Yesterday, the PCAOB proposed an auditing standard, Evaluating Consistency of Financial Statements, and a concept release concerning Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles. In addition, the Board provided guidance, in the form of questions and answers, on Rule 3522, Tax Transactions, and Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles.
Food for Thought: Minute-Taking Practices
Marty Lipton and Paul Rowe recently wrote the following in a Wachtell Lipton memo on the Netsmart Technologies case’s implications for minute-taking: “In a recent Delaware decision Vice Chancellor Leo Strine condemned the common practice of providing drafts of board and committee meeting minutes to directors for approval a substantial (several months in the case in question) period of time after the meeting. He said thus practice is “to state the obvious, not confidence-inspiring.” It bears emphasis that not only Delaware courts, but even more so courts in other jurisdictions, frequently regard minutes as the best record of what happened at the meeting. So too the SEC and other regulatory agencies. Courts and regulators will consider the minutes more reliable than the description in a proxy statement or the directors testimony, which is frequently (and understandably) characterized by lapses of memory and lack of precision
Minutes should be reasonably detailed, reflect the substance of the discussions at the meeting and make clear reference to the documents that were furnished to the directors before and at the meeting. If there were significant discussion with or among directors prior to the meeting consideration should be given to making appropriate reference to them in the minutes. Drafts of minutes should be prepared promptly after the meeting and circulated promptly to the directors and other; persons involved in the meeting.”
Lessons Learned in Auction Process: Netsmart Technologies
Below is what I blogged about Netsmart Technologies on DealLawyers.com a while back:
From Travis Laster: A few weeks ago, Vice Chancellor Strine of the Delaware Court of Chancery issued an opinion – In re: Netsmart Technologies – enjoining the cash sale of a small public corporation to a private equity firm until the directors (i) supplemented the disclosures regarding the sale process and (ii) disclosed their investment bankers’ projections. Vice Chancellor Strine was quite critical of the sale process used in the case, which he described as “a microcosm of a current dynamic in the mergers and acquisitions market.” Here are some high points from the 75-page opinion (ed. note: we have posted memos analyzing the opinion in the “Auctions” Practice Area):
1. VC Strine found that the Board and Special Committee did not act reasonably in failing to contact strategic buyers. The defendants attempted to justify this refusal based on sporadic contacts with strategic buyers over the half-decade preceding the deal. VC Strine held that “[t]he record, as it currently stands, manifests no reasonable, factual basis for the board’s conclusion that strategic buyers in 2006 would not have been interested in Netsmart as it existed at that time.” In later discussion, he carefully distinguished such informal contacts from a targeted, private sales effort in which authorized representatives seek out a buyer. He viewed the record evidence regarding prior contacts as “more indicative of an after-the-fact justification for a decision already made, than of a genuine and reasonably-informed evaluation of whether a targeted search might bear fruit.”
2. VC Strine rejected a post-agreement market check involving a standard window-shop and 3% termination fee as a viable method for maximizing value for a micro-cap company. He noted that such an approach has “little basis in an actual consideration of the M&A market dynamics relevant to the situation Netsmart faced” and would not have attracted topping bids “in the same manner it has worked … in large-cap strategic deals.”
3. VC Strine was quite critical of the lack of minutes for key board and Special Committee meetings, as well as the fact that most of the minutes were prepared in omnibus fashion after the litigation was filed.
4. VC Strine criticized the Special Committee for permitting management to conduct the due diligence process without supervision. “In easily imagined circumstances, this approach to due diligence could be highly problematic. If management had an incentive to favor a particular bidder (or type of bidder), it could use the due diligence process to its advantage, by using different body language and different verbal emphasis with different bidders. ‘She’s fine’ can mean different things depending on how it is said.” The Vice Chancellor ultimately found no harm, no foul on this issue because management did not have a favored PE backer and there was no evidence that they tilted the process in favor of any participant.
5. VC Strine found that the proxy’s disclosures regarding the company’s process and its reasons for not pursuing strategic buyers had no basis in fact. Adhering to his opinion in Pure Resources, he also found that the latest management projections relied on by the Special Committee and their financial advisor in its fairness opinion needed to be disclosed.
