A number of members e-mailed me after Friday’s blog about the parenthetical on the cover page of the 10-Q (which is also on the Form 10-K cover page). The parenthetical states: (Do not check if a smaller reporting company).
One member noted that if you look at the PDF version of the SEC’s adopting release – rather than the version published in the Federal Register – you will see that (on page 210) the parenthetical is located underneath the check box for “non-accelerated filer.” He inferred that, since smaller reporting companies are non-accelerated filers, the SEC wanted smaller reporting companies to check only the box for “smaller reporting company” and not both boxes.
I agree that this makes sense if the parenthetical is properly lined up with “non-accelerated filer” (one wonders why a similar instruction isn’t required to ensure a Large Accelerated Filer doesn’t also check the “Accelerated Filer” box). The same check box disclosure also appears on the cover page of other forms – and the location of the parenthetical is consistent across all of the them, so it wouldn’t appear that the parenthetical was an oversight, notwithstanding what was told by someone on the Staff to the members who fed me the information for Friday’s blog.
SEC Proposes Changes to Foreign Private Issuer Reporting and Registration Requirements
Last Wednesday, the SEC proposed a series of amendments to its filing, disclosure and registration requirements for foreign private issuers. Among other proposed changes, the SEC would require FPIs to file their reports electronically on EDGAR (ie. no more paper filings) – and shorten the existing 6-month filing deadline for FPIs to file annual reports on Form 20-F to 90 days for large accelerated and accelerated FPIs and 120 days for smaller reporting FPIs. Here is the SEC’s press release and Corp Fin’s opening statement. Here is some analysis of the SEC’s actions from Cleary Gottlieb:
Based on the description provided by the SEC staff, the proposed amendments would appear to have both positive and negative potential consequences for non-U.S. companies:
– On the positive side, the amendments would provide an automatic exemption from SEC registration for many non-U.S. companies that do not list or publicly offer securities in the United States, so long as they publish English versions of their home country annual reports and certain other documents on their websites. The current version of the exemption requires companies to submit an application to the SEC (which many companies do not do), and to submit paper copies of their home country documents to the SEC.
– On the other hand, the amendments would for the first time make eligibility for the exemption contingent on a company meeting substantive eligibility criteria: no more than 20% of its share trading volume can take place in the U.S. over-the-counter market, and it must maintaining a listing in its primary market. The current version of the exemption is available for all non-U.S. companies that do not list or publicly offer their securities in the United States.
– Additionally, the amendments would shorten the deadline for non-U.S. reporting companies to file their annual reports on Form 20-F, to 90 days after the end of a fiscal year for larger companies and 120 days for smaller companies. This proposal is likely to solicit significant comment, particularly in Europe where the home country reporting deadline is 120 days, as well as in other countries with home country reporting deadlines that are longer than the 90-day proposal.
The text of the proposed amendments is not yet publicly available, but should be published for public comment shortly. Once this occurs, it should be possible to assess more definitively the potential practical consequences of the amendments.
Impersonations on Earnings Calls
I found this WSJ article on Saturday fascinating about how someone has gained entry into a number of earnings calls recently to ask questions by impersonating well-known analysts. I caught up with Joe Herrick to ask him how – and why – he has done these impersonations in this podcast.
As a result of amendments to the disclosure rules for “smaller reporting companies” adopted in December and effective last week – February 4th – there are changes to Form 10-K that all reporting companies need to make in their Form 10-K reports. For companies that are not eligible (and do not elect) to report under the new “smaller reporting company” framework, these changes are minor – essentially amounting to changes in the check boxes relating to the company’s status on the cover page of Form 10-K.
Courtesy of John Newell of Goodwin Procter, we have posted “Comparison of Changes to Form 10-K,” which is a redline comparison of the newly-effective cover page of Form 10-K compared to the old version (this is a Word file and should help you tweak the Form you saved from last year; here is a PDF version if you need it).
