According to this Forbes article, the Mob is doing PIPE deals! Anways, following up on last week’s blog on the SEC Staff’s guidance on resales of securities underlying convertible notes, Andy Thorpe of Morrison & Foerster fleshes out what Marty Dunn and Shelley Parratt said at the Northwestern conference:
Corp Fin’s goal is to elicit clear disclosure in the registration statement so that purchasers in the secondary sale understand the background of the convertible note transaction and its effect on the company and on the shareholders. Regarding the 10-12 items it seeks, the Staff may request the following types of disclosure:
– The determination of the number of shares to register
– The dollar value of the securities registered for resale
– Amount of all fees and all payments made to the selling securityholder, its affiliates, or any other party such as a placement agent in connection with the transaction
– Amount of all proceeds to the issuer and amounts deducted from the proceeds
– Possible profits from the conversion of the notes (including profits as a result of a market discount built into the conversion formula)
– Prior transactions among the issuer and the selling securityholders
– Relationships between the selling securityholders and relationships between the selling securityholders and the issuer
– Issuer’s intention or ability to make payments under the terms of the notes
– The dilutive effect of the conversion
– The identities of natural persons with voting or investment power over the securities registered on behalf of the selling securityholders
– Short positions of the selling securityholders known to the issuer
Marty and Shelley also stated that transactions are more likely to withstand scrutiny as a valid secondary transaction if there are a large number of selling securityholders that are not affiliated with each other or the issuer – and where no single securityholder is selling a large number of securities.
Regarding the 60-day/six-month guidance, Marty indicated that the test is to be determined on a per selling shareholder (and its affiliates) basis. This means that a company can file a resale registration statement for a subsequent PIPE transaction before 60-day or six-month period if it contains new selling securityholders that are unaffiliated with those on the previous registration statement.
By the way, we just announced a new webcast – “The Latest on PIPEs II” – during which the panel will discuss the lay of the land for PIPEs now.
Analysis: Congress’ Proposed Legislation on Deferred Compensation
On February 1st, the Senate overwhelmingly approved the “The Small Business and Work Opportunity Act of 2007,” which would amend the Internal Revenue Code that would significantly curtail any employee’s ability to defer compensation in excess of $1 million per year under Section 409A. In addition, the Act would broaden the definition of “covered employee” under Section 162(m) so as to apply the $1 million deduction limitation to payments made to a “covered employee” even after such individual ceases to serve in that capacity. In this CompensationStandards.com podcast, Art Meyers of Seyfarth Shaw provides some insight into this proposed legislation, including:
– What’s in the Senate’s bill regarding deferred compensation?
– What would be the implications if the bill became law with no changes?
– What might happen in the Senate-House conferencing to change the bill?
Implementing Scrutiny-Proof Grant Procedures
For NASPP members, catch the webcast tomorrow – “Implementing Scrutiny-Proof Grant Procedures” – to hear Howard Dicker of Weil Gotshal, Sharon Hendricks of Heller Ehrman, Bill Dunn of PricewaterhouseCoopers and JD Higginbotham of Monolithic Power Systems discuss grant practices that all companies should consider implementing, as well as important control to prevent errors or even fraud.
Don’t forget to tune in next Monday for our webcast – “Last Minute Planning for the Proxy Season” – to hear Cathy Dixon of Weil Gotshal & Manges, Amy Goodman of Gibson Dunn & Crutcher, John Siemann the Managing Director 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.
SEC Continues to Get Slapped Around
On Thursday, a Senate committee released its interim investigation findings on the SEC’s Enforcement Division’s handling of an investigation of hedge fund, Pequot Capital Management. You may recall that two Senate committees began grilling the SEC last summer after a former Staffer, Gary Aguirre, said he was fired for complaining that the Pequot investigation had been derailed because of political considerations. Here is an excerpt from a Friday NY Times’ article:
“At best, the picture shows extraordinarily lax enforcement by the S.E.C.,” Senate investigators concluded. “At worse, the picture is colored with overtones of a possible cover-up.” The report strongly suggests that Mr. Aguirre was fired in retaliation for his criticism. At the same time, Senate investigators said they were “deeply troubled” by the failure of the S.E.C.’s inspector general, Walter J. Stachnik, to investigate Mr. Aguirre’s accusations properly.
[As an aside, I can’t help but remember the good old days of prank of folks calling a fellow Staffer and pretending to be the SEC’s inspector general. Those were some real gems.]
