Last Thursday, the US Attorney General and the SEC brought criminal and civil charges against three former senior Comverse Technology executives for alleged option backdating manipulation. Here is the SEC’s press release – and here is the SEC’s complaint. Courtesy of the “WSJ Law Blog,” here is the Criminal Complaint, which includes quite a bit of detail about the alleged fraud.
My favorite part of the complaints are when they reveal that the former Comverse executives secretly inserted fictitious names amid the names of actual employees on proposed option grantee lists, which then were submitted to Comverse’s compensation committee for approval. This is what Jimmy Rockford would have done in the corporate world (if Jimmy ever went to the “dark side”)! And it gets better – the former Comverse CEO is AWOL and on the lam! Some pretty crazy stuff – movie material perhaps? Read more about the Comverse allegations on Bruce Carton’s “Securities Litigation Blog.”
Unanimous Written Consents: Analysis of Proper Effective Dates
Alan Dye points out that the Attorney General’s and SEC’s case against the former Comverse executives confirms what we wrote in the March-April 2006 issue of The Corporate Counsel – about it being improper to treat a unanimous written consent as being effective “as of” an earlier date than the date the last signature was obtained. In e-mails to us, we had a few members question our view, but we stood our ground – and now it’s apparent that the government is taking the position that the grant date is the date on which the directors sign the consent and can’t be some earlier date specified in an “as of” sentence in the consent.
The government also appears to be questioning the practice of not including a date line next to each signature line – it’s perceived as a practice that is intended to facilitate backdating. So here’s today’s practice tip: start using datelines!
FCPA, Options Backdating, and D&O Exposure
Kevin LaCroix’s “D&O Diary Blog” contains some excellent analysis of how the Foreign Corrupt Practices Act figures into the option backdating scandal, including this prior post about how one of the dangers from an FCPA enforcement proceeding is the possibility of follow-on litigation. Kevin also explains how the recent securities fraud lawsuit settlement below provides a glimpse into the way FCPA violations can spawn follow-on litigation:
“On August 9, 2006, Willbros Group announced that it had settled the 2005 class action lawsuit that had been filed against the Company and several of its directors and officers. The Complaint alleged that the company had been the subject of numerous of numerous investigations “because the Company engaged in a campaign of illegal and illicit bribery of foreign government officials in Bolivia, Nigeria and Ecuador to successfully obtain construction projects.” The Complaint alleged that the company was forced to restate several years of financial statements and to establish a reserve to accrue for possible fines and penalties for FCPA violations. The Complaint alleged that as a result of these violations, the Company had misrepresented its true financial condition. The Complaint alleged that the company’s share price declined 31% when these matters were disclosed.
In its August 9 press release, the Company did not disclose the amount of the securities class action settlement, but the press release did state that the amount of the settlement would be funded by the company’s insurance carrier.
The Willbros settlement illustrates the growing D & O risk that increased FCPA enforcement activity could represent. The threat is not so much from the underlying FCPA enforcement action itself; any FCPA fines and penalties likely would not be covered under most D & O policies. Rather, the threat is from the potential liability that could arise in any follow-on civil action, including any follow-on securities fraud lawsuit like the one filed against Willbros Group. Any settlement or judgments incurred in a follow-on action, as well as defense expenses, would usually be covered under the typical D & O policy.
As FCPA enforcement actions grow in number and magnitude, this exposure could pose an increasingly greater D & O risk.”
Yesterday, SEC Chairman Cox appointed Erik Sirri as the new Director of the Division of Market Regulation, the last remaining senior SEC post that was vacant. It has been open since Annette Nazareth moved up to Commissioner last year.
Eric currently is a Finance Professor at Babson College and served as the SEC’s Chief Economist back in the late ’90s, back when I was worked for Commissioner Unger – so I have seen Erik in action. It is not unheard of for an economist to be head of Market Reg – Rich Lindsey moved up from Chief Economist to Market Reg Director in the mid ’90s.
SEC’s IM Staff Provides No-Action Relief After Goldstein
Last Thursday, the Division of Investment Management Staff gave this no-action response to the American Bar Association’s Subcommittee on Private Investment Entities to provide guidance to the hedge fund industry following June’s decision from the US Court of Appeals for District of Columbia Circuit, Goldstein v. SEC.