On Monday, the SEC finally posted an updated Form 10-K – even though the new Form had been effective for a week – and as several members have e-mailed me, the SEC mistakenly reverted back to an old version of the Form for the Part III in its PDF…
More Glitches in Smaller Company Reporting
Recently, I blogged about a glitch in the SEC’s smaller company reporting scheme relating to audit committee reports – and there have been a few others identified in our “Q&A Forum.” Thanks to Steve Amen and Grant Leach of Kutak Rock, here is another:
“We’ve been working on a Form 10-Q for a company with a September 30th year end that qualifies as a “smaller reporting company.” As we looked at the SEC’s adopting release regarding changes to Form 10-Q resulting from the new smaller reporting company rules, we noticed that the familiar paragraph in which registrant’s indicate their filing status has been modified (as expected) to include the new option for “smaller reporting company”. However, in the adopting release, the whole thing looks like this:
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
– Large accelerated filer
– Accelerated filer
– Non-accelerated filer
– Smaller Reporting Company
(Do not check if a smaller reporting company)
We could not make any sense out the parenthetical language at the bottom and we finally decided to call the Corp Fin Staff for clarification. Turns out it’s a glitch and we were told we could delete it from the cover page.”
Let The Trades Begin: New Rule 144 Is Now Effective
Starting today, new Rule 144 is effective. The SEC has posted a copy of the new Form 144 in a PDF; we have a Word version available in our “Rule 144″ Practice Area.
As noted by Ron Orol in this The Deal.com article, as much as $35 billion in restricted securities will suddenly be available to trade – so you can expect a sudden uptick in Rule 144 activity. So I posit this reminder: have you sent your memo to all our officers and directors explaining the new rule changes?
During our recent “Rule 144 Conference,” it was stressed that all companies need to get their officers and directors up to speed, particularly with the new potential pitfalls now facing affiliates. If you have not yet done so, we encourage you to furnish all your officers and directors with the model memorandum provided in the Conference “Course Materials.” It will get your key executives and directors updated on what they need to know now—and prevent costly violations.
By the way, I just posted a podcast with Ron Orol on DealLawyers.com regarding his new book: “Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking On The World.”
As part of its executive compenation review project, the SEC Staff has issued many comments on change-of-control and severance disclosures. We have urged companies to improve the clarity of disclosures in this area by providing full walk-away values in a table this year – including not just unvested grants, but previously exercised grants and projecting out future grants (here is a model table; learn more how to do this in our “4th Annual Exec Comp Conf” Archive). This is something that shareholders clearly want to see – and can help companies shorten their executive compensation section.
Below is a recent blurb from Mark Borges’ “Proxy Disclosure” Blog on CompensationStandards.com (and since Mark posted the blog below, he has added another one about a different company):
Out on the speaking circuit, one of the more provacative executive compensation disclosure topics is whether companies should be reporting the “walk-away” number as part of their termination and change-in-control disclosure. While I can’t say that I’ve seen any trend start to emerge yet, it’s a subject that never fails to stimulate strong positions and lively debate.
Recently, Scott Spector pointed me to the Starbucks proxy statement (filed on January 24th) which contains the first “walk away” numbers I’ve seen this year. As part of its “Potential Payments Upon Termination or Change in Control” disclosure, the company provides a table showing the fiscal year-end value of outstanding vested stock options, aggregate deferred compensation plan account balances, and unvested stock options that would accelerate upon the occurrence of certain specified triggering events. It also totals these amounts, with and without the accelerated vesting portion, essentially showing what its named executive officers would receive if they left the company under any circumstance.
Since this is Starbucks’ first filing under the new rules, I can’t tell if they elected to provide this disclosure to get out ahead of the issue or because this level of transparency made sense given the relative simplicity of their executive compensation program. In any event, it will be interesting to see whether other companies follow their lead this proxy season.
How Many Companies Will Disclose Performance Targets This Year?