Each of these issues underscores the benefits of bringing Delaware counsel into the transactional process early, both for purposes of structuring the exploration of alternatives and reviewing the proxy statement. The issues that VC Strine addresses in his opinion are frequent subjects of counseling by Delaware practitioners. Although this is the first opinion to bring many of them to judicial light, all have been on the radar screen for some time. There are many other nuggets to be gleaned from this important decision, particularly for those of us currently involved in processes with PE players (and in this market, who isn’t?).
Yesterday, Corp Fin updated its Rule 144 telephone interps…gonna be tougher than I thought blogging on vaca…
Tellabs Oral Argument
Below is an excerpt from the notes of the oral argument in the important US Supreme Court case – Tellabs v. Makor Issues & Rights – prepared by Lyle Roberts of the “The 10b-5 Daily”:
Predicting how the Supreme Court will rule based on oral argument, especially where there are multiple possible approaches to the issue, is difficult. That said, the Court appeared likely to reject the Seventh Circuit’s “reasonable person” standard as incompatible with the “strong inference” scienter pleading requirement. As noted by Justice Roberts and Justice Breyer, the “reasonable person” standard appears to allow for the possibility that the case will go forward even if the plaintiffs are only able to allege facts establishing a weak inference of scienter. There also appeared to be considerable support for the need to weigh competing inferences.
A few notes on the main issues discussed:
Is There A Seventh Amendment Violation? – Perhaps to the surprise of Tellabs’ counsel, who had argued in his briefs that the Court did not have to reach this issue, the justices spent a fair amount of time discussing whether there needed to be uniformity between the pleading and proof standards for scienter. In their brief, the shareholders had argued that the heightened pleading standard for scienter improperly required a court to act as a fact-finder on the merits of the suit. Justice Scalia and Justice Breyer expressed skepticism over the idea that Congress could not create a heightened pleading standard, noting that there are lots of barriers to entry to federal courts (including diversity and amount in controversy requirements). Justice Breyer wondered whether there was really any difference between saying a plaintiff’s case has to be “really strong” and saying that a plaintiff has to be “really suffering.” That said, a number of justices (Justice Breyer most of all) seemed concerned that the “strong inference” pleading standard was higher than the “preponderance of the evidence” proof standard. Tellabs’ counsel and government counsel both argued that if the Court wanted to address this question, it would need to reconsider the standard of proof, as opposed to watering down the PSLRA.
Can You Infer A CEO’s Knowledge About Financial Issues Based On His Position? – Justice Kennedy appeared anxious to get an answer to this question, asking it of both parties. Tellabs’ counsel responded that the CEO’s title was insufficient; plaintiffs needed to provide particularized facts regarding the CEO’s scienter. Shareholders’ counsel, however, suggested that it was unlikely that a CEO would not know about important financial issues. Moreover, the confidential witnesses cited in the complaint confirmed the existence of scienter for Tellabs’ CEO.
Competing Inferences – Justice Alito took center stage on the issue of how to evaluate competing inferences with the following analogy: if you see a person walking down the street toward the Supreme Court, this fact would create a strong inference that the person is going to the Supreme Court if it is the only building around. If there are a lot of other buildings, however, doesn’t a court have to consider the inference that the person is going to another location? In response to this analogy and further prodding from Justice Ginsburg and Justice Souter, shareholders’ counsel conceded that the court could consider other facts that were subject to judicial notice, but stopped short of agreeing that this constituted an evaluation of competing inferences.
How To Decide This Case – Justice Ginsburg noted that the phrase “strong inference” is not “self-defining” and other justices also appeared to struggle with its meaning. As to how to decide the case in front of them, Justice Scalia expressed a desire to provide lower courts with guidance on what is a “strong inference” of scienter and, during his rebuttal time, Tellabs’ counsel urged the same course.
Prof. Miller v. Justice Scalia – By his own admission, Prof. Miller has a more “colloquial” argument style. That got him into some hot water with Justice Scalia, with whom he traded barbs. Justice Stevens asked Prof. Miller if he could translate the “strong inference” standard into a probability percentage. Justice Scalia quipped that he thought it was 66 2/3%, in response to which Prof. Miller asked if that was “because you never met a plaintiff you really liked?” Justice Scalia got his revenge a few minutes later when Prof. Miller stated “don’t take me literally” on a certain comment and Justice Scalia replied that he would write that down. At that point, Justice Roberts called it a draw.
