Yesterday, the SEC posted its management report guidance regarding Section 404 of Sarbanes-Oxley – as well as its adopting release regarding amended rules. The SEC also posted the proposing release regarding the definition of a “significant deficiency.”
The SEC also has posted the proposing release regarding the Smaller Company Capital-Raising Reform, which will be analyzed more in tomorrow’s blog.
The SEC “Really” Wants Comments
Last week, the SEC posted an atypical “Notice of Additional Solicitation of Comments” relating to the PCAOB’s AS #5, seeking comment on seven specific questions. This notice seeks “additional” comments in addition to those solicited by the SEC’s notice from the prior week. My guess is that the SEC might not get much in response – how many times have folks had to comment on internal controls over the past five years? There’s gotta be some burnout from comment writers…comments are due July 12th.
SEC Adopts Universal E-Proxy
Also at yesterday’s open Commission meeting, the SEC adopted “universal” notice-and-access model of proxy distribution (commonly known as “mandatory e-proxy”) as well as amendments to Rule 105 of Regulation M to prohibit abusive short selling in the context of public offerings (here is Reg M press release). From Paul Weiss, here are notes from that portion of the open meeting (note the reference to a California conflict, as raised in Monday’s blog and teased out in our Q&A Forum further, specifically #2881 and #2889).
Regarding mandatory e-proxy, here is the opening statement from the Corp Fin Staff. For universal e-proxy, the new requirement will be phased in over two years, with large accelerated filers starting in 2008 and smaller companies and mutual funds beginning in 2009.
You may recall the Staff has been avoiding using the term “mandatory” with this rulemaking because that term implies that a company would have to deliver electronically. This is not true, companies can still deliver in paper under universal e-proxy – the only thing mandatory about it really is that companies will have to post their proxy materials on their website. And most companies already do that. The other change wrought by universal e-proxy is that the proxy materials would have to include another half-page worth of content, the “Notice of Internet Availability of Proxy Materials.”
SEC Proposes Elimination of Reconciliation of US GAAP for Foreign Issuers
At yesterday’s open Commission meeting, the SEC proposed to eliminate the requirement for foreign issuers to reconcile their financial statements with US GAAP if they are prepared in accordance with International Financial Reporting Standards (IFRS). Here are some opening remarks from the Corp Fin Staff.
Under the proposal, a foreign private issuer that presents financial statements in accordance with IFRS as adopted by the International Accounting Standards Board (IASB) will no longer be required to present a reconciliation to US GAAP. Such a reconciliation is currently required for audited financial statements, and in particular in an annual report on Form 20-F. It is also currently required for interim financial statements used in a registered offering of securities when the audited financial statements are more than nine months old.
Here are notes from this portion of the open meeting, courtesy of Cleary Gottlieb:
– The proposal will only apply to IFRS as adopted by the IASB. IFRS have been adopted with variations in particular jurisdictions, and notably in the European Union. The SEC, however, would only eliminate reconciliation if the issuer uses IASB IFRS, and the auditor opines on conformity with IASB IFRS. The technical implications of this approach were the subject of extensive discussion at the meeting and will be a focus for comments, since European issuers are required to prepare financial statements in accordance with IFRS as approved by the European Union.
– The proposal will refer to the English-language version of IFRS. The staff explained that IFRS are published in many languages, but under the proposal an issuer and its auditors will be required to refer to the English-language version.
– The proposal will apply only to foreign private issuers. As previously announced, the SEC staff is working on a concept release concerning whether U.S. domestic issuers should also be permitted to report under IFRS rather than US GAAP. That release was reported to be forthcoming later this summer.
– The proposal would affect Form 20-F and several other SEC forms and rules. The staff announced that the proposal would amend Securities Act Rule 701, which permits companies to issue shares and stock options to employees in the United States without SEC registration. Rule 701 currently requires a company to reconcile its financial statements to U.S. GAAP when it sells more than $5 million of securities per year to employees.
– It is too early to say when the rule changes might be effective, but it would appear that the process is on track for them to apply to calendar 2008 reports. The commissioners mentioned the importance of the European Commission’s deadline to decide by January 1, 2009 whether to allow U.S. issuers to file US GAAP financial statements in Europe.
The SEC said that the proposing release will also seek comment on whether to shorten the deadline for a foreign private issuer to file its annual report on Form 20-F, which is currently six months from the end of the fiscal year. The SEC has considered changing this deadline in the past, and the time required for the US GAAP reconciliation has been one reason it has not done so.
