Yesterday, the SEC’s Chief Accountant issued guidance – in the form of this letter – on determining measurement dates for option grants under APB 25. As stated in the SEC’s press release, the letter discusses the accounting consequences under APB 25 of dating an option award to predate the actual award date; option grants with administrative delays; uncertainty as to the validity of prior grants; among other related circumstances.
Here is one member’s reaction to the new guidance: Is it my imagination, or is this letter incredibly helpful and long overdue? If only we could get the IRS to give similar guidance for ISO/409A/162(m) purposes. I think these two excerpts from the SEC Staff’s letter alone resolve 90% of the options nonsense problems (without whitewashing the true back-dating situations):
“Where a company’s facts, circumstances, and pattern of conduct evidence that the terms and recipients of a stock option award were determined with finality on an earlier date prior to the completion of all required granting actions, it may be appropriate to conclude that a measurement date under Opinion 25 occurred prior to the completion of these actions. This would only be the case, however, when a company’s facts, circumstances, and pattern of conduct make clear that the company considered the terms and recipients of the awards to be fixed and unchangeable at the earlier date. The practices described in the preceding paragraph would, of course, preclude a company from concluding that a measurement date occurred prior to the completion of all required granting actions.
***
The staff does not believe that the lack of complete documentation being available several years after the activities occurred should necessarily result in a “default” to variable accounting or to treating the awards as if they had never been granted. Rather, a company must use all available relevant information to form a reasonable conclusion as to the most likely option granting actions that occurred and the dates on which such actions occurred in determining what to account for.”
Notwithstanding the foregoing, I have decided to make a difference in the world by starting my own new holiday! Please join me on November 14th for “Talk Like Lawyers Write” Day. Yes, that’s the best I could come up with – but it beats the alternative: “I Love Practicing Law (No, I Really Really Do)” Day…
“I See Rich People”
Here is the latest observation from Keith Bishop: “One of the unintended consequences of federal and state private placement exemptions has been that they can favor people who know rich people. A start-up whose founders don’t have rich relations or friends is often caught between the prohibition on general solicitation and the practical difficulty of finding investors without incurring the expense of filing a registration statement.
This has forced many issuers to turn to so-called finders. Finders are not registered broker-dealers. They rely on judicial and administrative exceptions from the broker-dealer registration requirement. At the SEC level, the Paul Anka no-action letter is often cited, but the SEC staff’s position on finders may have narrowed in the ensuing years. The result is a less than desirable situation with issuers and their finders operating in an area without a lot of clear guidelines. Sometimes, issuers are themselves victimized by the activities of finders.
In recent years, some states have stepped up enforcement over unlicensed finders (usually by scrutinizing Form D filings for commission payments). As mentioned in the release, both the ABA Section on Business Law and the SEC’s advisory committee on smaller public companies have addressed the question of finder regulation. I’m pleased to see that the new California Commissioner is willing to put these issues on the table in this new proposal.” We have posted a copy of the California Commissioner’s proposal in our “Private Placements” Practice Area.
We encourage you to read it and pass it on to others who might benefit from seeing the important actions that many should be considering to implement. This complimentary Special Supplement goes hand-in-hand with the regular Sept-Oct issue of The Corporate Counsel, which will be arriving in the mail this week to those who are our loyal readers.
FASB’s FAS 157: The “Fair Value” Pronouncement
Yesterday, the FASB issued its long-awaited pronouncement – SFAS No. 157 – regarding measurement and disclosure of fair values of assets and liabilities (here is a summary of FAS 157). Fair values can be quite useful for investors (as can historical cost numbers) – but they are only relevant if they are reliable (and obviously, not cooked up). This is a huge development that we will continue to provide guidance on…
SPACs: How to Use a Special-Purpose Acquisition Company
Preparing Your CD&A – You May Have Less Time Than You Think
Great piece from Mark Borges in his “Proxy Disclosure Blog“: If one message came out of last week’s Disclosure Conference, it’s that compliance with the new rules will be a lot of work. Consequently, companies will want to get started soon mocking up tables and outlining their first Compensation Discussion and Analysis. It occurs to me that, because of liability considerations, some companies may have even less time to prepare their CD&A than they suspect.
Currently, companies that are accelerated filers have to file their annual report on Form 10-K within 75 days after fiscal year end. (Large accelerated filers will move to a 60-day deadline this winter.) Most companies satisfy their obligation to include executive compensation information in their Form 10-K by incorporating that information by reference from their annual proxy statement involving the election of directors. Under General Instruction G(3) to Form 10-K, as long as the proxy statement is filed within 120 days of the end of the company’s fiscal year, that technique is permitted. While in many cases, the Form 10-K and the proxy statement are filed simultaneously (or within a few days of each other), in some cases, the filings can be separated by a month or more.
In this latter situation, a company’s CEO and CFO may be required to certify the Form 10-K without necessarily having seen the final version of the tabular pay disclosure (although certainly a draft version will have been circulated and reviewed). It’s not clear to me that the CEO and CFO will be willing to take the same approach in the future now that their certification also covers the CD&A. I would expect that they will want the CD&A to be finished or near completion at the time the Form 10-K has to be filed (and the accompanying certification submitted along with it) so that they will know the substance of what they are certifying.
It seems to me that, going forward, the timeline for preparing the CD&A (and, perhaps, the disclosure tables) will be the schedule for filing the Form 10-K, and not the schedule for the proxy statement. For companies that file the two reports separately, this means that the CD&A will have to be substantially wrapped up by before March 15th (in the case of a calendar-year company), rather than sometime in April.
Companies will need to factor this consideration into their plans as they look to revise their timetable for drafting their year-end filings, as well as the availability of the compensation committee to review drafts and provide feedback to management. In some situations, I can see where a company will need to get going soon on its CD&A in order to meet this shorter schedule.
Last week, the SEC Staff (OCA, Corp Fin and IM) issued long-awaited guidance – in the form of SAB 108 – on how errors, built up over time in the balance sheet, should be considered from a materiality perspective and corrected. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.
As stated in this press release, there have been two common approaches used to quantify such errors. Under one approach, the error is quantified as the amount by which the current year income statement is misstated. The other approach quantifies the error as the cumulative amount by which the current year balance sheet is misstated. The SEC Staff believes that companies should quantify errors using both a balance sheet and an income statement approach – and evaluate whether either of these approaches results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material.
SAB 108 also describes the circumstances where it would be appropriate for a registrant to record a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial as well as the required disclosures to investors. There is no real “effective date” of SAB 108 since they represent the SEC Staff’s views of the proper interpretation of existing rules, but November 15, 2006 is a reference point as noted in SAB 108. For more analysis of SAB 108, see the AAO Weblog.
CalPERS Calls for Hearing on Shareholder Access
To better understand the significance – and the consequences – of the AFSCME case, I am in the process of finalizing the panel for a webcast – “Shareholder Access and By-Law Amendments: What to Expect Now” – which will be held about a month after the SEC’s open Commission meeting to propose amendments to Rule 14a-8.
Here is some information from “CorpGov.net“: “In response to the AFSCME court victory on shareholder access and the subsequent announcement by the SEC to hold a public hearing on 10/18/06, CalPERS’ Board President, Rob Feckner sent a letter urging the SEC to fully consider investor views about access to the proxy to nominate corporate directors.
I understand that a Commission meeting has been scheduled to discuss a recommendation by the Division of Corporation Finance to amend Rule 14a-8 in response to the AFSCME litigation. Instead of simply responding to this litigation by adopting a stopgap rule, CalPERS asks that the Commission give the proxy access issue its full consideration.”
“The SEC-Saw”
From Friday’s WSJ, here is an editorial on shareholder access from Ira Millstein and Harvey Goldschmid:
“Shareholder access is officially back on the agenda at the SEC, forced there by a recent court decision. And this time around the SEC should seize the opportunity to craft a solution that opens up the proxy to shareholders in a sensible way, a solution that ensures board accountability to shareholders.
The decision last week by the Court of Appeals for the Second Circuit paved the way for shareholders to propose bylaw amendments allowing shareholders to nominate directors and for those nominations to be included on the company’s proxy. The decision turned on the court’s analysis of an SEC rule allowing exclusion of any proposal that “relates to an election” and the various interpretations given to that rule by the SEC over the years. The SEC has since announced that it will develop a proposed amendment to that rule and will hold an open meeting on Oct. 18, 2006, to consider the proposal.
This isn’t the first time the SEC has considered this issue. Most recently, in October 2003, it proposed new rules for shareholder access to company proxy material. Those rules were designed to shift the balance of power between corporate managements and shareholders, by giving dissatisfied majorities of shareholders a meaningful role in the election process without the need to embark on an expensive proxy contest. Under the process then and now in effect, there are virtually no contested elections for the boards of large public corporations in the U.S. The analogy is to elections in the Soviet Union.
The SEC’s proposed rules in 2003 generated an enormous amount of vigorous debate. It even led indirectly to reform in the area of majority voting through the urgings of institutional investors and governance thought-leaders. But the proposed rules themselves never progressed to “final.” This occurred for a variety of reasons, including concerns about complexity and potential for abuse by obstructionists, to pure management self-interest in ensuring that director elections remained under company lock and key.
The October 2003 proposed rules may have stalled, but the reasons they were proposed in the first place are all around us still. Shareholders are still the providers of capital in our economy. They are still responsible for electing directors who will improve performance. And they still lack a meaningful avenue of bringing about mid-course corrections when management is ineffective or wrongheaded and the board is compliant. They still need an avenue to making themselves felt.
The court’s decision has opened the door for the SEC to think again about shareholder access and its importance for corporate efficiency, honesty, productivity and profitability. The SEC should strive for a solution that gives shareholders a voice in the director election process. Its recommendation should include safeguards such as minimum holding requirements that may be necessary to ensure that access opportunities are not abused by shareholders with non-efficiency or obstructionist motivations. A uniform approach to shareholder access is key to achieving a balanced result and avoiding the confusion and delay that can reign when ad hoc development by too many cooks is permitted to occur (as with majority voting reform, for example).
We urge the SEC to balance the system and give shareholders the tools to hold boards accountable — and, in the process, restore public confidence in the fairness and economic rationality of the governance system.”
I know I am biased, but I can honestly say that anyone I have spoken to – or emailed with – raved about our just-concluded Conference: “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” (For those that missed it, all the panels are now archived and available to watch – it’s never too late to register and take in the Conference.)
One of the conference highlights was the keynote by John Olson of Gibson Dunn on how to make your presentation to the board about the new rules. Many attendees – including a CEO from Dallas who came to DC to take in both days! – urged us to make John’s remarks widely available as “necessary” viewing for CEOs and directors.
We wholeheartedly agree. We have posted John’s 20-minute video – on a complimentary basis – on the home page of CompensationStandards.com for everyone to see. Please watch John’s inspirational remarks – “John Olson on ‘The Board Presentation’” – and pass on the link to those that need it!
Conference Lessons Learned: What to Do Now
One of the central themes I heard from attendees is that each of the panels drove home the point that much more work will be involved this year putting together the new tables and disclosures; much more than they had originally thought. The mock-up tables and disclosures put together by the panelists really reinforced this point – even plain vanilla situations likely will result in tables that are 4x longer than you might have initially thought. And I challenge anyone who watched “The New Retirement Pay Tables” panel to bravely step forward and say their company can easily overcome all of the complicated open issues that were identified. The same challenge could easily apply to a half dozen other panels.
And the risks for not being prepared have never been greater. Not only do you bear the risk of angering directors and managers for surprising them with huge pay numbers – or even low numbers (eg. perks) – that will embarrass them once disclosed, but you run the very real risk of not capturing all the data you need to provide full disclosure.
And don’t forget that late SEC filings have now become a part of the game that hedge fund activists play, as they buy up bonds of late filers and then use the covenants in indentures to trigger huge defaults/cross-defaults – all in an attempt to put the companies in play! And as we all know by reading the papers, journalists are chomping at the bit for these enhanced disclosures – and investors are not afraid to use them to quickly mount a “just-vote-no” campaign against director nominees. This ain’t the same playing field as last proxy season, my friend! Not by a long-shot.
This is a mini-version of the internal controls exercise we went through over the past few years, just not nearly as comprehensive nor expensive. But another key difference is that most companies simply don’t have the resources they will now need to adopt a new multi-disciplinary approach to drafting compensation disclosures. As panelists repeatedly said, securities lawyers are now going to have to learn much more about compensation – and the HR staff needs to learn securities law. That’s why so many HR professionals attended our just-completed compensation disclosure conference.
So how are the securities lawyers going to learn about compensation? Attend the “14th Annual NASPP Annual Conference” coming up next month in Las Vegas, which has over 40 panels on various compensation issues. If you can’t do that, at least attend the “3rd Annual Executive Compensation Conference” by video webcast – if you listen to John Olson’s video, you should quickly recognize how important it is for lawyers to ramp up their compensation knowledge base as soon as they can. Remember that the “3rd Annual Executive Compensation Conference” is part of the NASPP Conference this year – so you get to attend it free as part of the 40 plus panels (and to cheer you up, there also is a private “Huey Lewis & the News” concert for NASPP attendees).
Consult Your Privacy Lawyer
I had many favorite moments during the Conference, among them was the advice from John Huber that securities lawyers shouldn’t practice privacy law. This was not in the context of the Hewlett-Packard saga, but in the more common context that many of us will now face when implementing updated disclosure controls & procedures and asking management and directors more questions about their finances and relationships.
Speaking of the Hewlett-Packard saga, I have posted the letter from four members of both parties of the House Committee on Energy and Commerce sent to H-P regarding their board investigation in the “Privacy Rights” Practice Area. There is legislation pending – that has been proposed for some time – to prevent the type of unauthorized access to individual phone records that appears to have occurred in the H-P situation (ie. HR 4943, Prevention of Fraudulent Access to Phone Records Act).
As reported by CFO.com, the PCAOB and the SEC are working together to rewrite the internal controls auditing standard – Auditing Standard No. 2 – so that it’s much shorter and clarifies the respective roles of the internal auditor and management in the internal controls process. However, the core principles of AS #2 will not change.
CFO.com also posted this survey with an interesting perspective from CFOs, including questions on Section 404 and putting liabilities for pensions and leases on the balance sheet. The survey results seem to run counter to the critics who content that Section 404 needs a complete overhaul as 70% say that they have seen at least some improvement in their business due to the new law.
SOX 404 – Moving Forward
Yesterday, Corp Fin Director John White delivered this speech on internal controls. I’m still catching up on my emails after being away two days at our Conference and haven’t read it yet…
The New “Committee on Capital Markets Regulation”
But I have read this article from the NY Times’ Floyd Norris about a new Commission – the “Committee on Capital Markets Regulation” – being formed to make legislative recommendations to Congress about how to “fix” Sarbanes-Oxley. Bizarre timing given all the scandals in the papers this week; Bristol-Myers, Hewlett-Packard, etc.
Here is a list of the Committee’s members – and here is an excerpt from the NY Times article:
“The Committee on Capital Markets Regulation, announced today, includes representatives of every industry group interested in relaxing regulation of securities markets, and of increasing regulation of those who would sue them. It is not an official body, but it includes former close associates of Treasury Secretary Henry Paulson, and the news release announcing the formation of the group included praise from Mr. Paulson.
As such, it provides a road map to what some people hope will come out of the current anti-regulation mood, and it calls for a lot more than relaxing Section 404 of the Sarbanes-Oxley Act, which requires that companies have their internal control systems audited. Other areas to be explored include finding ways to limit liability for auditors, directors and bankers, and to assure that no future Eliot Spitzer comes out of state government to impose new regulations on investment banks.
It will also look at shareholder rights, such as whether activist hedge funds should be curbed, and will consider whether the Securities and Exchange Commission should be required to pay more attention to the cost of its regulations. It may even suggest giving some other part of government the right to block S.E.C. rules on the ground they are too costly.
There are professors and chief executives galore on the committee, and even a lobbyist and a corporate lawyer. But there are no former members of the S.E.C.
Hal Scott, the Harvard law professor who will direct the committee and helped choose its members, told me that was deliberate. “We would not want to put people in the position who had formulated these rules in the past,” he said. “They may have a lack of objectivity.”
The committee plans to get a report out in November, a schedule that committee co-chairman W. Glenn Hubbard told me was suggested by Mr. Paulson. Mr. Hubbard, a former chairman of President Bush’s Council of Economic Advisers and now dean of the Columbia University Business School, said that there would be plenty of S.E.C. knowledge because “Many of these people have S.E.C. interaction on a regular basis.”
Mr. Scott says he assumes Congress will not act on any recommendations until next year, but there is a scenario that might lead to quicker action, during a post-election session of the Congress. There is a pending lawsuit filed by the Free Enterprise Fund challenging the constitutionality of the Public Company Accounting Oversight Board. If a judge were to agree with the premise of the suit, that could create a crisis that would seem to require quick Congressional action. This committee’s recommendations would then be available to anyone hoping to reduce the regulatory burden.”
Corp Fin Director John White gave this speech yesterday at our Conference, entitled “The Principles Matter: Options Disclosure” – and here is a speech that John delivered last week entitled “Principles Matter.” Based on his remarks, it appears that these two speeches are the first in a series of related speeches that John will be delivering in the area of executive compensation over the next few months.
I caught up with John after his remarks – and as I mentioned at the top of our “Dealing with the Complexities of Perks” panel – it sounds like the Staff will be issuing FAQs about early compliance at some point in the near future. It remains to be seen whether the Staff will issue FAQs on other interpretive questions, as they first need to see what types of questions they receive.
So far, I have heard nothing but glowing reviews about our Conference – but I am interested in criticism too (if you have any) because I really want your experience to be as positive as possible. One complaint I received was about bad pop music being played online during the breaks – I wasn’t aware of that (“My Sharona“?) and will see if I can get our video production folks to play something more soothing today…
How to Watch Today: Those of you watching live today will want to click on the appropriate link under the caption “Watch Live: Panels Presented Consecutively” – otherwise, if you wish to view an archived video from yesterday, click on a link under that panel’s caption.
Web Postings: Do They Satisfy Regulation FD?
Our new survey is on Regulation FD – please take a moment and answer the 4 queries. I’m particularly interested in how folks answer question #1, since it’s frequently asked these days (eg. see #2022 and 1487 of our Q&A Forum). The question relates to whether a company that solely posts information on its website satisfies its Regulation FD distribution obligations. As you might recall when the SEC adopted Regulation FD six years ago – in Section II.B.4(b) of the adopting release (Rel. No. 33-7881 (August 15, 2000) – the SEC acknowledged that companies may be able to rely solely on the Web to make disclosure at some point in the future, but emphasized that web postings by themselves likely were not sufficient as a means of distributing information at that time.
More recently, practitioners have been actively debating whether the “future” is upon us – and I have heard quite a few differing opinions on the topic. So the survey results might help resolve the debate – take the survey now!
Survey Results: Executive Sessions
The results are “in” from our latest survey on board’s executive sessions – they are repeated below:
1. Our board meets in non-management executive session:
– Before every board meeting – 12.5%
– After every board meeting – 62.5%
– Whenever the board decides it needs to – 8.8%
– Once per quarter – 8.8%
– Once per year – 1.3%
– Other – 6.3%
2. Our board’s Audit Committee meets in non-management executive session:
– Every committee meeting – 69.1%
– Whenever the committee decides it needs to – 14.8%
– Once per quarter – 13.6%
– Once per year – 0.0%
– Other – 2.5%
3. When our board’s Audit Committee meets in executive session:
– All employees of the company leave the room, including the corporate secretary- 86.1%
– Nearly all employees of the company leave the room, as the corporate secretary (or some other employee) stays to take minutes – 2.5%
– Nearly all employees of the company leave the room, as the corporate secretary (or some other employee) stays to take minutes for part of the executive session (for example, the employee stays for internal audit sessions but leaves for sessions with the outside auditor) – 11.4%
4. During the course of the year, our board’s Audit Committee meets at least once in executive session with each of the following:
– Independent auditor – 100.0%
– Head of internal audit – 81.5%
– General Counsel – 39.5%
– CFO – 53.1%
– CEO – 25.9%
– Chief Compliance Officer – 21.0%
– Other – 12.4%
If you are attending today’s Executive Compensation Disclosure Conference by webcast, remember that you need to use your Conference ID/password to access the video webcast. Your ID/password for TheCorporateCounsel.net or CompensationStandards.com will not work to access the video webcast. Here are other troubleshooting tips if you need them.
To gain access, simply go to the home page for one of the sites and follow the prominent link that sits at the top of the page. Then, you have three choices: (1) watch the panels consecutively live; (2) watch a specific panel live; or (3) watch a panel by archive (it will take 5-6 hours for a panel to be archived after it is over). Remember you are able to watch the archive of any panel from now until the end of 2007!
Conference materials are posted beneath the links for each panel. I was pretty excited to receive 20-pages of “Essential Practice Tips You Oughta Know” from the speakers – and that alone is worth the price of admission.
CLE Credit: We also have posted this list of states with the status/number of hours available for CLE credit, divided into two categories: those attending online and those attending in DC. If you are in a state for which the Conference is accredited for online CLE – please register for CLE for webcast attendance and follow the instructions there (then, approximately 3-4 weeks after the Conference, we will e-mail you a Certificate of Attendance).
Final Executive Compensation Rules Published in the Federal Register
On Friday, the SEC’s new executive compensation rules were published in the Federal Register – so they will become effective on November 7th (60 days after the date of publication), meaning triggering events for Form 8-Ks that occur on or after November 7th need to conform to the new requirements.
Compensation Standards – Our New Quarterly Print Newsletter!
In response to so many member requests for a practical print newsletter to share with their directors about executive compensation practices, we have created a new newsletter – Compensation Standards – to help directors learn the latest executive compensation developments – and to help them glean practice pointers that can assist them perform their challenging duties.
Compensation Standards is tailored for the busy director, quarterly issues that do not overload them with useless information – rather, this newsletter will provide precisely the type of information that you know they desire: practical and right-to-the-point. Plus, each issue will include timely compliance reminders to help directors avoid inadvertent violations (which also help advisors with their compliance tasks). And this newsletter is very reasonably priced – other director publications typically cost thousands! – with special discounts for companies that also are CompensationStandards.com members.
The WSJ reports that ISS has put itself on the auction block and might fetch as much as $500 million. ISS is privately held and changed hands just a few years ago. If a sale occurs, it will be interesting to see who will now control this influential organization.
If you are attending Monday’s Executive Compensation Disclosure Conference by webcast, remember that you need to use your Conference ID/password to access the video webcast. Your ID/password for TheCorporateCounsel.net or CompensationStandards.com will not work to access the video webcast. Here are other troubleshooting tips if you need them.
To gain access, simply go to the home page of one of the sites and follow the prominent links that will be at the top of the page. If you’re coming to DC, see ya there! “Walk-ups” will be accepted in DC, but I would call our HQ today to let us know you are coming and to find out the amount you should bring (our HQ’s number is 925.685.5111 or email info@thecorporatecounsel.net).
Binding Proposals: Second Circuit Overturns SEC’s Interpretation of (i)(8) Exclusion
On Tuesday, the Second Circuit of the US Court of Appeals ruled in favor of AFSCME in its lawsuit against AIG over the SEC Staff’s interpretation of the Rule 14a-8(i)(8) exclusion in the context of whether the shareholder proposal rule bars proxy access proposals. This decision reverses the district court, which decided in favor of AIG last year. Now, AIG is considering whether to ask for en banc review or appeal the decision to the US Supreme Court. We have posted a copy of the court opinion in our “Majority Vote Movement” Practice Area.
For the past two proxy seasons, AFSCME has submitted binding shareholder proposals to a handful of companies seeking to amend their bylaws to add a provision establishing procedures by which shareholders could nominate directors under certain circumstances (including that the shareholder or group of shareholders owns 3% or more of the company’s stock for at least one year). The SEC Staff permitted the exclusion of these proposals under (i)(8) because the proposals “related to an election.” AFSCME sued AIG – one of the companies that excluded the proposal in 2005 – in an attempt to force the company to include the binding proposal.
The Second Circuit decision states that it takes “no side in the policy debate regarding shareholder access to the corporate ballot.” Rather, the Court based its decision on the view that the current SEC interpretation of (i)(8) is a change from how the SEC Staff formerly interpreted the exclusion basis for a period of 15 years – from 1976 to 1990 – thereby creating an “ambiguous regulation.” In 1976, the Commission created the (i)(8) exclusion when it codified the Staff’s longstanding policy to exclude proposals that related to the election of directors so that proponents could not use the shareholder proposal process to effectuate a proxy contest.
Starting in 1990, the Staff began to interpret the (i)(8) basis more broadly to allow more companies to exclude proposals, but didn’t provide a rationale for this shift in position. However, the Staff very rarely provides the reasoning for a particular no-action response, because each letter is analyzed under its own unique circumstances. In a sense, the Court appears to take issue with the way the Staff provides no-action responses when it states that the original 1976 Commission interpretation should control (as interpreted by the Court), unless the SEC can offer “sufficient reasons for its changed interpretation.” The last paragraph on page 13 of the opinion drives the Court’s point home.
I’m not sure I agree with the Court’s logic here because forcing the Staff to provide a rationale for each no-action response would require the Staff to devote significant more resources to processing the hundreds of letters it reviews during the proxy season – and even then, what can appear to be very similar letters can get opposite results, because the Staff really does look closely at all the language in the proposal and supporting statement as part of its analysis.
The upshot may be that the SEC will reconsider whether it’s worth the hassle of going through the burdensome no-action letter process if it’s not allowed to change an interpretation over time. As evident from the last round of Rule 14a-8 rulemaking in 1998, the Staff would love nothing more than eliminating its role as referee in these disputes. But in that contentious rulemaking, one of the few things that everyone agreed upon was that it was critical that the Staff continue to serve as zebras.
Maybe a middle road is the Staff issuing more frequent Staff Legal Bulletins (recently, the Staff has issued one after each proxy season), such as issuing one whenever it decides to change a position under one of the shareholder proposal rule’s exclusion bases. If these SLBs included the Staff’s reasoning, that would appear to satisfy the Second Circuit – and it would help proponents and companies understand the latest Staff thinking.
What Does the AFSCME Decision Mean? Shareholder Access is Back!
The Second Circuit’s reversal essentially revives the SEC’s “shareholder access” reform – which was proposed by the SEC in 2003, but abandoned in the face of significant opposition – as it effectively allows for shareholder access until (and if) the SEC amends the shareholder proposal rule as noted below. It isn’t so much the bylaw element that is at issue here – rather, the decision questions the validity of the Staff’s view that 14a-8(i)(8) permits the exclusion of proposals that create election procedures that would have the effect of giving shareholders access to company proxy materials.
As a result of this decision, we should expect to see a huge increase in the number of binding “shareholder access” proposals this proxy season. If the decision stands “as is,” it would make it significantly easier for shareholders to add their own nominees to ballots, since shareholders could submit proposals under Rule 14a-8 that would allow them to make nominations to the board in future years (if the proposals were approved by shareholders and if the nominating shareholders were eligible to nominate candidates under the criteria set forth in the bylaw amendment).
The SEC’s Response: Amend Rule 14a-8
Just as I wrapped up drafting my blog yesterday morning, the SEC posted this press release noting that “that the Division of Corporation Finance will recommend an amendment to Rule 14a-8 under the Securities Exchange Act of 1934 concerning director nominations by shareholders. The staff proposal, still to be developed, will address issues raised by a decision of the U.S. Court of Appeals for the Second Circuit on Tuesday, which disagreed with the Commission staff’s longstanding interpretation of Rule 14a-8.
The Commission has calendared the recommendation for consideration by the Commission at an open meeting to be held on Oct. 18, 2006.”
Given the debate that took place inside the SEC when it was considering shareholder access the first time around, I would expect that there may still be some fiery exchanges within the SEC on this controversial topic – and remember that Chairman Cox and Commissioner Casey will be considering these issues for the first time…
I love a good thriller, perhaps that’s why I was drawn to all the lurid details in yesterday’s WSJ article (and today’s NY Times article) about the revelation that Hewlett-Packard hired a private investigator to monitor a long-time director’s communications for leaks. And now, California’s Attorney General has requested information concerning the processes employed in the investigations into the leaks.
I’m not aware of anything quite like this situation happening before, but there surely have been other examples of contentious infighting on boards – so that it wouldn’t shock me if it has happened before, particularly the private investigator stuff. Rather than repeat the details laid out so well in the WSJ article, let me suggest which actors might play some of the key players for the movie based on this situation (given that I don’t have any personal knowledge of these people, they may very well be miscast):
– George Keyworth (Ben Vereen), a long-time director and former science adviser to President Reagan and purported source of many of the leaks about board deliberations; he has not been re-nominated to serve on the H-P board
– Tom Perkins (Warren Beatty), a storied figure in Silicon Valley, having helped start one of the first venture-capital firms there, Kleiner Perkins Caufield & Byers and who worked for H-P in the 1960s, and joined the company’s board in 2002 and who rejoined the board in February 2005; he resigned from the board on May 18th when it appeared that the board might try to remove his friend Mr. Keyworth from the board (he was once married to romance novelist Danielle Steel and recently wrote a racy novel of his own titled “Sex and the Single Zillionaire”)
– Patricia Dunn (Meryl Streep), non-executive chair of H-P’s board and vice chairman of Barclays Global Investors; she stepped up surveillance of Mr. Keyworth after Ms. Fiorina was fired and she grew up in Las Vegas, where her father (James Caan) was entertainment director at various casinos and her mother (Sharon Stone) had been a showgirl
– Carly Fiorina (Glenn Close), former Chair and CEO of H-P, who was fired in February 2005, partially due to her focus on board leaks; she has a “tell all” book coming out soon
– Robert Ryan (Robert Duvall, this guy – not the real one), Chair of H-P’s audit committee and former chief financial officer of Medtronic; he oversaw the surveillance after Ms. Dunn and Ms. Baskins concluded the leak was a violation of the company’s Standards of Business Conduct, which are overseen by that committee (in doing so they bypassed the Nominating and Governance Committee, then headed by Mr. Perkins, which normally handled matters concerning board operations)
– Private investigator (James Garner – Jimmy!), who was hired by the outside contractor (Harvey Keitel) who was hired by H-P to investigate the board leaks and who appears to have engaged in a controversial practice known as “pretexting” (ie. investigators call the phone company, and use personal information to falsely represent themselves as another person, in order to obtain that person’s records)
With this melodrama spilling into the papers, I guess we shouldn’t be surprised that this is a board that paid over $21 million to a fired CEO…
The Duty to Disclose: Director Resignations over Disagreements
Should what happens in a boardroom stay in the boardroom? Well, we know that answer is “no” if a director resigns due to a disagreement with management, as disclosure is required under Item 5.02(a) of Form 8-K. Item 5.02 requires that a Form 8-K be filed if “if a director has resigned or refuses to stand for re-election to the board of directors since the date of the last annual meeting of shareholders because of a disagreement with the company, known to an executive officer of the company, on any matter relating to the company’s operations, policies or practices, or if a director has been removed for cause from the board of directors.” The Form 8-K is required to include “a brief description of the circumstances representing the disagreement that management believes caused, in whole or in part, the director’s resignation, refusal to stand for re-election or removal.”
After Mr. Perkins resigned from the H-P board, a Form 8-K was filed on May 22nd that simply noted that Mr. Perkins had resigned and left it at that. Yesterday, Hewlett-Packard filed this Form 8-K describing the situation as it stands now. We have added it to our list of Form 8-Ks filed over disagreements in our “Director Resignations” Practice Area.
In the Form 8-K, the company discloses that it has “received a comment letter from the staff of the Securities and Exchange Commission’s Division of Corporation Finance with respect to its May 22 Form 8-K regarding Mr. Perkins’ resignation. HP intends to respond to the SEC staff that it believes its disclosures in the May 22 Form 8-K with respect to Mr. Perkins’ resignation were accurate and complete at the time of filing and were based upon Mr. Perkins’ actions and representations prior to such time concerning the reasons for his resignation.”
I imagine Corp Fin is questioning the brevity and matter-of-factness of the May 22nd Form 8-K in light of Item 5.02. The WSJ article provides some background regarding why the company decided to go the route of minimalist disclosure in the May 22nd Form 8-K (ie. board concluded Mr. Perkins had no disagreement with the “company,” only with the non-executive chair). It will be interesting to see if this moves on to the SEC’s Enforcement Division…
Briefs Supporting the Existence of the PCAOB
Last Friday, SEC Chairman Christopher Cox announced that the SEC (as supported by seven former SEC Chairs, going back to 1973 and appointed by Presidents of both political parties) filed a brief on behalf of the United States setting forth the government’s arguments in support of the PCAOB’s constitutionality in the US District Court for the District of Columbia in Free Enterprise Fund v. The Public Company Accounting Oversight Board. In addition, another brief supporting the PCAOB was filed jointly by the Council of Institutional Investors, TIAA-CREF, CalPERS, AFL-CIO and more. We have posted these briefs – along with other courts filings – in our “Sarbanes-Oxley” Practice Area.
