Recently, the Department of Labor issued guidance on fund managers’ ERISA fiduciary duties when considering investments for social or political purposes. The guidance is applicable to labor funds and single employer pension plans – and is in response to the Chamber of Commerce, which previously asserted that pension plan managers have put political agendas ahead of the funds’ best interests.
The DOL’s guidance states that pension plan fiduciaries may not consider “factors outside the economic interests of the plan” in making investment choices unless they can provide an economic analysis that shows that the “investment alternatives were of equal value.” For example, a plan manager who adopts a policy to favor investments in “green” companies may not consider only “green” firms, but “must consider all investments that meet the plan’s prudent financial criteria.”
The guidance appears to be a “win” for the Chamber of Commerce, although some labor fund officials claim that it has not really changed the fiduciary obligations. For more on funds’ fiduciary best practices, see the “ERISA Securities Litigation” Practice Area.
Last Call for 409A Amendments
As many of you are aware, the deadline to be in compliance with Section 409A is fast approaching. Effective January 1, 2009, all things that are (or are considered to be) deferred compensation arrangements for employees, directors and other service providers must be in compliance. Many continue to push for another extension of the deadline (the last extension was granted in October ’07) – see the various commentaries on CompensationStandards.com “The Advisors’ Blog” – but it doesn’t look likely at this point. The penalty for non-compliance falls mostly on the employee, who becomes subject to immediate income tax and hefty penalties.
On the other hand, there has been a more much visible pushback against another deadline that is fast approaching (i.e., December 31st) – the beginning of the transition to the Pension Protection Act of 2006’s funding provisions. The PPA is intended to ensure that company pensions are adequately funded to meet the promised payouts. It requires companies to bring their pensions up to “full” funding over the next seven years.
Those companies that fall short will be forced to take steps such as freezing the accrual of new benefits for current plan members. Last week, a group of 300 companies sent a letter to Congress urging a “softer” transition from the old rules to the new ones.
More on Corp Fin Comments on REIT 10-Ks
A while back, we blogged about Corp Fin’s guidance for drafting REIT 10-Ks. In this new memo, Goodwin Procter reviews the most recent batch of REIT 10-K comment letters and notes these top six (non-accounting) areas of Staff comment:
– Lease expirations
– Occupancy rates and annual rents
– Dividends and distributions in excess of FFO/cash flows
– FFO presentation
– Non-GAAP measures
– Trends or uncertainties
Most of these comments were “futures” and did not seek amendment of the 10-K. For more on REITs, check out our “REITs” Practice Area.
As expected for the G-20 summit this weekend, the SEC released its proposed IFRS roadmap on Friday. The 165-page proposal includes this timeline:
– Mandatory – Several milestones that, if achieved, could lead to the required use of IFRS by US companies in 2014
– Voluntary – Only companies whose industry uses IFRS as the basis of financial reporting more than another set of standards would be eligible to voluntarily elect to use IFRS beginning in 2010
US District Court Rules Against Bebchuk’s “Shareholder Access” Proposal
Last week, Judge Hellerstein of US District Court (SDNY) dismissed Bebchuk v. Electronic Arts, Inc., which involves Professor Lucian Bebchuk’s attempt to use Rule 14a-8 to establish new “shareholder access” procedures. We have been following the developments of this important case in recent issues of The Corporate Counsel. If the case is appealed to the 2nd Circuit as expected, it is likely that a number of companies will receive similar proposals during this proxy season. Once we find a copy of the decision, we’ll post it in our “Shareholder Proposals” Practice Area.
Fundamentals of Investing in Public Companies
Tune in Wednesday for this DealLawyers.com half-day video webconference: “Fundamentals of Investing in Public Companies.” Thanks to Kirkland & Ellis, we are providing this conference to DealLawyers.com members so that they can learn the basics – as well as some advanced – practice pointers about investing in public companies.
Kirkland spends a lot of time preparing for this conference and it’s a “high value” proposition. You’ll want to print the slides/course materials for each panel before you watch.
Act Now: Try a no-risk trial for 2009 and get access to DealLawyers.com for the “rest of ‘08” at no charge. Or since all memberships are on a calendar-year basis, renew for ’09 today.
Congrats to my pal Doug Chia and all those that won awards last week at the “Corporate Secretary Magazine Awards” dinner. Maybe I’ll have a shot at an award next year if they create a new category: “Most Likely to Drool on Himself While Working.”
Yesterday, Corp Fin posted this overview of its policy offices, including some organization chart information. My guess is the SEC will have trouble keeping their org chart updated, as we have found maintaining our own “Corp Fin Org Chart” challenging given the surprising number of moves over time – but we do keep it updated.