The SEC staff announced at the meeting that it plans to create an area on its website where the public can readily locate the reports of foreign private issuers using IFRS and the comment letter correspondence on those reports.
The proposal will be open for comment for 75 days from the date of publication in the Federal Register.
With the five-year anniversary of the Sarbanes-Oxley Act arriving next month, Dave and I thought we would use that memorable event to kick off our weekly vidcast series entitled “The Sarbanes-Oxley Report,” featuring “Billy Broc” Oxley and Dave “The Animal” Sarbanes.
The first installment is entitled “Happy 5th Anniversary SOX! Sweet and Beautiful” – and is only 15 seconds long. Future installments will tackle the tough issues of the day – and we eventually hope to interview guests (basically anyone game to wear a wig).
Here is a Quick Survey to consider after you review the video. Feel free to e-mail us your comments or story ideas. I’ve already heard “it just looks like two guys and a six pack”…
More Thoughts on the SEC’s IBM Enforcement Action
A few weeks ago, I blogged about a SEC enforcement settlement regarding IBM’s violation of the Form 8-K reporting requirements (and Rule 12b-20’s requirement) to disclose additional material information so as to make required statements not misleading.
One member notes: Do you think this case may have a chilling effect on voluntary 8-K filings? [See this new quick survey on earnings releases and earnings calls.] It seems to me that since IBM’s April 5, 2005 call was publicly webcast, it was already Regulation FD compliant – and thus, there was no requirement for IBM to file the transcript and slides on an 8-K. Voluntarily filing the slides on an 8-K when they didn’t have to seems to be what got IBM into trouble.
Another member notes: My view is that this was a tenuous case by the SEC; IBM told people the ’04 impact of stock comp expense in the call/their filings, told people ’05 would be lower, without quantifying, but people got confused and thought a chart was ’05 – not ’04 – even though reading the 10-K would have made clear these were the same numbers as ’04 and IBM had said ’05 will be lower! The only thing I’d fault IBM for is not calling analysts to make clear they misunderstood, but I’m not sure that should be the basis for an SEC action.
Kicking the Earnings Guidance Habit?
A few days ago, a coalition issued a set of recommendations in these Aspen Principles, including one that companies cease providing quarterly earnings guidance or projections. And this Associated Press article from a while back describes how fewer companies are providing earnings guidance – and then, CFO.com ran this article describing how CFOs are eagerly awaiting the tipping point that will spell the death of earnings guidance altogether.
Quick Survey: Earnings Releases and Earnings Calls
We have posted a quick survey on earnings releases and earnings calls.
There are some interesting questions posed in this survey. For example, the last one asks whether companies are posting their earnings call archives on iTunes or in the form of a “podcast.” Some companies are doing this, such as Johnson & Johnson.
On CompensationStandards.com, tune in tomorrow for this webcast – “The Latest Compensation Disclosures: A Proxy Season Post-Mortem” – during which Dave Lynn, Mark Borges, Mike Andresino and Mike Kesner will analyze what was disclosed this proxy season. This 90-minute webcast is a “must” to get a handle on what the latest disclosure trends. Please print off these course materials before the webcast.
If you are not a member of CompensationStandards.com, take advantage of our half-price for the rest of 2007 no-risk trial today!
[Recommendation for SEC Staffers: Don’t include an opening joke in your published speech; I like the idea of a joke to start a speech, but I don’t see the need to include it in your permanent record. Paris Hilton simply doesn’t need the publicity. Then again, VC Strine mentioned Paris in his “must-read” Topps decision (a case I blogged about yesterday in the DealLawyers.com Blog. Crikey, now I have given Paris more publicity by mentioning her in this blog…]
Analyzing Mutual Fund Voting on CEO Pay
In this CompensationStandards.com podcast, Beth Young of The Corporate Library and Rich Ferlauto of AFSCME go over a new study – “Failed Fiduciaries: Mutual Fund Proxy Voting on CEO Compensation” – which was jointly conducted by AFSCME, The Corporate Library, Shareowner Education Group, including:
– Why have you done this study for two years?
– What were the major findings of the study?
– What were the biggest surprises of the findings?
– How hard is to find the N-PX filings for this study and decipher them?
– What do you think mutual funds that are “Pay Enablers” should do?
Underwriters Win Supreme Court “IPO Laddering” Antitrust Case
Yesterday, the US Supreme Court held – in Credit Suisse Securities (USA) LLC v. Billing, No. 05-1157 – that the securities laws preclude application of the antitrust laws. It establishes clearer guidelines for the application of the implied antitrust immunity doctrine in the securities field – and clarifies that private antitrust lawsuits should not be allowed to discourage IPO activity. We will be posting memos regarding this case in our “Underwriting Arrangements” Practice Area (and many blogs have already covered the decision, including: Scotus; Legal Pad; D&O Diary).
