Back in early 2004, as part of an omnibus appropriations bill, Congress has been requiring companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism. Since then, Corp Fin’s Office of Global Security Risk has been gradually growing in size and issuing comments eliciting such disclosure (see this memo as well as #2911 in our Q&A Forum to better understand the specific rules that allow the Staff to seek such disclosure). And remember that SEC Chair Chris Cox served as the Chairman of the House’s Committee on Homeland Security before he came to the SEC (and often is rumored to be the next head of the Department of Homeland Security).
I was on the road last week when the SEC launched its new “anti-terrorism” tool, but just by reading the SEC’s press release, I guessed that it would be an imperfect “blacklist” and could mislead investors about which companies are truly doing business in countries associated with terrorists.
This opinion column from yesterday’s WSJ does a great job of explaining how my hunch appears to be right.
Here is an excerpt from that column, penned by Todd Malan, president of the Organisation for International Investment (which represents the interests of the roughly 1,200 foreign companies with US stock market listings):
“Under U.S. law, corporations listing on American capital markets must disclose ties to state sponsors of terror. Many (but not all) companies have been doing so for years, but without the wherewithal to comb through thousands of filings, investors are unlikely to be fully informed. In that light, the SEC’s Web tool appears a welcome response to those investors and policy makers who are hungry for such data.
Unfortunately, the SEC simply compiles a list of companies with the words “Sudan,” “Iran,” “North Korea,” “Syria” or “Cuba” in their annual reports without regard to context.
The SEC’s tool could easily mislead investors. For example, Baker Hughes, a company on the SEC’s Sudan page, states in its 2006 annual report that its subsidiaries will ‘prohibit any business activity that directly or indirectly involves or facilitates transactions in Iran, Sudan or with their governments, including government-controlled companies operating outside of these countries.’ In other words, Baker Hughes withdrew from Sudan nearly two years ago.
Another company on the SEC’s Sudan page, Immtech Pharmaceuticals, appears because it conducted clinical studies for the treatment of first-stage African sleeping sickness in Sudan. We hope this isn’t the sort of corporate behavior the SEC would define as “subsidizing a terrorist haven or genocidal state.’
Not only has the SEC named and shamed the wrong companies, it’s missed many with significant operations in countries like Sudan. Not one of the companies generally identified as enabling the Sudanese government’s genocidal capacity appears on the SEC list even though some (such as PetroChina) list on U.S. capital markets.”
Last Chance: Early Bird Discount Extended Until July 20th
In the wake of the mad rush for last week’s Early Bird deadline, we have decided to extend the deadline – just this once – until July 20th. So this is your last chance to take advantage of a nice discount on the Member Appreciation Package to catch these three October Conferences by video webcast:
– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)
[Media Oddity: Detroit rocker Ted Nugent pens an opinion column for WSJ. Egads.]
Disclosing Spousal “Leisure Activities”
Mark Borges continues to do excellent work in his CompensationStandards.com blog. Here is an item he blogged about on Tuesday: Joann Lublin had an interesting article in Saturday’s Wall Street Journal on executive spouses who get to enjoy corporate perquisites (see “For CEO Spouses, Corporate Jets are the Perfect Perk” (subscription required)). Using the disclosures in this year’s proxy statements, she writes about how the families of top corporate officials often get to indulge in many of the perquisites and other personal benefits provided to the executives.
One particular item – leisure activities – caught my eye since Alan Dye and I had spoken about this in our session about perquisites at last year’s Proxy Disclosure Conference. This is one of those tricky areas, where the disclosure decision often turns on the tiniest of details.
As I recall, we highlighted several of the challenges in determining whether the ancillary activities (such as spa treatments or sightseeing trips) provided to spouses who attend a business-related function are disclosable perquisites. Take, for example, a typical situation where a company’s senior executives attend a Board of Directors’ retreat at which golf and other recreational events are paid for by the company. Frequently, the executives’ spouses also attend the retreat, with the company incurring expenses for their airfare, meals with the directors, and “leisure activities.”
To me, these events raise two questions: are the executives’ recreational activities considered a perquisite and, even if not, what about the activities for the spouses?
While any perquisites analysis is going to be situation-specific, I typically start with the assumption that the executives’ leisure activities are related to the business purpose for the event. In the case of spousal activities, I start from the opposite end of the spectrum, and assume that they should be considered perquisites. Of course, in both cases, I have to apply the SEC’s “directly and integrally related” test to the specific facts. If, ultimately, I conclude that the activities constitute a personal benefit to the named executive officer then they will need to be included as part of his or her total compensation if aggregate perquisites exceed the $10,000 disclosure threshold, and quantified if their incremental cost to the company is $25,000 or more (which is highly unlikely). For an example of a company that included spousal “leisure activities” as part of its executives’ perquisites disclosure, see the Rockwell Automation proxy statement (see footnote 1).
The other question that comes up here is whether describing a spa experience as a “leisure activity” is sufficient for disclosure purposes. I think it is. The Adopting Release only requires that a company’s perquisite description give investors a sense of the particular nature benefit received – it doesn’t seem necessary to me to disclose whether the spouse spent an hour in the amethyst steam room or received a hot stone massage.