A recent poll by Watson Wyatt Worldwide got a bit of play in the mainstream press; in the poll, the consulting firm found only 42% of companies plan to disclose the specific goals used in their executive compensation plans for the 2007 fiscal year; 31% have no plans to reveal the goals and the remaining 27% are unsure.
However, this “poll” was far from being scientific – just like our “Quick Surveys” aren’t – since it encompassed only 135 representatives from companies that were listening to a Watson Wyatt webcast. So I would take these numbers with a grain of salt – particularly given the SEC Staff’s continued strong interest in this area (see our recent webcast where a SEC Staffer addressed this topic at length) and institutional investors very strong interest in improved performance target disclosure this year. This was a hot topic during RiskMetric’s Conference last week and those companies that don’t adequately disclose performance targets should expect to become targets themselves during ’09.
Update: We now have over 80 comment letters (and their responses) posted in the “SEC Comments” Practice Area on CompensationStandards.com.
Directors Speak Out on Internal Pay Equity
According to a recent survey by Heidrick & Struggles and the Center for Effective Organizations, 90% of director respondents said CEO pay should be no more than two to three times higher than the next highest paid executive. And 85% said the mix was right at their company right now.
But I wonder whether these directors truly conduct an internal pay analysis since only a few hundred companies (out of 10,000; thus a small fraction) disclosed last year that they consider this benchmarking tool as a factor in their decisionmaking – and even those few companies that truly do consider internal pay equity don’t always conduct the analysis properly (eg. neglecting to include equity grants in the calculation). This issue of the Compensation Standards print newsletter from last year has an article explaining “How to Implement Internal Pay Equity.”
Also in the survey: 32% of the director respondents said CEOs are overpaid; up from 25% in the past – the respondents blamed it on compensation consulting firms and the creation of new incentive compensation programs.
A Rememberance: Sadly, Anita Karu passed away on Sunday after a brief illness. As many of you know, Anita was a senior attorney that worked in Corp Fin for over 25 years (much of it in Chris Owings group). She was a true believer in the Commission’s mission – very dedicated. We will all miss her!
Many of the memos analyzing the recent Private Letter Ruling – which reverses the IRS’ long-standing position on the effect of standard severance arrangements on the deductibility of performance-based compensation under Section 162(m) – have raised questions about the magnitude of the change (eg. whether there is a retroactive impact). Come hear Ken provide some guidance about the latest IRS’ positions. This webcast promises to be a “biggie.”
The following panelists will address the tax, accounting, plan design and disclosure issues raised by this PLR:
– Ken Griffin, Associate Chief Counsel, Executive Compensation Branch, IRS
– Elizabeth Drigotas, Principal, Washington National Tax, Deloitte Tax LLP
– Mike Kesner, Head of Deloitte Consulting’s Executive Compensation Practice
– Mike Melbinger, Partner, Winston & Strawn
– Paula Todd, Managing Principal, Towers Perrin
– Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
– Dave Lynn, Editor, CompensationStandards.com
Corp Fin Rejects “Proxy Access” Proposals: AFSCME to Sue Next?
As expected – given the SEC’s recent rulemaking to “stay the course” on how it wants Corp Fin to handle “proxy access” proposals – Corp Fin agreed with five companies on Monday to allow them to exclude proposals submitted by AFSCME that would amend the bylaws to require that the companies include in their proxy materials the name, along with certain disclosures and statements, of any person nominated for election to the board by a shareholder who has beneficially owned 3% or more of the company’s outstanding common stock for at least two years.
Given the SEC’s rulemaking, AFSCME expected this response and said as much when it announced last month that it was submitting these proposals. It is expected that AFSCME will sue like it did two years ago in the AFSCME v. AIG case, where it won in the 2nd Circuit.
We should be grateful to the SEC for posting these no-action responses, since they made a special effort to post them. Typically, shareholder proposal responses are not posted because there are so many that it would drain the Staff’s limited resources. Fyi, Corp Fin posted these on its “Frequently Requested Materials” page.
Pro or Troll #5: Risk Management and Governance Trends in 2008
Courtesy of Jennifer Meiselman, Managing Director of Risk Advisory Services, BDO Consulting, come try your hand at our newest “Pro or Troll” game – this one focusing on risk management.
Last week, I spoke at the annual RiskMetrics’ Conference (my panel was on executive pay, more on that later) and I hung around for most of the program since I have always enjoyed the Conference because it’s slant is different than the traditional legal fare. I was there when Carl Icahn announced he was thinking of starting a blog (although he didn’t call it a blog – nor was he really sure what it was gonna be, if anything). Perhaps Carl’s blog will look something like this blog – seeking change in companies he feels are undervalued. Carl also noted he would blog about governance more generally. At the Conference, he spoke out about outsized executive pay, as did nearly every speaker at the Conference.
For me, Carl’s announcement was just another wake-up call that we are truly in the infancy of how the Web will be leveraged by activists to place pressure on boards and management. And I say “wake up call” because I think that most companies are nowhere near ready to handle what is coming. They don’t view their IR web pages as a “campaign” tool and in fact, most companies outsource their IR web page to third-parties who have no clue about how to run a campaign because they merely provide simple tools to allow companies the bare minimum online.
I also think that most proxy solicitors don’t have a real handle on how to leverage the Web either. I understand that personal relationships with one’s largest shareholders is the best route to handling a tough vote. But I think we will find that the Web is a necessary adjunct to the traditional means by which proxy solicitors do their job. E-proxy plays a big role in this (and don’t take it just from me, check out this interesting paper from Professor Jeffrey Gordon entitled “Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy.”)
All Marty Lipton, All The Time
At the RiskMetrics conference, Marty Lipton talked about some of his grander moments over the years (eg. original label for the poison pill was the “warrant dividend plan”) and provided his views on the current state of affairs (he’s not really a professional entrencher of management; rather, he’s an entrencher of allowing the board to exercise its fiduciary duties). It was good stuff. During the Q&A, there was some heated moments between Marty regarding his views on “say on pay” and some in the predominantly investor audience.
By the way, a member points out a “Poison Pill” blog dedicated solely to Marty Lipton (albeit the blog may be defunct; it has been silent for a few months). It’s definitely different and I guess even corporate attorneys can have their own paparazzi…
RiskMetrics Goes Public
Speaking of RiskMetrics, its IPO occurred a few weeks back (and yes, I bought a few shares). Here is the IPO prospectus. It will be interesting to see their voting recommendations for their own annual meeting. Given their governance principles – which includes providing a say on pay and allowing for proxy access – they likely will get high marks. Here is a snapshot of some key governance principles:
– Annual Election of Directors – All of our directors will stand for election annually to create greater alignment between the directors’ and stockholders’ interests and to promote greater accountability to our stockholders.
– “Proxy Access” – Our bylaws set forth the provisions by which we will include in our proxy materials the name of a person nominated by one of our stockholders, or group of our stockholders, who meets specified requirements for election as a director. Generally, a nominating stockholder must have owned at least 4% of our outstanding common stock continuously for at least 2 years and must provide notice to us in accordance with our bylaws.
– Majority Voting – Our bylaws provide that in uncontested elections, our directors must be elected by majority vote and directors must submit a contingent resignation in advance of each annual stockholders meeting to help effectuate this process.
– Say on Pay – Our stockholders will be given the opportunity to vote on an advisory management resolution at each annual meeting to approve our Executive Compensation Policies and Practices as outlined in our annual proxy statement.