Below is a case summary from Mayer, Brown, Rowe & Maw (who represented the petitioners): Conduct is impliedly immune from suit under the antitrust laws if application of those laws would conflict with the operation of another statutory scheme. Yesterday the Supreme Court held, in the context of antitrust suits challenging underwriter conduct during IPOs, that there was a conflict between the federal securities laws and antitrust laws that prevented the antitrust suits from going forward.
Credit Suisse involved antitrust class actions in which investors brought suit against ten leading underwriters, alleging that they agreed to engage in anticompetitive tactics involving some 900 technology-related IPOs during the market “bubble” of the late 1990s. Plaintiffs claimed that the underwriters required investors, in order to obtain IPO allocations, to agree to purchase additional shares of the IPO stock in the aftermarket and to pay excessive commissions on other transactions.
The underwriters argued, and the district court held, that the antitrust claims were precluded by the securities laws. The Second Circuit reversed the dismissal of the plaintiffs’ complaints. The Court granted the underwriters’ petition for certiorari.
In a 7-1 decision authored by Justice Breyer, the Supreme Court reversed. The Court recognized that three “critical” factors for implied immunity were easily satisfied: the existence of SEC authority over the alleged IPO conduct, evidence that the “responsible regulatory entities exercise that authority,” and practices at issue that constitute “heartland securities activity.” The Court then held that there was a conflict between securities regulation and application of the antitrust laws that rises to the level of “incompatibility.”
Private antitrust litigation would require “dozens of different courts with different nonexpert judges and different nonexpert juries” to evaluate conduct in an area of the Nation’s economy in which the SEC has drawn fine and nuanced lines between activities that are essential to the operation of the capital markets and activities that are unlawful. The Court pointed out that if that were allowed to occur, courts and juries would inevitably reach decisions inconsistent with SEC regulation.
To avoid the risk of massive liability in a private antitrust treble damages suit, underwriters would have to “act in ways that will avoid not simply conduct that the securities law forbids . . . but also a wide range of joint conduct that the securities law permits or encourages.” That would interfere with “the effective functioning of capital markets” and “‘disrupt the full range of the [SEC’s] ability to exercise its regulatory authority.'” The Court rejected the Solicitor General’s suggestion that the case be remanded to determine whether alleged conduct prohibited by the SEC could be separated from conduct permitted by the SEC. The risk of inconsistent and incorrect results by judges and juries making such a determination would undermine the securities regulatory regime.
The holding in Credit Suisse is a resounding victory for the business community. It establishes clearer guidelines for the application of the implied antitrust immunity doctrine in the securities field, and clarifies that private antitrust lawsuits should not be allowed to discourage beneficial IPO activity.
Following up on last week’s 2-hour webcast on the new e-proxy rules (audio archive available now), you should consider a potential state law conflict that may exist for a large number of companies. Keith Bishop explains: “California Corporations Code Section 1501(a) requires that the board send an annual report to shareholders not later than 120 days after the close of the fiscal year.
There is an exception in the case of corporations with less than 100 shareholders of record that have expressly waived the requirement in the bylaws. Section 1501(a) applies not only to California corporations but also foreign corporations that either have their principal executive offices in California or customarily hold meetings of the board in California. The statute was amended in 2004 to permit sending of the report by “electronic transmission by the corporation.”
Although this would seem to have solved any problem, the term “electronic transmission by the corporation” is defined quite specifically in Corp. Code Sec. 20. One requirement of that section is that the recipient must provide an unrevoked consent. Moreover, if the communication is to an individual, the transmission must satisfy the requirements applicable to consumer consent under the federal E-SIGN Act.
Of course, California’s extension of the requirement to foreign corporations may raise questions about constitutionality ala Vantagepoint v. Examen. Note that the adopting release for the e-proxy rules states that the rules are not intended any applicable state law requirement for the delivery of a document related to a shareholder meeting or proxy solicitation.”
Learn more about California’s regulation of electronic communications by – and to – companies in Keith Bishop’s article posted in our “E-Proxy” Practice Area.
The Battle over the US Supreme Court’s Stoneridge (aka Charter) Case
Leading up to the Supreme Court’s “scheme” (aiding & abetting) Stoneridge (aka Charter Communications) case – which will be heard next term in the Fall – there have been a number of interesting developments, one of which is that the SEC apparently has “split” with the Republicans and voted to recommend filing an amicus brief in favor of investors. Although the SEC recommended that the Solicitor General file the brief – see this Bloomberg article – it appears that the recommendation was not been acted on by the Solicitor General.
In response, President Bush (and others in the government, like the Treasury Secretary) have interceded with the Department of Justice to prevent the filing of the SEC’s amicus brief. Remember that the SEC is an independent agency, whose primary mission is the protection of investors. The President’s move has been criticized by Rep. Frank and others, including the AFL-CIO.
The Nasdaq Speaks: Latest Developments and Interpretations
We have posted the transcript from the popular webcast: “The Nasdaq Speaks: Latest Developments and Interpretations.”
Early Bird Discount: Upcoming 3rd Edition of Romeo & Dye Section 16 Treatise
Peter Romeo and Alan Dye are hard at work updating their two-volume Section 16 Treatise. Order your set by July 15th to receive a pre-publication discount now – you can order online or by fax/mail with this order form. The Treatise will be completed and delivered to you in the Fall.
Earlier this week, SEC Chairman Cox gave an interview for this article where he talked briefly about the Staff’s executive compensation rules and more.
And on Monday’s “Nightline,” AFLAC’s CEO Dan Amos talked about why the company is the first one to adopt “say on pay” in the US, allowing his company’s shareholders to have a non-binding vote on the CEO’s pay package starting in 2009.
Finally, no surprise that a majority of Americans believe that CEOs are unethical and overpaid, as noted in a new survey discussed in this Bloomberg article. Here is an excerpt:
“More than six in 10 people surveyed say CEOs are ‘not too ethical’ or ‘not ethical at all,’ versus 33 percent who call them ‘mostly ethical.’ An overwhelming majority, more than eight in 10, say executives are paid too much. At the same time, Americans remain upbeat about the state of the
economy.”
By the way, the SEC will hold an open Commission meeting next Wednesday to consider adopting universal e-Proxy and propose rules that would permit foreign private issuers to file in the US using IFRS without having to provide a reconciliation to US GAAP.
[Congrats to Herb Scholl: Herb celebrated his retirement yesterday at the SEC after four decades of public service. Herb started working at the SEC in 1967. If you have ever had Edgar problems, you likely spoke to Herb – whose “claim to fame” is picking the name of “Edgar.” We will miss ya Herb!]
SEC Acts on Short Selling; Coming Soon? Demystifying Vote Lending Practices
This week, the SEC voted to adopt changes that will rein in naked short selling, which in turn should help prevent inappropriate vote lending. These changes are important; remember that one of the arguments made to slow down the SEC on a possible path towards shareholder access is that the entire voting system needs to be better understood – these changes should simplify the system (albeit this issue is just one of many issues that need demystifying). I tend to agree with this argument – the voting system is complex, with numerous moving parts and layers of intermediaries.
We may soon know more about the world of stock lending. Here is an excerpt from a recent Business Week article:
“Sources say authorities from the U.S. Attorney’s office are looking into allegations that some employees on the stock loan desks received kickbacks or other improper cash payments from so-called stock-loan finders, independent middlemen who sometimes track down shares for Wall Street firms to lend to investors. It is anticipated that the prosecutors will likely claim that some employees on the stock loan desk unnecessarily referred work to the finders, who did little to justify their fees and only added to the cost of arranging a stock loan.”
From Clearly Gottlieb, below are notes about what the SEC acted on during Wednesday’s open Commission meeting:
– Remove Rule 10a-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and amend Regulation SHO to provide that no tick test or other price test, including any price tests of any self-regulatory organization (“SRO”), shall apply to short sales of any securities;
– Amend Regulation SHO to eliminate the “grandfather provision” so that fail to deliver positions existing at the time a security became a “threshold security” would no longer be exempted from Regulation SHO’s close-out requirement;
– Amend Regulation SHO to extend the grace period before a broker-dealer is required to close out fail to deliver positions resulting from sales of threshold securities pursuant to Rule 144 under the Securities Act of 1933 (the “Securities Act”) to 35 settlement days (from the otherwise applicable settlement grace period of 13 days);
– Re-propose for comment the elimination of the options market maker exception to Regulation SHO’s close-out requirement, along with two alternatives providing for the close-out of options market makers’ fail to deliver positions in threshold securities within specified time frames; and
– Propose for comment amendments to Regulation SHO to require that broker-dealers marking a sale as “long” document the present location of the securities being sold.
Although the agenda for the Open Meeting also listed consideration of a pending proposal to amend Rule 105 of Regulation M (which applies to short sales in connection with public offerings), that topic was not addressed at the meeting and, we understand, will instead be discussed at the Commission’s next open meeting scheduled for June 20, 2007.
A new service from Avvo is creating a stir, a new site that rates and profiles lawyers. The site’s purpose is to allow consumers to easily obtain information about lawyers. The ratings are “unbiased,” culled from publicly available data. Here is the ratings formula (don’t look too hard as not much is revealed). As noted in this article, lawyers are not happy about their ratings or the process – and an examination of other reviews show that the primary beefs with Avvo are: numeric scoring, incorrect/missing data and poor functionality.
At first, I was miffed by my rating of 6.3 out of 10; after all, I graduated in ’88 and have learned a thing or two since then. But then I saw that some of my favorite lawyers got similar ratings – folks that I know are among the smartest securities lawyers out there. For example, Ron Mueller is only a 6.4 – and Amy Goodman a 6.0. Alan Dye and Mark Borges topped them with a 6.5. Hey, I’m proud of my 6.3! [Note the Avvo rating default falls somewhere between 6.1-6.5, until you input your credit card information to update your “profile” on the site.]
Full disclosure: Avvo’s founder, Mark Britton, is a dear friend of mine (but I have not discussed his site with him, it was in stealth mode until this week’s launch). Personally, I’ve gotten away from benchmarking against peers; I hear it’s a bad practice…
Some (Silly) Thoughts about Avvo’s Rating Service
Maybe my rating was so low because I got into a flap with the DC Bar and I’m “suspended” because I now refuse to pay dues to them? [My rating is higher now because I updated my profile yesterday.] Or maybe Avvo got wind of my intention to assume a new fabulous alter ego: “Captain XBRL.” Based on my distinguished awards (click “Recognition” tab), I feel entitled to an alter ego. Feel free to give me a whacky peer endorsement on my profile if you wish; the whackier, the better.
The funny thing about my Avvo profile is that I didn’t manipulate it to list me as a DUI lawyer in Seattle, it did that by itself. Genius! On the other hand, my parents tagged me at birth with the legal name of “Barak,” a story for another day.
Below are two of many comments posted on a WSJ Blog (these commentors appear to be imposters):
– “I only got a 6.5! I invented the poison pill!” – Comment by Marty Lipton – June 12, 2007 at 8:17 pm
– “Tell me about it Marty! I represented the VO of the United States, who shoulda been president, and all I got was a lousy 6.5!” – Comment by David Boies – June 12, 2007 at 8:19 pm
And here are some other thoughts I’ve heard:
– I think that a more fair way to rate us is by height (wasn’t that Chevy Chase’s methodology for measuring himself against other golfers?)
– Maybe ISS will develop a service to help lawyers increase their rating scores
– I guess I’ll continue to use Martindale, since they are kinder and gentler to me
[Note to Avvo Censors: Please don’t kill my profile; there’s no risk of me being hired because I won a “Tiny” Dancer award. My Avvo profile is the closest thing I will get to Facebook at my age.]
Even though it’s voluntary, many of you will soon be evaluating whether the costs savings promised by e-Proxy truly exist. In my opinion, that issue actually is a drop in the bucket compared to some of the other issues that you need to learn about when it comes to e-Proxy. For example, even if your company doesn’t use e-Proxy, dissidents can use it if they contest a director election or another matter on the annual meeting ballot.
To learn more, tune in to tomorrow’s webcast – “How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations” – which has just been bumped up to 90 minutes since there is so much material to cover. With e-Proxy effective at the end of this month, this will be a very timely – and practical – webcast. Join these experts:
– Tom Ball, Senior Managing Director, Morrow & Co.
– Joe Frumkin, Partner, Sullivan & Cromwell
– Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer
– Dominic Jones, Editor, IR Web Report
– Alan Singer, Partner, Morgan Lewis & Bockius
– Sid Rodrigue, Vice President, Broadridge (formerly known as ADP)
Among the topics to be discussed are:
– What does voluntary e-Proxy involve? Will voting patterns change?
– What should be considered in determining whether to forego paper next proxy season?
– How third-parties might use e-Proxy to wage proxy campaigns?
– What are the latest drafting tips to design “usable” proxy materials for the Web?
– How should your proxy solicitation and IR strategies change in the wake of e-Proxy?
E-Proxy Webcast: Important Course Materials to Print
For tomorrow’s e-Proxy webcast, please print these two sets of course materials:
NYSE Finally Revises Its Corporate Governance Proposal
Last Friday, the NYSE filed Amendment No. 1 to its proposal to modify the corporate governance listing standards set forth in Section 303A of the Listed Company Manual with the SEC. The original proposal, filed way back in late 2005, provided clarifications to the current standards and codified certain NYSE and SEC interpretations.
The most significant change in the original proposal related to the Section 303A.02(a) independent director disclosure requirements. However, last August, the SEC adopted amendments to Item 407 of Regulation S-K that consolidated director independence and related corporate governance requirements under a single disclosure item. Since the SEC’s new rules sometimes duplicate (or require more detailed disclosures) than the NYSE’s governance standards, the amended proposal seeks to eliminate those disclosure requirements currently set forth in Section 303A that are also required by Item 407. Here are some of the highlights of the amended proposal:
1. Eliminate the controlled company exemption disclosure requirement to avoid duplication with Item 407.
2. Add a new component to Section 303A.00 regarding disclosure requirements to give a listed company the option of providing the required disclosures in its annual proxy statement or, if it does not file a proxy, in its annual report filed with the SEC; or on or through its website.
3. Eliminate the original proposal that required disclosures may not be summarized or incorporated by reference.
4. Eliminate the NYSE requirement that a company disclose in its proxy (or Form 10-K) that its audit, nominating and compensation committee charters, code of business conduct and ethics and corporate governance guidelines are available on its website and in print to any shareholder who requests them to avoid duplication with Item 407.
5. Eliminate the Section 303A.02(a) independent director disclosure requirements to avoid duplication with Item 407.
6. Increase the Section 303A.02(b)(ii) direct compensation bright line test dollar threshold from $100,000 to $120,000 to bring the standard in line with Item 404 of Regulation S-K.
7. Amend the Section 303A.02(b)(iii) external and internal auditor bright line test as it applies to a director with an immediate family member so that it applies only to an immediate family member who:
– is a current partner of such a firm;
– is a current employee of such a firm and personally works on the listed company’s audit; or
– was within the last three years a partner or employee of such a firm and personally worked on the listed company’s audit within that time.
8. Clarify that all interested parties, not only shareholders, must be able to communicate their concerns regarding the listed company to the presiding director or the non-management/independent directors as a group.
9. Eliminate the Section 303A.05(b)(i)(C) requirement relating to the preparation of the compensation committee report to avoid duplication with Item 407.
10. Eliminate the Section 303A.07(c)(i)(B) requirement relating to the preparation of the audit committee report to avoid duplication with Item 407.
11. Redesignate the Section 303A.14 website requirement, adopted in August 2006, as Section 307.00 of the Listed Company Manual and eliminate the current Sections 307.00 and 314.00 regarding related party transactions.
In the amended proposal, the NYSE is also proposed changes to Section 203.01 – the annual financial statement requirement – to provide that a listed company that is subject to the SEC’s proxy rules, or is a foreign private issuer that provides its audited financial statements (as included on Forms 10-K, 20-F and 40-F) to beneficial shareholders in a manner that is consistent with the physical or electronic delivery requirements applicable to annual reports set forth in the SEC’s proxy rules, is not required to issue the press release or post the undertaking required by Section 203.01.
We are providing this webconference as a “thank you” to our community – and due to the seriousness of the issues related to climate change. All of the panels will be archived if you can’t catch it today. Below is the agenda:
1. What the Studies Show: A Tutorial: Margaret Leinen, Chief Scientific Officer, Climos
2. The Business Case for Tackling Global Warming :
– John Stowell, Vice President, Environmental Health & Safety Policy, Duke Energy
– Bill Ellis, Visiting Fellow, Yale School of Forestry and Environmental Studies
3. The Board’s Perspective: Strategic Opportunities and Fiduciary Duties:
– Michael Gerrard, Partner, Arnold & Porter
– Stephen Jones, Shareholder, Greenberg Traurig
4. The Investor’s Perspective: What They Seek and Their Own Duties:
– Janice Hester Amey, Director of Corporate Governance, CalSTRS
– Doug Cogan, Deputy Director of Social Issues Services, Institutional Shareholder Services
– David Gardiner, Founder, David Gardiner & Associates
– Mindy Lubber, President, Ceres
5. Why You Need to Re-Examine Your D&O Insurance Policy:
– Wylie Donald, Partner, McCarter & English
– Peter Gillon, Shareholder, Greenberg Traurig
6. Disclosure Obligations under SEC and Other Regulatory Frameworks:
– Miranda Anderson, VP, Investor Analysis, David Gardiner & Associates, LLC
– Maureen Crough, Partner, Sidley & Austin
– Jeff Smith, Partner, Cravath Swaine & Moore
7. How (and Why) to Modify Your Contracts: Force Majeure and Much More:
– Wylie Donald, Partner, McCarter & English
– Michael Gerrard, Partner, Arnold & Porter
8. Due Diligence Considerations When Doing Deals:
– Maureen Crough, Partner, Sidley & Austin
– Jeff Smith, Partner, Cravath Swaine & Moore
In addition to the webconference, there are plenty of other complimentary resources related to boards and climate change.
ESG = Environmental, Social and Governance
If you aren’t familiar with the acronym “ESG,” you will be soon as investors have reached a broad consensus that non-financial factors have a significant impact on investment performance. Just listening to Mindy Lubber, President of Ceres, during today’s webconference – “Tackling Global Warming: Challenges for Boards and their Advisors” – brings this point home. Ceres leads the Investor Network on Climate Risk, a group of leading institutional investors with collective assets of over $4 trillion.
To learn how some of the largest pension funds deal with ESG, see this new report (which gives a comprehensive overview of the different approaches taken by funds in various parts of the world). Also, ISS recently blogged about how ESG is playing a role in the investment process.
Bellwether Analysis: Delaware Chancery Court Dismisses Backdated Options Derivative Case
From Travis Laster: On June 7th, Vice Chancellor Strine of the Delaware Court of Chancery issued his opinion in Desimone v. Barrows, thereby providing a third major Delaware decision on stock option practices. There is much to digest in this 75-page opinion (which is posted in the CompensationStandards.com “Backdated Options” Practice Area). Here are some highlights:
1. On pages 38-43, VC Strine charts two scenarios involving backdating, one which he states would not give rise to any claim against directors and another which would. The core difference in the scenarios is whether the directors had reason to know that their actions were contrary to law. VC Strine’s paradigms will provide significant guidance to practitioners addressing option situations.
2. VC Strine rejects the idea that a “continuing wrong” exists when there have been a series of backdated options. Consistent with Ryan v. Gifford, VC Strine views each grant as a separate event. In Desimone, that meant that the plaintiff could not challenge grants pre-dating his stock ownership under Delaware’s continuous ownership rule.
3. As many commentators predicted, VC Strine holds that a board comprised of a majority of disinterested and independent directors can obtain a Rule 23.1 dismissal of stock option backdating claims. The Vice Chancellor distinguishes Ryan as a case in which half the board was conflicted and Tyson as a case in which there were detailed allegations of domination and control. VC Strine reaches this conclusion despite the fact that “Sycamore has essentially admitted in public filings that many [grants] were backdated.” The key issue under Rule 23.1, however, is not whether misconduct occurred, but rather “whether the … Board should be divested of its authority to address that misconduct.”
4. VC Strine notes at several points that he doubts whether any recognizable claim, other than a theoretical claim of waste based on overcompensation, could be asserted based on “bullet-dodging.” At that point, negative information has been disclosed to the markets and a grant at fair market value should not be problematic. Indeed, he observes that a contrary rule would incentivize option grants before the release of negative information, creating a counter-intuitive compensation strategy.
5. Desimone challenged various officer grants made under a plan that did not require fair-market-value grants, expressly permitted below-market-value grants, and under which virtually all employee grants were handled by a single executive officer without direct board oversight or involvement. VC Strine concludes that a challenge to these grants at most implicates a Caremark theory. He finds that Desimone failed to plead sufficient red flags to support any type of Caremark claim.
6. VC Strine holds that large grants of options to executive officers permit a pleading-stage inference of director knowledge of the terms of the grants. At the same time, however, VC Strine explicitly rejects the argument that the knowledge of any one director can be imputed to the others for purposes of demand excusal. Prior to this decision, Delaware courts had not meaningfully addressed imputation of knowledge among directors. VC Strine concludes that the complaint at most called into question the two members of the Compensation Committee and did not impugn the independence or disinterestedness of a majority of the board.
7. With respect to grants made to the outside directors, VC Strine considered the board to be interested without conducting any type of materiality analysis. He then held that the complaint did not state a claim as to these grants because the stockholder-approved plan provided for an automatic grant of 30,000 market priced options each year, as of the date of the annual meeting. Because the directors “took the good with the bad” in accordance to what the stockholders approved, no breach of fiduciary duty claim was stated.
Because of its overarching treatment of a variety of stock option scenarios, Desimone is likely to become the bellwether case for backdating analysis. The holding on director imputation of knowledge is also quite significant and potentially has far reaching implications, particularly because the questions of directors knew and when they knew it frequently create the dividing line between a care and loyalty claim.
A couple of recent cases have highlighted situations where beneficial ownership reporting by hedge funds is called into question, in one instance with a particularly draconian result – potential imprisonment.
The U.S. Attorney for the Southern District of New York announced that the founder and manager of two hedge funds pleaded guilty to three counts of violating federal securities laws arising from the activities of his funds in acquiring substantial positions in the securities of two public companies. In addition to defrauding the funds’ investors about transactions that resulted in losses of $88 million, the manager was charged with failing to file on Schedule 13D to report an interest of 5% or more of one company’s stock (he and his funds controlled over 80 percent of the stock), and failing to file a Form 3 to report his beneficial interest of more than 10% in another company (while falsely reporting ownership of under 10% in a Schedule 13D).
The SEC also commenced a civil action in this case back in 2005 that is still pending. Actions such as this one should come as no surprise to those who have heard the SEC Staff publicly express the point that compliance with the beneficial ownership reporting requirements has been – and will remain – a high priority.
While the failure to file accurate beneficial ownership reports was obviously important for the markets in the common stock of the companies involved, the lack of accurate beneficial ownership information was also crucial for the manager to carry out his fraudulent scheme, as any reporting of his interests would have informed his investors that he was not acting in accordance with the funds’ investment policies. Alan Dye has blogged more about this case on his Section16.net Blog.
And Another Schedule 13D/G Action…
Recently, the Delaware Chancery Court addressed the situation of a hedge fund that reported its “investment only” intent on Schedule 13G when it was potentially considering the nomination of a short slate of directors to the company’s board. While the case of Openwave Systems Inc v. Harbinger Capital Partners principally involved the hedge fund’s failure to timely nominate its director candidates under Openwave’s advance notice bylaw provisions, the court took particular note of the fund’s status as a Schedule 13G filer in assessing whether it was really in a position to nominate its own directors within the required timeframes of the advance notice bylaw provisions, as well as in rejecting the fund’s allegation that the board of Openwave reduced the number of directors in response to Harbinger’s potential “threat.”
NASPP’s “15th Annual Conference”: Program Announced!
The full program – with over 40 panels! – for the NASPP Annual Conference was just announced. This conference brochure lists all the panels. Register today.
This year’s conference will be held at the San Francisco Marriott from October 10-12 – and already is on track to have well over 2000 attendees. Make your hotel reservations now before the hotel is sold out. With the October 9th pre-conference – “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” – being so popular, this will happen very soon…
Starting this past Monday, non-US issuers were able to deregister from their ’34 reporting obligations if they met the requirements of the SEC’s new rules. As noted in this article on Dominic Jones’ IR Web Report, some foreign private issuers already have taken advantage of the new rules and headed out of the SEC’s door. In our “Foreign Private Issuers” Practice Area, we have posted plenty of memos on the SEC’s new rules.
A Wild Proxy Season: A Worst Case Scenario
As many of us weathered what amounted to another wild proxy season, have you ever thought about the worst case scenario? How about dissidents storming your headquarters! This happened back in January during a proxy “fight” for Competitive Technologies. As noted in this press release from the company, an ex-CEO and three of his associates arrived at the company’s headquarters and demanded entry because they believed they won the proxy fight. A few weeks later, the ex-CEO became the new CEO after the annual meeting was reconvened (and held at the AMEX) and the dissidents won the election.
Interestingly, one of the additional solicitation material filings filed by the dissident group – when the battle was raging – included a complaint letter sent to the SEC. While it’s common for opposing parties in proxy contests to privately send complaint letters to the SEC Staff, it’s not common to publicly file a complaint letter. So cheer up, your situation couldn’t have been as bad as this one…
Management Always Wins the Close Votes?
Some academic food for thought over at the Prawfs Blawg with this entry from Yair Listokin of Yale Law School. Yair’s work in progress investigates the theory that management wins “close” votes on proxy statement proposals more often then would be expected.
[Letters about “Scooter” Libby: As you may have read in the press, the Judge from the Scooter Libby sentencing hearing allowed the letters submitted to the court to be made publicly available; in this batch of the letters, the one on page 41 is from Jonathan Burks, the head of the SEC’s Office of Legislative Affairs – and the letter on page 57 is from SEC Chairman Cox.]
