A few weeks ago, I blogged about how lawyers were not happy about the FASB’s proposal to reform FAS 5. Now that the comment period has expired, the views of the auditors and investors are available – some of which side with lawyers (and management) and most of which that don’t. For example, CFO.com ran this article that summarized some of the objections.
Former SEC Chief Accountant Lynn Turner tells me: “The comments from the investor community are solidly in the camp favoring complete and timely information on loss contingencies. Now it is the unenviable task of the FASB to decide which camp they are in as their proposed statement was strongly supported by investors, and is consistent with their own conceptual framework. The question is whether the FASB will now water down what they have proposed.
As several of the investor comment letters note, it appears some companies are not currently complying with the current standards which raise the question of where is the enforcement. This issue also highlights that is probably not correct to say that there is an “expectation gap” difference between companies and their auditors and those in the investment community, as much as there is an out right ideological difference on what management of companies should have to report and disclose to the owners of the business.
And in the past, when on statements addressing such issues as off balance sheet SPEs, derivatives (No. 133), stock options (No. 123) and leasing, and the FASB chose to give companies what they asked for, it always seemed to come back to kick them on the backside when those standards had significant shortcomings or outright failures as a result of the compromises made.”
Getting lots of great feedback on the new “The Advisors’ Blog” on CompensationStandards.com, with new content from the 30-plus experts being posted daily. Yesterday, Gregory Schick of Sheppard Mullin blogged a great piece on the intersection of Rule 701 and Section 409A. Below is an excerpt from that blog:
The potential securities law compliance issue that is the source of my musings relates to Rule 701 of the Securities Act of 1933. Rule 701 is the easiest and primary way that companies obtain exemption from the registration requirements of the Act with respect to their compensatory stock options. Rule 701 imposes numerical limitations on the magnitude of equity securities that can be issued in reliance on Rule 701 in a twelve month period.
In particular, the aggregate sales price or amount of securities sold in a twelve month period cannot exceed the greater of: (i) $1 million, (ii) 15% of total assets or (iii) 15% of outstanding securities. Moreover, if relying on either (ii) or (iii) and the aggregate sales price of Rule 701-issued securities exceeds $5 million, then Rule 701 requires that additional disclosures (in essence, a prospectus) be provided to grantees. Such additional disclosures need to have been provided to grantees before they exercised their Rule 701 options and acquired shares.
The sales price for stock options awarded for purposes of these numerical tests is computed at the time of option grant and is calculated by multiplying the number of option shares by the per share exercise price. The SEC’s April 1999 adopting release of amendments to Rule 701 provides that “In the event that exercise prices are later changed or repriced, a recalculation will have to be made under Rule 701.”
Normally, such a recalculation would be performed (with favorable results) when there is an option repricing to lower the exercise price to equal a share fair market value that has declined since the grant date. But, what about if the option is repriced upwards in order to accommodate 409A? Presumably, options whose exercise price is increased to avoid being treated as a discounted option under 409A must also be recalculated for purposes of Rule 701 using the higher option exercise price. Would the recalculation be retroactively performed for the period when the initial grant was made or would the value of the amended option be included in Rule 701 numerical analysis as of the date of the amendment?
In either case, the effect of such an upward adjustment could result in the aggregate sales price exceeding the $1 million and/or total assets thresholds of Rule 701 whereas computations applying the pre-adjusted exercise prices did not. And, perhaps even more troubling, if the Rule 701 $5 million threshold was breached as a result of the recalculation, it could be problematic or even impossible for the company to comply with the additional disclosure requirements imposed by Rule 701 since it is quite possible that some grantees may have already exercised their stock options absent the benefit of the requisite additional disclosure.
Private companies that have increased their option exercise prices in order to comply with 409A may want to also re-examine their compliance with the numerical limitations of Rule 701 particularly if they are considering going public or being acquired since their historical securities law compliance will come under closer scrutiny. While it is possible that the company may be able to avail itself of another exemption under the Act (e.g., Regulation D for certain qualifying option grants), will these recurring 409A-related headaches never end?
The Battle Over Online Ratings
A while back, I blogged about the initial unhappiness over Avvo’s rating system – that service has evolved since then and seems to be doing well with consumers (and the litigation has been dropped). Now, the “Wired GC” Blog describes the latest dust-up regarding ratings involving TheFunded, a site that purports to offer information on VC firms and deal terms from anonymous entrepreneurs. This dispute involves anonymous online feedback…
I’m pretty excited about our upcoming webconference for InvestorRelationships.com: “The SEC’s New Corporate Website Guidance: Everything You Need to Know – And Do NOW.” The agenda is jam-packed, ranging from the SEC’s Corp Fin Chief Counsel Tom Kim – to online experts Dominic Jones and Ryan Lejbak – to legal wunderkinds John Huber and Stan Keller, and many more.