The big news is that these policy offices – including all your favorites like Chief Counsel’s, OMA, International and Chief Accountant’s – will now accept interpretive queries in writing via this online form.
Wow! It will be interesting to see if the volume of queries changes at all – my guess is it will go up, which will be a bummer for the Staff. But on the plus side from the Staff’s perspective, the queries will likely be couched more clearly when reduced to writing. Having worked myself in Chief Counsel’s office, it can be difficult to try to answer a question posed over the phone, particularly if the questioner is strangely vague or inexperienced (or drunk, but that’s a long story).
Then again, one may have the jaundiced view expressed by a member yesterday: “The chances of getting email questions answered by Corp Fin are about as good as getting phone calls answered these days – slim to none.”
This November-December issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Responding to Liquidity/Capital Constraints: The Joint Venture Decision Tree
– Breaking Up is Hard to Do – and Must Be Done Carefully
– Lessons from the Meltdown: Reverse Termination Fees
– Getting Engaged: When Hiring an M&A Financial Advisor, It’s All About the Contract
– Leveraging a Dealroom: A “How To” Guide
– Expanded Liability for Representations and Warranties: Limiting Survival Provisions
– Liquidity Facilities: The SEC Moves Towards Less Tender Offer Regulation
As all subscriptions are on a calendar-year basis, please renew now to receive the next issue. If you’re not yet a subscriber, try a 2009 no-risk trial to get a non-blurred version of this issue (and the rest of ’08) for free.
FINRA proposed new “Research Registration and Conflict of Interest Rules.” The proposed rules would replace the existing NYSE and NASD Rules governing research analyst conflicts of interest and would also supersede the proposed changes to those rules published by the SEC in January 2007.
Significantly, the proposed rules would shorten, and in some cases eliminate, the “quiet period” during which a member firm participating in an offering cannot publish or distribute research reports about the issuer, and the firm’s research analyst cannot make public appearances relating to the issuer.
Under current rules, the quiet period is:
– 40 days following the date of the initial public offering for lead underwriters and 25 days after the offering for other underwriters or dealers;
– 10 days following a follow-on offering; and
– 15 days before and after expiration, waiver or termination of a lock-up agreement.
Under the proposed rules, the quiet period would be limited to a single 10-day period following an IPO. Follow-on offerings and lock-up expirations, waivers and terminations would no longer trigger a quiet period. Note that the 25-day prospectus delivery period for an IPO may lead to all underwriters continuing to maintain a 25-day quiet period.
FINRA is requesting comment on the proposed rules by November 14, 2008. If, after receiving comment, FINRA determines to proceed with the proposed rules, it would need to file them with the SEC for approval. The SEC would publish the proposed rules in the Federal Register and subject them to an additional public comment period. The period for comment ends today.
Last week, I blogged about how some financial institutions participating in the Treasury’s TARP Capital Purchase Program might be changing their “double triggers” to single for their change of control arrangements. I clarified that blog right after it got pushed to those that have signed up for that feature (if you want to be added, just input your email address to the left of this blog or send me an email) that no bank has yet disclosed that it has taken such action (at least, as far as I know). Rather, I have been hearing that through the grapevine. So it’s hearsay at this point (a good thing because hopefully anyone thinking about it will now be enlightened).
I have also heard that some advisors are saying that (despite some apparently contradictory guidance in Q-11 of Treasury’s interim final rule release for participants in the CPP) that a move to pure “single triggers” is not required based on Q&A-16 in the IRS notice regarding the Section 162(m) and Section 280G provisions of the EESA and Section 302(e)(C)(i) of EESA itself.
In other words, some advisors are interpreting Q-11 to say that “double triggers” (or severance payments upon terminations after a change of control) may be prohibited parachute payments, even if the Treasury no longer holds any equity or debt in a company it once invested in. So some companies have been thinking that while they would have to ask executives to cut back on their “termination without cause” protection to comply with the Treasury’s program, they could modify their double trigger to make it a single trigger.
The thinking apparently is that if there is no requirement for a “termination of employment” in connection with the change of control payment, then it could never be a prohibited golden parachute. In response, tax lawyers and consultants have been pointing to Q&A-16 and Section 302(e)(C)(i) of EESA to say that a payment that is a parachute payment under the traditional 280G analysis – on account of a change of control without regard to the new Section 280G(e) – is not subject to the new prohibitions in 280G(e) and therefore not prohibited by the CPP. Clear as mud?
