swine Flu: Time to Have Electronic Shareholder Meetings?
– Survey Results: Number of Section 16 Officers
– Latest Trends: CEO-Chair Separation
– Barclay’s 2009 Annual Report Survey
– Dissecting the Citigroup Annual Meeting
– My Ten Cents: NACD’s “New” Key Agreed Principles
– Broadridge’s Latest Implementation of Householding
– Proxy Season Update
– Facing an Unpredictable World: How to Change Earnings Guidance Practices
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 (just like you can accomplish that functionality for this blog).
As a “thank you” to members – and due to the importance of the analysis included in it – we have decided to share a complimentary copy of the March-April issue of The Corporate Executive with you. This issue includes pieces on:
– Grant Guidelines and Declining Stock Prices
– Excessive Windfalls in Compensation Once Stock Prices Recover
– Two Fundamental—and Very Relevant—Considerations for High Level Executives
– Executives Surrendering Underwater “Mega” Grants
– Important, Timely Guidance on the Accounting Treatment of Acceleration of Vesting—Including Ramifications for Underwater Options
– Important, Timely Suggestions from a Respected CEO
In addition, you should read this supplement as it contains our recommended key fixes to the SEC’s executive compensation rules.
Act Now: To continue receiving the practical guidance imparted in The Corporate Executive, try a no-risk trial now.
Congrats to Jesse Brill for appearing on “The Today Show” this morning during a piece on executive pay. Here is a video archive of the segment.
SEC May Reverse “December Surprise”: Equity Compensation Disclosure Methodology for the Summary Compensation Table
In her AP article, Rachel Beck notes how the SEC may be considering reversing the rules from the December ’06 “surprise” – this relates to equity compensation disclosure methodology for the Summary Compensation Table.
Here is some commentary from Cleary Gottlieb on this development:
Many of you will recall that when the SEC comprehensively revised the executive compensation disclosure rules in August 2006, equity awards were to be presented in the Summary Compensation Table based on the full grant date fair value of each year’s awards, computed in accordance with FAS 123R. This was the methodology set forth in the proposed rules in February 2006, and there was full consideration of the approach as part of the comment process before the final rule was adopted.
In an unexpected release on December 22, 2006, the SEC changed the rules to require that the grant date fair value of an equity award be reflected in the Summary Compensation Table based on the recognition of accounting expense in the reporting company’s financial statements as required by FAS 123R in respect of the award, typically over an amortization schedule that corresponds to the award’s vesting period. That revision was adopted without a public meeting, without notice and comment and without any adequate explanation as to why the change was being made. Beyond the procedural concerns, many considered that the revision undercut the purpose of the Summary Compensation Table by obfuscating the value of equity-based grants, which are of course a principal element of executive compensation, and led to unnecessary last-minute changes to the composition of the named executive officers, primarily because amortization under the accounting rules was typically not permitted for “retirement eligible” executives.
Fast forward two-plus years, and we learn that the SEC is considering a reversal back to the original August 2006 rule. Press reports on Friday stated, based on an interview with SEC Chairman Mary Schapiro, that the SEC “is considering changing a formula that critics say often allows public companies to low-ball in regulatory filings just how much top executives are paid.” If the reversal happens, it in fact should be a welcome development for critics and reporting companies alike. The inclusion in the Summary Compensation Table of the grant date fair value of equity awards granted in each year to named executive officers presents a clearer picture of compensation decisions in a given year, and makes the determination of the named executive officers more predictable and sensible.
If the press reports are correct, interesting questions arise as to the transition from the current rule to the new rule. Will unamortized awards from prior years be entirely excluded from the Summary Compensation Table? Will companies be required or permitted to recompute the amounts disclosed for prior years, as if the changed rule had been in effect in the past? Could the basis of disclosure for 2009 (if that is the first fiscal year for which the change is effective) equity awards be different than the basis for the amounts set forth in the Table for earlier years? We would expect the SEC to address these and other transition issues as part of any rule change or in accompanying guidance. Stay tuned.
SEC Filing Fees: Going Up 28% for Fiscal Year 2010
Last week, the SEC issued its first fee advisory for the year. Right now, the filing fee rate for Securities Act registration statements is $55.80 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will rise to $71.30 per million, a hefty 28% price hike. The new fees will not go into effect until five days after the date of enactment of the SEC’s 2010 appropriation – which often is delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battle over the government’s budget.