This webconference will not just parrot the SEC’s new guidance (as most firm memos have done). Instead, all of the panels will provide detailed analysis and guidance about how to implement the SEC’s new positions. They will explore what the possibilities now are for companies – and how you can (and should) leverage them.
If you try a no-risk trial for InvestorRelationships.com for 2009, you get access to this webconference for free (including the upcoming Fall issue of our quarterly newsletter, in which I provide a detailed roadmap of how you can comply with Regulation FD under the SEC’s new guidance). Note that membership rates are very reasonable, starting at $295 for a single user through the end of ’09 (this gets you this webconference as well as the quarterly newsletter, and more to come on the site).
If you already have received an ID/password for InvestorRelationships.com this year, you can renew your membership for 2009 now (and get free access to this webconference, etc. for another year).
Here Come the E-Forums!
It appears that some companies intend to take advantage of the SEC’s new rules clarifying how to apply the securities laws to e-forums. This will be surprising to many who predicted that only investors would be sponsoring e-forums.
For example, Amerco has used an e-forum for its annual shareholders’ meeting the past two proxy seasons (see this description from the first year). And Michael O’Brien of iMiners (who will be speaking at our webconference) notes in his blog that Oxygen Biotherapeutics will soon be launching an e-forum via iMiners’ turnkey eShareholderForum solution. Looks like the smaller companies will be leading the way here.
Broadridge’s New Social Network?
Kudos to Dominic Jones of IR Web Report for catching Broadridge’s announcement about a proposed social network/e-forum called “Investor Network” during the company’s August analyst conference call. Chuck Callan of Broadridge will be explaining what this is all about at our upcoming InvestorRelationships.com webconference.
Below is an excerpt from an unofficial transcript of the conference call; scroll down for the portion that deals with the social network since I included additional comments at the top because they seemed interesting as well:
Rich Daly (CEO of Broadridge): Now, let’s move on to the business segment overview. I’ll start with our largest segment, Investor Communication Solutions. As I mentioned earlier, the ICS segment represents over 70% of Broadridge’s revenue and operating profits. We anticipate fee revenue growth for this segment in a range of 5% to 9% which feels great. Overall revenue growth will be in a range of 2% to 4%, but that’s just given the decline in postage.
We are anticipating close sales in a range of $100 million to $110 million, of which 50% is expected to be recurring and 50% is expected to be event-driven. Event-driven sales will primarily be related to mutual fund proxies. For the second year in a row, we’re expecting solid sales for both registered equity proxy and transaction reporting, which we expect will drive our recurring sales activity.
Our strategic leadership around Notice & Access in the core communications business has increased the chasm between Broadridge and our competitors. Our leadership in Notice & Access has resulted in industry-wide savings of an additional $140 million. The 600 or so companies that took advantage of the program realized significant savings in postage and print costs. Our industry leading Notice & Access solution gave us entre to sell our registered proxy services to over 350 new companies increasing our client count by 45% to approximately 1,200 public companies.
Despite the industry’s financial success from Notice & Access, the reduced rate of voter participation by retail shareholders that resulted remains an industry challenge, but it’s an opportunity for Broadridge to once again provide industry leadership. Notice & Access has had a slightly better financial impact on Broadridge than we originally anticipated. This was primarily due to winning new clients for our registered proxy services as well as selling a greater percentage of the ancillary services that are required to support Notice & Access.
Although other vendors offer these ancillary services, we believe we had a higher win ratio because of our strong one-stop shop value proposition and our subject matter expertise. In fiscal year 2009, we’re anticipating a 40% adoption rate for Notice & Access. The fact that we ended a full year with an adoption rate of 28% and we had an adoption rate during our fourth quarter proxy season of 31%, lead us to believe that 40% is a reasonable estimate.
Event-driven revenues are anticipated to be virtually flat to slightly down this year given the current economic environment we’re still in. Although we’re in a down market, we don’t expect to see the fall off in event-driven revenues that we experienced in fiscal year 2003, when it was down 30%. In fiscal year 2008, we did see a decline in proxy contest and M&A activity. However, the changes in mutual fund regulatory focus requiring more activity, our market share gains and our new products in the mutual fund space lead us to believe that there will be less volatility than we experienced in the past. As we exit this down market, we anticipate we’ll get back to realizing the greater than 10% CAGRs and event-driven revenue we experienced before in the past.