The Goldstein decision vacated Rule 203(b)(3)-2, the intent and effect of which had been to require the registration of a substantial number of investment advisers to hedge funds. As Chairman Cox noted in this recent testimony on the Hill, the SEC has decided not appeal the Goldstein ruling – instead, the SEC will go back to the drawing board and propose new hedge fund rules in the near future.
Alleged Section 409 Violation: The Quoza Story
A new monitoring service from Quoza claims to track whether companies are posting their press releases on their websites before – or exactly – at the same time that information is otherwise disseminated. The origins of this service appears to be based by the requirement in Section 409 of Sarbanes-Oxley for companies to disseminate information on a “rapid and current basis.”
Apparently, Quoza’s software repeatedly checks the IR and PR web pages of companies – and Thomson began to block this monitoring/tracking software because it causes “performance degradation and impairs its ability to accurately understand website traffic, usage trends and analytics.” Thomson operates the IR and/or PR web pages for a number of public companies. From what I gather, Thomson has requested a Cease & Desist order – and Quoza has made a number of complaints against Thomson, some of which are detailed on this page. Quoza also has sent this e-mail to a number of companies:
“You are in violation of section 409 of the Sarbanes- Oxley Act. Please stop blocking access to your website. This email is to inform you that www.quoza.com is launched and available to the public. We invite you to visit www.quoza.com and read the ‘Why Us’ section on the site. This section is self-explanatory and highlights the need and the mission to bring timely reporting, transparency and equal access to all material and mosaic news of your company to the masses and the small investor. Our objective is to bring all investors a fair system in real time that monitors information that leads to investment decisions. One way we do this now is bringing clear illustration thru compliance reports that show some locations where and possibly when information was distributed.
You may or may not be aware that we have had serious problems with one of the operating units of your subcontractor, The Thomson Corporation, stock symbol [TOC] which handles your website press release pages. They have been blocking and disrupting our attempts to bring timely reporting, transparency and equal access of your news to the masses.
The Thomson Corporation [TOC] is a company that has many services to add value to and integrate information. The Thomson Corporation [TOC] sells their services to many large financial institutions and the elite and helps distribute these services fast. Most of corporate America has been working to comply with section 404 of Sarbanes-Oxley. We note on our site that section 409 of Sarbanes-Oxley requires public corporations to distribute material information on a “Rapid and Current Basis”. We would like to caution you that the blocks placed by The Thomson Corporation on access to all your news that is material and non-material (mosaic) disrupts our ability to bring your news to the masses on a rapid and current basis. This increases the liability for your company and places your company in violation of section 409 of Sarbanes-Oxley. It is clearly a conflict of interest for The Thomson Corporation to handle and control access to your press releases on your website, while using this information to sell value added services to large financial institutions and the elite.
Your company can increase fairness and distribution by releasing all material and non-material (mosaic) information on your website, at the very same time such information is released, distributed or sold to large financial institutions and the elite anywhere else. By releasing all material and non-material information on your website, even if any non-material information is later determined to be material, you can demonstrate that the information has been made widely available thru your website. This also reduces your company’s liability and exposure.
Quoza gives the public the ability to extract your news from your company website, rather than the masses reading your edited company news on a third party websites. You are in total control of how you want your news story to be presented on your website along with other marketing material. Quoza’s method of giving the public the ability to extract news from your company website carries with it marketing advantages for your company at no additional costs. Quoza’s compliance reports on your news stories can also serve as a tool to decrease your company’s exposure and liability by bringing transparency and equal access to all your material and non-material (mosaic) information.
Quoza is offering a 24-hour free trial period to all general subscribers and corporate sponsors. We believe once you view our product by visiting www.quoza.com and read ‘Why Us?’ you will cooperate with us by asking The Thomson Corporation to stop blocks on our attempts to bring timely reporting and transparency of your company news on your web pages to the masses.
You can demonstrate your support for Quoza by becoming a corporate sponsor for an annual sponsorship USD 5000 per year. This fixed annual sponsorship fee is open to first 100 corporate sponsors at this time. The regular site sponsorship fee is USD 10,000 per year. You can also register as a general subscriber, which costs only USD 15.95 per month, but paid on an annual basis for a total cost of USD 191.40..