For those of you that deal with shareholder proposals, you undoubtedly have heard about the “nuns” that are shareholder activists. A recent Washington Post article prompted me to call upon one of the more active nuns to discuss what led her into this field.
In this podcast, Sister Valerie Heinonen draws upon her experiences from three decades of shareholder activism to give us a perspective on the shareholder proposal process from the proponent’s viewpoint, including:
– How did you get started in the shareholder proposal arena?
– What do you find most challenging about the shareholder proposal process? What do you find the most frustrating?
– If you could change the shareholder proposal process, what would you change?
– In terms of communicating with proponents, what do you recommend to companies that they do?
[Personal Note: My family and I walked in the DC “4th of July” parade yesterday carrying a large 5-point fabric star. Quite a trip marching past thousands and thousands. Next year, we graduate to manning the ropes on a big balloon.]
A Director “Retirement”: Two Tales
Below is a stark example of the differences between why a director really resigns from a board and what a company is willing to disclose about it:
“Last night, CVS/Caremark shareholders succeeded in removing embattled director Roger Headrick from the company’s board of directors and, in so doing, holding him accountable for his past failures to protect Caremark shareholders. As lead independent director and audit committee chair at Caremark, Mr. Headrick bears principal responsibility for approving a sweetheart deal with CVS that nearly cost shareholders $3.3 billion and for the ongoing DOJ and SEC investigations into possible stock option backdating.
Mr. Headrick’s resignation required extraordinary efforts after the CVS/Caremark board initially failed to respect the shareholder vote in its May 9 director election. In addition to communications from major institutional shareholders—including the California Public Employees’ Retirement System, New York City Comptroller William C. Thompson, Jr. and North Carolina State Treasurer Richard H. Moore—members of the House Committee on Financial Services questioned SEC Chairman Christopher Cox regarding the impact of the broker vote on Mr. Headrick’s tainted election during last Tuesday’s hearing on investor protection and market oversight.
The adoption of majority vote standards in director elections by hundreds of companies, including CVS/Caremark, should finally make director elections meaningful. The extraordinary measures required to remove Mr. Headrick, however, underscore the need for swift SEC approval of the NYSE proposal to eliminate the broker vote in all director elections to ensure their integrity going forward.”
2. Here is CVS/Caremark’s version of the director departure, as disclosed in the company’s Form 8-K:
“CVS Caremark Corporation has announced that Roger L. Headrick has decided to retire from its Board of Directors, effective immediately. The Company also announced that its Board of Directors has designated William H. Joyce to succeed Mr. Headrick as Chairman of its Audit Committee.
‘We are enormously grateful to Roger Headrick for the many years of distinguished service he has provided to Caremark,’ said Mac Crawford, Chairman of the Board of Directors of CVS Caremark Corporation. ‘During his tenure on the Caremark board, Roger helped guide Caremark through a series of large and successful transactions that rewarded Caremark shareholders and transformed our company into the nation’s leading pharmacy services provider. He will be greatly missed by me and his fellow directors of CVS Caremark.’
‘We thank Roger Headrick for his service to CVS Caremark and will miss his wise counsel and stewardship,” added Tom Ryan, President and Chief Executive Officer of CVS Caremark. “We wish him well in his retirement. We are also grateful to Bill Joyce for agreeing to succeed Roger as Chairman of our Audit Committee.’”
Survey Results: Blogging Anniversary
With five years of blogging under my belt (and now, a new partner-in-crime), I asked a few questions last month about how you might want to see the direction of this blog change. Here are the results:
1. I have been reading Broc’s blog since:
– Way back when Broc was blogging on RealCorporateLawyer.com (ie. 2002) – 41.5%
– For two-three years – 38.5%
– Just the past year – 20.0%
2. If I had my druthers, Broc would:
– Never mention his personal life again – 6.6%
– Mention his personal life occasionally, just as he does now – 83.8%
– Blog more about his personal life (because it makes my life appear so much better in comparison) – 9.6%
3. On TheCorporateCounsel.net, I wish Broc would do more of these types of podcasts:
– More podcasts about offering techniques – 34.7%
– More podcasts about governance practices – 64.5%
– More podcasts about disclosure analysis – 69.4%
– More podcasts about latest legal developments – 62.9%
– More podcasts of a human interest nature – 8.1%
Thanks for the feedback; Dave and I will heed your wishes about podcast topics – and letting our personal lives only occasionally pop up in our daily musings…
Yesterday, the SEC posted its proposing release for accepting financial statements without a US GAAP reconciliation when they are prepared in accordance with International Financial Reporting Standards (IFRS), as published by the International Accounting Standards Board (IASB) in its English language version. The SEC posted a Staff Observations Report and Staff Review Correspondence.
Under the proposed amendments to Form 20-F, portions of Regulation S-X, Rule 701 and various Securities Act forms, in order to be eligible to omit the US GAAP reconciliation, an issuer must state “unreservedly and explicitly” that the financial statements comply with IFRS as published by the IASB, and the independent auditors’ report must similarly opine on compliance with IASB-IFRS. The proposing release describes and solicits comments concerning a number of areas where the IASB has not yet developed standards or where IFRS permits disparate treatment. These areas include: accounting for insurance contracts and extractive activities; accounting for mergers of entities under common control, recapitalizations, reorganizations and similar transactions; and the lack of any specific conventions for the format and content of income statements.