Now, I’ll talk about a few other product opportunities in this segment. Summary prospectus is a pending regulatory change related to how investment companies communicate with investors. It could result in mutual fund prospectuses going from 20 plus pages today down to, say, five or so pages. Although the regulatory change would most likely have a negative impact on our pick-and-pack fulfillment business, the change could drive opportunities for our print-on-demand business. Directionally, we view it similarly to the way we saw the Notice & Access regulatory change.
Our Investor Mailbox product which is part of our e-delivery solution is designed to streamline multiple delivery channels into a single visit financial portal that investors find on their broker’s Web site. This product is having a positive impact by converting investors from traditional hard copy delivery to electronic delivery. Investor Mailbox has been the primary driver for increasing our electronic delivery rate for proxies from 47% to 52% this fiscal year.
I believe one of the new and exciting opportunities is around what we’re calling the Investor Network. It’s really unusual for us to be talking about something so early in its development, but the range of this opportunity could be anything from negligible to a unique and meaningful financial social network which could be really big. The Investor Network is an online electronic form that will facilitate shareholder to shareholder communications with a unique feature that will differentiate it from the chat rooms in existence today. Investors who use our Investor Network will be validated as real shareholders. This feature will not only enhance shareholder to shareholder communications, but it will provide a new channel of communication between shareholders and companies.
When the SEC expressed a desire to enable better communications between shareholders using today’s online technology, Broadridge stepped up to help provide a workable solution by leveraging our unique capabilities. The Investor Network will validate shareholders through the core plumbing of the Investor Communications segment while allowing institutional, retail and professional investors to remain anonymous. We are uniquely positioned to create a vibrant social network that validates real shareholders while allowing both anonymity and accountability for any statements made online.
Through providing industry-wide technology-based solutions for Notice & Access, summary prospectus and the new Investor Networks, we continue to demonstrate that we are in the communications solution business and it’s so much more than merely an ink on paper or physical distribution business.
Operator: Our next question will come from Leo Schmidt with the Chubb Corp.
Leo Schmidt – Chubb Corp: First of all, very good quarter gentlemen. Could you give us a little more insight into this new product you’ve been talking about? I know you’ve been talking about growing sales through acquisitions and then through products you invest to networks. Could you give us some insight how big that you think you could grow that? Could you explain a little bit how that works? Would that be something that investors would pay for, companies would pay for, would this be mandated by the SEC? Would you page your goal or could you give us a little sense of how that works and I’m assuming the incremental cost would not be that much bigger additive to revenues? Could you give us some sense to that?
Rich Daly: Okay. Well, the first thing I’m going to give you the sense of, is really hard to say this early. I took the unusual step and we actually talked about it internally here, but I took the step of talking about it now since we will be meeting with so many new entities out there on this topic. I really had a need to make it public completely. So far, the experts we are working with view it as on a range as – some of them think, well, maybe it will work, maybe it won’t, maybe it will just be another social network. To some of them, their eyes bulge open and say, wow, this could really be a game changer.
The activity here is really going to be driven by, is the SEC going to deem that this is something that shareholders need to have the right to. And if that was the case, then I can’t imagine at getting done any other way than through the plumbing we have in place, and again that’s a chasm between us and any one else, no one else is close to connecting every investor to every public company.
If this is going to be something where it’s on a shareholder opt-in basis only, then the validation process becomes a little more complicated, but again we are uniquely positioned to create that validation. And that would be, I’ll called it, a more evolutionary process where we take longer for the network to gain hold.
Now, depending on which way it happens is depending on who will pay and what the model will be. If it’s an opt-in model, I expect it’s going to be probably similar to an eyeball model where there is going to be advertising, et cetera. If it’s a right of shareholders, then it could be a combination of fees and banner advertising or other related activities. We have a significant number of people internally and externally working on this. We are looking to use the best mind on this activity outside of here. But let me be very clear. I think it’s upside, I think there’s very little downside, but we’re certainly not putting anything in any numbers we are representing to you to related to the future as it relates to this activity. But it is meaningful enough that if it was to become a real deal, we would be uniquely positioned with a high quality social network with real investors who are validated accountable and have an amenity, and I will call it a place where serious people could have serious conversations about their investments.