As a Corporate sponsor, Quoza will provide the service of giving the public the ability to extract news for your company directly from your website, along with the news time compliance reports. This service provided for news of corporate sponsors will be free to everyone and not just reserved for Quoza’s paid subscribers.
We look forward to your support in our mission to bring timely reporting, transparency and equal access to all your material and non-material information. If you need to contact us you can do so through the contact us section on the registration page. If you want one of our representatives to call you, please include your contact information and the best time to reach you in your email.”
My ten cents: This may very well be a novel case for a court to determine whether automated processes, such as crawlers, spiders, and other applications that scrape data or perform automated retrieval of content, are considered to be to legitimate users of web sites. In addition, I believe most of us presumed that the SEC’s adoption of new Form 8-K rules in 2004 (ie. “real-time” disclosure) took care of what Congress envisioned in Section 409 of Sarbanes-Oxley. It will be interesting to see how this plays out…
On Friday, the SEC posted the 436-page adopting release for its executive compensation disclosure rules. The compliance dates appear on page 2 – but you should also read pages 195-197 for more information about those important dates, including transition details. And thanks to Faegre & Benson for this useful Table of Contents to slap on your copy of the adopting release. Hours after its issuance, Mark Borges already had made his first stab at analyzing the adopting release in his “Proxy Disclosure Blog.”
With just a few weeks left, folks are registering in droves for our two-day Conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – which will be held live in Washington DC at the Marriott Wardman Park on September 11-12. Rooms are filling up fast – here is how to obtain special room rates.
If you come to Washington DC to take in the conference, you still will get access to the video archive of the Conference, which will be important when you actually sit down to draft – and review – disclosures during the proxy season. The Conference is still available by videoconference if you can’t make it to Washington DC on those days (and the Conference will be archived if those dates are conflicted for you).
If you haven’t yet, check out this detailed conference agenda to understand the types of challenges you should expect to face from the new rules.
Sample Executive Compensation Disclosures
Even in advance of our comprehensive Conference coming up in a few weeks, many of you are – wisely – drafting mock disclosures to figure out how the SEC’s new rules impact your unique circumstances. To assist you, we have organized a horde of Mark Borge’s blogs from the past year – each of which provides analysis about how a particular company attempted to meet a component of the SEC’s then proposed rules – in these sample disclosures. These sample disclosures are posted in CompensationStandards.com’s “The SEC’s New Rules” Practice Area.
As new proxy statements are filed, you can be sure that Mark will be analyzing how they stack up against the new SEC requirements in his “Proxy Disclosure Blog.”
Insider Trading Law Quirk?
A few bloggers are eating up the story about Dallas Mav’s owner Mark Cuban’s new ShareSleuth.com site (which I blogged about pre-launch) and the revelation that Mark is selling short in some of the companies for which the site does investigative reporting to find a company’s warts. Gary Weiss does a juicy job – and has been battling Cuban – in his blog: see Round I, Round II and Round III. And Bruce Carton gives us the full-on legal analysis in his “Securities Litigation Watch” Blog.
Like last year’s blowout with Hootie & the Blowfish, this year’s NASPP Annual Conference – in Las Vegas – will include a special entertainment event. The NASPP, along with Fidelity Investments, is excited to announce that immediately after the Gala Opening Reception on October 10th, all Conference attendees are invited to join the NASPP and Fidelity on the beach at Mandalay Bay for an exclusive private concert featuring Huey Lewis & The News!
The concert is offered to NASPP Conference attendees only. There is no additional charge to attend – but space is limited and you must register with Fidelity in advance. Alas, major conferences will never be the same for me…
The Pension Protection Act of 2006
Last Thursday, the US Senate passed the Pension Protection Act of 2006, a pension reform bill approved by the House of Representatives on July 28th. The Act addresses a wide range of employee benefit-related issues, including the first change to the definition of “plan assets” under ERISA since 1986. Among many other changes, this Act will now permit managers of hedge funds, funds of funds and other investment vehicles that accept investments from public and private, non-US and US ERISA plans – that do not otherwise qualify for an exception or exemption from the plan asset rules – to accept significantly more capital from ERISA plans.
Former SEC Secretary Jack Katz on an “Overlawyered” SEC
Former long-time SEC Secretary Jonathan “Jack” Katz penned an editorial for Tuesday’s WSJ, following up on Harvey Pitt’s recent editorial about the SEC being over-lawyered. Jack agreed with Harvey’s identification of the problems at the SEC – but Jack doesn’t think that hiring more economists and fewer lawyers solves the problem.
Instead, Jack wants the SEC to play a more active role in monitoring rules once they’re adopted: “Over-lawyering is not merely a reflection of the personnel working at the SEC, it’s also a product of the institution’s definition of itself.” Jack’s thoughts are consistent with recently departed Commissioner Glassman’s emphasis on the need to discern the real-world implications that SEC rule-making initiatives will have before the so-called problem-solving is effectuated. It’s rather jolting to see Jack’s name on something other than an SEC order – and he certainly has a world of experience as he sat “in the room” for more than two decades at the SEC.
Yesterday, the SEC issued two releases to grant smaller companies and many foreign private issuers further relief from compliance with Section 404 of Sarbanes-Oxley. This relief reflects the “next steps for Sarbanes-Oxley implementation” announced in May and includes some new initiatives not previously announced. Here is the related press release – and below is a summary of the SEC’s actions:
– Accelerated Foreign Private Issuers Get One More Year – In this adopting release, the SEC extended its Section 404(b) auditor attestation deadline for those foreign private issuers that also are accelerated filers (but not those that are large accelerated filers, who still must meet the earlier deadline of fiscal years ending on or after the July 15th that just passed) to fiscal years ending on or after July 15, 2007. Note that foreign private issuers still have to file their Section 404(a) management reports under the existing deadline of fiscal years ending on or after the July 15th that just passed.
– Proposed Five-Month Deadline Extension for Non-Accelerated Filers – In this proposing release, the SEC proposed to extend the Section 404(a) management report deadline for non-accelerated filers (both US companies and foreign private issuers) to fiscal years ending on or after December 15, 2007 – and would extend the Section 404(b) auditor attestation deadline for non-accelerated filers to fiscal years ending on or after December 15, 2008. If this proposal is not adopted, non-accelerated filers would have to begin filing their Section 404 reports for fiscal years ending on or after July 15, 2007.
The SEC also proposed to deem the Section 404(a) management report included in a non-accelerated filer’s annual report (as well as for foreign private issuers that are accelerated filers (but not large accelerated filers)) during the first year of compliance to be “furnished” rather than “filed” for purposes of Section 18 of the ’34 Act, unless the filer specifically states that the report is to be considered “filed” or incorporates it by reference into another filing.
– Proposed One-Year Relief for New Filers – In this proposing release, the SEC proposed a one-year stay for companies coming off IPOs (as well as those doing registered exchanges or any other first time filers with the SEC, regardless if they are US companies or foreign private issuers), so that they would not have to provide any Section 404 reports (ie. neither a management report nor an auditor attestation) in their first annual report. However, this relief would not be available if a company already had filed at least one Section 404 report.
More on Nasdaq’s Transition as an Exchange
In connection with Nasdaq’s transition to an exchange (see more in this blog), the SEC’s Market Reg and Corp Fin Staff issued this no-action letter that essentially permits companies and third-parties to satisfy, through EDGAR filings, their obligations to provide copies of most ’33 Act and ’34 Act filings to Nasdaq. Thanks to Alan Singer of Morgan Lewis for the heads up!
More on Blue Sky Issues and Nasdaq’s Exchange Transition
Recently, I blogged about possible blue sky issues related to Nasdaq’s transition to an exchange. Showing that I am indeed fallible, I overlooked Footnote 7 in Nasdaq’s amended rule filing which states that “The Nasdaq Global Market, including the Global Select segment, will be the successor to the National National Market. As such, Nasdaq believes that all securities listed on the Global Market, including those on the Global Select Market, will be “covered securities,” as that term is defined in Section 18(b) of the Securities Act of 1933, 15 U.S.C. 77r(b).”
Given that the SEC was silent on this point when it approved Nasdaq’s rule filing, practitioners can take some comfort that the position in this footnote holds some water.
By the way, we are still waiting for the SEC to approve Nasdaq’s rulemaking petition to designate securities listed on the Nasdaq Capital Market (f/k/a Small Cap) as “covered securities.” This rulemaking petition was made in February and I understand that the Nasdaq intends to file some changes to its Capital Market listing standards soon to address comments from the SEC Staff reviewing the petition, so some progress is being made…
On Monday, Corp Fin Director John White addressed the ABA’s Business Law Section in Hawaii. I couldn’t swing that hall pass, but the program was available via teleconference. We have put together notes from John’s remarks and posted them in our “Conference Notes” Practice Area. John covered some ground on the new executive compensation disclosure rules – and he did say that the adopting release will be available this week, coming in at over 400 pages!
Now that the adopting release will be out soon, you need to act fast to reserve a hotel room for our Conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – which will be held live in Washington DC at the Marriott Wardman Park on September 11-12. Rooms are filling up fast – here is how to obtain special room rates.
If you come to Washington DC to take in the conference, you still will get access to the video archive of the Conference, which will be important when you actually sit down to draft – and review – disclosures during the proxy season. The Conference is still available by videoconference if you can’t make it to Washington DC on those days.
If you haven’t yet, check out this detailed conference agenda to understand the types of challenges you should expect to face from the new rules.
Corp Fin Phone Interps: Regulation AB Interps Updated
Earlier this week, Corp Fin updated its Telephone Interpretations pertaining to Regulation AB, adding these items: 11.02 – 11.04, 15.02, and 17.03 – 17.05. Phone interp aficionados will recall that the Reg AB interps were the first new interps since Harvey Pitt became SEC Chair. No word on when the other interps will be updated…
How to Develop a Whistleblower Compliance Program Today
We have posted a transcript of our popular webcast: “How to Develop a Whistleblower Compliance Program Today.”
Litigation Update: How the Courts are Ruling on Stock Compensation
– What the courts are saying about contract ambiguities and other employment disputes
– Tips on how to stay out of court
– What the IRS is saying about equity compensation tax shelters
– How to keep abreast of recent legal and regulatory developments
A handful of members dropped me a line responding to my query last week regarding silence in anti-dilution provisions of stock option plans and FAS 123: the question of whether as a matter of contract construction, an option plan (or warrant) that was silent about adjustment could be adjusted if the stock was split.
For example, Professor David Yermack of New York University noted that a seven-year old Delaware case – Sanders v. Wang, 1999 Del. Ch. Lexis 203 (11/8/99) – considered the very issue of a Computer Associates equity compensation plan that was silent about what to do in the event of a stock split. A very large restricted stock award to the CEO and several top managers was split in line with the company’s stock splits. A shareholder sued, alleging waste of corporate assets, since the plan had no provision for such an adjustment to a share award. The court agreed and ordered the top three executives to return the extra shares – 9.5 million shares since their restricted stock plan had no provision for increasing the inventory of shares when the stock split – which cost them close to $600 million on paper. Interestingly, Dick Grasso was one of the outside directors/defendants in the suit.
And Ken Stuart of Holland & Knight noted that in December 2001 – in Reiss v. Financial Performance Corporation, 97 N.Y.2d 195, 764 N.Y.S. 2d 658 (2001) – the New York Court of Appeals held that where a warrant was issued without any provisions for adjustment in the event of a stock split (or a reverse stock split), the Court would not read such provisions into the warrant in the case of a one-for-five reverse split. Thus, the holder could exercise for the full number of shares stated in the Warrant and not the after-split amount. The lower court had relied on a First Circuit case – Cofman v. Acton Corp., 958 F2d 494 (1992) – which had held that the parties there had not given any thought to dilution and that an essential term of the contract was missing, so it could be given effect by the court. However, the N.Y. Court noted in dicta that if they were dealing with a forward stock split, they might give effect to dilution on the theory that the holder did not intend to acquire nothing.
Is It Time to Merge the SEC and CFTC?
In Saturday’s WSJ, former SEC Chairman Arthur Levitt opines that the SEC and CFTC should be merged into one in this editorial. I’m not sure many would disagree since the two agencies have overlapping constituencies to some extent. But why stop there? There are a number of federal agencies that should be merged out of existence – but the “gov” is so tough to downsize. That’s why we have six federal agencies to regulate financial institutions (Fed Reserve, OCC, OTS, FDIC, OTS, NCUA)…
Spinning Off: ADP’s Proxy Delivery & Voting Business
Last week, ADP announced plans to spin off a combination of its brokerage, securities clearing and outsourcing divisions – which includes the proxy delivery and voting services that it offers to its broker clients (which result in services offered to beneficial owners). The spin-off is expected to be in the form of a tax-free dividend, paid by the middle of next year.
Since mother ADP is not expected to control the new spun-off entity, it should give more freedom to the folks running the proxy delivery/voting services to be innovative, etc. – and it shouldn’t adversely impact companies or their shareholders.
This recent study on class action securities litigation – “2006 Mid-Year Securities Fraud Class Action Filings Report” – from Stanford Law/Cornerstone Research shows that securities litigation continues to trend downwards with a 45% decline in the number of securities class actions filed during the first half of 2006 compared to the same period of the prior year. We have posted a copy of the study, along with other securities litigation studies, in our “Securities Litigation” Practice Area. Can you believe that only one new securities class action was brought against an audit firm in the first half of 2006?
The Study posits some reasons for this trend, including the dissipation of the ill effects from the boom and bust period of the late ’90s, the cleansing effects of Sarbanes Oxley, and the absence of stock market volatility. Kevin LaCroix of the “D&O Diary” is a bit more cynical and believes that this downward trend is partially due to Milberg Weiss’ troubles and the disappearance of the paid plaintiff.
I believe Kevin’s hunch is correct – but also agree with the Study’s theory that the downward trend probably has been helped along by the morass of regulatory changes wrought by Sarbanes-Oxley, which has provided ample incentive for executives and boards to improve their governance practices. Another factor I would add is the spate of recent court decisions that have raised the benchmarks that must be met for successful cases, such as last year’s US Supreme Court decision of Dura Pharaceuticals.
Given that there were a record number of restatements in 2005 – and I understand that restatements in 2006 are ahead of that pace so far – I would hazard to guess that this downward trend will continue (except perhaps the option backdating lawsuits that are now being filed in droves will reverse the trend).
The Art of Predicting the Securities Law Class Action
In related news, The Corporate Library released an update to its continuing study of the correlation between its corporate governance ratings and the risk of securities class action lawsuits. The findings include:
– Companies rated “D” or “F” are more than 3x as likely to be hit with a securities class action lawsuit than those rated “A,” “B” or “C”
– Excessive CEO compensation is the single most predictive factor of being sued
– Other predictive factors include director age, tenure, over-commitment and lack of independence
– Takeover defenses are less important as a predictive factor
– Nearly all securities class action lawsuits are filed against companies with more than $485 million in market capitalization
A “Stolen” Parachute
What struck me as offensive about the article below from Sunday’s NY Times is not the political angle – but that a CEO got a $28 million severance package when he voluntarily quit his job to run for the US Senate (here is a related LA Times article – and here is the complaint amid other materials from the plaintiff):
“Someone has finally made executive compensation an explicit campaign issue. Emma Schwartzman, who says she is a great-great-granddaughter of a founder of what later became the Safeco Insurance Company, has sued the company’s recently departed C.E.O., Michael S. McGavick — now the Republican candidate for the United States Senate from Washington state — over his $28 million severance package. In her suit, filed in Federal District Court in Seattle, Ms. Schwartzman, 27, said Mr. McGavick was entitled only to his last paycheck and that he had forfeited all other compensation, including bonuses and stock options, when he resigned.
According to the suit, the board agreed to let Mr. McGavick remain on the payroll for an extra four months and then to provide freelance “transition services” for two more months. That agreement, she contends, let Mr. McGavick keep stock options and other compensation that he otherwise would have had to forsake, under the terms of his original employment contract.
Mr. McGavick, who is trying to unseat Maria E. Cantwell, a Democrat, said in a statement that the allegations were ‘without merit and politically inspired.’” Safeco described the departure package as ‘reasonable.’
Ms. Schwartzman’s lawyer, Knoll D. Lowney, said the case was about “corporate corruption, not partisan politics.’ But he also insisted that Mr. McGavick return the money to Safeco and not spend it on his campaign.”
What in the world was the Safeco board thinking when they allowed this severance payment to be made (not to mention keeping him on the payroll, etc.)? Particularly with the SEC’s new executive compensation rules requiring more disclosure about a board’s pay strategies, boards and their advisors should heed the responsible pay wisdom that will be imparted during the “3rd Annual Executive Compensation Conference,” available live in Las Vegas or by nationwide video webcast. Register today!
Last week, Nasdaq filed a proposal with the SEC to modify its definition of “independent director” with the result that the Nasdaq rules would be more consistent with the NYSE’s definition of independent director. This is different than the Nasdaq’s outstanding proposal to modify the independence cure period that I blogged about a month ago.
If adopted, the changes could result in sitting directors no longer meeting the revised Nasdaq independence requirements – so Nasdaq also proposed a 90-day transition period after rule approval for compliance with the new standards. The next step is for the SEC to publish the Nasdaq’s proposal for public comment – seems like 90 days for a transition could be a little short since an average director search takes nearly six months these days…
The Stock Market: 1950s Style!
For Friday fun, how about enjoying this cartoon from 1952 from the NYSE – “What Makes Us Tick.” This is a “cartoon promoting the stock market as the engine of America’s prosperity.” Thanks to Howard Dicker for pointing me to this antique video!
Delaware First
Here is a nice piece from Jim McRitchie’s “CorpGov.net“: Delaware, the first state, is also the most important state for corporate governance, since more than half of America’s publicly traded businesses are incorporated there and must live by its statutes. Additionally, states that want to keep up, frequently adopt Delaware rules. The Delaware Court of Chancery produced a 180-page tome with the legal opinion it rendered last year in the Disney case.
An article entitled Delaware Rules in CFO.com (8/1/06) gives us a glimpse of what Chancellor William B. Chandler III sees as questions the court will face in upcoming cases. For example, can shareholders adopt bylaws that trump board decisions? If they do, can the board then turnaround and negate their decision? “That issue has never been directly faced or answered in Delaware,” says Chandler, “but I think it’s inevitable that it will be decided.”
The author of the article, Roy Harris, believes that “what Chancery rulings say in the near future could establish standards that rival anything that Sarbanes-Oxley and the Securities and Exchange Commission have offered.” To back that up, he quotes Charles Elson. While the court must wait for cases to be brought before it — “ultimately the Delaware Chancery Court will have a significant role in changing governance,” he says. Elson adds, “Traditionally, the court’s view was that shareholders were not sophisticated and needed to be protected from their own foolishness,” he says. “Today what they need to be protected from is managerial overreaching.” Signs of new directions:
– director independence – Beth I. Z. Boland, a partner in the Boston law firm of Bingham McCutchen LLP, believes the court will now “look beyond quantifiable measures to go into soft issues” in determining who is independent.”
– liability – Chandler says, “my view is that our law doesn’t expect different standards to be applied to different directors based on their expertise, their skill, or their training.”
– directors are agents – Chandler argues that it “would be a strange thing to invoke your fiduciary duties as a sword to break a contract that you had made with shareholders.”
– compensation – “The board is ultimately going to have to decide compensation for executives,” Chandler says, “but could shareholders adopt bylaws that place limitations or constraints in either the scope or magnitude of that compensation, or on the procedures that boards must follow before it awards compensation to a particular executive?”
Charles Elson provides insight into the way the Court of Chancery works. “Delaware doesn’t get its jollies holding people liable,” he says. “Its message is that ‘the next time I see this conduct, I’m likely to rule differently.’ It’s a delayed impact that defines the parameters of behavior.” Good discussion of the issues plus one sentence summaries of two decades of important cases.
Following up on my blog from a few weeks ago, in this podcast, Jon Lewis of Fried Frank Harris, Shriver & Jacobson analyzes the issues raised by applying FAS 123(R) to anti-dilution provisions in equity plans, including:
– What are the Big 4 saying about anti-dilution provisions in equity plans?
– What are examples of situations, such as changes in capitalization and restructurings, that might cause problems?
– Will the FASB weigh in on this issue?
– What should companies do now to determine if they have an issue? And if they do have a problem, how can they fix it?
And the impact of this problem is starting to be felt – as noted in this Form 8-K, Core Labatories recently cancelled a planned stock-split after being alerted to the accounting problems raised by this issue.
As an aside, a member e-mailed me wondering if anyone would feel that an option plan that was silent about adjustment for stock splits would be allowed to adjust as a matter of contract construction, at least in the context or warrants or other contractual rights to receive stock. Has anyone yet dealt with that? Shoot me an e-mail if you have (and I will keep your identity hidden if you wish).
ISS on “Does Cumulative Voting Complement Majority Voting?”
As a result of the ongoing debate festering on this blog, ISS weighed in with its voting policy regarding cumulative voting and majority vote on the “Corporate Governance Blog“: “An interesting post ran last week on Broc Romanek’s TheCorporateCounsel.net Blog. If one agrees, as mentioned in the piece, that cumulative voting helps protect shareholder rights–which ISS policy does–then majority vote standard and cumulative voting compliment each other. Without majority vote standard, cumulative voting in an uncontested election has no teeth because then a director could still be elected if he/she receives one single vote.
As for cases of contested elections, it is a non-issue because plurality voting standard would remain the election standard maintaining the status quo. Having majority vote standard in an uncontested situation would actually serve as a takeover defense. Therefore, in evaluating shareholder proposals requesting majority vote standard, ISS looks for such carve-out for contested elections in the language of the resolution.
Regarding ISS’ policy on cumulative voting with respect to majority vote standard, we would not support a cumulative voting shareholder proposal if the company has majority vote standard in place. This is not because the two are incompatible, as many companies have been arguing. Rather, the rationale behind this policy is to provide an incentive mechanism (the carrot) for companies to move toward a majority voting standard for electing its directors.
It is true that cumulative voting can be viewed as a vehicle to allow special interest shareholders to make their voice heard in that, in theory, it makes it easier for a minority holder to get at least one director elected. However, many would say this isn’t necessarily a negative byproduct. ISS’ current policy is willing to “trade off” a cumulative voting provision if the company is willing to adopt a majority vote standard.”
New Treasury Secretary Doesn’t Like Sarbanes-Oxley’s Impact
From a Dorsey & Whitney alert: “Hank Paulson, the former head of Goldman Sachs worldwide who left that position last month to become the new US Secretary of the Treasury, has used the occasion of his first public address as Secretary to suggest that the US Sarbanes-Oxley Act of 2002 has caused too much damage to US competitiveness internationally and should be revised.
Early in his speech, Paulson noted that the US had taken “corrective measures to address corporate scandals and increase investor confidence” following the Enron and WorldCom failures. But, he added, “often the pendulum swings too far”. He said that the US now needed to follow its initial corrective measures with “a period of readjustment”, and that “the challenge” facing the US is “to achieve the right regulatory balance to allow us to be competitive in today’s world”.
The Secretary of the Treasury has no authority to amend SOX or the rules that have been promulgated under it, and he has no authority over the US SEC or the PCAOB (Public Company Accounting Oversight Board), the new agency that drafts SOX auditing rules. Changes to SOX must be made principally by the US Congress, which itself wrote most of the detail in SOX about which non-US companies complain.
Nevertheless, the person serving as Treasury Secretary is usually listened to carefully by US legislators and regulators when speaking on broad policy issues. And, this particular Treasury Secretary will likely be listened to even more closely, due to his personal background as a top international financier and his position as a late entry in the Bush cabinet charged with finding solutions to a number of economic issues that are currently worrying Washington.
Paulson’s swipe at SOX is part of a general concern in the US that may soon lead to real efforts to change the law. The US has its next Congressional elections in November 2006, at which time both Senator Paul Sarbanes and Representative Mike Oxley, the sponsors of the law, plan to retire from office. The Congress that meets following this election will likely be more open to amending the statute, which at that time will be over four years old and will have generated a substantial track record that should help SOX critics argue for meaningful revisions. And, at that time, Hank Paulson should still be Treasury Secretary.” Here is more commentary about Paulson’s speech at CFO.com.