The SEC has established a 75-day comment period for the proposed amendments, which should keep this proposal on track toward being effective for reports filed in calendar year 2008.
ISS Reports on the 2007 Proxy Season
ISS highlights trends from the 2007 proxy season in its latest “Corporate Governance Bulletin.” As noted in the bulletin, clearly the come-from-behind shareholder proposal of 2007 was the “say on pay” proposal. This season saw nearly 40 proposals seeking an annual shareholder vote on executive compensation, which is a significant jump from the handful of such proposals last year. The “say on pay” proposals were remarkably successful (as these things go), with four proposals garnering a majority vote.
Beyond the “say on pay” proposals, over 60 proposals sought shareholder input on improving the link between executive pay and performance. Among the notable developments with these proposals was more shareholder support for “clawback” proposals, which generally call for recouping payments made to executives in the event that a later investigation or restatement results in their incentive goals having not been met. Also, not surprisingly, investor support for proposals requesting a shareholder vote on golden parachute packages saw an uptick in 2007, with a number winning majority votes. ISS notes that among the new executive pay proposals this year were those requesting that companies disclose, cap or permit shareholder votes on supplemental executive retirement plans, those addressing a company’s option grant practices, and those seeking information relating to the independence of compensation consultants.
ISS reports that proposals seeking majority voting continued to fare well in the 2007 season, with the most novel approach seeking to have companies reincorporate in Delaware. Proxy access proposals at H-P and UnitedHealth received strong, but less than majority support. Proposals seeking a separation of the Chairman and CEO positions did not fare as well as they had in the past. ISS also highlights continued strong shareholder support for proposals targeting anti-takeover defenses, most notably poison pills, classified boards, supermajority voting and dual-class equity structures.
Options Backdating: SEC Staff Provides Guidance on RSU Awards
One of potential collateral consequences faced by companies in the midst of investigations and pending restatements arising from options backdating troubles is that they find themselves in the unenviable position of having to suspend their equity-based employee benefit plan transactions while the company gets its financial house back in order. Oftentimes, switching over to cash-based incentive compensation can present a financial hardship at the worst possible time for the company.
Recently, the Corp Fin Staff addressed these circumstances in a no-action letter to Verint Systems. Verint had been a wholly-owned subsidiary of Comverse Technology until an IPO in 2002, and is still majority-owned by Comverse. Verint’s options backdating troubles are intertwined with those of Comverse, and the company switched to cash awards in order to retain employees while it remained delinquent and delisted. As an alternative, Verint proposed to make broad based grants of restricted stock units and deferred stock to non-affiliate, non-management employees. These awards vest in at least 3 installments over a 3-year period, except that the awards would not vest on the applicable vesting date if Verint is not current in its Exchange Act reporting obligations or if its shares are not listed on an exchange. Awards failing to vest due to either of these circumstances only vest when the later of these events occur. Further, Verint indicated that it will not deliver any shares under the awards until it is current, and that any issued shares will be treated as restricted securities (in the Rule 144 sense, that is), so that no shares can be sold until the company has an effective registration statement in place.
The Staff indicated that it would not recommend enforcement action if the awards were made to Verint employees without Securities Act registration, based on counsel’s opinion that the grants did not constitute an offer or sale under Securities Act Section 2(a)(3). In providing this relief, the Staff did not stray too far from its prior precedent in this area, most notably its no-action letter to Goldman Sachs (Aug. 24, 1998).
One of the many topics that the SEC Commissioners discussed during last week’s testimony before the House Committee on Financial Services was the SEC’s ongoing efforts to scale back the implementation of Section 404 of Sarbanes-Oxley. When asked whether more of a delay in implementing Section 404 was necessary for smaller companies, the Commissioners rejected any notion of extending the compliance timetable.
Just a couple of days later, the US House of Representatives passed an amendment to the SEC’s appropriations bill that would limit the agency’s ability to require Section 404 compliance by non-accelerated filers for all of fiscal 2008 (that is, through September 30, 2008). Having not had much luck getting traction in the House with more comprehensive Sarbanes-Oxley reform, the sponsors of the amendment (Rep. Scott Garrett (R-NJ) and Rep. Tom Feeney (R-FL)) sought to use the often more reliable “power of the purse” to give smaller companies additional time for digesting new SEC and PCAOB guidance. Despite lobbying efforts by groups such as the AFL-CIO, the Council of Institutional Investors, AARP, a coalition of consumer groups and even leaders from the House Committee on Financial Services, the amendment passed by a vote of 267 to 154.
While the amendment’s prospects in the Senate are unclear, the fact that it passed so shortly after the SEC’s reassurances that it was making progress in reducing Sarbanes-Oxley compliance burdens certainly raises the pressure on the agency to reconsider giving smaller companies another break. At this point, can’t we just bite the bullet and get on with it? [Note that the bill itself is the appropriations bill, H.R. 2829, which doesn’t say anything about 404. The Garrett-Feeney amendment was introduced on the floor, and the text of it is reported here in the Congressional Record.]