Leo Schmidt – Chubb Corp: I am assuming that some regulator somewhere has made noise about how making this happen and this is part of the reason why you have interest in this. This is not — is that a fair assumption?
Rich Daly: I have had meetings with the SEC staff and the chairman of the SEC on this topic.
Now that the Delaware Supreme Court has affirmed the Chancery Court’s decision in Jana Partners (as well as the holdings in the Office Depot and CSX cases), as noted in this article, a number of companies are now crafting bylaws designed to flush out the actual size of activist stakes.
In the article, Professor Charles Elson notes that he wouldn’t be surprised if more than half of all US companies revise their advance notice bylaws in time for the 2009 proxy season. Tune in on Thursday for this DealLawyers.com webcast – “How to Change Your Advance Notice Bylaws” – so that you will be able to fully evaluate what you should be doing now.
This webcast is important because advance bylaw provisions are not boilerplate. Even if two companies have identical language in their advance notice bylaws, they may operate differently because companies in their shark repellent arsenal may (or may not) allow shareholders to call special meetings or act by written consent, etc., and because many companies have adopted a majority voting standard.
Here are a dozen questions that the panelists will be addressing during the webcast:
– Should companies that have their bylaws tied to the mailing of the prior year’s proxy statement consider revising their bylaws?
– What do the Delaware cases say about how long the advance notice period can be?
– How should companies deal with the interplay between Rule 14a-8 and their advance notice bylaws?
– In the wake of the CNET and CSX cases, are companies starting to incorporate the concept of “cash-settle only” and similar derivative instruments into their advance notice bylaw provisions?
– If so, how broadly are such concepts applied in their bylaws?
– Are you seeing companies incorporate the swap and derivatives concept into their poison pills?
– Are there any loopholes in these organic shark repellent provisions that the courts have not addressed?
– Are you seeing hedge funds and their investment banking and other institutional counterparties starting to shy away from total return swaps and similar derivatives arrangements in view of the CSX case?
– Apart from the recent judicial decisions, what mistakes do targets sometimes make with respect to their advance notice bylaws?
– What are the SEC Staff’s views on what is happening?
– At the end of the day, are the decisions in Openwave, C-Net and Office Depot contract construction and drafting error cases – or do they speak more broadly to Delaware corporate policy?
– Are folks over-reacting to all of this?
How Common are Rule 10b5-1 Plans that Buy?
In Bruce Carton’s new “Securities Docket,” he carries this item about a founder and chair of a company that has set up a 10b5-1 plan to buy his company’s stock because he believes it’s undervalued.
It’s not uncommon for companies to set up 10b5-1 plans to buy, but it is for executives. In talking this over with Alan Dye and Dave, this certainly isn’t a “first of its kind,” but it is rare. Slightly more common are 10b5-1 plans for directors to help them meet their stock ownership guidelines.
Our September Eminders is Posted!
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Last Thursday, the DOJ released a new set of guidelines regarding how it would charge companies. The new guidelines are effective immediately and they revoke earlier – and heavily criticized – guidelines issued under then-Deputy Attorney General Larry Thompson, which were then subsequently revised by then-Deputy Attorney General Paul McNulty. Here is the DOJ press release – and remarks from Deputy Attorney General Mark Filip.
The new guidelines parallel the legislative proposals contained in the reborn “Attorney-Client Privilege Protection Act of 2008,” which has passed in the House and pending in the Senate. So we ponder the big question: whether the new guidance sufficently protects the attorney-client privilege and work product protection, or whether congressional legislation is still desirable?
Apparently, the sponsor of the legislation thinks so. Sen. Arlen Specter issued a statement Thursday that says: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”
Potential Ramifications for Tandy Language?
In his statement approving the DOJ’s actions, ABA President Thomas Wells noted that the SEC was among the agencies with policies that pressure companies to waive their legal privileges. Others have expressed the same sentiment.
In talking to Dave, I think what they are talking about is the SEC’s “cooperation” policies as articulated in the Seaboard case – but it does raise an interesting question about the Tandy language that companies are “required” to include in their comment letter responses. That language is asking the company to waive a potential defense basically in return for processing the filing – which isn’t much different from making things easier on a defendant on the enforcement side for waiving attorney-client privilege. Might this spell the end of Tandy language in comment letter responses?
2nd Circuit’s Decision: Advancement of Legal Fees Protected
By coincidence, the Second Circuit Court of Appeals rendered its decision in US v. Stein also on Thursday, upholding Judge Kaplan’s dismissal of the indictments against thirteen defendants. The Court of Appeals upheld Judge Kaplan’s ruling that the government deprived the defendants of their right to counsel under the Sixth Amendment by causing KPMG to place conditions on the advancement of legal fees to defendants-appellees, and to cap the fees and ultimately end them.