– Separation of Chairman/CEO; Lead Director – Our policy is that the role of our chairman should be filled by someone other than our chief executive officer and that our chairman should come from the ranks of our independent directors. If our board of directors ever concludes that it is in the best interests of our stockholders to have a chairman who is not an independent member of our board of directors, then we will disclose this reasoning in our proxy statement and we will appoint a lead independent director to provide appropriate independent management of our board of directors and its processes. Since 2004, the roles of our chairman and chief executive officer have been filled by the same individual. Our board of directors believes it is prudent and in the best interests of our stockholders to leave this arrangement in place until additional independent directors join our board of directors following our initial public offering. In the interim we have appointed Stephen Thieke as our lead independent director.
– Director Stock Ownership – In order to more strongly align the interests of our directors with those of our stockholders, non-vested stock grants will be a significant component of our directors’ compensation. We will also require our directors to maintain certain levels of equity ownership.
– Poison Pills – Our board of directors’ policy is that it will not adopt a shareholders’ rights plan, or poison pill, without first seeking and obtaining stockholder approval.
The ‘Former’ M&A SEC Staff Speaks
We have posted the transcript from our recent DealLawyers.com webcast: “The ‘Former’ SEC Staff Speaks.”
After I blogged recently about Broadridge’s latest e-proxy stats, a number of members asked how many shareholders were requesting paper. Based on the stats provided by Broadridge, only an average of 0.79% were requesting paper from companies doing e-proxy so far.
We’re receiving so many queries about e-proxy that I created this new “Quick Survey on Voluntary E-Proxy.” Please take a moment to complete the three questions (note that the third question asks you to estimate even if your company doesn’t intend to e-proxy this year).
And after you take the Quick Survey, check out Dominic Jones’ IR Web Report blog about an e-proxying company adjourning their annual meeting because they missed quorum (note it’s an atypical situation because this particular’s company has shareholders that consist solely of veterinarian customers. Sounds like a dream I recently had; you see, there were these two pigs and a goat.).
E-Proxy & California Conflict: An Update
As I noted above, lots of e-proxy questions being posted in our “Q&A Forum” recently; one of them asked if there were any new developments regarding the California law conflict that I blogged about a while back. Here is an update from Keith Bishop:
No new developments to report. The Corporations Committee of the Business Law Section of the California State Bar is working on legislation but I don’t think any legislative fix will be made in time for this year’s proxy season. I don’t believe that there is much basis for a preemption argument and I don’t think that obtaining stockholder consents is a practical option for a public company.
How to Create an Online Annual Report – Free and in 5 Minutes!
Dominic Jones provides us with a real find – as described in his blog – by illustrating how easy it is to use the free software on Issuu.com. However, I second his big caveat: I do not recommend that you convert your online annual report to Flash or images – but if you are going to do so (as too many companies are), then free is the only way to go.
Last week, the IRS made a private letter ruling publicly available that is causing many to rethink the termination provisions in their plans and agreements. This PLR – dated September 21st! – relates to Section 162(m) and the deductability of pay arrangements for executives who are involuntarily terminated or quit with good reason. Many of the commentators so far observe that this is a reversal for the IRS.
We held off blogging on this huge development as we have read the wave of firm memos that have rolled in during the past week, many of them grappling with how to interpret this PLR and some disagreeing with each other. We have posted just over a dozen of these memos in the “Section 162(m) Compliance” Practice Area on CompensationStandards.com.
Next Week’s Webcast: The New IRS Letter Ruling: How It Impacts Your Employment Arrangements, Accounting, Proxy Disclosures, Etc.
– Elizabeth Drigotas, Principal, Washington National Tax, Deloitte Tax LLP
– Mike Kesner, Head of Deloitte Consulting’s Executive Compensation Practice
– Mike Melbinger, Partner, Winston & Strawn LLP
– Paula Todd, Managing Principal, Towers Perrin
– Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
Options Backdating Update
While the tide of new options backdating cases seems to have crested, developments continue with the outstanding SEC/DOJ cases, as well as on the private litigation front.
