A few days ago, I was quoted in this Indy Star article as saying that “outside directors should devote 200 hours or more a year to adequately do their jobs.” For those following governance, this shouldn’t be a bombshell as others have thrown around 200 hours as the post-SOX time commitment for quite a while (e.g. ABA’s Corporate Directors Handbook).
The article focused on the current President of Purdue University – Dr. Martin Jischke – who serves on three boards. The President is quoted in the article as saying that my 200 hour estimate “sounded high.” Probably proving that I take blogging too seriously, I decided to analyze his three directorships:
– Wabash National – According to the company’s 2006 proxy statement, the Board meet 5x during 2005 – and Dr. Jischke served on the board’s governance and compensation committees, which met 4x and 6x during 2005, respectively.
– Duke Realty – According to the company’s 2006 proxy statement, the Board meet 6x during 2005 (including 4 executive sessions for independent directors) – and Dr. Jischke served on the board’s compensation committee, which met 4x during 2005.
– Kerr-McGee (which was acquired last August; Dr. Jischke recently joined Vectren’s board) – According to the company’s 2006 proxy statement, the Board meet 14x during 2005 – and Dr. Jischke served on the board’s governance and compensation committees, which met 4x and 4x during 2005, respectively.
So, during 2005, assuming that Dr. Jischke attended all of the board meetings for these three companies (he did attend at least 75% for each company; otherwise there would be proxy disclosure that he hadn’t), he attended 25 board meetings and 22 committee meetings (not counting executive sessions, etc.).
Being generous in my calculations, let’s assume Dr. Jischke spent 8 hours per board meeting (which includes the time spent at a companion committee meeting, travel time, etc.). Based on this assumption, I figure Dr. Jischke spent 200 hours alone just sitting in board-related meetings (i.e. 25 x 8 hours).
Now, I recognize that one of Dr. Jischke’s companies was pondering a merger during 2005 and thus held an unusually large number of meetings – but if you sit on three boards, odds are that one of them will be in crisis mode or considering extraordinary events at any given time. But even if I was to presume “normal times” for each company on which he serves – and cut the number of board meetings for the mergerd company in half – I still come up with Dr. Jischke spending 150 hours for board-related meetings each year.
And in this age of close director scrutiny when it comes to the duty of care, I don’t see how a director doesn’t spend at least one hour doing board-related reading and research for each hour of meeting. Putting my “final answer” of 150 hours meeting plus 150 hours preparing = 300 hours per year. So I think I have room to argue that my estimate of 200 hours was even conservative if you’re doing the job properly.
That’s why I maintain – in our “Director Recruitment” Practice Area – that someone working full-time can’t handle more than one – and two at the most – board seats…
Last Batch of PLI’s “SEC Speaks” Notes: Enforcement
Apparently, my blog on Friday about the Direct Registration System – as it relates to amending by-laws to ensure companies are DRS-eligible – hit a nerve as I received quite a few emails in response. There appears to be a debate regarding whether – and under what circumstances – companies need to amend their bylaws to permit uncertificated shares.
Section 158 of the Delaware General Corporation Law permits shares of stock to be either certificated or uncertificated, in the discretion of a company’s board – the 2005 amendments to Section 158 went further, removing the statutory entitlement for holders of uncertificated shares to request an executed certificate for their shares. Many other states – including both Georgia and New York – followed Delaware’s lead and now permit the issuance of uncertificated shares (Section 14-2-626 of Georgia Business Corporation Code and Section 508 of the New York General Business Law).
The Debate Under Delaware Law
Section 158 permits companies to issue uncertificated shares if authorized by board resolution. However, many companies have by-laws that expressly provide that “all stockholders shall be entitled to receive certificates,” or, in even stronger language, that “all shares shall be represented by certificates.” Based on a common-sense reading of such bylaw provisions, one could view them as stand-alone requirements that are not overridden by Section 158. In comparison, by-laws that merely provide that “shareholders are entitled
to certificates” are less likely to be viewed as a stand-alone requirement.
What’s Happening in Practice (So Far)
It appears that there are different views among (and even within) Delaware law firms as to whether – and under which circumstances – one can interpret Section 158 as authorizing companies to issue uncertificated shares under the various permutations of certificate requirements that exist in the bylaws that exist today. This division is reflected in practice out there so far. For example, Paul Blumenstein of DLA Piper notes that he looked up the bylaws of a dozen or so “name brand” companies included in the list of DRS-eligible companies set forth in the SIA Dematerialization Guide – and in only two of them was he able to find language permitting the board to authorize uncertificated shares.