Corp Fin Adds An Asset-Backed Interp
On Friday, Corp Fin added #17.06 to its Regulation AB telephone interps, making a lot of ABS practitioners very happy. The new interp provides guidance on when a vendor hired by a servicer should not be viewed as a party participating in the servicing function (and thus will not need to provide separate assessment and attestation reports for inclusion in a 10-K).
Last week, the NASD filed a rule change with the SEC to amend its filing fees for WKSIs under Rule 2710, with a maximum fee of $75,500 for each such filing. The NASD rule was effective upon filingbut with an implementation date of February 26th. The maximum filing fee has been $75,500 for a while now.
The problem regarding filing fees for any shelf offering is that, even though the amount registered on the shelf would justify payment of the full fee, the NASD has been willing to allow the first broker-dealer that takes down a tranche need only pay a filing fee on that tranche, and then each following broker-dealer pays more fees – up to the $75,500 maximum per registration statement.
The NASD has followed this practice ever since the shelf rules allowed undesignated shelfs – and issuers and broker-dealers argued that the mere fact that the issuer had registered $500 million of securities, for example, did not mean the NASD should collect a fee on that amount, since the issuer may only sell a small amount from the shelf.
Thus, NASD was willing to base its fees for shelf offerings on the amounts sold off the shelf rather than the amount registered with the SEC. It appears that for WKSI filings, the NASD staff concluded that the practice was just too cumbersome and could hold up a no-objections letter. Since the n-o letter isn’t issued unless the fee is paid there is too little time in today’s filings for the underwriters to wait for the filing fee to be sent, received, recorded at the NASD.
For those negotiating agreements related to registering securities, the practice point is that you should ensure that the issuer is obligated to pay all NASD filing fees or otherwise clearly state what is expected up front – otherwise the broker-dealers, selling shareholders, and issuer will end up arguing about who is responsible for the full NASD filing fee when it is due upon filing of a shelf. I hear that there have been instances of selling shareholders doing a shelf takedown and discovering that the NASD wants the fee for the entire shelf covering all primary and secondary shares…
SEC Clears Market-Based Option Valuation
A few months ago, I conducted this podcast about Zions Bancorp and its use of market value for auctioning employee stock options. Last week, the Office of Chief Accountant issued this letter to the company approving the market-based valuation approach after the company tweaks what it has been doing. This WSJ article provides more details – and look for more information on this topic on an upcoming NASPP program.
In his “AAO Weblog,” Jack Ciesielski weighs in on whether ESOARs will fly in the marketplace.
Our February Eminders is Posted!
We have posted the February issue of our monthly email newsletter.
Today, the Senate overwhelmingly approved the “The Small Business and Work Opportunity Act of 2007,” in which I think Sections 226 deals with 409A and 226 deals with Section 162(m). It’s hard to parse this bill, which is S.349 if you plug it into this Bill Locator.
Yesterday’s WSJ included this negative opinion of the bill; I agree that Congress should not try to regulate executive compensation through the tax code as boards can evade the law with tax gross-ups and other employees may be unfairly penalized. Of course, Congress shouldn’t be blamed for excessive compensation as the op-ed intimates; that blame should fall on the shoulders of directors.
The Senate and the House now have to reconcile this Senate bill with a much simpler House version. Here are more documents related to the Act:
Here We Go Again: Caremark’s Severance for Those Not Terminated
I easily could blog on executive compensation every day. I really don’t want to and I don’t think you want me to either. But it’s hard not to, particularly with boards continuing to prove that they are either aloof or indifferent as to what their shareholders want. Take Caremark as the latest example. As yesterday’s Washington Post column from Steve Pearlstein outlines (as well as this press release), many of Caremark’s executives will receive hefty change-of-control payments when CVS completes its acquisition of Caremark – even though those executives also will receive handsome employment agreements with the merged company! No pay practice infuriates shareholders more than this one.
A lawsuit related to this merger has been filed in Delaware’s Chancery Court, with Chancellor Chandler getting another whack at these types of egregious compensatory arrangements (you may recall that Chancellor Chandler is the one who sent the Disney case to trial). With boards like Caremark, I don’t blame Congress for “getting into the game” and trying to rein in existing practices, even though the end result will likely cause unintended consequences…
President Bush on Rethinking Pay Practices
And putting the nail in the coffin that CEO pay truly is a hot political topic, President Bush called on Wall Street to rethink pay practices in a speech yesterday. Here is an excerpt from today’s related NY Times article:
“White House officials said that Mr. Bush decided to raise the issue out of his own sense of outrage over deals in which executives have left flagging or failed companies with huge compensation packages, as workers and lower-level executives have been left far behind.