You might be asking, “How are the SEC’s fees set?” The SEC sets its filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002.” The SEC’s budget is not dependent on its fees; it’s not a self-funded agency. In fact, the SEC wishes it could use those fees as it brings much more in for the government than it’s allowed to spend. Learn more how this all works in this blog.
I recognize that the heavy media attention paid to last week’s Banc of America annual meeting of shareholders is an anomaly and will never be the norm for all companies- or even the norm for an individual company from year-to-year. Still, the heightened level of attention paid to the meeting – including details that many of us in the business would consider minor – should serve as a “wake-up call” to all companies that annual meetings are indeed changing.
Here are a few facts about the BofA meeting: four hours long; 2000 in attendance, with many disgruntled shareholders turned away (and some complaints that “insiders” displaced shareholders who traveled far to attend); two directors with over 30% withhold votes and four more with more than 20% (with those numbers likely higher if broker nonvotes were removed, per this article); and a binding “split the Chair/CEO” proposal garnering 50.3% support.
Here are some takeaways from the BofA meeting that relate to growing trends:
1. People Expect Immediate Voting Results – As just mentioned last week in this blog, there is a growing expectation that the voting results will be announced at the conclusion of the meeting – since the general public is conditioned by the immediacy of the results produced by our political elections.
I watched numerous news accounts on the day of Banc of America’s meeting and every single reporter spent considerable time about their frustration over how the voting results were not announced at the conclusion of the meeting. Can you imagine what those reporters would have said if they knew that the typical timeframe for reporting voting results from an April meeting was mid-August? Wisely, BofA recognized the public relations danger of waiting that long – and a few hours after the meeting, the company released its results in a press release.
2. The Nature of the Media is Changing – There was quite a bit of “live blogging” at the meeting (including live tweeting); this type of live coverage will undoubtably grow for many companies. Live bloggers/tweeters included: SEIU Blog; Rick Rothacker of the Charlotte Observer; and radio station WFAE (click on live blog link). And of course, other blogs covered the meeting after-the fact (eg. DealBreaker).
One consequence of coverage provided by others than the mass media is that the more interesting parts of the meeting were covered. For example, there was considerable commentary about Evelyn Y. Davis, who apparently was in classic form. Evelyn talked so much that people were shouting “Order!” at her – and at one point, the entire packed theatre started clapping in the middle of her antics in the hopes of getting her to sit down. Here is one blog that focused on Evelyn – and here is another blog.
3. Lack of Attention to CEO Succession Can Be News – As noted in this WSJ article, a reporter was able to sleuth that the board meeting held after the shareholders’ meeting did not include a discussion of CEO succession planning. CEO succession planning continues to be the least understood part of a board’s job – yet, probably the most important. Learn more about how to implement a succession plan during our June 17th webcast: “How to Plan for CEO (and Other Senior Manager) Succession.”
4. CEO Lewis Loses His Chair Title – As noted in this WSJ article, BofA’s shareholders voted in favor of a binding bylaw amendment requiring the board to split the CEO and Chair jobs at the company, mostly aimed at Ken Lewis who held both titles. After the shareholder meeting, BofA’s board acted in the wake of the vote and split the jobs (and a longtime director became the board chair). According to RiskMetrics, the vote marked the first time that a S&P 500 company was forced by shareholders to strip a CEO of his Chair duties.
5. The Media Might Push Shareholder for More Withholds – Check out this Bloomberg article entitled “Bank of America Owners Declare War on Taxpayers,” in which Jonathan Weil rails against those BofA shareholders that didn’t withhold their votes (despite the quote from Prof. Charles Elson in the article, who properly recognizes that the level of withhold votes here was quite significant compared to historical norms).
6. Coming Soon: Online Battle for Board Seats – Even though BofA knew in advance that its meeting would be contentious – a group of seven unions had announced a “just vote no” campaign beforehand – it still didn’t have a notable online campaign against it (other than a few efforts to get similarly-minded people together like this “call to action” to have BofA stop funding coal). Based on continuing trends in the political arena (see this Washington Post article about how the current Virginia Governor’s race is being waged primarily online), I think it’s worth reading my article – “The Coming Online IR Campaigns: The Future of Director Elections” – from the Spring ’08 issue of InvestorRelationships.com well before the 2010 proxy season so you can be prepared for some possible changes next year.
It’s worth wrapping up my thoughts on BofA with an excerpt from this commentary from Beth Young of The Corporate Library:
A second shareholder proposal, to give holders of 10% of B of A’s shares the ability to call a special shareholder meeting, nearly passed, garnering over 49% of the vote. What’s surprising about this proposal’s near-passage is that B of A, unlike the majority of companies we cover, already allows shareholders to call a special meeting, although it requires that holders of 25% of shares make the demand. Often, the fact that a company has gone a good part of the way toward implementing a proposal undercuts shareholder support for it because many shareholders are reluctant to micromanage. That was not the case at B of A this year, however.
Finally, B of A was required to put up a management proposal for an advisory vote on executive compensation as a result of its participation in TARP. About 71% of shares voted in favor of this proposal, a high proportion given the extent of shareholder anger. The ability of brokers to fill in votes for their customers who did not vote, the so-called “broker-vote,” likely boosted the vote on this proposal. (Broker voting, a creature of stock exchange rules, is not available on shareholder proposals.)
Although the SEC appears poised to approve changes to the broker-may-vote rule that will prevent its use in uncontested director elections—broker votes accounted for some of the support for Mr. Lewis and the other embattled B of A directors—those changes would not extend to the shareholder advisory vote on executive compensation. It seems likely that shareholders will press the SEC to keep broker votes from being cast on advisory votes in the 2010 proxy season.
Happy Anniversary Baby! #7 and Counting
Yes, today marks seven years of my blither and blother on this blog (note the DealLawyers.com Blog is nearly six years old – not shabby!). It’s the one time of the year that I feel entitled to toot my own horn – as it takes stamina and boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age.
I’m excited about our upcoming webcast – “Looking Out for #1: How to Manage Your Career” – because it will enable me to share some insights about blogging that I have gleaned over the years. It will hopefully enable you to feel more “blog proud” rather than “blog tolerant,” two nice terms-of-art coined by “3 Geeks and a Law Blog” in this recent piece.
I’m excited to see that another of the old-timer bloggers, Mike O’Sullivan of Munger, Tolles & Olson, is back on the scene blogging again after a five year hiatus. Give his new “Provided However” Blog a try…
Our May Eminders is Posted!
We have posted the May issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
We just sent the March-April issue of The Corporate Executive to the printer. This issue includes pieces on:
– Grant Guidelines and Declining Stock Prices
– Excessive Windfalls in Compensation Once Stock Prices Recover
– Two Fundamental—and Very Relevant—Considerations for High Level Executives
– Executives Surrendering Underwater “Mega” Grants
– Important, Timely Guidance on the Accounting Treatment of Acceleration of Vesting—Including Ramifications for Underwater Options
– Important, Timely Suggestions from a Respected CEO
To have this issue rushed to you, try a no-risk trial to The Corporate Executive today.
Corp Fin’s Latest CD&I: XBRL Boxes for 10-Q/10-K Cover Pages
As we flagged early last week in this blog, companies need to place a new box on their Form 10-Q and Form 10-K cover pages, even if they won’t be filing in XBRL anytime soon (see our new cover pages available in Word). Yesterday, Corp Fin issued a new “Exchange Act Form” Compliance and Disclosure Interpretation – CD&I 105.04 – to deal with the many questions being asked on this new box.
The SEC’s New Risk Identification & Assessment Initiative
Yesterday, the SEC announced an enhanced effort to identify and assess risks in the markets by getting help for its Office of Risk Assessment through a new “Industry and Markets Fellows Program.”
Back in ’04, under former SEC Chair Donaldson’s tenure, the Office of Risk Assessment was created (after getting the idea from former Chair Pitt) – but it was only staffed with a handful of folks and the office chief left after a few years and was never replaced. Now it looks like this Office will be staffed more appropriately.