More House Action: Compensation Consultant Conflicts
As Broc noted back in May, Rep. Henry Waxman (D-CA), Chairman of the House Committee on Oversight and Government Reform, had sent letters to a number of compensation consulting firms seeking information about their potential conflicts of interest when recommending pay packages for executives. Based on this article from Saturday’s NY Times, it looks like Rep. Waxman means business on this matter, issuing a subpoena to Towers Perrin seeking the previously requested information about the firm’s clients and the services that it provides to those clients.
When adopting the executive compensation rules last year, the SEC rejected suggestions from some commenters that the rules require disclosure about the actual or potential conflicts of interest that compensation consultants may have when designing or recommending executive pay. Given that Rep. Waxman’s inquiry shows no signs of abating, this issue will potentially be a hot topic among shareholders (and perhaps the SEC) going into next proxy season.
SEC Posts Electronic Form D Proposing Release
In yet another installment of the proposals directed at making things easier for small business (and in this case, anybody doing Reg. D private placements), the SEC posted its proposing release for simplifying Form D and establishing an online filing system for the Form. This one has been on the Corp Fin to-do list for a while now, so it is nice that this proposal is now seeing the light of day.
Under the proposal, Form D would be reorganized into 14 numbered items that would solicit information generally along the lines of what Form D requires now, with some tweaking (and in some cases expansion) of the current disclosure requirements. More explicit direction on when to file amendments to Form D are also proposed, which would hopefully clarify those situations where there is most likely a material change in the previously submitted information.
The proposed electronic filing capability would be available to anyone using a computer with Internet access. Filers would obtain the same codes necessary to file using the EDGAR system, and would utilize an online Form D filing system with drop-down menus designed to assist in preparation of the Form. In terms of output, the filed Form D would be available to the public through the SEC’s website in either normal text or XML. With the proposed XML feature, the tagged data would be searchable and “interactive.” The SEC proposes to take care of any general solicitation and general advertising concerns arising from the ready availability of Form D by proposing a safe harbor for the electronically filed information, so long as it was provided in good faith and the issuer made reasonable efforts to comply with the Form D requirements.
The SEC has established a 60-day comment period for this proposal. We will be posting memos about this and other smaller company capital-raising reform proposals in our “Private Placements” Practice Area.
There was a lot of talk this week about many key regulatory issues, starting off with Tuesday’s appearance by all five Commissioners before the House Committee on Financial Services. As noted in this Wednesday Washington Post article, questioning was relatively gentle from the Committee, with Rep. Barney Frank (D., Mass.) setting the tone with a statement that the Commission has “hit the right balance.” In prepared testimony, the Commissioners defended the SEC’s recent actions on virtually all fronts, including oversight of the Enforcement Division’s negotiation of penalties, efforts to improve the clarity of mutual fund and 401(k) disclosure (as well as other fund issues such as 12b-1 fees and soft dollars), the adoption of guidance on implementing SOX Section 404, proxy reform and work to realize the overall promise of interactive data.
On this last point, Chairman Cox repeated a presentation that he delivered back in March at the USC Marshall School of Business, demonstrating the much-anticipated XBRL tool that will permit analysis of the S&P 500’s executive compensation data. As he did in March, Cox demonstrated how users can slice and dice the numbers to compute total compensation based on inclusion of the grant date fair value of equity awards (as the rules were originally adopted last summer) rather than the expensed portion of those awards (as the rules were changed by the “December surprise”). The Chairman noted that 62% of the companies in this data set actually reported a higher total compensation number based on the December surprise methodology, as compared to what the would have reported under the grant date fair value method.
In response to questioning about Congressional efforts to establish a means for shareholders to have a “say on pay,” Chairman Cox was noncommittal. He did commit on proxy access, however, telling the Committee that the agency planned to propose changes to the proxy rules by late July so that new rules could be in place before the 2008 proxy season. While Cox said that he did not favor “a national bylaw” approach, he did indicate that it was important to have “one rule for the whole country” in the wake of the Second Circuit’s AFSCME v. AIG decision. Rep. Frank promised hearings on the issue of proxy access once a rule is proposed. On the broader topic of proxy reform, the Chairman pointed to the themes covered at the May roundtables as ripe for consideration, including the prospect for an electronic shareholder forum.
It remains to be seen whether the Commissioners can actually reach any sort of consensus on proxy access by the end of July, given that a vote has been very publicly postponed twice in the past 9 months!
Imagine a World with Understandable Financial Statements
Financial statements have been getting a bad rap for some time now because of their ever-increasing complexity and lack of clarity, yet no one seems to know what to do about it. On Wednesday, the SEC announced that a newly-established SEC Advisory Committee on Improvements to Financial Reporting is on the case. According to the notice establishing the Advisory Committee, it will kick things off with a public meeting on August 2 at the SEC’s Washington offices. Operating under this charter, the Advisory Committee will be comprised of between 14 to 18 members and will have an anticipated life of about 1 year. Robert Pozen, chairman of MFS Investments, has been tapped to chair the Advisory Committee, but it remains to be seen who will fill out the remaining seats.
The SEC has tasked the Advisory Committee with a huge job: figure out what is broken with the current system, and come up with proposals on how to make the process better and the end-product more transparent and “user-friendly.” Not surprisingly, the Advisory Committee is going to focus on how technology can make things better by utilizing XBRL, hyperlinks and other technological advancements.
For more discussion of the Advisory Committee, check out FEI’s “Financial Reporting” Blog.