But officials said there was also an economic concern: that distrust of corporate executives over their pay had the potential to scare individual investors out of the market.”
Yes, Many CEOs of US Public Companies Really Are Overpaid…
This recent op-ed from the Washington Post is probably the most misguided one I have seen yet on executive pay. As I often do, I dutifully posted a comment with my views but what struck me the most was the outpouring of anger from others in the comment section. Executive pay likely will be an issue to contend with in upcoming elections, as reflected already in the recent Congressional activity in this area.
Harvard Law School has a new corporate governance blog and I will be posting some rants now and then on it. Below is a response to Professor Kaplan’s comments on the recent New York Times article about private equity funds:
While it’s true that some private equity funds are luring sitting CEOs with higher pay, I think it’s far from a widespread trend. There are about 14,000 sitting CEOs today; maybe a dozen have been lured away, if that.
And since the terms of the pay arrangements given to privately held CEOs are not publicly available, we don’t really know what those arrangements consist of. Will private owners continue to pay for poor corporate performance? Will they pay out a huge severance package–or any severance–to a fired CEO? I doubt that private owners would follow the lead of so many public companies in these criticized areas.
But more importantly, we must remember the difference between CEOs of private companies and public companies. Private owners are free to pay someone as much as they want; it’s their money. In the public company context, the board of directors have their fiduciary duties to consider when paying someone and appropriate processes must be used. Unfortunately, the processes followed today often are broken – and have been for some time.
In this “Open Letter to All Journalists,” I try to explain how board processes for setting CEO pay levels can be improved. For example, can you believe that boards didn’t consider the total amount already committed to be paid to a CEO before layering on more compensation as recently as three years ago? On CompensationStandards.com, we coined the term “tally sheet” in 2004 when we started pushing boards to begin consulting spreadsheets before adding/changing an element of a CEO’s pay package.
I continue to get too many confidential emails from board advisors describing naive – and uninformed – acts by directors to buy into the notion that CEOs are underpaid. Many processes continue to be broken and even when the processes are repaired, boards have not yet addressed the excesses created by more than a decade of bad practices. This is all common sense: if we pay a highly paid CEO even more, will shareholders get better performance? I think the millions most CEOs already receive should be incentive enough.
On Monday, Reliant Energy filed a lawsuit asking a federal court in Texas to declare that the company can exclude a shareholder proposal that deals with shareholder access. This is not surprising given the SEC’s recent “no view” position regarding Hewlett-Packard’s similar proposal. The case is Reliant Energy Inc. v. Seneca Capital LP, case number 07-376 in the U.S. District Court for the Southern District of Texas – and a copy of the complaint is in our “Shareholder Access” Practice Area. Here is a related article.
The other company with a shareholder access proposal – UnitedHealth Group – might not resort to the courts because it is reported that the company is arguing that the gist of the 2nd Circuit Court’s decision in AFSCME v. AIG doesn’t apply because UnitedHealth is incorporated in Minnesota – and shareholders in Minnesota-incorporated companies must hold at least 3% of the company’s voting power to propose bylaw amendments.
Investors Speak Out about “Quickie” Executive Compensation Rule Change
The Council of Institutional Investors has filed this comment letter with the SEC regarding the “interim final rules” adopted by the SEC just before Christmas. The Washington Post recently ran this article on the CII letter.
Note that the letter begins by chastising the SEC for adopting rules without allowing for “real” comment, something that someone might very well argue violates the Adminstrative Procedures Act. I know I have blogged about this before, but I still keep asking myself: what were the Commissioners thinking by going about rulemaking this way? I note that the SEC is on an extended losing streak in the courts…
My Ten Cents: 8 Hours is Kidnapping
Off topic, but most of us travel a lot. I couldn’t believe the tone of the American Airlines spokesperson in yesterday’s NY Times article about how stranding passengers for 8 hours on the runway wasn’t that big a deal because they had running water, even if they had run out of bottled water and food. I don’t care if they have grilled shrimp and lollipops, eight hours is way too long to be sitting on a runway without being given the option of getting off a plane!