After McNulty: Changes in the Attorney-Client Privilege and Investigations
We have posted the transcript from the recent webcast: “After McNulty: Changes in the Attorney-Client Privilege and Investigations.”
The SEC’s April Fuhrst Prank
As a big believer in April Fool’s jokes (my poor wife), kudos to the SEC for their fake press release announcing “plans” to require publicly-listed companies to reveal the pay and perks of the “top 100 people who make more than the CEO.”
On Friday, Corp Fin updated another set of its phone interps, this set relating to the Trust Indenture Act.
Another SEC Rule Vacated
On Friday, the SEC continued its losing streak in the courts when the DC Circuit Court of Appeals – in Financial Planning Association v. SEC – vacated Rule 202(a)(11), a rule adopted in 2005 which deems certain broker-dealers not to be investment advisers. The Court held that the ’40 Act does not authorize the SEC to except from the ’40 Act any group that is already covered by another exception.
“Say on Pay” Bill Moves Forward
From Mark Borges’ “Proxy Disclosure Blog” on CompensationStandards.com: On Wednesday, H.R. 1257 (the “Shareholder Vote on Executive Compensation Act“) was approved by the House Financial Services Committee on a vote of 37-29. The bill, which would give shareholders an annual non-binding advisory vote on executive pay, now moves to the House floor for consideration. According to media reports, no date has been set for a vote by the full House.
One of the more interesting aspects of the bill is exactly what shareholders would be voting on. The approved bill text indicates that the vote would be based on the compensation discussion and analysis and the compensation tables. This approach could be problematic, however, given the length and complexity of these disclosures.
To address potential liability concerns, the bill was amended to make it clear that private rights of action are prohibited if the board of directors fails or refuses to comply with the shareholder vote. Again, this is fairly ambiguous language. I’m not sure how one responds when shareholders indicate that they don’t agree with a company’s compensation program as reflected in its proxy disclosure. Presumably, it means that the board (or compensation committee) needs to talk with shareholders. That’s what the bill is trying to encourage.
And from yesterday’s WSJ article: Even if the bill passes the House (which seems likely), its prospects in the Senate are uncertain. It could wind up sitting for a while, although I expect that Representative Frank, the bill’s sponsor, will continue to push this initiative forward over the next several months.
The next step is a vote in the full House, and Rep. Barney Frank (D., Mass.), chairman of the committee and sponsor of the bill, says that the House leadership has promised that they will make time available on the floor for a vote, although a date hasn’t been set. The prospects of the advisory-vote bill are uncertain, especially since the Senate Banking Committee’s chairman, Christopher Dodd (D., Conn.), hasn’t indicated plans to push a similar measure through his panel.
As announced yesterday, Corp Fin Chief Accountant Carol Stacey has put in her notice and will join the SEC Institute in a month or so. Quite a healthy choice for Carol, who undoubtedly had many opportunities available to her. The SEC Institute is an executive training organization for financial types and has a very solid reputation. And Carol always has been one of the few highlights at legal conferences with her engaging and straight-forward speaking style. Carol, welcome to the world of working in your pajamas! In New Hampshire, no less!
Late Filings: Use of Rule 12b-25 By Large Accelerated Filers
In our “Rule 12b-25″ Practice Area, we have posted a Glass Lewis report that provides details about how many large accelerated filers failed to timely file their Form 10-Ks so far this year; this category of issuers filed late more than 47% compared to last year. Some of the companies noted in the report have been chronically late, so the newly shortened deadline doesn’t appear to be a factor…
But At Least, My Dog Didn’t Eat It!
As I head off on a spring break vacation (I will be blogging – but not working -next week), I thought it was time for a little humor by looking at this amended Form 10-Q filed by Neptune Industries. Under Item 5, the company discloses:
“On November 20, 2006, the Company filed its Form 10-QSB for the quarter ended September 30, 2006, pursuant to an extension notice on Form 12b-25 filed on November 14, 2006. The extension of the filing date was required because the Company’s accountants, Dohan and Company, CPAs, PA, of Miami, Florida, were unable to complete their review of the Form 10-QSB in a timely manner. The Company had previously complained to Dohan & Company regarding its lack of responsiveness and lack of attention to the Company’s account, which had resulted in previous extensions and late filings by the Company, including the Form 10-KSB for the fiscal year ended June 30, 2006, which was filed on the SEC EDGAR system on October 13, 2006, the extended due date, after the 5:00 PM filing deadline, due solely to additional, non-material changes first requested by Dohan & Company late on the afternoon of October 13, 2006, after previous requests for changes, also received by the Company on October 13, 2006 had been incorporated into the final filing.
The review of the Form 10-KSB and the audit of the Company’s financial statements for the fiscal year had been delayed for nearly six weeks, because the audit partner on the Company’s account had taken extended maternity leave, which was concealed from the Company despite repeated calls and e-mail communications to the audit partner, with no response. Eventually, the Company was advised that the audit partner familiar with the Company account would not be available, that the audit would be managed by a junior accountant with no experience in or knowledge of the Company account, and that an extension of the time to file the 10-KSB would be required. After repeated requests for a status report on the audit and review, the Company finally received its first communication with requested changes to the Form 10-KSB and the financial statements at the end of the first week of October, 2006.
The Company made all of the requested changes and provided all of the additional information promptly, but new and different changes were requested the following week, most of which were non-material changes to grammar, punctuation, style and formatting. On October 13, 2006, the extended due date for the Form 10-KSB, the Company received additional non-material changes, which it made and returned to the auditors with the understanding that the Form 10-KSB was then ready to be filed. The Company completed the EDGAR conversion for filing and was ready to file when Dohan & Company send a new demand for additional non-material changes late on the afternoon of October 13 2006. By the time these changes were incorporated and EDGARized, the Company was unable to file the Form 10-KSB electronically by the 5:00 PM SEC cut-off.
The Form 10-KSB was filed at 5:06 PM on October 13, 2006, but was reported on the SEC EDGAR web site as filed on Monday October 16, 2006, which resulted a notice from the NASD OTC Compliance Unit that the Company was not in compliance with its timely filing obligations. On November 20, 2006, the Company filed its Form 10-QSB on a timely basis, again pursuant to a Form 12b-25 extension request by Dohan and Company, because the auditor again was unable to complete its review on a timely basis. After completing a number of changes requested by the auditors to the Form 10-QSB, and providing extensive information and documentation which had already been reviewed and covered in Dohan and Company’s audit of the June 30, 2006 fiscal year, filed three weeks earlier, the Company on November 20, 2006, the extended due date, received one more set of requested changes, which it made and returned to the auditors for their final review, with the message that the Company intended to file this final reviewed version of the 10-QSB that day on a timely basis, unless there were still more, as yet undisclosed, changes that had not already been communicated on a timely basis.
The Company then filed the Form 10-QSB as indicated on a timely basis on November 20. 2006 after receiving no further comments from the auditors. Later on November 20, 2006, after the Form 10-QSB had been filed and after the EDGAR filing deadline had passed, Dohan and Company sent an e-mail to the Company advising that it might still have further comments. Approximately two weeks later, the Company received additional suggested changes to the Form 10-QSB, none of a material nature and nearly all involving formatting (capitalizing of certain items on the cover page and revising the entries on the Table of Contents), adding of commas to certain parts of the text, suggesting style changes to certain text language, and similar items. The only numerical items involved the change of several entries by a one dollar amount to reflect rounding differences, and the change in the number of shares of common stock outstanding from 11,349,051 to 11,349,269, to reflect the issue of 218 shares as a result of rounding in the reverse split which occurred during the last fiscal year.”
There’s even more about this matter disclosed about this diatribe…but I’ll spare you…
The SEC has scheduled an open meeting for next Wednesday to “discuss” the PCAOB’s internal controls auditing standard (AS #5) and the SEC’s own management report proposal. Based on the wording of the SEC’s announcement, it doesn’t seem like they will adopt anything – rather, the Commissioners and Staff will discuss the comment letters received to date (including the oft-mentioned alignment of the PCAOB’s and SEC’s proposals) and approaches available to the SEC. The SEC seems “on plan” to adopt something by May.
Maybe my memory is foggy, but I don’t recall an open Commission meeting being held during which rules were not being proposed or adopted. In the past, these were fairly scripted affairs (but not as much over the past several years) and a discussion like this one would be conducted behind closed doors. Maybe its driven by a desire to ensure the standards are harmonized without treading on some “government in sunshine” restrictions about the SEC’s dealings with the PCAOB…
The FASB’s Appointment Process
Yesterday’s WSJ included this article on recent changes to the selection process used to select members of the board of trustees for the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB). The article recounts the back and forth between the SEC and the FAF over how much power the SEC should have regarding the selection process at the FASB.
You might recall that Section 108 of Sarbanes-Oxley gave oversight power to the SEC over the FASB – and the SEC outlined its role in a 2003 policy statement. In that statement, the SEC said that, given its oversight responsibilities, the FASB should give the SEC “timely notice of, and discuss with the Commission” its intention to appoint new members. According to the article, “timely notice” became an issue for the SEC in recents months and an agreement reached this month defines “timely” as generally 45 days but not less than 30 days before the FAF nominates members to its board or FASB members.
Critics of the SEC’s oversight power worry that the SEC could hold reappointment over the heads of FASB or FAF members while important votes are being considered. They also point to the fairly recent experience at the PCAOB, where some appointments by the SEC were not made very timely (and eventually made when votes on significant issues were on the table).
A Closer Look: SEC Chief Accountant Conrad Hewitt
Yesterday, the Washington Post ran this interesting article about relatively new SEC Chief Accountant Conrad Hewitt.
E&Y Censured Over Independence (Again)
On Monday, the SEC announced a $1.5 million settlement with Ernst & Young relating to alleged independence violations for its work at two clients, AIG and PNC Financial, in 2001. You might recall that E&Y had been censured just a few years ago for its PeopleSoft audit because E&Y’s consulting arm profited from recommending PeopleSoft software to customers.
Here are some thoughts from Lynn Turner: “Some in the auditing profession argue investors should rely on an audit firm itself to assess its independence and put in place safeguards if it is questioned. The three cases cited in this WSJ article regarding E&Y in recent years strongly arues against any such approach. Interestingly enough, in April 2001, the partner then in charge of the E&Y national office declined a request to meet with the SEC staff to discuss progress that E&Y was making in instituting a system to ensure its independence on a global basis, citing he did not need anyone at the SEC telling him what the independence rules were. (The other 7 largest firms accepted such an invitation).
It is also interesting an E&Y partner is a leader of the current effort to obtain what is in essence, an indemnification of auditors by their clients. Certainly, these are matters of concern for investors and audit committees.”
Yesterday, Corp Fin’s Office of Mergers & Acquisitions issued this global exemptive order – even though the order is in response to a request from Chordiant Software, which is not unusual for global no-action relief – relating to Section 409A and the tender offer prompt payment rules. During the past few weeks, OM&A had issued three separate exemptive orders (these orders are posted in the CompensationStandards.com “Backdating” Practice Area) – and now with this global relief, it can cut down on its workload going forward.
Yesterday, the SEC posted its adopting release on non-US issuer deregistration. Here’s a first – the SEC even put out a press release to indicate that the adopting release was posted…
Lawsuit Targeting Sarbanes-Oxley and PCAOB Dismissed
Last week, the lawsuit filed by Free Enterprise Fund seeking to abolish the PCAOB was dismissed. The lawsuit claimed that Congress acted unconstitutionally by creating the regulator because it operates independent of government supervision. In his decision, U.S. District Court Judge James Robinson disagreed by noting that the PCAOB is accountable to federal officials because the SEC Commission can remove its members. The Judge also said that the plaintiff raised “nothing but a hypothetical scenario of an overzealous or rogue PCAOB investigator.” The Free Enterprise Fund plans to appeal.
Sarbanes-Oxley and Pornography
As noted in this article, a prominent defense attorney alleged to have destroyed child pornography evidence has been charged with obstruction under Section 1519, a obstruction provision added by Sarbanes-Oxley that is stronger than pre-Sarbanes-Oxley tampering statutes. Under Section 1519, there need not be an investigation in place (or even imminent) as a predicate for prosecution.
Here is a quote from another article: “Every criminal defense lawyer in the country has to be alarmed at the indictment,” said New York University law professor Stephen Gillers. “It’s going to upset a lot of assumptions about how lawyers can represent clients. I think this is a boundary-pushing case.” This is not the first attempt to bring obstruction claims under Sarbanes-Oxley for alleged pornography use, as this blog notes, the former head of Bowne was similarly charged back in 2005.
A few weeks ago, I blogged several times about SEC Chairman’s Cox’s first comments on the incoming executive compensation disclosures. Last Friday, Chairman Cox gave another speech during which he delves deeper into why he believes that executive compensation disclosures – particularly – the CD&A is not in plain English. The part of Chairman’s speech that deals with compensation disclosures is quite long – below are just a few excerpts to give you a sense of his message:
– “I have to report that we are disappointed with the lack of clarity in much of the narrative disclosure that’s been filed with the SEC so far. Based on the early returns, the average Compensation Disclosure and Analysis section isn’t anywhere close to plain English. In fact, according to objective third-party testing, most of it’s as tough to read as a Ph.D. dissertation.”
– “For starters, the executive pay disclosures in the study were verbose. We had it in mind that they’d be just a few pages long, but the median length for the CD&As was 5,472 words, over 1,000 words more than the U.S. Constitution.”
– “Just as the Black-Scholes model is a commonplace when it comes to compliance with the stock option compensation rules, we may soon be looking to the Gunning-Fog and Flesch-Kincaid models to judge the level of compliance with the plain English rules.”
– “So where do you think our new Compensation Disclosure and Analysis sections come in, seeing as how they’re newly minted in “plain English” for the average investor? In these tests, the average Fog Index for the CD&As in the sample was 16.45. That’s about the same as an academic paper, such as a Ph.D. dissertation here at USC.”
– “But the SEC’s own qualitative review of this year’s proxy statements indicates that we have far to go before we can say that legalese and jargon have truly been replaced by plain English. It’s clear that many companies are letting lawyers have the final say on the CD&A. As the firm that undertook this study points out, many of the problems could easily have been fixed in just a few hours by a qualified copy editor. Retail investors deserve better.”
My Ten Cents: Compensation Disclosures So Far
Just like the Chairman’s last compensation disclosure speech, some lawyers are disturbed and sending me e-mails expressing their dismay (eg. they missed the point in the SEC’s adopting release that indicates that the CD&A should only be a few pages long). For those out there that have truly worked hard to meet the extensive new requirements, I can understand their frustration and expect that the SEC will be providing us with guidance to clarify their CD&A expectations for next year.
On the other hand, far too many CD&As look eerily similar to compensation committee reports from the past and don’t really provide much in the way of analysis – despite the verbosity of the CD&As! In a prior blog, I noted that some members have told me of their efforts to cut through the HR department’s attempt to put boilerplate in the proxy statement. Since then, I have heard from plenty of non-lawyers with horror stories about lawyers who don’t understand how to narrate in plain English and worse (eg. hiding things in footnotes). Clearly, the drafting process will need to be better managed next year for many companies.
I won’t even get into the horror stories I continue to hear about dysfunctional compensation committees and boards, as that is a different topic. We are re-tooling our “4th Annual Executive Compensation Conference” to ensure it’s as practical as can be – with a theme of “lessons learned.” And our companion conference – “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” – will include a panel regarding the drafting process and how to manage it. So save the dates of October 9-11…
Some Compensation Disclosure Statistics
In his speech, Chairman Cox threw out a few statistics, as noted in this excerpt:
“A private sector investor relations firm, Clarity Communications, has analyzed 40 companies’ CD&As for their level of compliance with the plain English requirement. They determined that all 40 of them fall far short of accepted standards of readability. In fact, they found that most of the disclosure documents failed even to meet the readability standards that states require for insurance forms. For starters, the executive pay disclosures in the study were verbose. We had it in mind that they’d be just a few pages long, but the median length for the CD&As was 5,472 words – over 1,000 words more than the U.S. Constitution. And the longest was more than 13,500 words – a far sight longer than a full-length feature in the New Yorker.”
Here are few more statistics from a recent DolmatConnell & Partners survey:
– The median length of the CD&A was 4,726 words, nearly five times longer than many original estimates.
– Only approximately one-third (36%) of companies chose to include exact financial performance targets (for short-term incentives) in their CD&A. The remaining firms did not disclosure specific targets, presumably because these firms believe such disclosure would cause competitive harm.
[Sidenote: Broc’s favorite perk so far – Footnote 1 to the perquisites table on page 34 of Anheuser Busch’s proxy statement regarding “beer for personal use and entertaining.”]
We have just sent our March-April issue of our new newsletter – Deal Lawyers – to the printer. Join the many others that have discovered how Deal Lawyers provides the same rewarding experience as reading The Corporate Counsel. To illustrate this point, we have posted the March-April issue of the Deal Lawyers print newsletter for you to check out at no charge. Feel free to share it with your deal-minded brethren.
This issue includes pieces on:
– Private Equity Clubs: Seller Beware? Latest Developments and Practice Tips
– Falling into the “Going Private” Trap: A Cautionary Tale for Private Equity Fund Buyers
– In Vogue: The “Entire Fairness” Doctrine
– The Practice Corner: Special Committees
– The “Sample Language” Corner: Providing for a California Fairness Hearing
– An M&A Conversation with Chief Justice Myron Steele
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John White on IFRS and the US Capital Markets
On Friday, Corp Fin Director John White gave this speech on IFRS and the US Capital Markets. In his speech, John recaps the themes of the recent IFRS roundtable held at the SEC’s HQ, including some points about the costs associated with reconciliation. For those who need to know more, here is a transcript of the SEC’s IFRS roundtable.
The Global Director
In this podcast, George Davis of Egon Zehnder provides guidance on how to recruit globally for boards:
– What is driving the need for international experience on boards?
– What industries are at the forefront of this movement?
– Where are companies finding directors with global experience?
– What other skills are most in demand on boards today?
On Monday, the US Court of Appeals for the Fifth Circuit issued a decision in the Enron securities class-action litigation that generally affirms that bankers, accountants, and others who work with publicly traded securities are not subject to securities-fraud claims that arise due to fraud committed by the issuer. There is some useful analysis of the decision in “The 10b-5 Daily.”
And here is some analysis of the decision from Gibson Dunn: In a decision having important implications both for the scope of liability under the securities laws and for class certification in general, on March 19, the Fifth Circuit ruled that a securities fraud action against certain financial institutions that participated in transactions with Enron Corporation could not proceed as a class action. The decision, Regents of the University of California v. Credit Suisse First Boston (USA), Inc., No. 06-20856, 2007 WL 816518 (5th Cir. March 19, 2007), adds to a growing body of federal caselaw that places limits on efforts by plaintiffs’ lawyers to plead securities fraud claims against secondary actors such as investment banks and other professional advisors, who did not themselves make any misrepresentations or omissions. The Fifth Circuit joins the Eighth Circuit in narrowly construing the scope of liability under such theories, and helps solidify a circuit split with the Ninth Circuit, which recently adopted a more liberal standard.
The Fifth Circuit’s decision denying class certification also represents another recent example of how federal courts are beginning to impose more rigorous standards for certification of investor classes in securities cases, and are permitting defendants to present more sophisticated “merits-based” arguments opposing class certification in appropriate cases. In December 2006, the Second Circuit reached a similar conclusion in the high-profile In re IPO Public Offerings Securities Litigation case, and denied class certification in that case as well.
IRS Provides Guidance for Reporting Tax Shelter Penalties to SEC for Non-10-K Filers
On Monday, the IRS issued Revenue Procedure 2007-25 (pg. 761) to provide guidance to companies that don’t file Form 10-Ks (egs. for those that file 10-KSBs, 11-Ks, 20-Fs, etc.) about how to disclose tax shelter penalties to the SEC. These rules were originally established in the American Jobs Creation Act of 2004 when Congress added Section 6707A to the Internal Revenue Code. In 2005, the IRS provided its initial guidance for Form 10-K taxpayers in Revenue Procedure 2005-51.
Yesterday, the SEC adopted long-awaited rules that will make it easier for foreign private issuers to deregister and terminate their SEC reporting obligations. New Rule 12h-6 and related Form 15F will enable a foreign private issuer meeting specified conditions to terminate its ’34 Act reporting obligations. The final rules are similar to those re-proposed with some technical adjustments. Here are opening remarks from Corp Fin – and here are comments from Commissioner Atkins, Nazareth, Casey and Campos.
The new rule will be effective 60 days after publication of the SEC adopting release in the Federal Register – it is expected that the adopting release will be published by mid-April so that the rules will be effective by the middle of June. If this happens, calendar year companies will be able to avoid filing a 2006 Form 20-F (for large accelerated filers, the first to require internal control reports under Section 404 of Sarbanes-Oxley).
Below is some analysis of the adopted rules from Cleary Gottlieb: Under the new deregistration rule, a company can deregister equity securities if its average U.S. trading volume over a 12-month period represents 5% or less of its worldwide trading volume, so long as it meets the other requirements described below. While the basic test is identical to the December 2006 proposal, the SEC has refined the test in three respects:
– The 5% threshold will be calculated by comparing a company’s U.S. trading volume to its worldwide trading volume, rather than comparing it to trading volume in the company’s one or two primary markets.
– Off-market trading will be counted worldwide, and not only in the United States, so long as the information source is reliable and not duplicative of exchange-reported trading.
– Convertible and other equity-linked securities will no longer be counted in the threshold calculation.
Like the December 2006 proposal, the final rule provides that companies that terminate their listings or ADR programs will have to wait one year before deregistering. In contrast to the proposal, however, the waiting period will only apply to companies that are above the 5% threshold when they terminate their ADR programs (this was true for terminating listings, but not ADR programs, in the proposal). There will also be a transition rule for companies that terminated listings or ADR programs during the year preceding the adoption of the rule.
The final rule retains a number of other provisions from the December 2006 proposal, including a requirement that a deregistering company be listed in one or two foreign markets that together represent at least 55% of its worldwide trading for a year prior to deregistration, that it have at least a one-year SEC reporting history at the time of deregistration, and that it not have sold securities in an SEC-registered offering for a year prior to deregistration. Companies that deregister are automatically eligible for the registration exemption of Rule 12g3-2(b), meaning that their deregistration will be permanent so long as they publish English versions of their home country reports and financial statements on their web sites.
Under the December 2006 proposal, a company could also deregister debt or equity securities if the securities were held by no more than 300 U.S. residents (based on improved “look-through” counting rules) or 300 holders worldwide (without applying “look-through” rules). While a number of comment letters suggested raising the threshold for debt securities, the SEC did not refer to any modification of the threshold during the open meeting.
It remains to be seen whether a significant number of foreign private issuers will use the new rules. Many of the largest European issuers have informally indicated that they intend to stay registered, at least for the time being. Many of these issuers will wait to see whether the SEC eliminates the U.S. GAAP reconciliation of IFRS financial statements (currently targeted for 2009), a change that would substantially reduce the costs of a U.S. listing. Several of the Commissioners expressed support for this objective during the open meeting.
The most significant practical impact may come from a provision of the new rule that allows companies that use their shares to acquire foreign SEC registrants to avoid registering themselves as “successor issuers” (assuming this provision remains in the final rule in the form proposed in December). This provision could facilitate cross-border M&A transactions that previously would have been blocked by the successor registration requirement.
Senate May Hold Proxy Access Hearing
According to this Reuters article, the Senate’s Subcommittee on Securities, Insurance and Investment may hold a hearing on process acces in mid-2007. Barney Frank, who chairs the House Financial Services Committee, said that if his “say on pay” bill becomes law, but is widely ignored by board compensation committees, he would expect Congress to look into proxy access as the next step in addressing shareholder rights.
Deal Protection: The Latest Developments
We have posted the transcript from the recent DealLawyers.com webcast: “Deal Protection: The Latest Developments.”
Assessing Fraud Risk
In this podcast, Jennifer Meiselman of BDO Seidman provides insights into how companies should be assessing their fraud risks, including:
– How do companies move to away from “siloed” SOX, internal audit and compliance programs to a holistic risk assessment while continuing to manage and monitor by department?
– Why have so few companies undertaken a thorough fraud risk assessment? Why are corporate boards the most likely source for these initiatives?
– What is involved in assessing fraud risk?