In describing Watts Water Technologies Form 8-K with their amended bylaws, I stated that they “needed” to amend there bylaws to provide for noncertificated shares to become DRS eligible. I retract that thought in the wake of receiving member input.
For example, Eric Handler of Dewey Ballantine notes that Watts Water’s by-laws, prior to being amended, neither prohibited the issuance of noncertificated shares nor required the issuance of certificated shares only. Rather, they simply stated that the holders of stock shall be entitled to a certificate (which language was left in the bylaw even after the amendment). Eric notes that other large company’s such as McDonalds and Staples have DRS issues (according to Appendix 4.1 of the SIA Dematerialization Guide) and yet their by-laws contain no language expressly authorizing the issuance of noncertificated shares – in fact, the bylaws of those two companies contain the same “shall be entitled to a certificate” language as that found in Watts Water Technologies.
The Upshot
As Brink Dickerson and Curry Woods of Troutman Sanders have shared with me: Although there’s seems some ground to stand on that companies can rely on Section 158 without having to amend their by-laws, the safe thing to do would be to amend the bylaws – for those companies with by-laws that did not anticipate uncertificated share issuances – to provide clarity and transparent compliance with the new SRO rules. This just seems like the smart thing to do even though I understand that some companies prefer not to trigger an 8-K event if it can be avoided. At the end of the day, I don’t think companies should feel ashamed to file this type of an 8-K as I don’t think it reflects poorly on them.
After a longer delay than usual (as I blogged about recently), President Bush signed a continuing resolution on Thursday that allows the federal government to operate for the remainder of fiscal year ’07 (instead of the regular appropriations bill that Congress normally passes; Congress can’t get their act together this go around) – which triggered the filing fees cuts determined by the SEC last year (but which doesn’t go into effect until Congress acts).
These are significant cuts as SEC Chairman Cox notes in this press release. Starting today, registration fees are down to $30.70 per million, a 71% drop from the prior filing fee rate of $107.00 per million! The extended delay cost companies some real change this time around…
Recently, Nasdaq sent out a notice reminding listed companies that they must be using a transfer agent and have governing documents that enable them to participate in the Direct Registration Program, even if they don’t intend to actually participate in the Program. To be DRS-eligible, a company must allow for investors to hold their securities in book entry-only form (aka “uncertificated shares”).
All the exchanges adopted similar rules regarding the Direct Registration Program last summer, with a long phase-in period to enable companies to find new transfer agents or make changes to their by-laws if they needed to do so (eg. see the NYSE’s approval at page 3 and the SIA dematerialization guide on page 26).
There is a standard section in most by-laws about certificates that addresses form and it’s possible that some companies have a section that doesn’t provide for uncertificated securities. In this case, a by-law amendment would be in order (and I guess it’s also possible some by-laws that don’t permit uncertificated certificates and would require shareholder approval for such an amendment, but most by-laws have a provisions that permit the board to amend the by-laws).
However, few companies have needed to make by-law changes, since many companies already allow for uncertificated shares through ESOPs or DRIP programs, etc. Here is an example of one company that needed to make a by-law amendment recently to comply with the new DRS-eligible requirement: Watts Water Technologies filed a Form 8-K under Item 5.03.
IT Forensic Audits
In this podcast, Don Cox of Cyber-Tech Forensics explains how to protect a company’s assets, including:
– What should companies do to protect themselves against employees misusing computers?
– If someone deletes a document, is it really gone?
– What is involved with an IT computer audit?
Blog Switcharoo
Yes, blogs can live on even when their founders move on…meaning this blog may very well live well past my own lifetime and my mortality fades. Anyways, Bruce Carton has left ISS to join claims administrator Garden City Group and just started up the new “Best in Class” Blog.
[Kidnapping redux, don’t let it happen to you! Another round of airplanes sitting on the ground for 10 hours with no food, etc. Sign the petition today and support the “Stranded Passengers Bill of Rights”!]