Following up to my blog last month on problematic PIPEs, Corp Fin Staffers have begun speaking about when resales of securities underlying convertible notes will encounter Staff scrutiny. Recently, the Staff has questioned the availability of Rule 415(a)(1)(i) for delayed or continuous secondary offerings of securities in PIPE transactions by issuers that are not primary S-3 eligible when the amount being registered is disproportionately large in relation to the issuer’s capitalization. My guess is that the Staff is tired of folks trying to squeeze abusive convertible note transactions into the Staff’s longstanding PIPEs analysis by calling them catchy things like “structured PIPEs” and doesn’t want abusive, toxic convertible notes to hide behind the cloak of the traditional PIPE analysis.
Last week, Deputy Directors Marty Dunn and Shelley Parratt spoke about the issue at Northwestern’s Securities Regulation Institute in San Diego. David Mittelman of Reed Smith reports on what they said:
– the Staff has not changed its historical position, but has increased its focus on “extreme convertible” note secondary offerings that dilute the market
– expect Staff comments when a non-shelf eligible issuer seeks to register for resale more than 1/3 of the outstanding common stock held by non-affiliates prior to the convertible note transaction
– the comments will request an analysis of why the offering is a secondary resale, rather than a primary given its size
– whether the Staff objects to use of Form S-3 will depend upon the facts and circumstances, but non-fixed convertible notes and other “toxic” securities are less likely to pass muster
– Staff comments also may request information, with a view toward disclosure, of 10 to 12 items including (i) how the issuer determined the number of shares to sell and (ii) if known to the issuer, any short positions held by selling shareholders
– the Staff will not object to the issuer registering an additional 1/3 tranche of the securities underlying the convertible note offering provided the later of (a) 60 days has elapsed since sale of “substantially all” of the prior tranche, or (b) six months has elapsed since effectiveness of the prior tranche registration statement. In other words, additional tranches can be registered after the later of 6 months from the effective date and 60 days after sale of substantially all the shares registered for a selling shareholder. This is to be determined on a per selling shareholder (and its affiliates) basis.
– Corp Fin does not expect to issue written guidance in this area other than through the comment letter process
An M&A Conversation with Chief Justice Myron Steele
– Internal control reportable conditions still existed at the end of the SEC’s last fiscal year ending September 30th; there has been significant improvement from the prior year (page 60).
– A drop in the percentage of companies and investment companies having their disclosures reviewed (page 13).
– The SEC has a rising attrition rate, as noted on pages 24-25. In the past, the SEC disclosed the actual rate, but did not this year. However, from reviewing the SEC’s annual reports, we can glean that the SEC had 3,865 staff as of September 30, 2005, compared to 3,590 a year later – that is a reduction of 275 people (thus, a reduction of 7.1%).
– A decline in the percentage of the budget spent on enforcement activities (page 38)
– A decline in overall spending, which declined form $917 million in 2005 to $888 million in 2006; this included a decline in enforcement spending from $364 million to $336 million (page 61 and pages 83 and 84)
Just like the UK, Australia has a relatively new law that allows shareholders to cast an advisory vote on executive pay reports; you might recall, this is the regulatory format that Rep. Barney Frank is seeking. ISS’s “Corporate Governance” Blog notes how that new law is faring, with a number of Australian companies receiving high levels of dissenting votes in its 2nd year under the new law.
SEC Chairman Cox on the Power of Blogs
A few weeks back, a CFO.com article entitled the “The Blogging Regulator” led me to a Reuters’ article entitled “SEC’s Cox Uses Blogs To Gauge Public Sentiment.” According to the Reuters’ article, SEC Chairman Cox told a summit on Monday: “‘Blogs are a great way to infer passion and depth of feeling… They give you an early read on the … response you might expect.” However, Reuters noted, “Cox said he does not rely on blogs to find the way forward on tough issues – as he observed, “Blogs in many cases are so irreverent… They don’t wait for facts.”
It’s funny how statements like this are deemed to be “news”; I think that most people feel the same way about blogs as the Chairman: useful but take with a grain of salt (just like I approach the mainstream media!).
As the number of backdating lawsuits grow (we have links to numerous complaints in our “Timing of Stock Option Grants” Practice Area on CompensationStandards.com), the perspective of the economists grows more important as they will help dictate what the level of damages will be. In this podcast, Bruce Deal of Analysis Group, an economic consulting firm, provides some insight into the challenges of calculating damages in option backdating lawsuits, including:
– How is the economist’s role different from the accountant’s role in the pending option backdating cases?