We recently wrapped up our Quick Survey on D&O Questionnaires practices. Below are our results:
1. When we update our D&O questionnaire each year, the following groups review it before it’s sent to the D&Os:
– Outside law firm – 37.1%
– Independent auditor – 5.7%
– Finance department – 1.4%
– General counsel – 57.1%
– Executive compensation department – 4.29%
2. Our _______ has overall responsibility for the “master” D&O Questionnaire to be sent out each year:
– Legal department – 64.9%
– Finance department – 0%
– Corporate secretary – 21.1%
– Outside counsel – 14.0%
3. Before we distribute our D&O Questionnaires, the company “pre-completes” responses in the following sections for review and acknowledgement by each individual respondent:
– We ask respondents to provide all information without pre-completing – 9.0%
– Compensation information, except for the perks – 16.7%
– Compensation information, including the perks – 16.7%
– Equity ownership, including beneficial ownership – 53.9%
– Section 16 compliance – 24.4%
– Biographical information – 59.0%
– Related-party transactions – 18.0%
– Independence – 16.7%
– Audit committee financial expertise – 18.0%
4. To assist respondents in identifying related-party transactions, we provide the respondents with a list of the company’s vendors, customers or other counterparties:
– Yes – 14.6%
– No – 85.5%
5. To assist in identifying related-party transactions, we compare known information about respondents’ affiliations with a list of the company’s vendors, customers or other counterparties:
– Yes – 59.6%
– No – 40.4%
6. After sending the D&O Questionnaire, the company’s follow-up with respondents consists of:
– Reviewing responses with all respondents individually – 1.8%
– Reviewing some responses with respondents individually if questions or issues arise – 86.0%
– Answering questions from respondents about particular questions or issues if they arise – 66.7%
– Little or no interaction with the respondents – 10.5%
7. After receiving the D&O Questionnaire responses, the company reviews the responses (or a summary report) with the following:
– Full board of directors – 23.4%
– Governance and nominating committee – 57.5%
– Compensation committee – 4.3%
– Disclosure controls committee – 14.9%
– Relevant departments – 36.2%
– Outside counsel – 42.6%
8. Our company retains the D&O questionnaire responses for a period of:
– Until the proxy statement is filed (we essentially don’t retain them) – 1.8%
– For about one year (roughly until the next year’s questionnaire is drafted) – 5.3%
– Between 1 and 3 years – 21.1%
– Between 3 and 5 years – 19.3%
– Between 5 and 7 years – 28.1%
– More than 7 years – 24.6%
Use of Corporate Plane for Directors to Attend Board Meetings
As we are reminded by this recent note from the “The Race to the Bottom” Blog – and this DealBook piece on how Verizon is ending free plane use for ex-CEOs ahead of next week’s shareholders meeting – personal use of corporate aircraft continues to be a controversial issue. But what about when outside directors get flown to – and/or from – board meetings? How do companies deal with that?
That is the subject of our latest “Quick Survey – Corporate Airplane Use by Outside Directors.” Please take a moment to answer the question posed.
“4th Annual Proxy Disclosure Conference”: Early Bird Follow-Up
The early bird offer that expired Friday resulted in great momentum, with a record number of members signed up so far for the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) – that will be held in San Francisco and via Live Nationwide Video Webcast on November 9-10th.
Our New “Early Bird” Rates – Expires May 22nd: Still recognizing the hard economic times we face—and in response to requests from members who were not able to submit their registrations by the deadline—we are offering a reduced rate for the Conferences through May 22nd.
For example, you can attend in San Fran for only $995 if you register by May 22nd (reg. rate is $1295) – and it’s only $495 if you also attend the “17th Annual NASPP Conference” (which starts right after the Proxy Disclosure Conference). Here is the Conference registration form – and here is the agenda.
With Congress poised to consider legislation mandating say-on-pay (expected to be introduced by Sen. Schumer soon) – and SEC Chair Schapiro recently stating that there will be new proposals to change the executive compensation rules in the near future – this year’s Conferences are a “must.” Register now and take advantage of these favorable rates.
Many are still figuring out whether – and how – to do deals under the new “Public-Private Partnership Investment Program.” And only a handful of deals have been done so far under TALF. Join these experts tomorrow in our webcast – “Tripping the PPIP – and TALF – Fantastic” – as they analyze the issues presented under both government programs:
– Alan Beller, Partner, Cleary Gottlieb Steen & Hamilton LLP
– Tony Nolan, Partner, K&L Gates LLP
– Meg Tahyar, Partner, Davis Polk & Wardwell
How to Repay TARP Funds
One of the hot TARP topics is how can companies repay them if they so wish – quite a few companies have already expressed an interest in repaying. Last week, Treasury Secretary Timothy said that Treasury will support early repayment of Capital Purchase Program funds and will apply standards that consider the banking industry’s financial health and lending levels (despite evidence that Treasury is taking its time in assessing applications to repay once they are submitted).
Last month, Treasury posted a form of acknowledgement of repurchase equity to be utilized for public companies desiring to make such repurchases – although any repurchases must be approved by the institution’s federal regulators (here are Treasury’s FAQs about repayment; here is the form to repurchase warrants). It’s unclear from the form of agreement whether Treasury will impose some minimum requirement for partial repurchases of an institution’s preferred. In our “TARP” Practice Area, we have posted memos specifically about repaying TARP funds.