SEC Adopts Changes for Cross-Border Business Combinations, Exchange Offers and Rights Offerings
Last Wednesday, the SEC approved a host of changes to the exemptions for M&A transactions and rights offerings at an open Commission meeting; here are opening remarks from Tina Chalk of Corp Fin. On our “DealLawyers.com Blog,” we posted a summary of these changes last week.
Yesterday, the SEC adopted a proposed roadmap for the potential transition by US companies from US GAAP to IFRS at an open Commission meeting. The roadmap provides that the voluntary transition to IFRS for a limited category of US companies could start with reports filed for fiscal periods ending on – or after – December 15, 2009. To be allowed to do that, a company would have to be among the 20 largest companies within its industry in the world – and a large number of its competitors would have to already be using IFRS. The SEC estimates that about 110 companies would qualify for this voluntary movement.
The roapmap entails possibly mandating IFRS for large US companies for their 2014 financial statements, with somewhat smaller ones required to make the move in 2015 and then the smallest companies forced to use IFRS in 2016. The final decision on whether to implement this timetable would be made in 2011.
We’ll provide more coverage of this big development over the next few weeks. Note that the Big 4 auditors and others will soon be holding webcasts – I’ve already seen announcements – so there will be “all you can handle” coverage of this topic. Here’s more coverage from FEI’s “Financial Reporting Blog.”
SEC Adopts Tighter Form 20-F Deadline
At its open Commission meeting, the SEC also adopted amendments to the rules applicable to foreign private issuers that file reports with the SEC (here are opening remarks from the Corp Fin Staff; here is the press release). Here are extensive notes from Cleary Gottlieb:
The most important amendment is to accelerate the deadline for filing an annual report on Form 20-F to four months after the end of the fiscal year, an improvement compared to the 90-day deadline the SEC originally proposed for large issuers. Based on the discussion at the open meeting, the final rule will otherwise implement the amendments substantially as proposed in March 2008, with one exception (the full text of the release is not yet available).
Deadline for Filing Form 20-F
Currently an issuer’s annual report on Form 20-F is due six months after the end of each fiscal year. The SEC shortened the deadline to four months for all FPIs. It had proposed 90 days for accelerated filers and 120 days for other filers. The change will take effect for fiscal years ending on or after December 15, 2011 – so for a calendar-year issuer, it will take effect for the 2011 annual report filed in 2012.
To justify the shorter deadline, the SEC pointed out that filing deadlines in other countries are generally not longer than four months and that a four-month deadline will ensure more timely disclosure for investors. The SEC apparently rejected the arguments of many commentators that an accelerated deadline will be burdensome for FPIs since their 20-F reports must include more and different information than the home-country report and are often prepared after the home-country report is substantially complete.
The accelerated deadline is particularly significant for FPIs that must reconcile their financial statements to U.S. generally accepted accounting principles, a complex and lengthy process that may be hard to complete within the new deadline. Companies that prepare financial statements under IFRS (as issued by the International Accounting Standards Board) are exempt from this requirement, and the tighter deadline may cause some companies to switch to IFRS, especially if they can use IFRS for home-country reporting. One reason for the three-year delay in effectiveness is to allow time for foreign issuers and regulators to adopt IFRS.
Other Changes Relating to Form 20-F
Most of the changes concern the disclosure requirements of Form 20-F, which FPIs use to file annual reports with the SEC and which forms the basis of the disclosures required for registered offerings.
– An FPI that must reconcile its financial statements to U.S. GAAP will no longer have the option to use the less demanding presentation under Item 17 of Form 20-F. Financial statements of a company other than the issuer – e.g., an acquired company or an equity-method investee – may still be prepared under Item 17.
– Form 20-F will require disclosure of significant differences between the issuer’s corporate governance practices and the requirements of U.S. securities exchanges. The rules of the U.S. exchanges already require essentially the same information but permit it to be published on the website instead.
– Form 20-F will require disclosures about any fees and charges relating to an issuer’s ADR programs, including payments made by a depositary to the issuer in connection with the programs.
– Form 20-F will require disclosures regarding changes in and disagreements with the issuer’s auditors. The disclosures are substantially the same as those that apply to U.S. issuers under Form 8-K, except that under Form 20-F they will only be required annually.