Even though Treasury might not particularly care if SEOs get prohibited parachute payments in connection with – and particularly, after – a change of control in which Treasury has been bought out (in the case of equity) or paid off (in the case of debt), I imagine investors certainly will care, as well as those in Congress who approved the $700 billion blank check to Treasury…
The Form 8-Ks: Those Not Participating in Treasury’s Capital Purchase Program
It is widely reported that all but $60 billion of the initial $350 billion allocated by Congress for Treasury to take equity stakes in banks is already spoken for – today is the deadline for applications. Yesterday, Treasury Secretary Paulson announced that the plan to buy distressed securities has been scrapped – and Treasury will instead focus on consumer lending and perhaps launch a second CPP to provide capital to companies that are not banks (see Paulson’s announcement). Thus, these notes from SIFMA’s “TARP Conference” that took place on Monday may already be outdated (here are Neel Kashkari’s official remarks from that Conference).
According to this recent survey by SIFMA and four other industry groups, 91% of respondent financial institutions said that a lack of clarity about the way TARP works made them less willing to participate in it. The banks cited the requirement to grant warrants to the Treasury, and uncertainty about investor perception about a bank’s participation in the TARP, among the factors affecting their willingness to participate. Personally, I think it’s the investor perception that may keep some banks from sticking their hand out – but I have seen media articles that report that numerous banks may participate. So I’d take this survey with a grain of salt until we see the final number of banks willing to take the government’s money (or even new “banks” like American Express).
In our “Credit Crunch” Practice Area, we have tweaked our list of the Form 8-Ks filed regarding the the CPP to break out those banks that have filed 8-Ks to disclose that they have decided not to participate in the CPP.
A New Phase of Credit Crisis Litigation
In his “D&O Diary” Blog, Kevin LaCroix discusses how the credit crisis recently entered a dark new phase that has already produced its own distinctive round of lawsuits. In comparison, see Kevin’s musings in a piece entitled “Are the Subprime Securities Lawsuits Faring Poorly?”
Poll: How Many Will Seek Capital Under TARP’s CPP?
Today is the deadline for financial institutions to apply for a capital infusion. Here is our poll guessing how many will seek it:
The first issue will tackle all that you need to be prepared to do now with your proxy disclosures, in the wake of EESA and other likely regulatory responses to the crisis. Subscribers will receive a second issue of the Updates newsletter in early January, with plenty of last-minute critical pointers for your proxy disclosures.
Try a No-Risk Trial Now: Order your Treatise now so we can rush it to you today – and we can send you the first issue of the Updates newsletter as soon as it’s done. Note there is a reduced rate if you are ’09 member of CompensationStandards.com. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.
An Explosion of Unsponsored ADRs
I always thought unsponsored ADRs were a bad idea, because I think it’s very confusing for investors. As illustrated in this podcast with Rich Kosnik of Jones Day, it can be confusing for companies too. Rich explains why there is an explosion of unsponsored ADRs during the past few weeks – and provides some insight into how to handle them, including:
– What is happening with unsponsored ADRs?
– What caused this new development?
– How can companies know if unsponsored ADRs exist for them?
– What implications does this development have for companies (ie. crossing 300 US investor limit under Rule 12g3-2(a)? Is there anything that companies do to protect themselves?
Long story, but the gist is that I was born “Barak Romanek” and I got tired of teachers botching my name growing up. So when I went to college, I changed it to “Broc” – although legally, it’s still “Barak” (pronounced with two syllables – but not the same as the President-elect’s name since he spells it with a “c” in the middle). Hence, my Avvo profile includes my real name (but according to Martindale Hubbell, I don’t exist anymore).
According to this NY Times article, there now will be a bunch of kids with something similar to my unique name. I have to admit that this freaks me out since I went all these years without once meeting someone with the same name. Anyways, I’m sticking to “Broc” as I love one syllable names…
The IPO market for startup companies has been in the doldrums for some time – it’s been over 4 months since the last IPO in the US (although there could be this one soon)! According to this report from the National Venture Capital Association, there were only 6 venture-backed IPOs through the first three quarters of 2008. In contrast, in 2002, after the “dot-com bust”, there were 22 venture-backed IPOs.
The recent extreme volatility in the stock market hasn’t made the market for new issuances any easier. It’s now reported that there were no IPOs in the month of September, the first time that has happened since this data has been tracked, starting in 1980.
IPOs have long been the favored exit strategy for venture capital investors – they provide liquidity and allows VCs to invest their money again. And the splashy returns of an offering – read Google IPO – don’t hurt their ability to raise new money either. But even the traditional alternative strategy to an IPO – selling your startup to a big public company – hasn’t been easy this year either. The NVCA reports that M&A activity is also down – even companies with strong balance sheets are getting more cautious about spending their cash.