John Grossbauer on Delaware’s Final Legislation
In this podcast, John Grossbauer of Potter Anderson provides some follow-up to his podcast from last month now that the new Delaware legislation has been finalized. We have been posting numerous memos analyzing these amendments in our “Delaware Law” Practice Area.
Yesterday, Apple announced that it filed a corrected Form 10-Q to clean up some “human errors” that happened during the course of tabulating voting results from its recent annual shareholders meeting. The reversed error now shows that Apple received a majority vote on a non-binding shareholder proposal that sought to have the company to conduct say-on-pay votes. The company incorrectly counted abstentions as “no” votes. [As an aside, some proxy statements say some strange things about effect of abstentions. But that’s a story for another day.]
Apple initially claimed victory in its initial Form 10-Q filed last week. Now with egg on its face – and in the wake of two consecutive years of a majority vote in favor of doing so – the company says it will place say-on-pay on the ballot next year. The reversal comes on the heels of the tabulation math being examined by Mercury News’ “SiliconBeat” on Friday.
Unfortunately, bad tabulation math happens all too often after annual meetings (eg. last year’s Yahoo meeting). Once again, I urge all those that deal with annual meetings to read this important piece from last Fall’s issue of InvestorRelationships.com: “An Insider’s Perspective: How to Avoid a Yahoo-Like Tabulation Nightmare.” You can get receive it for free – you just need to input some basic contact information.
Voting results have become too important for companies to not have truly independent tabulators (often, a company’s transfer agent serves as the tabulator). And I believe that the SEC should adopt rules requiring companies to file voting results on a Form 8-K within 4 business days of the results being certified (or at least requiring disclosure on a press release or posted on corporate websites within that timeframe).
The existing standard of having shareholders wait until the next Form 10-Q is simply too long – for many of the calendar-year companies that hold their annual meetings in April and May, we won’t see voting results until mid-August. If I make an effort to vote, it’s nice to know the results as soon as possible – it’s a vital part of the voter experience. Think election night.
And clearly people really need to evaluate how they treat tabulation from a disclosure controls and procedures perspective – and make sure the disclosure committee is involved in the process. Don’t just rely on the tabulators if you value your job (not to imply that the tabulators were at fault in Apple; we don’t yet know what the “human error” was)…
Corp Fin Updates Numerous CD&Is
On Friday, Corp Fin updated a bunch of its “Compliance and Disclosure Interpretations,” including some in these categories: ’33 Act Sections; ’33 Act Rules; ’33 Act Forms; ’34 Act Rules; Section 16 Rules & Forms; ’34 Act Forms; Form 8-K; and Regulation S-K. The Staff has marked each of the specific CD&Is that have been updated. I imagine Dave might provide us with analysis about some of these changes when he blogs towards the end of next week.
FINRA’s New Limited Representative Category for Investment Bankers
A few weeks ago, the SEC approved FINRA’s rule change that creates a new limited representative category – Limited Representative-Investment Banking – for persons whose activities are limited to investment banking, including those who work on the equity and debt capital markets and syndicate desks. The new registration category, which has long been requested by the securities industry, permits persons who function solely in the investment banking area to avoid having to pass the Series 7 examination.
According to this WSJ article from Saturday, Sen. Schumer intends to introduce legislation this week that would overhaul a number of governance areas. This is the legislation that we all have been expecting since the financial crisis broke – and, with a few exceptions, its components should come as no surprise since most of them have been proposed before in one form or another before.
According to the article – whose authors saw a draft of the legislation – it will include these significant provisions (bear in mind that actual proposals could change from the draft):
1. Say-on-Pay – require companies to give shareholders an annual nonbinding vote on executive pay practices
2. Say-on-Severance – give shareholders a nonbinding vote on severance packages for executives following mergers or acquisitions
3. Proxy Access – buttress potential SEC rules that would make it easier and cheaper for investors to nominate their own directors (article says SEC is considering a number of “proxy access” techniques and could issue a proposal in mid-May)
4. No More Classified Boards – require companies to hold annual director elections rather than putting only a portion of the board up to vote each year
5. Majority Vote Standard for Director Elections- require directors to resign if they don’t win a majority of shares voted
6. Independent Board Chairs – require board chair to be independent
7. Risk Management Board Committees – require boards to appoint special committees to oversee risk management
The article says that House Financial Services Committee Chair Barney Frank is working on say-on-pay legislation as well. And we already have seen SEC Chair Schapiro’s ambitious agenda for governance rulemaking that will take place in the near term.