Paulson’s 10 Cents: “Next Steps” to Global Competitiveness
Earlier this week, Treasury Secretary Paulson announced his six “next steps” toward improving the global competitiveness of US markets. Among the notable items outlined in his action plan are: pursuing a modernized regulatory structure for financial services providers (to be proposed early next year); encouraging best practices among asset managers and hedge funds to deal with investor protection, market discipline and systemic risk; rolling out improved investor education efforts; and working on cross-border mutual recognition.
[Not to be outdone by this week’s discussion of key issues by so many luminaries, those intrepid talking heads at the “Sarbanes-Oxley Report” debate the thorny issue of options backdating in their latest installment.]
A tripleshot blog from our California law expert, Keith Bishop: I get many questions regarding the status of the proposed changes to the California Department of Corporations’ proposed stock option regulations. These were proposed last September and have been winding their way through the notice and comment process. Recently, this proposal has begun to move.
The proposal was filed with the California Office of Administrative Law (OAL) on May 30th. OAL is the office in California charged with reviewing regulations for compliance with California’s Administrative Procedure Act. Thus, OAL review is a technical review – not a policy review. OAL has 30 working days to review the proposed regulations. If OAL approves the regulations, it files the regulations with the Secretary of State.
Although regulations in most cases become effective 30 days after filing with the Secretary of State (Cal. Gov. Code Section 11343.4), I’ve been told that the Department has requested immediate effectiveness on filing with the Secretary of State. As a caveat, OAL does have the power to disapprove regulations. Although this is rare, it does happen occasionally. If OAL does so, the regulations go back to the department or an appeal is made to the Governor. I would be very surprised if OAL disapproves of these regulations; regardless, I think that many people are anxiously awaiting the effectiveness of these rules.
What is the California’s Proposal on Options?
More from Keith: The proposed regulations perform double duty. Originally, they served as guidelines for the exercise of the California Commissioner’s discretion in applying the fair, just and equitable standards for qualification purposes. Although they still perform this function, they began serving an additional purpose in 1996 when California enacted Corp. Code Section 25102(o).
That section exempted offers and sale of securities that, among other things, are exempt under Rule 701 and meet the Commissioner’s rules for qualification of stock option plans. While it was good to have a new exemption for stock option plans, the Commissioner’s rules were out of sync with many plans. In 1999, the Department proposed amendments to the rules.
However, these proposals went nowhere. In 2001, the legislature enacted SB 1837 to extend the statutory exemption to limited liability companies. Consequently, the Department amended its rules but only to account for options granted by limited liability companies. At the time, I had recommended that the amendments proposed by the Department in 1999 be included. However, the Department limited its amendments to the issue of limited liability company options. In 2002, the Department issued an invitation for comment on changing the rules. Although many comments were received, the Department took no action.
Now, at long last, the Department has finally addressed some of the issues that have been bedeviling issuers for the last ten years.
How Might the California Option Proposal Impact Public Companies?
I asked Keith: “If companies that have registered their plan on Form S-8 (which are just about all public companies), do they need to worry about these rules?”
Keith noted: These rules are of concern to many public companies. Smaller public companies with securities listed on a national securities exchange designated by the Commissioner (basically, the Nasdaq Global Market, NYSE, AMEX and Tier I of the Philadelphia Stock Exchange) are exempt because Cal. Corp. Code Section 25100(o) exempts both the listed securities and options to acquire listed securities.
Public companies whose securities are not listed on these exchanges cannot rely on the 25102(o) exemption because the exemption is conditioned on the availability of Rule 701 (for Rule 701 to be available, the company must not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act). Thus, public companies whose securities are quoted in the OTCBB or Pink Sheets are cannot use the exemption. Also, it is not clear to me that companies with securities listed on the Nasdaq Capital Market are exempt because although the SEC has now designated the listed securities as “covered securities” under Section 18 of the Securities Act, their options are not covered securities.
Unless relying on some other exemption, options granted by these companies would be subject to qualification. In that case, the rules would perform their original function – standards for qualification. Sometimes, the stock option qualification issue can be a surprise and a problem for those companies that fall of the exchange. In those cases, the plan was not likely to have been drafted with the Commissioner’s standards in mind.
In this podcast, Steve Kunkel and Bill Smith, both from CBIZ Accounting, Tax & Advisory Services and Mayer Hoffman McCann, explain how the IRS may well turn FIN 48 into a roadmap and treasure map for audits, including:
– What are the latest FIN 48 developments?
– What is the most common uncertain tax position that you have seen?
– What is the best approach in addressing staffing needs for initial compliance for FIN 48? What is an “advisory accountant”? What role will our independent auditor play in evaluating tax positions for FIN 48 purposes?
– What do you anticipate the IRS will do with FIN 48 disclosures?
– How will FIN 48 affect tax positions that companies take in the future?
– How does a company determine a “unit of account”?
– What impact can FIN 48 have on a company’s banking covenants?
More Serious Thoughts about Avvo
A few weeks ago, I poked a little fun about Avvo in this blog. But what do I really think? I believe Avvo gets it “right” in that some aspects of practicing law are on the verge of being revolutionized. Too many industries are being transformed to think that the legal field will go unscathed. Exhibit A are the web sites we have launched, they are unique – and to be honest, I think they merely scratch the surface of where I think they can evolve to in the not-too-distinct future. With Dave Lynn on board here, there is now room for the creative juices to flow.
I predict that Avvo will listen to what their audience wants – and that the end product could be truly something breathtaking. It might end up being a Facebook for lawyers; who among us would ever think that something like that would happen so fast? If you check the legal blogosphere, Avvo became a household name overnight. That alone would be unthinkable a decade ago.
In today’s world, each lawyer should be branding and marketing themselves as much as they can. That probably was always true, but real opportunities weren’t there for most of us. Now, someone can make their “name” on the Web even before they graduate from law school. It’s truly every man and woman for themselves, as job-hopping is not frowned upon as it was in the not-too-distant past.
And trust me, all these changes are gonna be for the “good” as hopefully the traditional lawyer lifestyle will become more balanced and away from billable hours and tedious meetings.
Note that Avvo isn’t alone, it appears that LawDragon.com has a similar goal to allow folks to endorse lawyers, with one feature that I am surprised hasn’t created more of a buzz – the site allows evaluators to identify how much per hour the lawyer charged them (not too many lawyers have endorsements that identify rates but I did find a few). In theory, this feature could put downward pressure on billing rates. As expected from a relatively new site (been up little more than a year), this one has bugs too (e.g. Alan Beller listed as Corp Fin Director).
If you followed the SEC’s recent proxy process roundtables, you heard a bit of debate over the electronic shareholder forum idea. This is an idea that has been floated for a while – and even tried a few years back at MCI, as forced upon that company by the Breeden Report and called a “Town Hall.” This idea is described in this SEC roundtable briefing paper.
A Verizon shareholder/retiree recently created an electronic shareholder forum for that company to facilitate a discussion of that company’s pay-for-performance policies. This development was written up in Sunday’s NY Times.
The idea that all-year-round forums can replace the existing Rule 14a-8 shareholder proposal process was criticized by some during the SEC’s roundtables, by both management and investor representatives. In my mind, companies shouldn’t like the idea because of the expense – and manpower necessary to – maintain and respond to shareholder initiatives all year round. Investors shouldn’t like it because many proposals are submitted as part of a broader strategy that involves getting management behind closed doors.
[Another Corp Fin Retirement: Madeline Booker ends decades of service this week as the principal administrative contact in the Division. Thanks for everything Madeline!]
Catching Up to Nasdaq’s Changes
Keith Bishop notes: Transitions are always tough, but it seems that the regulators don’t want to catch up with the name and other changes at the Nasdaq Stock Stock Market, Inc. In a recent blog, you noted that the SEC has amended Rule 146 to include the Nasdaq Capital Market as a “covered security” for purposes of Section 18 of the Securities Act of 1933. The SEC also said that it was amending Rule 146 to reflect the name change of the National Market System of the Nasdaq Stock Market LLC. Nasdaq renamed the National Market to the Global Market on July 1, 2006. At the same time, Nasdaq created the Global Select Market as a segment within the Global Market. Despite the SEC’s stated intent to reflect the name changes at Nasdaq, the rule still refers to the “National Market System of the Nasdaq Stock Market”, which it incongruously now defines as the “Nasdaq/NGM”.
I am embarrassed to say that the California Department of Corporations still hasn’t reacted to the conversion Nasdaq and the renaming of its markets. As Broc blogged way back in August, California has an exemption for listed securities that includes any warrant and other right to purchase the listed security. Corp. Code Section 25100(o). The statute refers to securities listed on a national securities exchange or the “National Market System of the Nasdaq Stock Market” if the exchange or Nasdaq Stock Market (or its successor) has been certified by rule or order of the Commissioner of Corporations. Corporations Code Section 25101(a) contains a similar exemption with respect to nonissuer transactions for listed securities if certified by the Commissioner. Finally, California has a usury exemption in Corporations Code Section 25117 that is dependent upon the Commissioner’s certification of the exchange.
It should be noted that the addition of the Nasdaq Capital Market to the list of “covered securities” in Rule 146 doesn’t mean that the California exemptions discussed above are now available to Nasdaq Capital Market securities. In particular, the NSMIA did not clearly preempt state qualification requirements for options or warrants to acquire covered securities, as discussed in May-June 2003 issue of The Corporate Counsel. Cal. Corp. Code Section 25100(o) provides an exemption for listed securities but only if the securities are listed on a certified exchange. While the Nasdaq Global Market is the successor to the Nasdaq National Market, the Nasdaq Capital Market is not.
May-June 2007 Issue: The Corporate Counsel
We just mailed the May-June 2007 issue of The Corporate Counsel. Try a no-risk trial for half-price for the rest of the year.
The May-June issue includes analysis of:
– Deep (1933 Act) Thoughts on Google’s TSO Program
– The CDI—The Staff’s New Guidance Format
– The Coming Internal Control Disclosures by Non-Accelerated Filers—Staff Clarifies Scope and Effective Date of 10-Q Temporary Item 4T
– Issuer Private Placement While There is Undisclosed Material Information—Rule 10b-5 Concerns (Waiver?)
– Goldman Sachs Belatedly Adds Shareholder Proposal to Annual Meeting
– Why So Many Forms 4 Cluttering Edgar?
– Internet Proxy Solicitation—State Law Compliance?