If market turmoil continues into 2009, and the IPO market remains virtually closed, will VC investors scale back their investments in start-up companies? A potential slowdown in VC investing is just one of the many unanticipated results of the current volatility in the market. Thanks to Linda DeMelis, our new Silicon Valley hire for this entry!
Latest Developments in Capital Market Deals
We have posted the transcript for our recent popular webcast: “Latest Developments in Capital Market Deals.”
Wanna Try Financial Suicide?
I got crazy a week ago and tried “day trading” for the first time in an effort to recoup some of my market losses. I bought an ETF that gives you two-times leverage selling short last Monday. Needless to say, I sweated through Election Day when the market rose 3% and then got lucky when the market dove the next two days in the biggest point drop over two days ever. I sold my position near the end of that second day and make out nicely.
But I got lucky. Trying to time the market like that would never work in the long run – and it’s my opinion that these leveraged ETFs shouldn’t be available to retail investors. In this market crash, retail investors in other countries got killed more than here because CDO-like securitizations were sold to them that were fortunately not sold in the US (and only because the SEC didn’t allow Wall Street to sell them here; the Street pushed hard to get them approved). Which leads me to wonder why the SEC has approved the new three times leverage ETFs that began trading last week. Even this WSJ article notes they are not appropriate for retail investors…
Something that I’ve been wanting to do for years is create a competitive environment under which we all can learn. I don’t want to use the term “game” because I don’t want to scare those of you with kids that live behind a console. I have built something simple and fun – the “Blue Justice League” is born!
Under two methods of ranking (ie. quantitative and qualitative), the “Blue Justice League” allows you to compete against your colleagues and peers – and lifelong enemies – in feats of professional strength and skill (and learn much in the process). I think it will be a lot of fun, whether you are a deal lawyer with nothing to do right now – or a jammed in-house officer with the need for some stress release.
How to Play: Here are simple instructions on how to participate in the “Blue Justice League.” Know that you can participate anonymously – in fact, you can use more than one “screen name” to play. For example, one of my names is “Jimmy Funk.”
How to Contribute: When you participate in the contests that make up the “BJL,” you will note that some of them have been drafted by members of our advisory board. My profound thanks to them. I’m more than happy to add contributions from you (you don’t need to be an experienced practitioner to do so) – so consider whether you want your name in lights. I’m happy to walk you through the process. Enjoy – and suggestions/criticisms of the BJL are more than welcome!
Corp Fin Issues More Shareholder Proposal Guidance – and Posts Incoming Requests!
On Friday, Corp Fin issued Staff Legal Bulletin 14D, the latest installment in pre-proxy season guidance on shareholder proposals from the Staff. This is the first SLB on proposals since ’05. The Staff Legal Bulletin tackles these topics:
– Inability of proponents to seek companies to amend board charters if state law empowers board to initiate amendments
– Sending defect notices if registered owner proponent hasn’t met holding period
– Requirement that proponents send copy of their correspondence to the SEC Staff
– New e-mail address for the Staff to which no-action requests and correspondence can be sent
In addition, Corp Fin has created a new page that contains incoming no-action requests that the Staff has not yet processed. This will be helpful for those in-house folk who like to track the other companies that have received a similar proposal during the proxy season.
More on Reforming Securities Class Actions Via Shareholder Proposals
Last week, I blogged about a Professor who claims to have developed this model proposal to reform the class action process through the Rule 14a-8 process. Shareholder proposal pro Marty Dunn weighs in by asking: How would such a provision not violate the anti-waiver provision of the ’34 Act?
Marty goes on to explain: Professor Pritchard proposes that shareholders “could adopt an unjust enrichment model by making a partial waiver of the FOTM presumption of reliance in the corporation’s articles of incorporation.” Because the proposed waiver would limit the extent of possible recovery by shareholders under the Exchange Act, the proposal’s waiver would run up against the anti-waiver provision in Section 29 of the Exchange Act. Professor Pritchard addresses this issue in his paper and dismisses it; however, given the SEC’s position regarding Section 29 and mandatory arbitration provisions in company charters, it seems unlikely that the SEC would agree with his reading of Section 29.
Yesterday, Corp Fin Director John White announced he will be leaving the SEC at the end of the year, after working at the SEC for nearly three years. I understand that John will return to the law firm for which he spent over 30 years, Cravath Swaine & Moore. Like his predecessor, John has overseen an enormous amount of regulatory change on his watch – and we thank John for all he has done for the corporate community, including speaking out about responsible executive compensation disclosures.
Rumors: Who Will be the Next SEC Chair?