– What types of valuation methods do you expect to be used in these cases?
– How might the use of these methods impact settlements and judgments of backdating cases?
– What other economic issues might arise in these cases other than the value of option grants?
– What types of damage do you expect to see plaintiffs’ claim in litigation?
Section 409A Consequences Forces Some Option Backdaters Out of the Closet
As noted in this article, at least 28 companies disclosed that they are investigating for stock-options backdating during the past three weeks as these companies awarded repriced options by the end of last year to keep their senior managers from paying a 20% surtax on potential profits from the options. Per my earlier blog, I noted that the IRS had issued Notice 2006-100 to provide interim guidance to employers regarding their reporting and withholding obligations for calendar years 2005 and 2006 with respect to deferrals of compensation and amounts includible in gross income under Section 409A.
And some companies don’t appear to care much about what shareholders think of their backdating practices, as this Saturday WSJ article reports that these companies have paid bonuses to employees in an amount equal to the value that the employees might lose due to backdating. Shareholders don’t want to pay even more for the backdating practices of these companies (on top of all the money being paid to investigate them, etc.) – and in fact, at some companies, executives have paid back the amounts they reaped due to backdating back to the company.
Is Backdating Criminal?
As noted in this article, the FBI is devoting significant resources to options backdating investigations as they have mushroomed to comprise one-eighth of the FBI’s corporate fraud caseload.
Kevin LaCroix provides some thoughts on D&O Diary Blog Steve Jobs and criminal backdating, as well as links to others who have shared their thoughts on this hot topic.
Yesterday, Corp Fin posted interpretive guidance on the new executive compensation rules. The guidance is divided into two sections – 28 questions & answers and 18 telephone interp-style responses. The second part replaces the S-K Item 402 interpretations in the July 1997 Telephone Interpretations and its March 1999 Supplement.
This new Corp Fin “Staff Compliance and Disclosure Guidance” page apparently means that the Staff has devised a new way to provide us with written guidance. The end of Telephone Interps perhaps?
Some Thoughts about Foreign Private Issuer Deregistration
With comments due to the SEC by mid-February, in this podcast, Andy Bernstein of Cleary Gottlieb provides some insight into the SEC’s re-proposal regarding foreign private issuers and deregistration, including:
– Why did the SEC re-propose its FPI deregistration scheme?
– How does the re-proposal differ from the SEC’s original proposal?
– What types of comments do you expect to be made on the re-proposal?
– If the re-proposed rules are adopted, do you think that many foreign companies will take advantage of them and deregister?
Hewlett Packard Files Proxy Statement With “Access” Proposal
Yesterday, Hewlett Packard filed its proxy statement – and included AFSCME’s shareholder proposal regarding shareholder access (note that their executive compensation disclosures were filed under the old rules). Probably a smart move given the risk of exclusion.
Interestingly, the company asserts that supermajority approval is necessary before it can amend its bylaws. I’m not sure that the proponents had supermajority approval requirements in mind when they submitted the proposal.
The Bloomberg-Schumer Report
Earlier this week, Mayor Bloomberg and Senator Charles Schumer – with the the assistance of McKinsey – issued this report about how New York City is losing its competitive edge and could give up its lead as the financial capital of the world in as little as 10 years. The D&O Diary provides some lengthy analysis on this new report. Not sure all these reports really have traction on the Hill and in the federal agencies…but we shall see…
In the wake of Corp Fin’s recent sample letter guidance on option backdating, Brink Dickerson of Troutman Sanders recently has been working with the Corp Fin Staff to determine when option dating issues necessitate restatements. He reports that the Staff believes that in applying Question 3 of SAB 108, it is necessary to assess the materiality of the prior period errors under SAB 99 to determine if the errors can appropriately be included in the cumulative effect adjustment. SAB 99, in turn, contemplates assessing materiality on both quantitative and qualitative bases.
Since intent is a factor in assessing qualitative materiality, Brink reports that the Staff doubts that companies will be able to conclude that the errors are not material where the dating errors were intentional on the part of senior management. Certainly there are some errors – e.g., the occassional screw-up in documentation – that would not taint the assessment of qualitative materiality, but the Staff expects that many of the reporting problems that have been disclosed so far will require a restatement.
First Proxy Statements Filed Under New Exec Comp Rules
As Mark Borges has been dutifully blogging about on CompensationStandards.com, the first proxy statements complying with the new executive compensation disclosure rules have been filed, including:
