This recent story about trading of California’s registered warrants on eBay caught my eye. My understanding is that the warrants are IOUs issued by the state and have a maturity date of October 2, 2009.
Thinking out loud, the warrants may fall within the ’34 Act exclusion from the definition of a “security” in Section 3(a)(10) for a “note, draft, bill of exchange or banker’s acceptance, which has a maturity date at the time of issuance not exceeding nine months.” This assumes that a California registered warrant fits within Section 3(a)(10)’s terms (e.g. maturity date of 9 months or less, etc.).
Interestingly, I understand that California’s definition of the term “security” doesn’t have the same 9-month exclusion. Therefore, someone who is engaged in the business of effecting transactions in these warrants might be subject to licensing as a broker-dealer. Further, offers and sales could be subject to California’s antifraud statutes. For example, a state official with material, non-public information about the state who negotiates a warrant could be subject to California’s insider trading statute.
9 Trade Groups Join to Influence Accounting Standards
As reported by Webcpa.com in this article, 9 trade groups representing the financial, insurance, banking, real estate and other industries have united to create a coalition with the goal of influencing accounting standard-setters who are working on revising the rules for financial instruments.
The new coalition – known as the “Financial Instruments Reporting and Convergence Alliance” or “FIRCA” – includes the American Council of Life Insurers, the Commercial Mortgage Securities Association, the Council of Federal Home Loan Banks, the Financial Services Roundtable, the Group of North American Insurance Enterprises, the Mortgage Bankers Association, the Property Casualty Insurance Association of America, the Real Estate Roundtable and the U.S. Chamber of Commerce.”
According to FEI’s “Financial Reporting Blog,” FASB Chair Bob Herz recently gave a speech noting threats to accounting principles include “politicization” by “special interests.”
Compliance Programs under Obama Administration
In this podcast, Jeff Kaplan of Kaplan & Walker discusses corporate compliance in the current environment, including:
– What’s new in the compliance field since last year
– What he expects from the Obama administration in the area of corporate compliance
– The responsibilities of general counsels in this environment
– Some practical guidance for making sure that senior officers understand and are accountable for their compliance responsibilities
A few months ago, I blogged about how periodic Edgar outages and how the SEC does a poor job of communicating about them. Unfortunately, I can report that “it’s business as usual” and that outages continue and that the SEC not only doesn’t make the filing community aware of them, it might be said that they are “buried.”
Last Thursday, I understand that Edgar was out for more than an hour in the late afternoon and some fee-bearing filings were tied up starting well before the 5:30 pm eastern same-day filing deadline. In many cases, the SEC’s system did not return an Accession Number (ie. an acknowledging receipt) and the SEC’s Filer Support staff was unable to confirm whether filings had been received. During this time, the SEC’s “Latest Filings Received and Processed” page showed that no filings had been received/disseminated starting at 5:45 pm.
What if a company discloses material information on a filing and it doesn’t show up on the SEC’s site? But even beyond that type of concern, I believe that the SEC has a duty to inform the filing community if it has an outage. There has to be some way that they can do that so that everyone doesn’t stay in the dark…
Here is a query for you: Do you know what the implication would be if an issuer filed pursuant to Rule 462(b) where the issuer can begin selling securities immediately upon acceptance of the filing (even if the filing is made after 5:30 pm)? Such an example is Submission Type S-3 MEF. Similarly, when automatic shelf-registration statements of securities of well-known seasoned issuers are submitted under Rule 462(e), they often plan to start selling securities immediately (though they are limited to pre-17:30 filings in order to go effective the same day).
If the SEC system doesn’t actually accept their filings – as a result of EDGAR system issues – must they wait to begin selling securities….and perhaps miss a window of opportunity? Let me know what you think.
Survey Results: To Whom Does Your General Counsel Report?
Below are some interesting results from a recent poll on this blog – the respondents indicated that their general counsel reports to:
– CEO only – 72%
– CEO and other operational officers – 6%
– CEO and board member – 10%
– Other operational officer(s) but not CEO – 10%
– Board member(s) but not CEO – 2%
Last year, Broadridge was feeding us new statistics about e-proxy during each month of the proxy season. This year, we have their beneficial owner statistics as of the end of the proxy season, which we have posted in our “E-Proxy” Practice Area.
As of May 29th:
– 1312 companies (technically, it’s not companies – it’s “distributions” which is a greater number than the number of companies) used voluntary e-proxy between July ’08 and May ’09 (compared to 653 for the same period in the year prior). And 12% of all distributions used N&A during this ’08-’09 period.
– Size range of companies using e-proxy continued to vary considerably for all shapes and sizes (eg. 28.9% of distributions on jobs between 10,000 and 50,000 shareholders used N&A).
– 5.9% of beneficial positions held in companies using N&A received full package by bifurcation, in addition to the 9.2% that received full packages by prior consent. Note that the 5.9% represents positions, not companies.
– 0.8% of shareholders requested paper after receiving a notice; this average is down 25% from last year’s 1.05%.
– 54% of companies using e-proxy had routine matters on their meeting agenda; another 34% had non-routine matters proposed by management; and 12% had non-routine matters proposed by shareholders. None were contested elections.
– Retail vote continued to slip, although just slightly compared to the same period last year (recall that retail voting was down dramatically last year compared to pre-eproxy days) – the number of retail accounts voting dropped from 26.6% to 24.4% (a 8% drop from the prior year’s period).
Note that the slight drop in retail voting refers to those shareholders who got a Notice only and not a full package through stratification, consent, or fulfillment. The number of retail holders getting full packages increased – and this group votes at a higher rate, which somewhat offset the drop in the retail Notice-only group.
More ’09 Proxy Season Statistics
In addition, Broadridge has posted its statistics for the proxy season more generally. Among the more interesting stats:
– Overall Number of Shares Voted: 85.7% (I wish we could get that rate for our political elections)
– Average Percentage of Broker Nonvotes: 19.1% (backing these out probably lowers the overall voting percentages to what happens in political elections)
– Methods by Which Shares Voted: 9.2% of shares voted by paper; 0.9% by phone; 10.6% online; and 79.3% by ProxyEdge (ie. institutional investors using Broadridge’s proprietary service)
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:
– How to Be a Director: Yahoo’s CEO Speaks Frankly
– Conference Notes: Hot Topics in Corporate Governance –
– The Basics: Insider Trading Penalties
– Advancing Legal Fees: Bank of America Ponies Up
– How to Obtain CLE While in Transition
– Corporate Governance Ratings: Any Future?
– Presenting New Ideas at a Board Meeting
– Sifting Through Job Databases for Lawyers
– What Should I Do With My Life?
– Outside Counsel Take Note: In-House Lawyers Want Predictability
Recently, the ABA’s Task Force on Shareholder Proposals released an Exposure Draft that proposes a model bylaw – along with commentary – that is designed to assist companies that wish to adopt a bylaw that provides shareholders with proxy access for director nominations. The Exposure Draft doesn’t take the SEC’s proxy access proposal into account and the Task Force seeks comment.
In this podcast, the Task Force’s co-chairs – Todd Lang of Weil Gotshal and Chuck Nathan of Latham & Watkins – discuss the Exposure Draft, including:
– Why did the Task Force embark on this project?
– What are the main principles of the illustrative bylaw?
– Are there any issues in particular that you seek comment on?
“It’s Groundhog Day!” Deciding Whether to Disclose Merger Negotiations
Sometimes you can’t blame deal lawyers for feeling like Bill Murray’s character in Groundhog Day – there are just some things that seem to happen over and over again in almost the same way on practically every deal. When it comes to public company deals, having to decide whether or not to disclose pending negotiations is defin itely one of those recurring events.
Assuming you’re not dealing with an auction or some other process where the seller has decided to hang a “for sale” sign on itself, nobody involved in the transaction wants the world to know that talks are going on until the parties are ready to announce a signed deal. Among other issues, premature disclosure may create problems for the buyer and the seller with key constituencies – like their employees, customers and in some cases, shareholders – that they would like to postpone until a later date when they have had time to map out a communications strategy.
The SEC cuts public companies some slack when it comes to disclosure of merger negotiations. In general, the Staff’s position is that even though MD&A’s “known trends” disclosure requirement might be read to require companies to address pending talks, if the company doesn’t otherwise have an obligation to disclose preliminary talks, then disclosure won’t be required in response to this line item in an Exchange Act report. (See, e.g., Securities Act Rel. No. 6835 (May 18, 1989)).
The SEC’s position is helpful, but this issue isn’t confined to Exchange Act reporting. Public companies have a duty to disclose material information under other circumstances as well, including situations involving leaks for which the corporation or insiders are responsible – and it’s these situations in which the disclosure issue usually arises.
Legally, there are two major issues to keep in mind in deciding whether you need to say something. The first is whether you’ve got a duty to disclose that you’re engaged in discussions. While there’s no general obligation to dispel rumors in the marketplace that you aren’t responsible for, the problem is that you’ll seldom be able to determine whether you’ve got responsibility for the leak or not – and there’s a pretty good chance that you might.
The second legal issue is whether information about the potential deal is “material.” That question, as everybody knows, is a function of its probability and its magnitude under the test announced by the Supreme Court in Basic v. Levinson. There are a lot of ways to look at Basic’s requirements, but it goes without saying that the further down the path you are, the more likely it is that information about your deal is going to be considered material.
While lawyers naturally tend to focus on the legal issues, business concerns frequently drive a decision to go public with negotiations. Companies may feel that their hands are forced by the media’s decision to run with a story on the rumored deal, or by inquiries from the Nasdaq or the NYSE about the reasons behind unusual market activity. Once information leaks, the need to manage the potential damage to key relationships may also make a compelling business case for disclosure. What’s more, there’s sometimes concern that speculation may cause the market to get carried away. That can lead to the unpleasant situation where the market price rises above the price levels that the parties are negotiating.
Once a decision to disclose pending talks is made, the next issue becomes, how much do you say? Often, people want to say as little as possible. The parties may decide not to identify the buyer, and sometimes, will avoid making any disclosure about the price as well. Sometimes, discussions about what you’re going to say can get pretty contentious, as the two sides may have conflicting views when it comes to the extent of disclosure that’s appropriate.
If you’ve got a relatively efficient market for your stock, and you don’t feel a need to reach out to other constituencies, a minimalist approach may work. Just bear in mind that the less you say, the less freely you can communicate with your key constituencies and the more you remain at risk for the consequences of market speculation. If you don’t say enough, you may find yourself needing to make a second announcement, which only further complicates everyone’s life.
When leaks happen, companies often find themselves in a completely reactive position, with very little time to think through all of the implications of their decisions about disclosure. That’s why I think the best advice is to address the possibility of leaks early on in the process, and chart out a course for managing the disclosure process if they do occur.
Advance planning won’t stop leaks from happening, but it will put everyone in a better position to respond to them if they do. Getting a jump on this issue may make it less painful when you hear the familiar sound of Sonny & Cher’s “I Got You Babe” coming through your clock radio, followed by a couple of morning DJ’s cheerily reminding you that “It’s Groundhog Day!”
Again.
Broc’s note: A great version of “I Got You Babe” is the one by UB40 and the Pretender’s Chrissie Hynde.
Bernie Peepoff: The Game is Up
On Friday, my family went to a local art show which included a Washington Post diorama contest for using peeps (ie. the marshmellow Easter candy) in artwork. Here are photos of some of the best from the 1100 entries. Although not nearly among the best, I was laughing because this entry featured a parody of the Bernie Madoff scandal:
Yesterday, the SEC voted 3-2 to approve the NYSE’s proposal to amend Rule 452 (and Listed Company Manual Section 402.08) to eliminate broker discretionary voting for director elections. The amendment to Rule 452 will be applicable to meetings held after January 1, 2010 (but won’t apply to a meeting that was originally scheduled to be held in 2009 if adjourned to a date after January 1st).
As I’ve mentioned before, in my opinion, this change is the biggest of the reforms that companies face – bigger than proxy access, say-on-pay, etc. Here is the SEC’s press release addressing all of its actions yesterday – and here is Chair Schapiro’s opening remarks (and Commissioners Walter’s statement and Aguilar’s statement).
Commissioners Casey and Paredes opposed the proposal, both stating that the broker nonvote issue should be considered in the broader context of rejiggering the proxy process (read “proxy access”) as well as examining more completely the impact of this change on companies. In his opening remarks, Commissioner Paredes noted they weren’t alone – 93 comment letters (out of a total of 136) also urged a comprehensive review of the proxy system. They also expressed concerns that the change would disenfranchise retail holders at the expense of more control by institutional investors.
Since all the other Commissioners agreed with the importance of studying the proxy system’s “plumbing,” near the end of the meeting, Chair Schapiro stated that the SEC would conduct this type of review later this year. I see roundtables in our future. If interested in reviewing “live tweets” that occurred during the meeting, see @footnoted and @simonbillenness.
Oh, boy! Check out today’s front-page article from the Washington Post about how the SEC was warned in ’04 by a SEC Staffer about Madoff – but yet the SEC didn’t follow up. And that Staffer’s boss ended up marrying Madoff’s niece. The article is quite in-depth and is likely to result in more headaches for the SEC. I’ll cover this more extensively next week.
The Surprise: SEC Proposes Expedited Disclosure of Voting Results
Although most of the SEC’s big open Commission meeting went as telegraphed by earlier statements by the SEC Chair, there was one big surprise. The SEC proposed a new Form 8-K requirement for companies to disclose the results of a shareholder vote within four business days after the end of the meeting at which the vote was held (in contested elections, the final results would be permitted to be delayed under certain circumstances).
As I’ve complained before, the current disclosure standard doesn’t elicit voting results for weeks – or sometimes months – after the vote, which doesn’t really work in today’s more competitive annual meeting environment.
Not a Surprise: SEC Proposes Say-on-Pay for TARP Recipients
Not surprisingly, the SEC also proposed rules – by a 5-0 vote – that would help implement Section 111(e) of EESA to permit an annual advisory non-binding shareholder vote on executive compensation. The SEC’s proposal clarifies how these requirements apply to TARP recipients in the form of new Rule 14A-20. The SEC has already posted the proposing release for this one; could be record time for that. Here is Corp Fin’s opening statement.
During the open Meeting, it was pointed out that – outside of the EESA mandate – the SEC Staff has allowed the inclusion of say-on-pay proposals. Commissioner Casey note that she only supported this proposal because it was required under EESA.
SEC Proposes Changes to Executive Compensation Disclosure Rules
No surprises here either. As expected, the SEC proposed amending Item 402 of Regulation S-K as follows (here is Corp Fin’s opening statement):
– Broader CD&AS to cover risk – provide information about how a company’s overall compensation policies create incentives that can affect the company’s risk – and the management of that risk, including policies for employees generally, including non-executive officers. Such disclosure would only be required if the risks arising from those compensation policies may have a material effect on the company. The SEC did not propose any requirement that would not require the disclosure of specific salaries of any individuals beyond those already required.
– Improved reporting of stock and option awards – revise way in which stock and option awards are reported in the Summary Compensation Table and Director Compensation Table so that it’s based on the award’s fair value on the grant date. This would reverse the December ’06 “surprise.”
– More disclosure about compensation consultants – in an effort to allow shareholders to evaluate potential conflicts, require disclosure about compensation consultant fees and services (and their affiliates) when they play any role in determining the amount or form of compensation for executives and directors, but only if those consultants (or their affiliates) also provide other services to the company.
In his “Proxy Disclosure Blog,” Mark Borges provided in-depth analysis of the proposals yesterday.
SEC Proposes More Corporate Governance Disclosures
Finally, the SEC proposed a few governance disclosure enhancements, including revising Item 401 of Regulation S-K to require more disclosure about each director’s particular experience, attributes and skills that are appropriate for the person to serve as a director and as a member of any committee to which the person is appointed; extend the disclosure of the director’s board memberships to the past 5 years; and expand disclosure of legal proceedings to the prior 10 years.
In addition, the SEC proposed requiring disclosure of why the board selected a particular management/leadership structure, particularly why the board chose to combine or separate the board chair and CEO positions. Although not proposed, the SEC’s proposing release will solicit comments about whether the SEC should require disclosure about director diversity, including whether diversity is a factor considered when nominating director candidates.
On Tuesday, the FASB released FAS No. 168, its codification of GAAP that has been long in the making and is officially launched as of today.
As Edith Orenstein notes in FEI’s “Financial Reporting Blog”: “FAS 168 represents the last numbered standard to be issued by FASB under the old (pre-Codification) numbering system, and amends the GAAP hierarchy to set the stage for a watershed moment – the July 1 launch of FASB’s Codification (full name: the FASB Accounting Standards Codification TM.) The Codification will supercede existing GAAP for nongovernmental entities; governmental entities will continue to follow standards issued by FASB’s sister organization, the Governmental Accounting Standards Board (GASB).”
For a long time, I was miffed that the accounting standards that make up GAAP were not available for free. For us lawyers, this was akin to the SEC charging for access to its rules and regulations. About six years back, the FASB got smart and started posting its standards for free. Before then, just summaries were complimentary. (Note that a paper subscription always has – and still does – cost a fee.)
Now the FASB has done it again, charging an annual $850 subscription fee for the online “professional” edition of its codification of GAAP (a beta version was available for free during the recent verfication period). In comparison, the “Basic” version of the Codification is available at no charge (here is FASB’s “Codification Resources” page). From reading the descriptions of the two, I believe lawyers can live with the Basic version since the Professional one has bells & whistles not related directly to the content of the Codification (egs. better search tool and printing ability).
It gets me nervous when a regulator sells access to its regulations, even if its just adding bells & whistles. It’s a perception of transparency thing and a practice that should be prohibited. I understand that FASB is a non-profit organization and not a federal agency – but it still is a regulator by virtue of the SEC designating it as the organization responsible for setting accounting standards for public companies in the US. Let me know your thoughts (I won’t post them without your consent).
NYSE Permanently Lowers Market Cap Requirement
Yesterday, the NYSE filed two rule changes with the SEC – both effective immediately – regarding its continued listing standards so that:
– In this rule filing, permanently lowered the $25 million average market capitalization requirement to $15 million (a temporary bar at the $15 million level was set to expire yesterday).
– In this rule filing, extended the temporary suspension of the $1.00 average closing price requirement until July 31st (prior suspension expired yesterday).
Our July Eminders is Posted!
We have posted the July issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
I received quite a bit of member feedback on my recent blog regarding how Corp Fin has a challenging job analyzing the circumstances of each shareholder proposal before making an exclusion/inclusion determination. Some of the feedback was frustration with the way that the Staff sometimes splits hairs. Here is an example of one member’s frustration:
I liked your note about how companies, in trying to interpret the SEC’s no-action responses, can misinterpret the tea leaves. I have heard from some in-house counsel about a special meeting proposal that John Chevedden has submitted to almost two dozen companies. He has two versions (copied below), which differ only slightly in the wording – as noted by the bolded and underlined language:
1. RESOLVED, Shareowners ask our board to take the steps necessary to amend our bylaws and each appropriate governing document to give holders of 10% of our outstanding common stock (or the lowest percentage allowed by law above 10%) the power to call special shareowner meetings. This includes that such bylaw and/or charter text will not have any exception or exclusion conditions (to the fullest extent permitted by state law) that apply only to shareowners but not to management and/or the board.
2. RESOLVED, Shareowners ask our board to take the steps necessary to amend our bylaws and each appropriate governing document to give holders of 10% of our outstanding common stock (or the lowest percentage allowed by law above 10%) the power to call special shareowner meetings. This includes that such bylaw and/or charter text will not have any exception or exclusion conditions (to the fullest extent permitted by state law) that apply only to shareowners and meanwhile not apply to management and/or the board.
In fact, in three instances, John submitted both versions to the same company. In no-action responses to Bristol-Myers, Dow and Wyeth, the SEC Staff allowed exclusion of the “and meanwhile not” version under 14a-8(i)(3). On the other hand, the Staff inexplicably did not allow exclusion of the “but not to” version of the proposal (and rejected arguments made under (i)(2), (i)(3), and (i)(6)).
In each of the cases, it appears that the Staff’s determination hinged on whether the proposal contained the “and meanwhile not” wording or the “but not to” wording. It certainly is not clear why the result would turn on that wording. None of the companies made arguments that referred to that wording – and to my eyes, they mean the same thing. It seems that you make your arguments to the SEC Staff, they ruminate on your letters in silence for a few weeks, and their unexplained answer mysteriously appears on their website. I’m not happy.
Personally, my ten cents is that during those weeks of silence, the Corp Fin Staff is in fact researching precedent and often going through a healthy internal debate on where to draw the line. It is understandable that the line drawn often is not apparent to those on the outside since the Staff’s response letters don’t explain the rationale for the Staff’s decision – and we are not privy to the internal debate. And I note that the Staff simply doesn’t have the resources to add the rationale to their responses – so that is not the answer unless Congress ponies up more funding for the agency.
Fake SEC Filings: I Felt the Love
A while back, I asked whether anyone remembered a fake filing from a few years back. In response, a horde responded – reminding me of the fake Form F-1 filed by Apollo Publication Corporation in June 2005. I was embarrassed because I had blogged about that filing myself back then – not once, but twice! Clearly, I spaced when I did my homework.
Some interesting anecdotes about the Apollo fake filing:
– It was a Form F-1, not a Form S-1 or SB-2
– The directors of the alleged company included President Bush, Alan Greenspan, Jimmy Carter, Fidel Castro and a cast of thousands.
– The SEC issued a stop order in September ’05 (here is an article about that).
An Even Better Fake Filing: Vietnam War Style
One long-time member sent me this prospectus to allow investors to buy stock in the Vietnam War. I am told this was a big hit circa 1970. It is one of the true classics, particularly for those who were in the military during the Vietnam-era. Almost every sentence has a gem in it. Just check out the subtitle: “This offering involves a high degree of risk.” Ain’t that the truth…
As I’ve spoken at a number of conferences over the past year regarding last year’s “corporate use of website” guidance from the SEC, I thought a few words about creating barriers to entry on your IR web pages would be appropriate. And by “few words,” I mean: “don’t do it.”
There is nothing more antithetical to investor relations than requiring investors to jump through unnecessary hoops in order for them to access any of the content on your IR web pages. There is no practical reason for companies to impose click-through disclaimers on their IR content any more than requiring similar disclaimers for other content on their site. Can you imagine requiring a potential customer to click on a disclaimer to get product information? It’s against the general nature of the Web (ie. simple and fast navigation on the information highway) – and severely diminishes the value of your IR web pages as investors will likely go elsewhere to seek what they want.
Luckily, this is a position that the SEC appears to agree with – in its recent interpretive release, the SEC cautions that the use of disclaimers may not be effective. In particular, the SEC says that companies can’t require investors to waive protections under the federal securities laws as a condition to accessing content (at least in the blog and e-forum context).
In fact, the Corp Fin Staff seems to be issuing comments to companies that have click-through disclaimers. For example, in comment #3 of this letter to West Bancorp (as part of a Form 10-K review), the Staff asks the company how the disclaimer – which required investors to agree to a general release of liability – “accords with your responsibilities under the federal securities laws.”
Unfortunately, the company’s response was to add a statement to the disclaimer that the agreement is not intended to limit federal securities law liability. Check out this company’s IR home page – would you bother as an investor to go further? So much for having relations with investors. [Ironically, the disclaimer is all about “we provide this site ‘as is’ and stuff like that” – but when you click the “I Agree” button, you are told you are going to a third-party provider who hosts the company’s IR web page.]
I strongly believe that the SEC needs to get into the business of imposing a few bare minimum “do’s” and “don’ts” for IR web pages since it’s much more likely that’s where investors will obtain information about an investment today compared to reviewing SEC-filed documents. In other words, the SEC needs to help save companies from themselves…
California Bylaw Provisions May Not Offend the Right to Buy Livestock
Here’s something to brighten your day from Keith Bishop: “As someone who enjoys fishing, I’ve been bemused by the fact I have a constitutional right to fish here in California (Art. I, Sec. 25 “The people shall have the right to fish upon and from the public lands of the State and in the waters thereof . . .”).
I’ve been practicing corporate law in California for more than two decades and I am ashamed to admit that I’ve been completely ignorant of the fact that this California statute specifically prohibits the directors or stockholders of a California corporation from adopting a bylaw that would prohibit any officer, stockholder or other person connected with the corporation from buying livestock in any market in California where livestock is bought and sold. This is definitely a statute to keep in mind when drafting bylaws – especially since any attempted enforcement of the proscribed bylaw would be a misdemeanor.”
First Drafts: On the Two Yard Line or Closer to Midfield?
Below is some good stuff that John Jenkins of Calfee Halter & Griswold recently blogged on the “DealLawyers.com Blog“:
A few months ago, our law firm had one of its periodic training sessions for our associate attorneys. The topic for this particular session was making the transition from junior associate to seasoned business lawyer, and the presenters were two investment bankers from one of our firm’s clients.
Lawyers have an obligation to zealously represent clients and protect their legal interests in a transaction, and that may cause lawyers to butt heads with bankers from time to time. But when bankers speak about the things lawyers do that drive them nuts or impress the heck out of them, it’s worth listening to them, because I think you can pretty much count on their position being consistent with that of the typical corporate client.
After all, when it comes to what an M&A client wants to accomplish – getting the deal done as quickly and efficiently as possible – there’s nobody in the transaction whose interests are more closely aligned with the client’s than its investment banker. That’s because bankers eat what they kill: they only get paid for their efforts if the deal closes.
The bankers who spoke to our associates shared a lot of insights about good and bad lawyering, and I’ll talk about more of them in later posts, but at the very top of their list of bad habits was something that anybody who has worked on a deal has experienced – namely, receiving a first draft of a purchase agreement that is so aggressively one-sided that it’s like starting a drive from your own two yard line.
They pointed out that this bit of grandstanding usually ingratiates you to absolutely nobody, including your own client. The first draft of a deal document sets the tone for the entire transaction. When you start out with one that’s burdensome and oppressive, the recipient’s legal and financial advisors immediately let their client know that the document is over the top. That means that not only does the draft usually get flyspecked, but each succeeding draft, along with just about every request made by the other side during the course of negotiations, gets looked at with a jaundiced eye.
Instead, the bankers suggested that a more balanced first draft is a much better way to approach a deal. If you start out with a document that puts the ball on the 35 yard line, you not only create an atmosphere that suggests your side wants to do business, but ironically, you’ll probably be more successful in your efforts to win on the handful of important deal points that you’ve drafted in your favor. When it comes to doing deals, it’s usually the reasonable people who can get away with murder.
From my perspective, I’ll concede that there are circumstances where it makes sense to be pretty aggressive in documentation. For example, if you’ve got a very hot commodity or a buyer that’s drooling all over the conference room table, then a little documentary boorishness is probably in order. But most deals don’t fall into that category, and most experienced business people don’t view an acquisition or a divestiture as a zero sum game. A first draft that suggests otherwise is usually a bad idea if your client’s primary objective is to get a deal done quickly and efficiently.
As we continue to post hordes of memos analyzing the SEC’s proxy access proposal in our “Proxy Access” Practice Area, we’re also are keeping an eye on the comment letters being submitted to the SEC. It’s very early – so most of the comment letters so far are from individuals, including this one from a disgruntled citizen who is mad about the SEC’s handling of Bernie Madoff and this one decrying the tyranny of the voting system (from Thomas Paine no less).
On a more serious note, Ning Chiu of Davis Polk notes: “One of the sleeper issues that has not been noted as much about proxy access is the impact on majority voting. If there’s a shareholder nominee, then majority voting provisions default back to a plurality standard since the definition of a contest is usually phrased as having more candidates than board seats. That limits the power of “vote no” campaigns and ISS “vote no” recommendations, which had an impact on compensation matters this year. It’s possible that activists and ISS would rather have threat of majority voting than a shareholder nominee on the ballot whose chances of getting elected may be slim.”
Just before the SEC posted its proxy access proposing release, I noted that the month wait for the proposal was heading towards a record. [Note that 11% correctly picked “sometime this week” in my poll of predicting when the release would be out; the release came out the day following when the poll went up.]
Former Staffer Scott Taub, now with Financial Reporting Advisors, wisely responded that it wasn’t even close to record “still waiting” territory. He points to the gap between the approval of the draft IFRS roadmap at an open Commission meeting (August 27th last year) and when that proposal was posted (November 14th). That wait will be hard to beat…
The Latest Compensation Disclosures: A Proxy Season Post-Mortem
We have posted the transcript from our recent CompensationStandards.com webcast: “The Latest Compensation Disclosures: A Proxy Season Post-Mortem.”
No, Michael Scott Does Not Work for Us
But I wish he did. For those of you that aren’t fans of the TV show – “The Office” – Michael Scott is a funny character played by Steve Carell. I do watch the show and it’s good, but the reason I have bothered to blog about him is that some of our members have decided to use the names of characters from the show when they leave anonymous questions/answers in our “Q&A Forum.” Here is one of the funnier notes:
I can sell you some paper, but cannot give it away. That would be stealing from my company. Instead, I’ll give you a pass for a free night stay at Schrute Farms.
My superior thanks you, Dwight Schrute, Assistant Regional Manager
I just love it. Just like I love the screen names that members have used for our “Blue Justice League.” My Top 5 there include: To Dye For; Tinkerbell; Clever Hans; moto moto and Professor Bertram.
As long as I’m blogging about TV shows, you need to see Tina Fey trying to get out of jury duty by pretending to be Princess Leia in this video.
As promised by Chair Schapiro earlier this month, the SEC has calendared an open Commission meeting for next Wednesday, July 1st, where it will consider proposals related to executive compensation disclosures, TARP’s say-on-pay and other corporate governance issues. It also will consider approving the NYSE’s “elimination of broker non-votes for director elections” proposal. This is a biggie.
There is one curious item on the SEC’s agenda – I have no idea what the second part of Item 3 relates to: “to clarify certain of the rules governing proxy solicitations.” I haven’t heard anything about problems with the proxy solicitation requirements. [Note: I now understand that this relates to codification of the Amylin letters (Eastbourne Capital/Carl Icahn) letters and other “housekeeping” rules.]
Early Bird Expires Tomorrow: With the SEC’s goal to have new executive compensation disclosure rules in place before next proxy season – combined with the real likelihood of say-on-pay legislation and the loss of broker nonvotes for director elections – our the “4th Annual Proxy Disclosure Conference” (whose pricing is combined with the “6th Annual Executive Compensation Conference”) will be more important than ever. These Conferences will be held at the San Francisco Hilton and via Live Nationwide Video Webcast on November 9-10th.
Take advantage of reduced rates that will expire tomorrow, June 26th by registering now. These rates will not be extended – there will be no early bird discounts after Friday!
The SEC’s Quick Response to Insider Trading Allegations: A More Restrictive Compliance Program
As media accounts continue to dribble out that damage the SEC’s reputation (eg. see this recent Washington Post article regarding the Cox years), it appears that the furor over allegations over possible insider trading by SEC Staffers has died down.
One of the reasons may be the SEC’s quick response – it quickly announced a series of measures that will strengthen its internal compliance program as noted in this WSJ article. More specifically, as outlined in this SEC press release, the measures include:
– New set of new internal rules governing securities transactions for all SEC employees that will require preclearance of all trades
– Prohibition on trading in securities of companies under SEC investigation regardless of whether an employee has personal knowledge of the investigation
– Contracting with an outside firm to develop a computer compliance system to track, audit and oversee employee securities transactions and elicit financial disclosure in real time
– Consolidated responsibility for securities transactions and financial disclosure reporting oversight within the SEC’s Ethics Office
– Authorized the hiring of a new Chief Compliance Officer
Here is a noteworthy Washington Post article in which a SEC Staffer responds to complaints unrelated to the insider trading allegation, but which were included in the related SEC’s Inspector General report .
Alleged Insider Trading: Reactions from Our Community
Since our members are closer to what happens at the SEC compared to the general public, it’s worth noting some of their reactions to the insider trading allegations. I’ve already blogged my own thoughts in a piece entitled “My Ten Cents: What Does This Alleged Insider Trading Scandal Mean?”
And we have these poll results regarding “Should the IG’s Report Have Been Made Public So Soon?”:
– 54.6% said it shouldn’t have been made public yet
– 34% said it should have been made public when it was
– 14.4% said the report was too long to read
– 15.5% wanted to cry
– 7.2% wanted to laugh
Here some of the member reactions that I received:
– Perhaps the SEC should do what some of the more conservative law firms do and prohibit its employees from trading in anything except index funds and ETFs? That would reduce the workload for the clearance officer and virtually eliminate any appearance of conflict. Still, if either of these people is guilty, they’re just plain stupid since they of all people know how easy it is for the SEC to trace suspicious acvtivity.
– It is unclear whether the SEC Enforcement Attorneys traded on inside information or seriously violated SEC rules. However, the IG has been investigating for 15+ months and felt strong enough about the record to refer it to the US Attorney. Doesn’t sound good- especially the parts about trading in stocks with potential or current investigations. I do note that the IG’s last two reports to Congress mention the investigation and give identifying details.
– One person said that certain people who were familiar with the record found that the many of the questioned trades “didn’t make sense.” No one was happy with this reputational hit.
– These appear to be innocent (yet sloppy) transactions, not intentional fraud. One of the big problems at the SEC is that not many truly understand how the law and the financial markets work in a macro sense and how everything is connected to each other. Sure you have brillant people is specialized offices who know all about net capital rules, investment company communications or no action letters, etc… but not many who understand what really make investors, financial analyst and traders tick (can we say “Madoff”). This is not an easy thing as its takes a ton of work and reading to keep on top of things as you are aware. Thus you actually have to commend those who try to help others bridge the gap (this is how to invest in a stock, this is a bond) and who generally try to hone their skill sets.
– Didn’t the SEC say they wanted to hire more financial professionals, do they expect these people to put all of their money in T-bills when they join? Unfortunately, the careers of these lawyers are probably doomed regardless of their culpability since if you did that many trades eventually you will probably run into a SEC conflict at some point, especially if you are buying financial stocks. I remember trying to pre-screen trades at the SEC many years ago; itf was essentially a broken system, so I hope that is not the reason for their predicament. Bottomline: expect future risk taking, innovation, and morale at the SEC to take a further set back.