The SEC specified that the change described in the first bullet above will take effect for fiscal years ending on or after December 15, 2011. It did not address the effectiveness of the other amendments, which will apparently be earlier.
The SEC did not adopt one related proposal, under which an annual report on Form 20-F would have had to include target financial statements and pro forma financial information for some large completed acquisitions. The proposal would have affected only a few companies each year, but the burden would have been significant, so the decision not to adopt this requirement provides significant relief.
Changes to “Going Private” Rules
The SEC amended its “going private” rules under Exchange Act Rule 13e-3 to cover share repurchases, tender offers and proxy solicitations that are intended, or would be reasonably likely, to render an FPI eligible to deregister its securities.
Changes to Determination of FPI Status
Under the new rules, an issuer will be required to determine its FPI status under the SEC’s rules once a year on the last day of its second fiscal quarter, and the amendments will provide a transition period for a company that loses FPI status. Under current rules, a company must test its status continually and start reporting as a U.S. company immediately upon the loss of FPI status.
SEC Overhauls Registration Exemption for Foreign Companies
At the open Commission meeting, the SEC also voted to adopt amendments to Rule 12g3-2(b), which exempts certain foreign private issuers from registration with the SEC (here are opening remarks from the Corp Fin Staff; here is the press release). Here are extensive notes from Cleary Gottlieb:
Based on the SEC staff’s comments at the open meeting, the SEC has accepted the most widely made comment on its original proposal, by eliminating the proposed 20% cap on U.S. trading volume. The final rule will otherwise be adopted substantially in the form proposed in the SEC’s February 2008 proposing release (the full text of the release is not yet available).
Under Section 12(g) of the Securities Exchange Act of 1934 and related rules, a foreign private issuer (as defined under the Exchange Act) that has 300 or more U.S. resident holders of a class of equity securities at the end of its most recently completed fiscal year, and 500 or more worldwide holders of record (plus US$10 million or more in total assets), must register that class under the Exchange Act unless an exemption is available. Exchange Act registration requires a company to comply with SEC reporting requirements, and with the Sarbanes-Oxley Act of 2002.
Registration under Section 12(g) is theoretically required even if a company does not list or publicly offer its securities in the United States. However, an exemption is available under Rule 12g3-2(b). Rule 12g3-2(b) currently allows an FPI that has not listed or publicly offered securities in the United States to avoid registration by making an application under the Rule and furnishing the SEC with English-language versions of certain material information that the issuer makes public or is required to file in its home country. For most companies, the information must be submitted to the SEC in paper form.
The amendments will make the exemption automatically available to eligible FPIs, which will no longer have to make an application to the SEC. Under the amendments, in order to maintain the exemption, a company must publish electronically (either on its website or on a publicly available electronic system) English translations of certain key documents, such as annual and interim reports and financial statements, material press releases and certain other significant documents. Paper submission will no longer be required.
The amendments will include two eligibility requirements that an FPI must meet to benefit from the exemption:
– The issuer has no active Exchange Act reporting obligations under Section 13(a) or 15(d) (this means essentially that the issuer has not listed or publicly offered securities in the United States).
– The issuer maintains a listing of the subject securities on one or more non-U.S. exchanges that are its primary trading market (meaning one or two markets that represent at least 55% of its worldwide trading volume, at least one of which must have greater trading volume than the United States).
The amendments do not include the most controversial eligibility requirement from the SEC’s February proposal, which would have made companies ineligible if trading in the United States represented more than 20% of the issuer’s worldwide trading volume in the most recently completed year. In the open meeting, the SEC’s staff indicated that most commenters had opposed the 20% trading volume test, in particular due to the dampening effect it could have had on sponsored ADR facilities and the inclusion of U.S. investors in exempt offerings such as private placements. As the issuer must still meet the primary trading market requirement described above in order to benefit from the exemption, U.S. trading must in any case represent no more than 45% of an issuer’s worldwide trading volume.
The result of these amendments is that vast numbers of non-U.S. companies that regularly publish English-language documents will automatically become exempt, without any action (or even any knowledge of the exemption). As a result, their shares will become eligible for unsponsored ADR facilities and Rule 144A resales to qualified institutional buyers. At the same time, some companies, such as unlisted funds or acquisition targets that have delisted but have remaining U.S. shareholders, may be ineligible for the exemption.
It is also uncertain whether the amended Rule will require that issuers publish full English translations of documents or whether English versions that cover all material information will be sufficient. We had noted in our comment letter that many companies include information in their home country reports (due either to local regulations or to local practices) that is not of interest for U.S. investors, and that some of these companies omit this information from the English versions of these reports.