– S-K Item 403 Follow-Up—Staff Now Says Deceased NEO May Be Excluded Completely From Beneficial Ownership Table
– Reporting Standalone Stock Appreciation Rights in the Beneficial Ownership Table—What Number of Shares?
– Post-Termination Rule 144 Cutoff for Control Stock—Waiting Period!@#$%
– Staff No Longer Allows Adding Shares to Form 144 by Amendment—Ramifications
– New Backdating Investigation Numbers
Expires This Friday! Our Early Bird Discount for the “Member Appreciation Package” to attend our three special Conferences via video webcast expires this Friday. Act now to save $300; the Package includes:
Late Friday, the SEC posted the proposing release regarding changes to Rules 144 and 145. As these rules are some of the “bread and butter” issues that we have been writing about in The Corporate Counsel for over 30 years, rest assured that we will be analyzing these proposals in upcoming issues…
[What’s the story with this dramatic chipmunk? Make sure you see the “director’s cut” version too…]
Outside Counsel Serving as In-House Counsel
In this podcast, Margaret Rosenfeld of Smith, Anderson explains what’s it’s like for someone at a law firm to serve as in-house counsel, including:
– Is it necessary for a public company to have an in-house lawyer with knowledge of the securities laws?
– If there is no in-house securities lawyer, who do you usually work with at a company?
– What do you do to ensure that a client’s legal or finance staff has sufficient knowledge to be able to interface appropriately on securities law issues?
– What risks does a company face that tries to handle its compliance, disclosure and corporate governance work internally alone (even if they have the internal expertise)?
– Is it cost-effective for a public company to have only outside securities counsel?
Survey Results: Board Evaluations
We have wrapped up our quick survey on board evaluations; below are the results:
1. When is your company’s board evaluation typically conducted:
– During the fiscal year in which board performance is evaluated – 52.5%
– Following the fiscal year, but before the proxy statement is filed – 39.0%
– Between the filing of the proxy statement and the annual meeting of shareholders – 6.8%
– We do not perform annual board evaluations – 1.7%
2. In conducting board evaluations, some boards use written questionnaires and some use oral interviews (or both). At our company, we use:
– Written questionnaires only – 60.0%
– Oral interviews only – 13.3%
– Both written questionnaires and oral interviews – 26.7%
3. If written questionnaires are used in the board evaluation process, are copies retained:
– Yes – 44.4%
– No – 55.6%
4. Who manages the board evaluation process:
– Non-executive board chair or lead director – 11.9%
– Chair of governance/nominating committee – 42.4%
– All members of the governance/nominating committee – 6.8%
– General counsel/other in-house counsel – 25.4%
– Outside counsel/consultant – 6.8%
– CEO – 0.0%
– Other – 6.8%
5. Is a written report produced based upon the results of the board evaluation:
– Yes – 67.8%
– No – 32.2%
6. How do the minutes reflect the board evaluation results:
– Brief summary of results, without including conclusions – 26.3%
– Brief summary of results, including conclusions – 43.9%
– In-depth details of the results – 0.0%
– Minutes do not reflect results – 29.8%
The Art of the Cross-Border Deal
We have posted the transcript from our recent DealLawyers.com webcast: “The Art of the Cross-Border Deal.”
Last year, I blogged about late SEC filings serving as bond defaults and, more specifically, a New York decision in BearingPoint. Now, a recent decision in Texas – Cyberonics, Inc. v. Wells Fargo – seems to have come to a contrary conclusion. Cyberonics recently filed a Form 8-K about this case – and both of these court opinions are posted in our “Late SEC Filings” Practice Area.
Here is some analysis about Cyberonics from Davis Polk: As a result of the large number of delayed SEC filings in the last several years due to option back-dating and other accounting problems, investors and companies have focused significant attention on whether a failure to file SEC reports will trigger a default under a company’s indenture that will permit acceleration of the Company’s debt. Last year, a New York state court, in a decision regarding BearingPoint, Inc., interpreted standard indenture language to require the timely filing of SEC reports and held that a failure to file was a default. Recently, a U.S. District Court in Texas held, contrary to the New York court, that similar language did not impose such an obligation.
In the BearingPoint case decided by the Supreme Court of New York, New York County, on September 18, 2006, the covenant in the indenture called for reports to be filed with the trustee by the company “15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC.” BearingPoint argued that, so long as the documents were not filed with the SEC, there was no obligation to provide them to the trustee and hence no default. However, the court ruled that the company’s failure to file reports with the trustee when such reports were required to be filed with the SEC constituted an event of default under the indenture.
The court also found that, aside from the language in the indenture itself, the language in Section 314(a) of the Trust Indenture Act “specifically obligates” an issuer of bonds to provide the trustee with “current filings,” meaning filings made in accordance with the time frames prescribed by the SEC. Section 314(a) of the TIA provides that an issuer must “file with the indenture trustee copies of the annual reports and of the information, documents, and other reports (or copies of such portion of any of the foregoing as the Commission may by rules and regulations prescribe), which such obligor is required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.”
Last week, the U.S. District Court for the Southern District of Texas, in litigation brought by the trustee for bonds issued by Cyberonics, Inc., took the opposite view of the BearingPoint court. First, the Cyberonics court held that the language of the reporting covenant itself (which was substantially identical to the language in the Bearingpoint indenture) clearly only required Cyberonics to file Exchange Act reports with the Trustee 15 days after actually filing them with the SEC (not 15 days after when they were due).