Last month, Gregory Reyes, the former CEO of Brocade Communications, became the first CEO to be sentenced to jail time for backdating. Reyes now faces 21 months in prison and a $15 million fine. The former CFO of SafeNet, Carole Argo, also received a prison sentence – she will serve a six month sentence and pay a $1 million fine. While no time in prison is a good time, these certainly aren’t the kind long sentences faced by financial fraud kingpins like Dennis Kozlowski and Jeffrey Skilling. I doubt, however, that four or five years ago many would have predicted any sort of prison time from cases that some continue to argue only involve benign paperwork errors and a “technical” accounting issue.
The SEC also recently announced the settlement of civil charges against Andrew McKelvey, the former CEO of Monster Worldwide, for his involvement in a long-running backdating scheme at Monster. While the terms of the settlement provide for an injunction, disgorgement and an officer and director bar, the settlement didn’t include a civil penalty “due to the overriding personal circumstances related to McKelvey.”
On the private litigation front, the derivative lawsuit involving allegations of “spingloaded” options against Tyson foods and some of its current and former directors settled last month. Under the settlement, former Tyson CEO Don Tyson, as well as the company’s largest shareholder, agreed to pay $4.5 million to the company. As Broc noted in the blog last summer, Delaware Chancellor Chandler twice refused to dismiss the lawsuit, citing the inherent unfairness of springloaded options and the board of directors’ concealment of the unlawful scheme. Chancellor Chandler’s opinions in this case are posted in our “Backdated Options” Practice Area on CompensationStandards.com, and I suppose will continue to serve as the main authority out there on the state law implications of spingloading.
The San Francisco Regional Office Enforcement Staff was interviewed for this recent MarketWatch article concerning the backdating cases. Members of the Enforcement team expressed how shocked they were to first realize that such high level of people had been involved in creating bogus minutes – in particular respected, top-ranking lawyers. According to the article, the Staff used so-called “V-Charts” as a way of identifying suspicious option grants made at the bottom of the “V.” Marc Fagel, Acting Regional Director of the SEC’s San Francisco Regional Office, indicated that their focus in these cases was on management and not lower level employees. He also noted that the first line of defense for many executives – “I am not an accountant and I don’t know anything about this” – typically failed because it turned out that those executives were aware of the issues.
The Advisory Committee on Improvements to Financial Reporting (CIFiR) has posted a Draft Progress Report in anticipation of a public meeting scheduled for Monday, February 11th. The Progress Report largely tracks CIFiR’s earlier Draft Decision Memo, with some tweaks here and there to the draft proposals – for more on those specific tweaks, check out the FEI Financial Reporting Blog.
As I mentioned in yesterday’s webcast – “The Former SEC Staff Speaks” – CIFiR is recommending an ambitious plan for rolling out XBRL, which seems largely consistent with Chairman Cox’s push to make XBRL a reality for at least some subset of issuers later this year. In the current draft proposal on the topic, the Committee recommends that once testing of the XBRL taxonomy currently out for comment is complete – and the voluntary XBRL filers have successfully used the taxonomy to submit tagged reports – a phase-in could commence with the largest 500 domestic public reporting companies “furnishing” separate tagged financial statements (presumably to be mandated as early as this Fall for calendar year-end Form 10-Ks). CIFiR’s draft recommendation further provides that one year later, the domestic large accelerated filer group would be required to furnish tagged data. Depending on the results of these efforts, the Committee would expect that, “over the long term,” the SEC should require all public reporting companies preparing GAAP financial statements to tag their filed financial statements using XBRL. Committee member Peter Wallison from the American Enterprise Institute submitted a separate statement that he believed maintaining a distinction during the phase-in of “furnished” versus “filed” tagged data was not necessary and that the implementation timetable should be left to the SEC.
One of the notable non-financial draft recommendations to be considered by the Committee on Monday is a call to update the SEC’s guidance on the use of corporate websites as a means of disclosing corporate information, including liability issues for summary information provided on a company’s website, hyperlinks from within or outside of a company’s website, treatment of non-GAAP information, and clarification about the public availability of information on a reporting company’s website.
For future consideration, the Committee is exploring the potential use of an executive summary in Exchange Act periodic reports – which is an interesting concept but in my mind potentially could add to the complexity of these already over-stuffed reports.
Posted: Electronic Form D Adopting Release
Yesterday, the SEC posted the adopting release for the rules implementing electronic filing of Form D. Unlike other recent rulemakings that were effective shortly after adoption, these rule changes have a longer lead time. Beginning September 15, 2008, issuers will have the option of filing Form D in paper or electronically – then, beginning March 16, 2009, electronic filing will become mandatory for Form D.
Yet Another SEC Office is Established
Earlier this week, the SEC announced the establishment of an Office of Collections and Distributions. Adding to the proliferation of “special purpose” Offices at the Commission, this group will be tasked with overseeing the distribution of so-called “Fair Funds” to investors. Previously, this function was carried out by the Division of Enforcement.
In a report issued last summer, the GAO criticized the SEC for its management of Fair Funds, citing, among other things, the decentralized approach for managing the Fair Funds program. At the time of the GAO report, the SEC had announced its plans to create this centralized Fair Funds office.
As Broc noted in the blog last summer, the decision in Cyberonics, Inc. v. Wells Fargo Bank N.A. further muddied the debate on whether the language of a typical delivery covenant in an indenture (which obligates the issuer to deliver SEC reports to the trustee) could serve as a basis for declaring a default when an issuer becomes delinquent in filing its Exchange Act reports. The Cyberonics court interpreted a widely used delivery covenant to require that Exchange Act reports be filed with the trustee only after being filed with the SEC, and stated that Section 314(a) of the Trust Indenture Act does not provide a deadline for filing such reports with the SEC. This decision was in stark contrast to a decision of a New York state court in The Bank of New York v. BearingPoint, Inc., where that court ruled that the company’s failure to file its Exchange Act reports when required by the SEC constituted an event of default under the indenture. Both the Cyberonics and the Bank of New York opinions are posted in our “Late SEC Filings” Practice Area.
More litigation of this sort continues in a number of courts, with the next case likely to see a decision being UnitedHealth Group Inc. v. Wilmington Trust Co. in the U.S. District Court for the District of Minnesota.
Moody’s recently issued a report that outlines the issues raised in these decisions and similar litigation, as well as a useful appendix compiling the delivery covenants of a sampling of companies who have received default notices for failure to comply with those covenants. The Moody’s report highlights that of the two most prevalent variations on the delivery covenant, the one with language that states “the Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file with the Commission” is most protective of bondholder rights. Moody’s reaches this conclusion because – unlike the covenant at issue in Cyberonics and The Bank of New York that merely says reports will be filed with the Trustee “after it files” with the SEC – the more protective covenant expressly requires timely SEC reports while providing a default remedy if the promise is breached, and would avoid the necessity for costly litigation over this issue.
Moody’s notes that while many issuers will take a public stance that they are not in breach of the delivery covenant, only a small minority of issuers will actually choose to litigate this issue. In many cases, Moody’s found that issuers take preemptive action, such as conducting consent solicitations to eliminate events of default.
My two cents: As a devotee of the Trust Indenture Act, I think that Section 314(a) of the Trust Indenture Act does not impose a new or separate filing obligation on the obligor, but rather relies on what the issuer has to file under its obligations pursuant to Exchange Act Sections 13(a) or 15(d). This view is consistent with the holding on this issue in the Cyberonics decision.
Current Reporting Obligations When an Event of Default is Declared
While on the topic of declaring an event of default under an indenture, it is important to keep in mind the potential triggering event under Item 2.04 of Form 8-K around the time of an event of default.
The Staff clarified in Question 20 of its November 2004 Form 8-K FAQs that if the indenture requires notice before an acceleration and notice has not yet been provided, then no 8-K is triggered at that point – but if the acceleration happens automatically without declaration or notice, then the issuer must file the 8-K within four business days of when all of the facts necessary to trigger the default have occurred.
Even if an issuer takes the position that the notice of default fails to state a legitimate claim (as noted above is often the case with delivery covenant defaults), I believe that the Staff would still expect to see the Form 8-K filed within four business days of the triggering event – however, the issuer may include disclosure in the Form 8-K describing why it believes no event of default has occurred.
The transcript has been posted for the first part of the two-part CompensationStandards.com webconference – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!” You can now read about some of the latest guidance from the Staff based on its targeted review of executive compensation disclosure, including:
– Performance Target Disclosures – Materiality and Confidentiality Standards
– Disclosure of Operational versus Financial Performance Targets
– Disclosure of Performance Targets for Completed versus Current or Future Periods
– “Degree of Difficulty” Disclosure Concerning Performance Targets
– Benchmarking Disclosures – Naming Peer Group Companies
– Presenting Two Years of Compensation Data and Related CD&A Disclosure
– Dealing with FAS 123R Reversals in the Summary Compensation Table
Catch tomorrow’s webcast – “The Former SEC Staff Speaks” – to hear former SEC Senior Staffers Marty Dunn, John Huber and Brian Lane join me in a discussion of the latest rulemakings – and interpretations – from the SEC. This webcast will provide a complete “bring-down” of what’s happening at the SEC – and provide practical guidance about what you should be doing as a result. Among the topics are:
– Shareholder access
– New types of shareholder proposals
– PIPEs enforcement cases
– SEC financial reporting developments
– XBRL and more…
Course Materials Now Available: As part of this webcast, you will want to review these Course Materials that relate to “materiality” determinations.
Potential Proxy Solicitation Relief for Delinquent Filers
In our November-December 2007 issue of The Corporate Counsel, we mentioned that the Staff was considering how to provide relief for reporting issuers that must defer their annual meeting because reporting delinquencies or a pending restatement makes it impossible to comply with Rule 14a-3’s requirement to deliver financial statements when soliciting proxies. Yesterday, the SEC published an adopting release for an amendment to its delegation of authority rules that will now permit Corp Fin to consider one-off exemptive applications in these circumstances.
Prior to this rule change, Corp Fin would listen to the concerns of issuers facing these problems, but indicate that it did not have the authority to do anything to help them out – now, Corp Fin will be able to formally consider an issuer’s specific request for exemptive relief from the requirements of Rule 14a-3(b) or Rule 14c-3(a).
While there is not likely to be a flood of these sorts of applications, it will certainly be something that can be used when an issuer finds itself stalled out in its SEC reporting due to a restatement or internal investigation – particularly when hostile shareholders are at the door demanding an annual meeting.
More Executive Compensation Inquiries
Some of the larger companies that have recently wrapped up their executive compensation comment process with Corp Fin now have a new inquiry to deal with – this time from the House Oversight and Government Reform Committee, chaired by Henry Waxman (D-CA). The Committee announced last week that it had sent letters to the compensation committee chairs of each of the Fortune 250 companies, requesting information about how those companies utilize compensation consultants in setting executive pay. As I noted in the blog back in December, the same Committee’s Majority Staff recently released a report raising concerns about potential compensation consultant conflicts of interest. Apparently that was not the end of the story, because the Committee indicates that its investigation into the role of compensation consultants in setting executive pay is ongoing.
The Committee’s questions focus on areas such as: (i) the retention of consultants; (ii) the parties to whom the consultant reports; (iii) the other services performed by the consultant; (iv) disclosure about the role of the compensation consultant; and (v) whether the company has a written policy about the other services that an executive compensation consultant can perform for the company. The Committee is expecting responses back by February 22, 2008.