The amendments will provide for a three-year transition period for FPIs that lose their Rule 12g3-2(b) exemption because they are unable to meet the Rule’s new substantive requirements. In addition, the Rule will include a three-month transition period following effectiveness to enable issuers to comply with the Rule’s substantive requirements, in particular the electronic publication of English-language documents.
Back in early July, the SEC snuck in a proposal – amidst a host of proposals directed at the rating agencies – that has the potential to limit the number of companies that can currently issue debt securities using a shelf registration statement, while at the same time expanding shelf eligibility to less creditworthy issuers. As proposed, the investment grade non-convertible debt securities transaction requirements in General Instruction I.B.2 of Form S-3 would be replaced with essentially the WKSI debt issuer standard – that the company has issued more than $1 billion for cash in registered offerings of non-convertible securites over the prior three years. The comment period for this proposal ends next week, on September 5.
This potentially could be a huge deal. For instance, junk bonds could be offered on Form S-3 under the proposed eligibility criteria, so long as the issuing company meets the $1 billion issuance standard. Further, a company could use S-3 if it met the $1 billion standard, even if some or all of the outstanding debt is in default. The SEC also asked questions about making disclosure concerning ratings mandatory (now it is permissive under Item 10(c) of S-K), including whether ratings and changes in ratings should be disclosed on Form 8-K. Further, in an unusual move, the eligibility standard for issuing asset-backed securities off of Form S-3 would look to, among other things, the status of the investors – namely whether they are QIBs. In its proposing release, the SEC says that only six corporate debt issuers would be kicked off of S-3 if they switched to the $1 billion issuance standard, but it is unclear at this point whether that estimate captures the full impact of the proposed rule change.
Unfortunately, this proposal appears to represent a purely facial change – pulling references to credit ratings out of all of the SEC’s rules because it supposedly gives the ratings (and the ratings process) an SEC “stamp of approval” – that could have some far-reaching ramifications for the markets at a time when issuers of asset-backed securities, hybrid instruments and corporate debt are most in need of the quick access to capital afforded by Form S-3 and shelf registration.
Good to see more securities law blogs emerge. Joe Wallin’s new “Corp Fin Blog” recently ran this item:
In Julian v. Eastern States Construction Service, Inc. (Del. Ch. July 8, 2008), the Delaware Chancery Court ordered the disgorgement of director compensation bonuses after its determination that the bonuses did not pass the entire fairness standard.
“Self-interested directorial compensation decisions made without independent protections, like other interested transactions, are subject to entire fairness review. Directors of a Delaware corporation who stand on both sides of a transaction have “the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts.” They “are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain.” The two components of entire fairness are fair dealing and fair price. Fair dealing “embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” Fair price “assures the transaction was substantively fair by examining ‘the economic and financial considerations.’
SEC Approves PCAOB’s “Communication with Audit Committee re: Independence” Proposal
Yesterday, the SEC issued this order approving the PCAOB’s proposal regarding communications with audit committees regarding independence.
Despite indications that the holding would be the opposite, the DC Circuit Court of Appeals delivered an opinion in Free Enterprise v. PCAOB which upheld – by a 2-1 vote – the constitutionality of the Public Company Accounting Oversight Board on Friday. Here is a statement from SEC Chairman Cox – and here is a PCAOB statement.
The Court of Appeals decision upholds a lower court decision from eighteen months ago. The WSJ reports in this article that the plaintiffs intend to appeal either for a rehearing before the full DC Appeals court or to the US Supreme Court.
In eighteen parts, Professor Jay Brown has some analysis of the decision in his “Race to the Bottom” Blog. And here is an excerpt from a Washington Post article:
“Writing for the appeals court panel’s majority, Judge Judith W. Rogers said the plaintiffs lost the bulk of their case more than 70 years ago when the Supreme Court upheld the constitutionality of independent agencies. In addition, the SEC, whose members are nominated by the president and confirmed by the Senate, has broad authority over the board, including the power to change its rules, limit its operations and block any sanctions it proposes against auditors, she said.
The Sarbanes-Oxley Act “vests a broad range of duties” in the accounting oversight board, but the board’s “exercise of those duties is subject to check” by the SEC “at every significant step,” Rogers wrote. She was joined in the majority by Judge Janice Rogers Brown.