Second, the court rejected the trustee’s argument that Section 314(a) of the TIA required the reports to be filed with the trustee in accordance with the SEC’s deadlines. The Cyberonics court stated that Section 314(a)(1) is virtually identical to the reporting covenant itself but is “less stringent” because it does not specify a time frame for providing the reports to the Trustee.
The opinion is a significant victory for Cyberonics and for other issuers that are subject to indentures with similar reporting covenants (the opinion is largely irrelevant to issuers with reporting covenants that provide explicit SEC filing deadlines).
By interpreting the Cyberonics reporting covenant to require that Exchange Act reports be filed with the trustee only after being filed with the SEC and stating that Section 314(a) of the TIA does not provide a deadline for filing such reports with the SEC, the Cyberonics opinion provides issuers that are facing restatements or are otherwise delinquent in their SEC filings a bit more leverage against bondholders threatening default or acceleration as a result of such delinquency. The Cyberonics court emphasized, however, that during the period that Cyberonics was delinquent in filing its Form 10-K, Cyberonics kept “the trustee informed of company developments” by filing Form 8-Ks containing information about its operations.
Accordingly, we recommend that delinquent issuers continue to provide as much operating information to bondholders and the trustee as possible. Issuers should also take note that this opinion, like the BearingPoint opinion, is by a single trial court and is not binding on other courts.
[Cowabunga! These big wave videos get me antzy. 100 foot waves!]
Tellabs: Another Blow to Securities Fraud Lawsuits
Yesterday, the US Supreme Court – in Tellabs, Inc. v. Makor Issues & Rights, Ltd. – enforced a strict pleading standard for private securities actions. This case dealt with the issue of what a plaintiff is required to plead under the Private Securities Litigation Reform Act in order to establish a “strong inference” that the defendant acted with the requisite mental state. This issue has long split the lower courts.
In a 8-1 decision (Justice Stevens dissenting), the Court found that to qualify as a strong inference of scienter within the meaning of the PSLRA, the inference must be more than merely plausible or reasonable – it must be “cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” The Court found that when determining whether a Rule 10b-5 claim meets that requirement, a court must consider plausible opposing inferences – although the inference of scienter need not be irrefutable.
Yesterday’s WSJ’s Law Blog included some interesting commentary from participants in the case. This case comes on the heels of another important Supreme Court case dealing with private lawsuits: Credit Suisse Securities (USA) LLC v. Billing. A copy of the opinion – and a bunch of related memos – are posted in our “Securities Litigation” Practice Area.
Opening Up the Shelf: The SEC’s Proposals to Benefit Smaller Public Companies
From Dave: On Wednesday, the SEC published its proposed amendments to Forms S-3 and F-3, seeking to open up those forms for primary offerings (on a limited basis) by companies with less than $75 million of public float. Under the proposals, these smaller companies (as well as companies selling below-investment grade debt) could sell securities off the shelf in an amount up to 20% of their public float over any 12 calendar month period. The proposed limited primary offering provisions would be available to companies quoted on the OTCBB and Pink Sheets.
For the purposes of calculating whether an issuer could do a takedown under this proposed new instruction, you would compute 20% of the public float immediately prior to the intended sale, and compare that number to the aggregate amount (gross proceeds) of sales of securities in primary offerings under the S-3 instruction over the past 12 calendar months, including the amount of the intended sale. The SEC’s rationale for limiting sales to 20% of public float is to strike a balance between the issuers’ need to raise capital with the potential effect of primary offerings on the markets in relatively thinly-traded securities.
In the proposals, the SEC specifies that, for convertible securities, the amount that could be sold off the shelf would be based on the aggregate market value of the maximum amount of underlying securities, rather than the market value of the convertible securities themselves. The proposals would specifically prohibit otherwise S-3 eligible shell companies from utilizing the new shelf flexibility – until 12 calendar months after it ceases to be a shell company, the shell company has filed all of the Form 10-like information required and the shell company has been timely reporting for 12 calendar months.
One of the nice features in these proposals is that the 20% threshold is calculated by reference to public float just before the contemplated takedown (rather than, say, at the time of filing the registration statement), so the amount of securities that an issuer is able to sell increases if the issuer’s public float increases. Further, the 20% restriction on sales goes away if an issuer crosses the $75 million public float threshold and reaches the promised land of unlimited shelf offerings. When the Section 10(a)(3) update time next rolls around, the issuer would then have to re-evaluate its public float and, if the float is less than $75 million, the issuer would drop back into the 20%-limited shelf offering instruction.
While these proposals don’t go as far as the Advisory Committee on Smaller Public Companies had hoped, they do go a long way toward improving the capital formation picture for smaller companies. With the prospect of at-the-market direct public offerings done off the shelf, issuers may be less inclined to seek financing through the PIPEs and equity lines markets, where terms may not be as advantageous for the issuers.
Corp Fin No-Action Letter: A New 409A Option Repricing Twist
For those with 409A option repricing exchanges on the brain, I blogged about a new Corp Fin no-action letter yesterday on the DealLawyers.com Blog…