With new Item 404(b) requiring that the proxy statement describe a company’s “policies and procedures for the review, approval, or ratification of any transaction required to be reported” by Item 404(a), our latest survey on these policies and procedures was popular. Below are the results from that survey (and please participate in our new survey on director resignations!):
1. Indicate which of the following you have in place (or are proposing) to implement for approval of related party transactions:
– A stand-alone policy statement regarding related person transactions – 42.5%
– Approval procedures regarding related person transactions covered in one or more board committee charters – 20.4%
– Approval procedures regarding related person transactions covered in our Code of Conduct – 19.5%
– Approval procedures regarding related person transactions covered in our corporate governance guidelines – 14.2%
– Approval procedures not included as part of any of the documents noted above – 10.6%
2. Indicate what process do you use (or are proposing) to use for approval of related party transactions:
– Pre-approval or pre-clearance of related person transactions – 61.8%
– Monthly review of related person transactions after-the-fact – 0%
– Quarterly review of related person transactions after-the-fact – 5.6%
– Annual review of related person transactions after-the-fact – 12.4%
– Periodic review of related person transactions, with timing tied to board/board committee meetings after-the-fact – 14.6%
– Other – 5.6%
3. If someone is responsible for reviewing related person transactions, which of the following will undertake that task:
– Full board – 12.2%
– Board committee – 76.7%
– Board committee chair – 8.9%
– General counsel – 35.6%
– Securities counsel – 23.3%
– Other type of inhouse lawyer – 1.1%
– Head of human resources – 2.2%
– Chief compliance officer – 7.8%
– CFO or controller – 11.1%
– Other – 2.2%
SAB 108 Disclosure Trends
As we were reminded by Corp Fin Chief Accountant Carol Stacey during “SEC Speaks,” the one-time relief granted in connection with restatements under SAB 108 is not a general amnesty for prior period restatements. The Staff expects companies to restate prior period financial statements for material errors if management failed previously to appropriately apply either the iron curtain or rollover method (whichever method it had previously selected to use) including the proper consideration of all relevant quantitative and qualitative factors.
Recently, the SEC and the DOJ jointly filed an amicus curie brief in the Tellabs case pending on writ of certiorari before the US Supreme Court, in which the agencies urge the Court to adopt a restrictive test that plaintiffs must satisfy in order to meet the heightened pleading standard under the Private Securities Litigation Reform Act. Kevin LeCroix does a great job exploring what this means in his “D&O Diary” Blog – and here is a related article from Business Week and an article from NY Times.
In our “Conference Notes” Practice Area, we have posted notes from the Accounting panel and workshop from the PLI “SEC Speaks” Conference. No big surprise for those avidly following this blog, SEC Chief Accountant Conrad Hewitt spoke about how he wants to add liability limits for audit firms to AS #5 at the Conference.
By the way, following up on the global accounting “roadmap” announced back in the spring of 2005, the SEC has announced it will hold a Roundtable on this topic on March 6th.
The SEC’s 8-K Rule Changes: How They Impact You
Join SEC Staffer David Lynn, Alan Dye and Ron Mueller tomorrow for the CompensationStandards.com webcast: “The SEC’s 8-K Rule Changes: How They Impact You.” This is Part III of our Web Conference regarding the SEC’s new executive compensation rules.
As an aside, following up on my blog yesterday about the ability to file preliminary proxy statements without exec comp disclosures, Corp Fin tweaked Interp 1.04 of the newly minted Item 402 FAQs (ie. 1.04 relating to FAQs of “General Applicability”; the numbering system for the new interps can be a little confusing) yesterday to reflect what was said at SEC Speaks. Of course, companies can choose to file preliminary proxy statements with the exec comp disclosure as Baker Hughes recently did…
Backdated Options: IRS’ New “Tax Reprieve” Program
Last week, the IRS launched a new initiative for rank and file employees that unwittingly received backdated stock options. Here is the IRS announcement – and here is the related IRS press release.
Under the voluntary initiative, companies are allowed to pay the 20% penalty plus interest tax owed by employees – but they are not allowed to pay for the taxes on backdated options for Section 16 officers and other insiders and directors. This relief is available only for options that vested in 2005 and 2006 and were exercised last year – and the amounts paid to cover these additional taxes will be treated as compensation income for those employees in 2007 tax year.
For companies that plan to participate in the program, they must notify the IRS by February 28th and notify the affected employees by March 15. If they do decide to participate, companies will be expected to provide detailed information about the backdated options, including the tax calculation sufficient to allow the IRS to determine that the Treasury received all taxes owed.
Given the February 28th deadline, this 20-minute podcast on “IRS’ Voluntary Initiative for Backdated Options” on CompensationStandards.com with “Handy” Hevener of Baker & McKenzie is timely and should be very useful for those companies with backdating issues. Handy is one of the more experienced practitioners out there when it comes to dealing with the IRS. The podcast is a big audio file so give it a minute to download…
In our “Conference Notes” Practice Area, we have posted notes from Corp Fin’s panel and workshop from the popular PLI “SEC Speaks” Conference, which was held over the weekend.
Corp Fin’s Position on Preliminary Proxy Statements and Exec Comp Disclosures
At the PLI’s “SEC Speaks” conference, Corp Fin Chief Counsel David Lynn provided some guidance about whether the Division intends to review executive compensation disclosure in preliminary proxy statements this year. For this proxy season, Corp Fin doesn’t intend to review preliminary proxy statements just because they have executive compensation disclosure under the new rules. In other words, companies may file their preliminary proxy statements that omit executive compensation without fear that the filing is so deficient that the 10-day clock doesn’t start to run, so long as the omitted disclosure isn’t the reason for the preliminary filing and the executive compensation disclosure isn’t otherwise made public. Of course, the executive compensation disclosure is required to be included when definitive proxy materials are filed.
This position isn’t much of a surprise given that IBM filed a preliminary proxy statement without executive compensation disclosure a few weeks ago – and General Electric filed a preliminary proxy statement without such disclosure last week…
NYSE Issues Annual Corporate Governance Letters
Last month, the NYSE issued its annual corporate governance letters to listed companies. The letters provide an overview of the things that listed companies should keep in mind when preparing for their annual meetings and Form 10-Ks or Form 20-Fs; there are two versions of the letter: the US issuer letter and the non-U.S. issuer letter.
On Friday, Corp Fin unveiled its new home page, with the content more organized along the lines of various subject matters. Looks good, but no new substance.
My favorite is a new catch-all called “Frequently Requested Materials,” which houses two ancient items: one is 45 years old and the other is nearly 20. A more accurate label is “Old Stuff You May Never Have Heard About (But Still Has Some Value)”…
More Proxy Filings Under the New Executive Compensation Rules
The new batch of proxy filings are starting to flow, and Mark Borges blogged Friday about a handful of them. Here are a few others that aren’t noted in Mark’s blog that Bob Dow of Arnall Golden Gregory sent me:
House Tax Measure to Omit Senate-Approved Limit on Deferred Pay
Following up on the Senate’s passage of a tax package that would include limits on nonqualified deferred compensation, as noted in the following excerpt from a Bloomberg article by Ryan Donmoyer and Vineeta Anand: “the U.S. House Ways and Means Committee will draft a tax cut for small businesses of as much as $1 billion that omits a Senate-passed penalty on employees who receive tax-deferred compensation in excess of $1 million, a congressional aide said.
The aide, who is involved in drafting the House legislation, confirmed that it wouldn’t contain the provision, a key element of an $8.3 billion measure passed Feb. 1 by the Senate. The House panel will debate its tax measure Feb. 12.
The omission is a victory for groups that opposed the Senate provision such as the Financial Services Roundtable and Financial Executives International. The deferred-pay rule was one of about a dozen revenue-raising measures designed to offset the cost of the tax cuts, which are included in legislation to increase the minimum wage for the first time in a decade. ‘This is a huge relief,” said Brick Susko, a partner in the New York law firm of Cleary Gottlieb Steen & Hamilton, who advises corporations on executive pay. “The Senate bill was misguided and not well thought out.”
The deferred-compensation provision may become a sticking point later this month when House and Senate lawmakers meet to reconcile differences between the two tax measures, possibly delaying passage of the broader minimum-wage legislation.” Here is a related Forbes’ article.
Tune in Monday for our webcast – “Last Minute Planning for the Proxy Season” – to hear Cathy Dixon of Weil Gotshal, Amy Goodman of Gibson Dunn, Ellen Friedenberg and Gloria Nusbacher of Hughes Hubbard, John Siemann of Georgeson Shareholder, and Bill Tolbert of Jenner & Block discuss the latest guidance to help you feel more comfortable that you have not missed anything for this year’s proxy season, including the SEC’s new related-party transaction rules, hot areas for MD&A and much more…
More D&O Questionnaires Posted
We have posted two new D&O Questionnaires in our “D&O Questionnaires” Practice Area, one for Nasdaq companies and one for NYSE companies. They come complete with a “crib sheet” for determining director independence.
ABA’s Letter to SEC Chairman: Seeks Revised Cooperation Guidelines
On Monday, the President of the ABA wrote to SEC Chairman Cox urging the SEC to revise its cooperation guidelines to bar the SEC staff from demanding that companies waive the privilege. We have posted a copy of the letter in our “Attorney-Client Privilege” Practice Area.
Earlier this week, the SEC released its budget request for 2008, as well as it’s Congressional justification for the request. As is the case for most federal agencies not dealing with homeland security or the military, the SEC’s budget would remain flat in terms of constant dollars as it increases to $906 million from $878 million, as noted in this article.
More importantly, the headcount at the SEC would once again be cut for almost all substantive functions, including Corp Fin and Enforcement – although the budget assumes the SEC will finish fiscal 2008 with 3,567 full-time employees, the same number the agency is expected to have at the end of the current fiscal year. With accountants making up the bulk of Corp Fin these days, the number of lawyers in the Division today is quite low compared to the good ole days when some of us roamed her halls…
SEC Filing Fees: Any Update?
A member recently asking if Congress ever approved the SEC’s budget, which in turn would lower the SEC’s filing fees. Although a delay from approving the SEC’s budget – whose fiscal year ends September 30th – is an annual rite of passage, this year’s ongoing delay might be a record! Four months and counting (although there finally has some movement on approving the Federal budget this week). Here is the SEC’s most recent resolution that extended temporary funding through February 15th. So, filing fees remain at last year’s rates for the time being…
– Director compensation rose 12% to $160,000/yr., mostly due to higher value of equities.
– Stock option use continued to decline, down to 54% of directors from 58% in 2005 and 66% in 2004. Restricted stock use increased to 51%, compared to 44% in 2005.
– Annual retainers remain the most popular, with 95% of boards getting them.
– Increased disclosure of stock ownership requirements; 37% in 2006 v 28% in 2005. 56% of S&P 500 now have such requirements, typically 5 times board retainer.
– Diversity hasn’t changed from 2005 to 2006. Still 12% of directorships held by women; 10% by minorities.
Yesterday, Delaware Chancellor Chandler delivered two opinions in declining to dismiss complaints alleging backdating of options (in Ryan v. Gifford) and spring-loading of option grants (in Tyson Foods). We have posted copies of these opinions in our “Backdated Options/Grant Policies” Practice Area.
Here is some analysis of these opinions courtesy of Potter Anderson & Corroon:
The backdating case is Ryan v. Gifford. The Chancellor declined to stay the case in favor of earlier filed California federal actions, citing, among other things, the interest of Delaware courts in deciding novel and important issues of Delaware law. Not surprisingly, the Chancellor refused to dismiss the complaint, saying very strongly that intentional backdating constituted bad faith and that the board made fraudulent disclosures to shareholders by putting out proxy statements and other documents saying that the grants complied with the plan when in fact they did not, because the plan required the options to be priced at fair market value on the date of grant. The Chancellor did dismiss the complaint as it related to backdating that allegedly occurred before the plaintiff acquired his stock in a stock-for-stock merger.
The Tyson Foods opinion deals with a complaint challenging many aspects of compensation and alleged self-dealing. Among the allegations were several instances of “spring-loading”; that is, issuing options ahead of news the directors allegedly knew would move the stock higher. In refusing to dismiss the spring-loading complaint against the members of the compensation committee that granted the options, the Chancellor found it “difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at ‘market rate’ and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more.”
The Chancellor went on to clarify that it was important to his decision that the plan in question was approved by shareholders and that to survive a motion to dismiss the plaintiff must plead that the directors knew they had inside information and intended to “circumvent otherwise valid shareholder-approved restrictions upon the exercise price of the options.”
Lawsuits Against Audit Firms
Against the backdrop of the push for capping auditor liability, here is an interesting paper on large claims filed against the auditing firms. As the paper notes, the incidences of such claims has declined – and these claims may be dismissed, dropped or settled for substantially less than the amounts claimed. The paper also discusses trends in the litigation. The paper is posted in our “Securities Litigation” Practice Area – which has grown so large that it’s almost a website unto itself – under “Studies Re: Securities Litigation Trends.”
Forecast for 2007 Proxy Season and Strategies to Consider
We have posted a transcript of the popular webcast: “Forecast for 2007 Proxy Season and Strategies to Consider.”