In an impassioned dissent, Judge Brett M. Kavanaugh wrote that the Sarbanes-Oxley Act renders the PCAOB “unaccountable and divorced from Presidential control to a degree not previously countenanced in our constitutional structure.” The majority sided with U.S. District Judge James Robertson, who threw out the suit last year, asserting that its legal theories did not merit a trial.”
– adopting rule amendments regarding the circumstances under which a foreign private issuer is required to register equity securities under Section 12(g)
– adopting amendments to foreign private issuer form/rules that are intended to enhance the information that is available to investors
– adopting an expansion of the cross-border business combination transactions and rights offerings exemptions and adopting changes to the beneficial ownership reporting rules to permit certain foreign institutions to file reports on a shorter form (as well as issuing interpretive guidance related to cross-border transactions)
It’s gonna be light blogging from here until Labor Day. To amuse yourself, take a moment and participate in this Quick Survey on Analyst “Quiet Period Practices. This will help us all gauge how analyst quiet periods differ from insider trading blackout policies as well as Regulation FD policies.
And also take a moment to fill out this Quick Survey on CEO Succession Planning.
Harvey Pitt and His Naked Short Selling Compliance Role
On the heels of the news that former SEC Chairman Harvey Pitt is one of the forces behind a new web-based electronic stock lending and location service, the State of Alabama tapped Harvey to become a Deputy Attorney General so that he can investigate naked short selling activities that impact companies in the state. Here is a column from NY Times’ Floyd Norris.
I have all the respect in the world for Harvey (I believe his work as SEC Chair in the wake of SOX and 9/11 is unparalleled in the history of the SEC) – so I hope he isn’t getting in over his head here. Criticism for his role in short selling (as well as the identity of one of his partners in his new venture) has started and may not abate. Here is a blog about possible conflicts from DealBreaker.
Recently, the Connecticut Treasurer – through the Connecticut Retirement Plans and Trust Funds – issued this press release to announce that it has withdrawn shareholder proposals at Abercrombie & Fitch and Supervalu after the companies pledged to disclose information relating to pay differences among top executives. Although it’s unknown whether these two companies will adopt all of the requested elements sought by the withdrawn shareholder proposals (their proxy statements have vague statements about use of internal pay equity), here are the four pieces of the internal pay equity policy that the Connecticut Treasurer proposed:
– The Committee should receive data on internal pay equity at peer group companies at least annually.
– The Committee should consider internal pay equity in (a) the establishment, modification and termination of senior executive pay plans and programs and (b) making specific awards under those plans and programs.
– The Committee should provide the internal pay equity data it receives, as well as any analysis performed by it or its outside advisors, to the board as a whole (or an appropriate Board committee) at least annually to assist in evaluating succession planning.
– The Company should disclose to stockholders on its website or in its proxy statement the role of internal pay equity considerations in the process of setting compensation for the CEO and other NEOs.
It will be interesting to see how more shareholders demand changes in board’s benchmarking practices in the near future. We have posted copies of the internal pay equity shareholder proposals in our “Internal Pay Equity” Practice Area on CompensationStandards.com.
Study: Leadership Pay Disparities
While we’re on the topic of internal pay equity, here is an interesting excerpt from Professor Lisa Fairfax posted on the “Conglomerate Blog“:
I recently ran across a 2007 study conducted by the Institute for Policy Studies, a progressive research center, which published figures on the pay disparities of various people in leadership positions. Based on 2005 and 2006 data, the study focused on the median salaries for the twenty highest paid individuals in various sectors. It found the following:
– Congress members: $171,720
– Military leaders: $178,542
– Federal executive branch: $198,369
– Heads of non-profit organizations: $968,698
– Heads of publicly held companies: $36.4 million
Recently, I posted this same blurb on “The Advisor’s Blog” on CompensationStandards.com and received quite a variety of responses. Some criticized the way the study was prepared – some had a visceral reaction to the stats…
CEO Pay Remains in the News
Warning signs over excessive pay and those who won’t stand for it anymore continue to pop up all around us. For example, recently – as noted in this Washington Post article – the Maryland Insurance Commissioner cut in half the $18 million severance package paid to a former CareFirst BlueCross BlueShield CEO, saying the CareFirst board failed to restrain his compensation.
It’s also noteworthy that UnitedHealth Group has settled the two class action lawsuits over its options backdating for the unbelievable amount of $912 million (this is on top of the more than $600 million the former CEO has proposed to repay to settle the lawsuit against him). Shortly afterwards, the company announced it was laying off 6% of its workforce.