This is all quite notable, particularly when combined with the high likelihood that the SEC will approve the NYSE’s proposal to eliminate broker non-votes in director elections which, according to this WSJ article, may come as soon as this week!
It will be interesting to see how hard corporate lobbying groups will fight the pay components of Schumer’s bill. There are numerous examples that reflect little change in executive compensation practices. For example, see today’s Bud Crystal note on Six Flags.
And speaking of Sen. Schumer, he and Sen. Shelby introduced an amendment to an existing anti-fraud bill last week that would increase the SEC’s budget by $20 million to allow it to hire 60 additional Enforcement Staffers and upgrade its technology.
Ca-Ca-Catfight! Banc of America vs. the Gov
Good heavens, who knows where to start commenting on the latest mess related to fixing this crisis. According to this WSJ article from Thursday, BofA’s CEO Ken Lewis says he was urged to lie to investors as part of testimony before New York Attorney General Andrew Cuomo. The NY AG’s office has released a slew of documents related to this testimony, including this letter to Congress.
Probably best to just fire off a few quick thoughts (mine and others) and not drone on:
– The obvious: If proven true, it would mean the Treasury Secretary and Federal Reserve Chairman urged a CEO to break US federal securities laws. And if true, these type of actions taken by senior government officials raise serious questions as to whether citizens can trust their government, and what can be done to hold them accountable and increase transparency such that they can no longer engage in such actions behind closed doors, even during a financial crisis.
– On December 4th, then-SEC Chair Chris Cox delivered this speech, in which the he warned of the danger of such actions by the government and how it would undermine the enforcment and regulatory regime in the US. It is notable this speech came during the timeframe the questionable practices were alleged to have occurred.
– WSJ’s article entitled, “Are Ken Lewis, Ben Bernanke and Hank Paulson Heroes or Goats?”
– D&O Diary’s blog entitled, “Ken Lewis, BofA and the Fed Strong-Arm: Ten Questions”
– This might have happened more than once. Last month, this Washington Post article outlined how the head of FHFA (which oversees Fannie Mae, Freddie Mac and the FHLB) urged Freddie and Fannie to make misleading disclosures.
– BofA, under the leadership of the CEO, has the ultimate responsibility for ensuring compliance with its obligations to provide disclosure to investors. Notwithstanding what he was told to do by government officials, it was ultimately the company’s decision as to whether or not to break the law. In the Freddie and Fannie case, it appears that they chose not to break the law and did make the required disclosures.
– Don’t leave the investigating to Congress or even the NY AG in this case. The SEC should investigate, subpoena all people in the discussions and all the relevant emails, documents and telephone records and get to the bottom of this and get us the truth. Anyone, including any government officials, that are found to have broken securities laws, should be held accountable by the SEC so they can ensure the investing public that this is not a rigged market.
– BofA’s annual shareholder meeting – to be held this Wednesday – surely will be one for the ages! Ken Lewis – and other BofA directors – already were the subject of a “just vote no” campaign before this latest maelstorm.
Here is a video clip of the “Seinfeld” scene where Kramer goes into his “catfight” routine. Classic. Perhaps not as good though as this “Friends” catfight. Or if you want some “cat love,” this “Christian the Lion” reunion video will surely make you weep with joy.
The Bank Stress Tests: Fed’s White Paper Outlines Standards
On Friday, the Federal Reserve issued a “Design and Implementation” White Paper, which includes the stress test standards for the 19 banks that are being subjected to the tests. While the stress test results will not be released until next Monday, the White Paper helps us somewhat understand how those tests are being carried out – particularly Table 1 which spells out the scenarios, etc. I indicate “somewhat” because some critics say the White Paper is too vague (eg. Bloomberg’s article, “Fed’s White Paper Leaves Questions Unanswered, Analysts Say.”).
For the most part, it seems like the government’s tests are based on two potential economic scenarios – a baseline scenario – based on a early ’09 consensus among economic forecasters – and a more “worser case” scenario, based on a longer, more severe recession. Here is the Fed’s related press release – and here is a list of the 19 banks.
Condolences to those that knew Professor Louis Lowenstein, who passed away last week and was a founder of Kramer Levin. Here is an obituary from the NY Times.