With the Democrats about to take over the White House, the media has commenced to guessing who will be the next Treasurer, SEC Chair, etc. As noted in this WSJ article that muses on regulatory reform, SEC Chairman Cox will likely leave in February.
When it comes to the next SEC Chair, I’ve seen some suggestions that I know are a non-starter – but others that may very well happen. Here’s some rumor fodder from the Legal Times:
– John Olson, Senior Partner, Gibson, Dunn & Crutcher
– New Jersey Governor Jon Corzine
– Mary Schapiro, FINRA CEO and Former SEC Commissioner and CFTC Chair
– Former SEC Commissioner and General Counsel Harvey Goldschmid
– MFS Investment Management Chair Robert Pozen
35% of Professionals Would Choose BlackBerry Over Spouse
Dave sent me this ABA Journal article that reveals the awful truth about many of you BlackBerry addicts out there. Although I’m proud to not own one, trust me that I have my own problems and work way too much. I mean waaay too much. Maybe I need a BlackBerry to keep me company…anyways, here is our own poll:
For those financial institutions participating in the Treasury’s TARP Capital Purchase Program, you will be disturbed to learn that I have heard through the grapevine that some companies might take the opportunity to play it “cute” with how they revise their executive compensation arrangements in response to EESA.
In a perverse irony, these companies would amend their existing “double trigger” change of control arrangements to make them pure single triggers. Single triggers have been widely discredited in recent years and most companies have replaced them with more investor-palatable double triggers (ie. compensation is payable only (i) after a control change actually takes place and (ii) if a covered executive’s job is terminated because of the control change).
Apparently, some view single trigger payments as not being prohibited “golden parachute payments” under the Treasury’s program. I find it hard to believe that a movement back to single triggers is the result that Congress wanted – and I doubt investors will take kindly to this development if it indeed occurs.
Coming Soon: Mandatory E-Proxy
Since the end of last year, larger US companies (ie. large accelerated filers) have been required to post their proxy materials on their corporate websites. Soon, all companies engaging in proxy solicitations will need to do so as the SEC’s mandatory e-proxy rules for smaller companies become effective commencing on – or after – January 1st of ’09.
In this podcast, Matt Dallett of Edwards Angell discusses how smaller companies need to get ready to comply with mandatory e-proxy for the first time, including:
– What is mandatory e-proxy?
– What will be absolutely required and what is still voluntary?
– What do smaller companies need to do to get ready for mandatory e-proxy?
Reforming Securities Class Actions Via Shareholder Proposals
Bruce Carton’s “Securities Docket” includes this interesting piece on how Professor Adam Pritchard has developed this model proposal to reform the class action process through the Rule 14a-8 process (here is a paper on this topic too).
From Davis Polk: Last week, Treasury completed its investment in the nine systemically important banks – and, on October 31st, Treasury posted standardized final documents on its website. The final documents, reflecting comments from the nine systemically important banks, clarify a number of points and contain certain differences from the Term Sheet originally published on October 14th.
Although the final Term Sheet is little changed from the Term Sheet that Treasury originally published, an analysis of the underlying documents – the securities purchase agreement, the Warrant and the certificate of designations for the Preferred Stock – reveals some significant differences between those documents and the published Term Sheet. A revised Term Sheet, which has been marked to reflect the important differences between the Term Sheet and the final documents for the Capital Purchase Program, is set forth as Annex A of this memo (which also reviews those differences and certain other significant issues that financial institutions should consider before applying for funding under the program).
Treasury has stated that it will invest in each publicly-traded financial institution that participates in the program on the same terms in a “one-size-fits-all” approach, without change for individual financial institutions. We believe, however, that Treasury will consider modifications to accommodate important institution-specific issues, but otherwise will not agree to changes. Each financial institution will need to review carefully the final terms and the underlying documents to see if it can and would want to comply with them.
The application deadline for publicly-traded financial institutions is 5:00 pm Eastern next Friday, November 14th. Treasury has stated that it will post application information for privately-held financial institutions at a later date and establish a reasonable application deadline for them. Learn more from this memo (and the many others) posted in our “Credit Crunch” Practice Area.
Also note that Treasury – once the investment agreements are complete and the investment is authorized – will publicly disclose the name and capital purchase amount for each participating financial institution within two business days. The information will be posted here and updated daily at 4:30 pm Eastern as needed.
The Form 8-Ks: Participating in Treasury’s Capital Purchase Program
Below are some of the Form 8-Ks filed so far that relate to the EESA and the CPP. They include all nine of the original banks who “signed on” (the first six were filed on 10/30, the last three were filed on 10/31). Already more institutions have sought government money and their Form 8-Ks are included in our ongoing list in the “Credit Crunch” Practice Area:
