Recently, the California legislature passed SB 1207 (Alarcon) to allow some California corporations to adopt a form of majority voting. California law currently requires plurality voting for California corporations. The bill was co-sponsored by CalPERS and CalSTRS. Unless Governor Schwarzenegger returns the bill before September 30, it will become law and take effect on January 1, 2007. Voting on the bill in both houses of the legislature was sharply divided and bill supporters and opponents are making opposite predictions on the likelihood of a veto by the Governor.
As the bill moved through the California legislature, I understand some objected to the fact that it would allow majority voting in corporations with cumulative voting. California law mandates cumulative voting for all California corporations (and even corporations incorporated in other states that meet specified conditions). However, listed corporations (i.e., companies with shares listed on the NYSE, AMEX or Nasdaq National Market) may eliminate cumulative voting by an amendment to their articles or bylaws.
In the last few weeks of the legislative session, SB 1207 was amended to address this concern. As amended, a listed corporation that has eliminated cumulative voting may adopt an amendment to its articles or bylaws to provide that in an uncontested election the “approval of the shareholders” is required to elect a director.
Approval of the shareholders means the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present, which shares voting affirmatively also constitute at least a majority of the required quorum. If a director fails to be elected by approval of the shareholders, his or her term ends on the date that is the earlier of 90 days after the date on which the voting results are determined or the date on which the board selects a person to fill the vacancy.
Test Your Ability to Access Video Webcast
For those attending next week’s conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – by video webcast, please test your ability to access videotoday (use your conference id/password to reach the testing area; a successful test means that you were able to play the sample video). We are unable to keep up these testing links beyond tomorrow, so it’s important that you test now.
Options Backdating: US Senate Finance Committee Meeting
For those of you burning to catch today’s US Senate Finance Committee Meeting on options backdating, I hear that you may be able to access a webcast of the 10 am eastern hearing. The witnesses include:
Last chance to register to attend our blockbuster conference:”Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now.” Many of you are making the trek to Washington DC – and even more are will be taking in the Conference online (either live on September 11-12th or by archive). Here is check-in information if you will attend in DC – and here is testing information if you plan to watch by video or audio; you definitely should test in advance of the Conference to ensure that you have either Windows Media Player or RealPlayer properly installed.
For those attending online, simply to the home page of TheCorporateCounsel.net and CompensationStandards.com on the days of the Conference and click on the prominent link that will then be available and log-in. Note that course materials will not be available until the first day of the Conference. They will be handed out in DC and posted online, adjacent to the links you will use to access the video/audio.
September E-Minders is Up!
We have posted the latest issue of our monthly e-mail newsletter.
Revisiting Deferred Compensation
In this Special September Supplement, we have compiled a bunch of Mark Borges’ recent blogs – from his “Proxy Disclosure Blog” – that have analyzed the SEC’s new executive compensation rules to give you a leg up on the type of practical guidance that will be imparted at our upcoming Conference. Below is an example of Mark’s latest handiwork:
“A couple weeks ago, I blogged about the the disclosure rules for nonqualified deferred compensation, but, as I’m starting to discover, I really only scratched the surface of the complexities involved in reporting deferral arrangements. Take, for example, a program that permits executive officers to defer all or a portion of their annual cash bonus into deferred stock units. each unit represents a share of stock at the deferral date. Let’s also assume that the DSUs are payable to a recipient at retirement (in other words, the arrangement contains no separate vesting condition).
It seems to me that, under Instruction 2 to Item 402(c)(2)(iii) and (iv), a bonus deferral into DSUs would be reportable as a stock award in the Stock Awards column of the Summary Compensation Table. (I reach this conclusion in spite of the literal language of the Instruction which says that it applies to amounts otherwise includable in the Salary or Bonus columns of the SCT. As we know, most performance-based annual incentives will be reportable in the Non-Equity Incentive Plan Compensation column and not the Bonus column of the SCT. I’m assuming that the Instruction can be applied to “bonuses” before their reporting status is determined. If I’m right, this Instruction has the curious effect of shifting an amount that may be otherwise reportable in the Non-Equity Incentive Plan Compensation column to the Stock Awards column. The result seems reasonable to me though, since by electing to defer the payment the executive officer has essentially converted a cash amount into a stock award.)
This deferral arrangement would have several additional reporting consequences as well:
– The DSUs would be reportable in the year of grant in the Grants of Plan-Based Awards Table (presumably, in column (i), the All Other Stock Awards column). The company would also be expected to describe the deferral arrangement as part of the narrative supplement to the Summary Compensation Table and the Grants of Plan-Based Awards Table required by Item 402((e).
– The DSUs would be reportable in the Nonqualified Deferred Compensation Table as nonqualified deferred compensation. They would show up in the year of grant as an executive contribution to a NQDC arrangement in column (b) and the year-end value of the DSUs would be included as part of the executive officer’s aggregate account balance in column (f). A footnote to the table would indicate where this amount was reported in the SCT (see the Instruction to Item 402(i)(2)). Again, the narrative discussion to accompany this table would need to describe the deferral arrangement (perhaps a cross-reference to the SCT discussion would be sufficient.)
– In subsequent years, the DSUs would be reportable:
= in the Outstanding Equity Awards at Fiscal Year-End Table (columns (g) and (h)) while outstanding and
= in the Option Exercises and Stock Vested Table in the year the executive officer retired. Even though the award doesn’t have vesting conditions, it seems to me that receipt at retirement is the equivalent of vesting for disclosure purposes. Also, if the executive officer has properly elected to defer receipt of the shares again, then a footnote to this table would be necessary to quantify the amount and disclose the terms of the subsequent deferral.
– The DSUs would also continue to be included each year in the Nonqualified Deferred Compensation Table as part of the executive officer’s aggregate account balance in column (f) and would be included as part of the footnote to the table quantifying amounts previously disclosed as compensation in the SCT (again, pursuant to the Instruction to Item 402(i)(2)).
= Unless further deferred, presumably the value of the DSUs at the time of retirement would be reported in the Aggregate Withdrawals/Distribution column of the table and would reduce the yearend account balance.
As I read back through this summary, I’m not sure that it’s right – or that I’ve even identified all of the relevant issues. In addition, my example doesn’t even get into how to treat any earnings on the DSUs while they were outstanding, which presents an additional set of reporting issues. That analysis will have to wait until tomorrow, or the next day.”
A number of major newspapers ran similar stories about how the number of late Form 10-Qs set an all-time record this quarter, the kind of thing that I am convinced would not have been deemed newsworthy “but for” the option backdating scandal. Of course, without Glass Lewis providing statistics, I doubt the media would have been able to dig out the story.
One of the interesting items in these stories is that the SEC’s Enforcement Division says 80 option backdating investigations are underway, but less than 50 companies have disclosed such investigations according to the Glass Lewis study – which begs the question: is there a duty to disclose the commencement of an SEC investigation? Learn the answer in our FAQs about Disclosure of SEC Investigations in our “SEC Enforcement” Practice Area. And we have posted a copy of the Glass Lewis study in our “Rule 12b-25/Late Filings” Practice Area.
Late Filings Lead to Bond Defaults
Yesterday, the WSJ ran this scary article outlining how some hedge funds are relying on late SEC filings as a way to accelerate repayment of outstanding bonds. Particularly scary is that acceleration of payment in one group of bonds could lead to a cross-default – and the forced acceleration of all the company’s bonds. Here is an excerpt from the WSJ article:
“Traditionally, when companies missed a deadline for filing their financial statements, bondholders would look the other way and let the company work out the kinks — even though, technically, the company was in default and bondholders could demand repayment.
But return-hungry hedge funds and other big investors have found an opportunity to profit, thanks in part to a spreading scandal over the practice at many companies of backdating stock-options that were granted to employees as a form of compensation. That practice has come under scrutiny by regulators, and dozens of companies are having to review whether their earnings statements accurately accounted for such compensation — which, in some cases, is delaying their filings.
In one of the largest recent examples, a group of UnitedHealth Group Inc. bondholders last week formally warned the Minnetonka, Minn., insurance company in a letter dated Aug. 25 that it is in default for failing to file its second-quarter report with the U.S. Securities and Exchange Commission. If it doesn’t file the paperwork within 60 days, the group says it has the right to declare the bonds due and payable immediately.
The amount UnitedHealth would have to pay: $800 million, not otherwise due until 2036. Investors would stand to make a quick profit because UnitedHealth’s bonds are trading below face value; if the company is forced to pay full value to redeem them, the bondholders who bought at below par would make a tidy return on their investment.”
Here is how UnitedHealth responded to the default letter, as described in a Form 8-K filed Monday: “On August 28, 2006, UnitedHealth Group received a purported notice of default from persons claiming to hold certain of its debt securities alleging a violation of the Company’s indenture governing its debt securities. This follows the Company’s not filing its quarterly report on Form 10-Q for the quarter ended June 30, 2006. The Company believes it is not in default and intends to defend itself vigorously. The Company’s indenture requires it to provide to the trustee copies of the reports the Company is required to file with the SEC, such as its quarterly reports, within 15 days of filing such reports with the SEC.”
Gliffy is Here!
If you find diagrams as useful as I do to explain complicated matters, you need to check out Gliffy.com, a new site that allows you to create diagrams easily online – and for free!
Only two weeks left until the blockbuster conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now.” Many of you are making the trek to Washington DC – and even more are will be taking in the Conference online (either live on September 11-12th or by archive). Here is check-in information if you will attend in DC – and here is testing information if you plan to watch by video or audio; you definitely should test in advance of the Conference to ensure that you have either Windows Media Player or RealPlayer properly installed.
We also gently remind you that only persons registered to attend are entitled to use an ID and password to access the Conference. In other words, it is illegal to share your ID and password with anyone else inside (or outside) your office – as well as a violation of the terms & conditions of attending the Conference. If you share your ID and password with someone that is not registered – you not only will lose access to the Conference, you also will not be entitled to a refund. If you feel the urge to share, you should upgrade your license now to accommodate more people – our HQ will apply any money you already spent on a license towards a larger one.
Unfortunately, we will be monitoring for this illegal activity. For some reason, people forget that stealing online is still stealing (remember the “Napster days” are long gone). You might recall that a few years back, Legg Mason was hit with a $20 million dollar judgment because its employees were sharing IDs/passwords for an online service.
Impact of ’33 Act Reform on M&A
In this DealLawyers.com podcast, Jim Showen of Hogan & Hartson analyzes the impact of the SEC’s ’33 Act reform on M&A transactions, including addressing these questions:
– It’s my understanding that the SEC’s securities offering reform rules that went into effect last December specifically do not apply to M&A transactions. Yet I have heard that there may be a couple of important considerations stemming from those rules that M&A practitioners ought to keep in mind. What are those?
– Since the WKSI test involves primarily size and compliance by the issuer – and acquisitions would presumably always make the company bigger – how could an acquisition cause a company to lose its WKSI status?
– How does the securities offering reform rules work in tandem with Regulation MA during the pendency of a registered merger?
Broadening of the SEC’s Direct Registration System
Recently, the SEC adopted rule changes from the NYSE which would mandate that listed companies become eligible to participate in a Direct Registration System. Nasdaq and Amex have filed similar rule changes, which have been adopted by the SEC. The DRS has been in pilot program mode for years.
These three sets of rule changes provide for lengthy transition periods and there are some exceptions. Note there are differences in wording among the SEC orders, such as requiring certain listed securities to become eligible – versus requiring listed companies to become eligible.
Last week, the SEC approved changes to the NYSE Listed Company Manual so that Section 203.01 was changed to eliminate the NYSE requirement (a requirement which can be traced back to 1895!) for a listed company to physically distribute an annual report to shareholders – and allow a company to satisfy the annual financial statement distribution requirement by making its Form 10-K (or Form 20-F) available by a link to its corporate website, with a prominent undertaking in English to deliver a paper copy, free of charge, to any shareholder who requests it.
Listed companies also are required to issue a press release stating that its annual report has been filed with the SEC. This press release must specify the company’s website address – and indicate that shareholders have the ability to receive a hard copy of the company’s complete audited financial statements free of charge upon request. In addition, the NYSE added Section 303A.14, which requires listed companies to maintain a corporate website.
As I noted in this earlier blog, US companies are still obligated to distribute annual financial information under Rule 14a-3(b) – so the real benefits of these new NYSE standards won’t be realized for them until the SEC adopts some form of its e-Proxy proposal. However, for those foreign private issuers that are exempt from the proxy rules – they should realize cost savings right away. I’m trying to figure out when these changes take effect, as that is not mentioned in the SEC’s order…my guess is that the NYSE rule change is immediately effective, which is the normal result under Section 19(b). The NYSE already has incorporated the change into the Manual.
Congress Takes On Options Backdating
When Congress gets back to work next week, the US Senate already plans to hold two separate hearings on stock option timing. On September 6th, the Senate Finance Committee will hold a hearing – and this Committee’s Chair, Senator Grassley (R-Iowa), is making noise about the possible need for Congress to change the tax laws to tackle backdating. The Senate Banking Committee also plans to hold a hearing on option timing issues in the near future. Egads…
By the way, you might want to check out this San Jose Mercury News interview if you want another Silicon Valleyite’s perspective of the backdating scandal.
SEC Issues Nasdaq’s Proposal to Change “Independent Director” Definition
As I blogged about earlier this month, the Nasdaq has proposed to amend the definition of “independent director” – which has now been formally proposed by the SEC with a 21-day comment period. These changes make the Nasdaq rules more consistent with those of those of the NYSE. The proposed amendments would:
– modify the definition of “independent director” in Rule 4200(a)(15)(B) to provide that a finding of independence is precluded if a director accepts any “compensation” from the company or its affiliates in excess of $60,000 during any consecutive twelve month period within the three years prior to the independence determination (replacing the term “payments”)
– amend IM-4200 to clarify that after the effective date of the rule change, a company’s board may determine that a director who served as an officer of the company on an interim basis for up to a year is not precluded from being considered independent solely as a result of that service (including service that occurs before the approval of this proposed change)
– clarify that an exception to the audit committee requirements contained in Rule 10A-3(c)(2) for certain companies that have a listed parent also is applicable to Nasdaq’s audit committee requirements
– provide that a transition period for an independent director who becomes disqualified due to the amendments, which would allow the disqualified director to remain on the company’s board for 90 days
I continue to be astounded by the number of firm memos we are posting in our “Timing of Stock Option Grants” Practice Area on CompensationStandards.com – and many of the more recent ones aim to provide practical guidance rather than rehash what is in the mainstream press.
My good friend Kris Veaco, who recently left McKesson Corporation (where she was Assistant General Counsel and ran the Corporate Secretary’s office) to start her own governance consulting firm, provides her own practical guidance for those grappling with how to establish sound option grant processes:
“Given all of the issues surrounding stop options these days, I was wondering what kinds of governance practices companies have in place with respect to their stock grants. I have heard from seasoned stock administrators that companies with few resources and/or a lack of appreciation for the complexities of stock administration would assign that function to the CEO’s assistant or someone else with little or no qualifications in the area.
Alternatively, those preparing the materials for the Compensation Committee (or other Board Committee with the authority to award stock grants) may not appreciate the corporate governance requirements necessary to have effective grants. The SEC’s new requirements for disclosure in the proxy may address some of these concerns, but there may still be room for practical information on how the process should work.
Well in advance of the Committee meeting the process for determining who will receive grants, what kind and how many should occur so that by the date of the meeting the list of recipients is known and fixed. The materials presented to the Committee, including the draft resolutions for the Committee’s approval, should provide the Committee with who is getting the grants, how many shares or options or units per recipient and in total, the vesting schedules, and the grant date (based on plan language) and how the price will be determined.
The plans I have seen establish that the grant price will be the closing price on the date of grant, which is very clear and easy to determine. The date of grant is usually the date of the meeting unless it is close to an earnings release or some other significant event, and then the regular practice might be that the grant date will be some period of time following the release of the earnings – 3 business days, 5 business days, 48 hours – something to allow the market to absorb the information and be reflected in the stock price.
If the grants are made via unanimous written consent, then the effective date of grant will be the date the last signature is received unless some other future date is noted in the resolutions. Of course, the minutes should reflect the Committee’s actions and include the list of recipients, and original signatures are required for the minute books for if the consent process is used.
Of course, if there are grants to any Section 16 insiders, then the process has to include advance notice to whoever files the Forms 4 as well as a follow up on the date of the meeting to ensure the numbers or terms did not change.”
I’m hoping Kris will become a regular contributor to this blog as she clearly has a lot to offer! She is currently setting up her new business, but for the time being can be reached at kveaco@comcast.net.
Latest Challenges for Compliance Programs
In this podcast, Jeff Kaplan, Founder and Partner of Kaplan & Walker, explains how to deal with the latest challenges on compliance programs, including:
– How are “best practice” companies dealing with compliance program challenges?
– What do you mean by third-party compliance? And how are companies responding?
– What are the challenges in dealing with the “tone at the middle”?
– Given how busy boards and senior executives are, what are effective strategies for meeting the new standards for compliance program oversight and management?
In late June, the New York State Supreme Court, Appellate Division decided in HF Management Services LLC v Pistone (with three judges concurring and two dissenting) that, despite last year’s New York State Court of Appeals decision in EBC I v Goldman, Sachs & Co. (aka the “eToys” case), “New York courts and jurisdictions applying New York law have long recognized the non-fiduciary nature of the underwriter-issuer relationship” and “not only is a fiduciary aspect absent from the majority of underwriting relationships, such relationships are better characterized as adversarial since the statutorily imposed duty of underwriters is to investors.” We have copies of both opinions posted in our “Underwriting Arrangements” Practice Area.
Though technically the decision relates to whether plaintiff’s litigation counsel in an employment-related dispute should be disqualified, the case hinged on whether a fiduciary relationship exists between an underwriter and an issuer and such fiduciary relationship should be imputed to underwriter’s counsel. In this case, HF Management had sued two former employees and WellCare for breach of a non-solicitation agreement. HF Management’s counsel had previously acted as due diligence counsel to the underwriter of WellCare’s IPO. The lower court had granted defendants’ request to disqualify HF Management’s counsel on the grounds that the underwriter owed a fiduciary duty to WellCare and plaintiff’s counsel, as the underwriter’s agent, shared the underwriter’s fiduciary duty to WellCare.
This is a heartening decision for underwriters concerned that, in light of eToys, courts might too readily conclude that a fiduciary relationship was created by ordinary course communications and activities in connection with an underwriting. Nevertheless, there remains cause for concern, particularly in light of statements by the court that “[c]ertainly, there is no indication or suggestion that [underwriter] and WellCare enjoyed any type of pre-existing relationship, or that [underwriter] acted as an “expert advisor on market conditions” to WellCare in the same way that Goldman Sachs apparently advised eToys.” The obvious concern is that ordinary course discussions regarding market conditions and timing could be deemed “expert advise” giving rise to a fiduciary obligation rather than, as arising from a commonality of interest in achieving a successful offering.
In light of eToys, most underwriters revised their forms of underwriting agreements to, among other things, require issuers to disclaim any fiduciary relationship, but (out of an abundance of caution) such provisions should be reviewed in light of the HF Management decision to ensure that they also disclaim any advisory responsibilities relating to the offering, regardless of whether the underwriter has previously or currently providing advisory services with respect to other matters. Thanks to Kevin Miller of Alston & Bird for these thoughts.
An Interview with Alan Beller
I am a big fan of former Corp Fin Director Alan Beller, who is back to work at Cleary Gottlieb and recently gave this interview to CFO.com. Catch Alan talking about the new CD&A and disclosure controls & procedures for executive compensation at our upcoming Conference in two weeks!
A few months ago, I blogged about Zions Bancorp planning to register securities that would mimic employee stock options for public auction. Well, not only were those securities finally registered, but the complicated instrument was auctioned off at the end of June. Here is a copy of Zion Bancorp’s final prospectus filed July 3rd – and a free writing prospectus with FAQs about ESOARs (employee stock option appreciation rights). And here is the ESOAR auction website, which includes more information about these novel securities.
Here is a Dow Jones article about the offering:
“An innovative Internet securities auction by Zions Bancorporation (ZION), set for Wednesday and Thursday, may provide an attractive opportunity to investors, but if it does, that could undermine the entire purpose of the auction. Bidding opens at 9:30 a.m. EDT for an offering of “Esoars,” a derivative security designed to mimic the value of employee stock options. Zions isn’t making the offering in order to profit directly, but instead hopes to create an accounting tool that will allow companies to reduce their reported expense for granting stock options. Zions intends to profit by selling that tool.
The Zions plan was spurred by a recent change in accounting rules that requires companies to record the expense of granting employee stock options. Opponents of the change had argued that there is no good way to assign a value to those options, but now that companies must do so, they say traditional valuation models exaggerate the expense.
Zions, of Salt Lake City, proposes to let the market decide, and to that end it is offering the derivative, which is formally named “Employee Stock Option Appreciation Rights Securities.” Cindy Ma, who was a member of the Financial Accounting Standards Board group set up to create option valuation guidelines, questions Zions’ strategy, saying that the intimidating complexity of the Zions derivative will deter investors from offering full value.
Joel D. Hornstein, chief executive of Structural Wealth Management LLC, agrees with Ma about the complexity of Esoars — and perceives an opportunity for a savvy investor. “Auctions create significant inefficiency if you don’t have smart, sophisticated bidders,” Hornstein said. “We hope to benefit from the fact that we may be the only sophisticated (investors), or one of the very few, in this auction process, and that should be good for us.” Hornstein won’t say how much he is willing to bid, but he does have a specific number in mind.
He said he came up with a valuation by estimating how long Zions employees are likely to hold their options, and applying those estimates to the Black-Scholes model, a common tool for valuing stock options that takes into account such factors as the options’ expiration date and the underlying stock’s volatility. He said he then discounted that result to ensure “a healthy margin relative to fair value.” He said he won’t bid if he doesn’t get that margin. “Our intention is to bid only if the price is a significant discount to the value we estimated using Black-Scholes,” Hornstein said.
Hornstein argues that the normal incentives in a stock offering are turned upside-down in the Zions case, making his bidding scenario more likely. Companies, after all, have reason to seek a higher price for their securities, while Zions’ purpose is to establish a value for stock options that is below the value produced by current accounting methods.
Ma, however, said if bidders do shy away from the auction and the Esoars price is therefore too low, Zions will have a tougher time convincing regulators that the auction provided a true value for accounting purposes. “The instrument may have appeal to really sophisticated institutional investors. I am very skeptical for individual investors,” said Ma, a vice president at NERA Economic Consulting. “They don’t have that sophistication to try to analyze the data.”
Each Esoars will allow holders the right to receive payments pegged to the exercise of stock options by employees, with Esoars holders receiving the same value that employees get when they exercise their options. Returns will be affected by the amount and timing of option exercises by employees, the vesting schedule of options and the trading price of Zions common stock. Henry Wurts, a vice president at Zions subsidiary Zions Bank, acknowledged that investing in Esoars is riskier than buying the company’s stock or regular options on that stock.
Wurts said that investors will — and should — take that risk into account when they bid. Because Zions has designed a fair auction, the auction’s result — whatever it is — will be the fair value of the options, he said. “To clarify, the price will depend on the bidders,” he said. “So the bidders themselves will determine what value they give to these.”
The Securities and Exchange Commission, which will ultimately decide the validity of Zions’ proposed accounting technique, has said that a market-based method may be preferable to traditional options accounting models. “The SEC suggested they wanted a market price, and we are giving them the opportunity to see a market price,” Wurts said. “That is our goal. We are not trying to tell people how to price options. We are trying to help the SEC see a market price for these options.”
Wurts declined to estimate the value of Esoars. Evan Hill, a colleague of Wurts who helped to develop the derivative security, has said he expects the price to fall somewhere in a range of about $5 to the low teens. Using Zions’ current method for calculating option expense and taking into consideration assumptions used to value employee stock options last year, each Esoars would be worth about $16, Hill said.
The auction for 93,603 Esoars is to be hosted on the Internet Web site www.esoars.com. The auction is scheduled to open at 9:30 a.m. EDT Wednesday and close at 4:15 p.m. EDT Thursday. Zions’ Hill said that as of late Tuesday, there were 70 approved bidders for the auction. Hill said that regardless of how the auction turns out, Zions could seek SEC approval to use the result as part of an accounting method for valuing stock options. Wurts said that no matter the result, it will be a valid result for that purpose.
“We can explain any price that comes in,” he said. “If it comes in at $2, we can explain why that happened: There was a deep discount for risk. If it comes in at $15 we can explain how that happened: They didn’t take a deep discount for risk.”
ISS has released an updated version of its Proxy Season Scorecard, whose highlights include:
– Majority vote to elect director proposals received an average level of support of 47.8 percent, up from 43.7 percent in 2005
– Use performance-based vesting proposals received an average level of support of 41.5 percent, jumping more than nine percentage points from 2005
– Disclose political contribution proposals received an average level of support of 20.7 percent, which is more than double last year’s average
Majority Vote Standards: The New Proxy Card
Several companies that have adopted pure majority vote standards have tweaked their proxy cards (and voting instruction forms) to allow for shareholders to vote “against” director nominees – we have posted several of these samples in our “Majority Vote Movement” Practice Area. It is important to note that ADP has the systems in place for those companies who need to make similar changes.
Incorporation by Reference and Written Statements: The PSLRA’s Safe Harbor
We seem to get a fair number of queries about incorporation by reference in our Q&A Forum, so I thought it would be informative to repeat this development (and analysis) from a recent Wachtell Lipton memo: “The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) creates a “safe harbor” from liability under the federal securities laws for earnings projections and other forward-looking statements, both written and oral, that are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”15 U.S.C. § 78u-5(c)(1). In the case of oral forward-looking statements made by or on behalf of an issuer subject to Exchange Act reporting requirements, the statute provides that “meaningful cautionary statements” contained in an identified written statement may be incorporated by reference. Id. § 78u-5(c)(2).
Because the PSLRA’s “safe harbor” expressly permits incorporation by reference with respect to oral statements, shareholder plaintiffs have argued that a corporate defendant’s written statement (e.g., a press release) that incorporates by reference the “meaningful cautionary statements” contained in another written document (e.g., the corporation’s annual report) is not entitled to “safe harbor” protection.
This argument was recently rejected in Yellen v. Hake, 2006 U.S. Dist. LEXIS 47012 (S.D. Iowa July 7, 2006). The court reasoned that “[w]hile the Safe Harbor provision does not explicitly provide for incorporation by reference for written forward-looking statements,” a defendant’s ability to avail itself of the “safe harbor” in this manner was implicit in the statute. The court also noted that numerous federal courts have concluded that cautionary language is not required to be in the same document as the allegedly false statement for a defendant to get the benefit of the “safe harbor.”
Although the decision in Yellen offers some comfort that a press release containing forward-looking statements can come within the PSLRA’s “safe harbor” by incorporating by reference cautionary statements contained in prior SEC filings, the safer course remains for companies to avoid the issue altogether by simply repeating verbatim in their forward-looking press releases the same cautionary statements contained in their prior SEC filings.” We have posted a copy of this memo in our “Forward-Looking Information” Practice Area.
In the wake of the recent PCAOB rules on auditor independence, many companies have been updating their pre-approval policies regarding non-audit services. Some companies have even been cobbling new policies together that prohibit personal tax services from being performed by the independent auditor for persons in a financial reporting oversight role. In our “Pre-Approval of Non-Audit Services Policies” Practice Area, we have posted a sample of one of these new policies in a Word file.
The Big 2000
A few weeks ago, our “Q&A Forum” passed the 2000th question mark, which is really higher since a fair number of those include follow-ups. Quite a body of achievement if I must pat ourselves on the back as there is quite a bit of practical content buried in the Forum. I’m not sure if we can keep up with the growing pace of questions – and I remind you that we welcome your own input into any query that you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply…
Inspector General Recommendation: Continuous SEC Surveillance of Larger Companies
Last month, the SEC’s Office of Inspector General issued this report which recommends that the Division of Corporation Finance engage in continuous surveillance of larger companies. According to the report, this recommended program would be operated in a manner similar to that used by the SEC’s Office of Compliance Inspection and Examination for investment advisors. The report also recommends that Corp Fin better manage its workload and use risk factors more frequently during its preliminary screening of filings.
I beg to differ. I understand that a large portion of the overall US market cap consists of the huge capitializations of a relatively small group of companies – but these companies typically also have the most resources to devote to compliance matters. And as a general matter, it is my understanding that more frauds are perpetuated at smaller companies compared to larger ones. So using scant SEC Staff resources to continuously oversee the General Electrics of the world doesn’t seem like the best way to protect investors…
And we just added a senior actuary from Towers Perrin – Tim Marnell – to the “The New Retirement Pay Tables” panel. When you hear what Tim has to say, you will realize how challenging those tables (and the related SCT column) will be!
A few Conference items to note:
1. Ensure you are registered, particularly if you delegated getting registered to someone else in your office. I have interacted with several members who thought they had registered – but it hadn’t happened yet. We are dreading the inevitable last-minute rush during the week of Labor Day. Please don’t procrastinate!
2. Ensure your registration is in the form you want it to be. Our experience with our popular annual Executive Compensation Conferences is that a lot of people show up in-person for the Conference – but they had only registered for webcast attendance (which is a little cheaper). We won’t turn away those people at the door, but the processing takes some time. Save yourself the hassle!
In reviewing this salesforce.com proxy statement, I saw something I haven’t run into for a while: disclosure about the Rule 10b5-1 sales plans that have been implemented by various officers and directors – in a separate section following the discussion of employment contracts and certain transactions, the company identifies which officers and directors have entered into such plans on page 17.
While I’ve seen plenty of Rule 10b5-1 plans disclosed in press releases and Form 8-Ks, this is only the second time I’ve seen the topic covered in a proxy statement (Plantronics has had similar disclosure in its proxy statements for each of the past two years). Note that I am not advocating that companies make such disclosure nor do I claim that’s it’s required – I’m just pointing out some novel disclosure…
The Law Firm That We Know All Too Well
Some wise guy has written a fictitious book – “Anonymous Lawyer: The Novel” – about a crude law firm. I figure I don’t need to read the book since I’ve already lived it (and re-lived it in my nightmares).
Much more interesting is the author’s hilarious web site for the fake firm. My favorite lawyer is Patrick Weinberg – reminds me of my own associate skills back in the day!
