Just like the UK, Australia has a relatively new law that allows shareholders to cast an advisory vote on executive pay reports; you might recall, this is the regulatory format that Rep. Barney Frank is seeking. ISS’s “Corporate Governance” Blog notes how that new law is faring, with a number of Australian companies receiving high levels of dissenting votes in its 2nd year under the new law.
SEC Chairman Cox on the Power of Blogs
A few weeks back, a CFO.com article entitled the “The Blogging Regulator” led me to a Reuters’ article entitled “SEC’s Cox Uses Blogs To Gauge Public Sentiment.” According to the Reuters’ article, SEC Chairman Cox told a summit on Monday: “‘Blogs are a great way to infer passion and depth of feeling… They give you an early read on the … response you might expect.” However, Reuters noted, “Cox said he does not rely on blogs to find the way forward on tough issues – as he observed, “Blogs in many cases are so irreverent… They don’t wait for facts.”
It’s funny how statements like this are deemed to be “news”; I think that most people feel the same way about blogs as the Chairman: useful but take with a grain of salt (just like I approach the mainstream media!).
As the number of backdating lawsuits grow (we have links to numerous complaints in our “Timing of Stock Option Grants” Practice Area on CompensationStandards.com), the perspective of the economists grows more important as they will help dictate what the level of damages will be. In this podcast, Bruce Deal of Analysis Group, an economic consulting firm, provides some insight into the challenges of calculating damages in option backdating lawsuits, including:
– How is the economist’s role different from the accountant’s role in the pending option backdating cases?
– What types of valuation methods do you expect to be used in these cases?
– How might the use of these methods impact settlements and judgments of backdating cases?
– What other economic issues might arise in these cases other than the value of option grants?
– What types of damage do you expect to see plaintiffs’ claim in litigation?
Section 409A Consequences Forces Some Option Backdaters Out of the Closet
As noted in this article, at least 28 companies disclosed that they are investigating for stock-options backdating during the past three weeks as these companies awarded repriced options by the end of last year to keep their senior managers from paying a 20% surtax on potential profits from the options. Per my earlier blog, I noted that the IRS had issued Notice 2006-100 to provide interim guidance to employers regarding their reporting and withholding obligations for calendar years 2005 and 2006 with respect to deferrals of compensation and amounts includible in gross income under Section 409A.
And some companies don’t appear to care much about what shareholders think of their backdating practices, as this Saturday WSJ article reports that these companies have paid bonuses to employees in an amount equal to the value that the employees might lose due to backdating. Shareholders don’t want to pay even more for the backdating practices of these companies (on top of all the money being paid to investigate them, etc.) – and in fact, at some companies, executives have paid back the amounts they reaped due to backdating back to the company.
Is Backdating Criminal?
As noted in this article, the FBI is devoting significant resources to options backdating investigations as they have mushroomed to comprise one-eighth of the FBI’s corporate fraud caseload.
Kevin LaCroix provides some thoughts on D&O Diary Blog Steve Jobs and criminal backdating, as well as links to others who have shared their thoughts on this hot topic.
Yesterday, Corp Fin posted interpretive guidance on the new executive compensation rules. The guidance is divided into two sections – 28 questions & answers and 18 telephone interp-style responses. The second part replaces the S-K Item 402 interpretations in the July 1997 Telephone Interpretations and its March 1999 Supplement.
This new Corp Fin “Staff Compliance and Disclosure Guidance” page apparently means that the Staff has devised a new way to provide us with written guidance. The end of Telephone Interps perhaps?
Some Thoughts about Foreign Private Issuer Deregistration
With comments due to the SEC by mid-February, in this podcast, Andy Bernstein of Cleary Gottlieb provides some insight into the SEC’s re-proposal regarding foreign private issuers and deregistration, including:
– Why did the SEC re-propose its FPI deregistration scheme?
– How does the re-proposal differ from the SEC’s original proposal?
– What types of comments do you expect to be made on the re-proposal?
– If the re-proposed rules are adopted, do you think that many foreign companies will take advantage of them and deregister?
Hewlett Packard Files Proxy Statement With “Access” Proposal
Yesterday, Hewlett Packard filed its proxy statement – and included AFSCME’s shareholder proposal regarding shareholder access (note that their executive compensation disclosures were filed under the old rules). Probably a smart move given the risk of exclusion.
Interestingly, the company asserts that supermajority approval is necessary before it can amend its bylaws. I’m not sure that the proponents had supermajority approval requirements in mind when they submitted the proposal.
The Bloomberg-Schumer Report
Earlier this week, Mayor Bloomberg and Senator Charles Schumer – with the the assistance of McKinsey – issued this report about how New York City is losing its competitive edge and could give up its lead as the financial capital of the world in as little as 10 years. The D&O Diary provides some lengthy analysis on this new report. Not sure all these reports really have traction on the Hill and in the federal agencies…but we shall see…
In the wake of Corp Fin’s recent sample letter guidance on option backdating, Brink Dickerson of Troutman Sanders recently has been working with the Corp Fin Staff to determine when option dating issues necessitate restatements. He reports that the Staff believes that in applying Question 3 of SAB 108, it is necessary to assess the materiality of the prior period errors under SAB 99 to determine if the errors can appropriately be included in the cumulative effect adjustment. SAB 99, in turn, contemplates assessing materiality on both quantitative and qualitative bases.
Since intent is a factor in assessing qualitative materiality, Brink reports that the Staff doubts that companies will be able to conclude that the errors are not material where the dating errors were intentional on the part of senior management. Certainly there are some errors – e.g., the occassional screw-up in documentation – that would not taint the assessment of qualitative materiality, but the Staff expects that many of the reporting problems that have been disclosed so far will require a restatement.
First Proxy Statements Filed Under New Exec Comp Rules
As Mark Borges has been dutifully blogging about on CompensationStandards.com, the first proxy statements complying with the new executive compensation disclosure rules have been filed, including:
Yesterday, the SEC finally posted the 110-page adopting release regarding E-Proxy – or as it’s also called: “Internet availability of proxy materials.” These rules were adopted more than a month ago at a December 13 open meeting.
The new rules cannot be used before July 1, 2007 (which means a notice under the new rules cannot be sent to shareholders before then) – given that the notice period under the new rules is 40 days, this new notice and access model cannot be used for meetings scheduled before August 10th. As you may recall, these rules are optional and I bet it will take time for the proxy intermediaries to tweak their systems to allow for the new model. We will cover these new rules in a webcast – including what these tweaked systems look like – in a few months…
SEC Proposes Extension of E-Proxy to “Universal” Status
Yesterday, the SEC proposed amendments to E-Proxy that would require issuers and other soliciting persons to furnish proxy materials to shareholders by posting them on a web site and providing shareholders with notice of the Internet availability of the proxy materials. Comments are due 60 days after publication in the Federal Register.
Back in December at the open Commission meeting, this was referred to as “mandatory” e-Proxy, but that was a bit of a misnomer and I believe the proposing release doesn’t even mention the term “mandatory,” it’s coined “universal” instead – because compliance with the proposal would be so simple: merely posting proxy materials and providing notice of the URL. This change in terminology is helpful to understand what the SEC is proposing; I butchered my interpretation of what “mandatory” meant in a blog last month when the SEC first mentioned it. I can be a space cadet sometimes…
Corp Fin Expresses “No View” in Hewlett-Packard Shareholder Access Response
Yesterday, Corp Fin made public its highly anticipated no-action response letter staff to Hewlett-Packard regarding the AFSCME shareholder proposal seeking a by-law amendment that would allow for a form of shareholder access. It has been reported that this was the only shareholder access proposal submitted to an issuer this proxy season (although this Washington Post article intimates that two other companies have received this proposal). We have posted a copy of Corp Fin’s response in our “Majority Vote Movement” Practice Area.
Since the SEC is still grappling with how to respond to the Second Circuit’s decision regarding a similar proposal that AFSCME submitted last year to a handful of companies, the Staff decided not to express a view as to whether Hewlett-Packard can exclude the proposal from its upcoming shareholders’ meeting.
In deciding to pass on considering a proposal relating to this matter at a January 31st open Commission meeting as expected, SEC Chairman Cox said, “The SEC staff quite properly are following Commission precedent, expressing no view as to the eventual disposition of what is for the moment an unsettled legal question. Fortunately, during the current proxy season, the very small number of inquiries we have received have come solely from companies representing that they are not governed by the decision in the Second Circuit, so in the near term there is no risk of conflicting application of our rules. As a result, the Commission is taking advantage of this opportunity to consider more fully the questions raised by the court decision in their broader context, and to work on crafting a carefully considered proposal that will ensure there is one, clear rule to protect investors’ interests in all jurisdictions during the next proxy season.” So it looks like the SEC is still debating internally what it should do in this area…
What is a “No View” Response from the Staff?
It’s not surprising that the Staff decided to go with a “no view” response here, as the Staff has refused to take a position over the years when a close call is involved if the governing law is unclear.
Although a “no view” response may provide some comfort to a company that the SEC will not bring an enforcement action if it excludes the proposal, it is probably more likely that a court would compel inclusion since there is no Staff decision for a court to defer to – or consider – in making its decision…albeit the courts haven’t been following the SEC’s lead anyways in recent decisions, like the AFSCME one. Hewlett-Packard is expected to file its proxy materials within a few days and it will be interesting to see what appetite for risk they have after the pre-texting scandal.
A few weeks back, the PCAOB finally released its inspection reports for the two remaining auditors of the Big 4: E&Y and KPMG. As aptly covered in this CFO.com article, the reports reveal a number of issues at those firms.
Given that all four auditors did not receive rave reviews by the PCAOB during last year’s round of inspection reports, I’m not sure why the SEC’s Chief Accountant is supportive of giving auditors immunity for liability. Maybe setting the standard for negligence higher (or whatever the proper standard is for liability) is a better legislative/regulatory response?
By the way, Kevin LeCroix of the “D&O Diary” Blog provides us with the latest developments about auditor liability reform in Europe.
The SEC’s December Rule Changes: How They Impact You
We have posted the transcript from the popular CompensationStandards.com webcast: “The SEC’s December Rule Changes: How They Impact You.” Over 1300 members have listened to that webcast (either live or by audio archive) – and over 1400 caught last Thursday’s webcast: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!” (for which there will be no transcript due to its length of over 3 hours, but the audio archive is available now).
On CompensationStandards.com, we continue to post numerous resources daily, including these recent gems:
– Posted in our “The SEC’s New Rules” Practice Area, Cleary Gottlieb has put together 52 FAQs regarding the new rules (helping us out until the SEC Staff’s FAQs come out sometime during the next week or two).
– There are 99 pending proposals on majority vote to elect directors versus 94 that came to a vote in 2006.
– There are 39 pending proposals on linking pay-to-performance versus 17 that came to a vote in 2006.
– There are 40 pending proposals to report on or disclose political contributions versus 28 that came to a vote in 2006.
Supreme Court to Review Pleading Standard in Private Securities Actions
From Wachtell Lipton: The US Supreme Court last week granted review in an important case that should resolve a split of authority concerning the pleading standard in private securities fraud actions. The standard was established by Congress in the Private Securities Litigation Reform Act of 1995 to combat abusive securities “strike suits,” and it requires that a securities complaint for damages “state with particularity facts giving rise to a strong inference”t hat the defendant acted with “scienter,” i.e., fraudulent intent. In virtually every securities fraud action, the defendants will likely move to discuss the complaint on the ground that the allegations doe not give rise to such an inference. If the court sustains the complaint, defendants must either settle or endure the massive expenses and risks of discovery and trial.
The case being reviewed by the Supreme Court is Makor Issues 7 Rights Ltd. V. Tellabs, 437 F.3d 588 (7th Cir. 2006), in which the United States Court of Appeals for the Seventh Circuit held that a securities fraud complaint should survive “if it alleges facts from which, if true, a reasonable person could infer that the defendant” acted with scienter. Id. at 602 (emphasis added). In making that determination, the court may not, according to Tellabs, evaluate inferences more consistent with innocence than with fraud. This approach is markedly more lenient for plaintiffs than the standards applied in other Circuits, which require the district court to consider all plausible inferences. The Seventh Circuit, however, reasoned that a district court could not consider competing inferences without potentially invading the constitutional role of the jury.
The Supreme Court decision promises to be a landmark in the federal securities laws. The “strong inference” standard is central to the congressional effort to eliminate abusive standards that prevailed prior to 1995. That effort has been frustrated by a multitude of approaches between and within the various circuits, and has led to forum-shopping, uncertainty, and inconsistent outcomes. From a defendant’s standpoint, the Seventh Circuit’s decision in Tellabs not only adds to this confusion, but takes a significant step backwards to the pre-PSLRA era. The Supreme Court has directed that briefing be completed by March 20, 2007, making it reasonably likely that a decision will be rendered this term.
We Live in a Complicated Society
The best part about working from home is that I don’t have to shave years off my life driving in rush hour traffic. I can leave my machete at home. I loved this WSJ article which laid out a number of websites where those without machetes can instead embarrass our fellow humans into behaving better, including:
To pay for certain small business tax relief, the Senate Finance Committee yesterday approved legislation that would severely limit nonqualified deferred compensation for executives. Specifically, the “Small Business and Work Opportunity Tax Act of 2007” would:
– Amend Section 409A to limit the annual accrual of nonqualified deferred compensation to $1 million (or if less, the executive’s average annual compensation determined over five years ). Going over the cap would trigger ordinary income tax plus a 20% additional tax.
– Amend Section 162(m) to treat any former executives as continuing to be covered by the Section 162(m) limits with the effect that payments made after termination of employment would no longer be deductible by the company.
From the FEI “Section 404″ Blog: At its board meeting yesterday, the FASB board voted unanimously (7-0) not to delay the effective date of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). However, FASB will consider potential implementation guidance to be drafted by its staff and presented for the board’s consideration at a future meeting, on one particular issue: the definition of “ultimate settlement.”
FASB received over 400 comment letters on FIN 48 in the past month. FASB staff said most of the letters were from preparers or organizations representing preparers, most were signed by tax executives, and many were form letters referencing an early letter sent by the Tax Executives Institute. FASB also received comment letters from users of financial statements who asked FASB not to delay FIN 48.
In reaching its decision not to delay the effective date of FIN 48 (effective fiscal years begininng after 12/15/06), FASB considered the 3 main calls for delay as summarized by the FASB staff:
– Implementation issues arising directly from provisions of FIN 48 (for which they decided to have staff draft guidance to be considered at future board meeting on the meaning of ‘ultimate settlement’)
– Other consequences not directly associated with FIN 48’s provisions (including documentation, internal control, timing constraints and available tools)
– Industry or other entity-specific concerns
As noted above, FASB decided the staff should draft implementation guidance for FASB to consider on the definition of ‘ultimate settlement’ but staff said other implementation issues raised in comment letters had been dealt with by staff or did not lend themselves to further general guidance because they were facts and circumstances based. Since FASB directed the staff to “burn the midnight oil” and work as quickly as possible on the “ultimate settlement” guidance, they did not believe a delay in the effective date of FIN 48 was required due to this particular implementation issue.
John White on FPI Deregistration and Other Global Issues
Earlier this week, Corp Fin Director John White delivered this speech at PLI’s 6th Annual European Securities Law Institute. John covered a number of international topics, including foreign private issuer deregistration and global accounting convergence.
Yesterday, Corp Fin’s Chief Accountant’s office posted guidance – in the form of a sample letter (ignore the header about oil & gas companies; that is a SEC webmaster snafu) – regarding restatements and option backdating. A little nerve-wracking that the Staff gives a lot of helpful guidance – but then adds the qualifier that even if you follow it, it doesn’t mean you can conclude you are current. So I imagine the Staff will continue to get a lot of calls from folks with backdating issues.
This Staff guidance was anticipated in the Nov-Dec 2006 issue of The Corporate Counsel, which was mailed last week – and will be dealt with more in the upcoming Jan-Feb issue which will be mailed by the end of the month. By the way, that Nov-Dec issue has a great – and lengthy – analysis of how to implement the SEC’s new related person rules.
The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!
Catch tomorrow’s blockbuster 3-hour webcast – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!” – to hear the SEC’s Paula Dubberly, Mark Borges, Ron Mueller and Alan Dye discuss how companies are gearing up to provide their new executive compensation and related party transaction disclosures this proxy season.
Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com (Part I on the SEC’s December rule changes was last week, audio archive now available), we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers has ended) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.
Senate Panel May Limit Tax-Deferred Pay to $1 Million
According to this Bloomberg article, the Senate Finance Committee may consider a proposal setting a $1 million limit on the amount of compensation highly paid workers such as corporate executives, professional athletes and entertainers can defer tax-free each year. The provision was included in a preliminary draft of legislation that was posted yesterday (but then removed because it had been posted “prematurely”).
Rep. Barney Frank: CEO Pay Bill Vote By Mid-’07
Rep. Barney Frank, the new Chair of the House Financial Services Committee, continues to be outspoken on executive pay as he works towards resurrecting his Truth-in-Pay bill. On Thursday, Rep. Frank said he hopes to pass a bill by mid-2007 to give shareholders more say in setting corporate executive pay, according to this Reuters article.
Rep. Barney Frank: Speaking Frankly
Below is an excerpt from comments made by Rep. Frank at the National Press Club on January 3rd:
MODERATOR: You’ve said that you would support giving shareholders more power to constrain executive pay.
Will you provide some details, please, on how you would do this?
FRANK: We’re still working out the details. But, yes — I have to say, boards of directors, I didn’t know much about them before I got to be the senior member of our committee.
You read about boards — they’re supposed to be — I read about boards of directors in Enron and MCI and elsewhere, and they reminded me, I guess this is an appropriate journalistic forum to use this metaphor, the role of the boards of directors in all these crises remind me of something Murray Kempton once said, the great journalist from the New York Post, talking about editorial writers. He said the function of editorial writers is to come down from the hills after the battle is over and shoot the wounded.
(LAUGHTER)
And it seemed to me that’s what the boards of directors used to do.
Now, some of them have gotten more energetic, and I think Sarbanes-Oxley has helped them do that.
But there’s one area where the boards of directors do not appear to be much of a check, and it’s easy to understand why, because they don’t stand up to the CEO. They may stand up to the workers. People said, “Well, do you want to cut the bargaining agreements or the wages to go to shareholders?” You can count on the board of directors to want to depress what they pay the workers.
FRANK: But with regard to the CEO, in the first place, the CEO picked the board of directors; they picked the CEO. It’s a very collusive relationship.
And it’s clear that boards of directors do not provide any real check on CEOs. And it’s true, I guess, the board of directors of Home Depot finally decided that Mr. Nardelli had to go. And they put their foot down and gave him $210 million and asked him to please leave, at which point he apparently succeeded, for the first time, in raising the stock price, by leaving. But $210 million is an expensive thing for that.
So I plan to have some legislation by which we increase the ability of shareholders to vote. And we’re going to try to work out the details, including what happens if they were to vote no.
They have that in Britain, by the way. And Britain has become, recently, an example. And a lot of American corporate leaders have said, well, we like what they have in Britain. We think the Financial Services Authority is more flexible than the Securities and Exchange Commission, that Britain does it better.
But in Britain, shareholders have much more say. And particularly here, I do not think you can count on boards of directors to be adequate checks.
By the way, this compensation for CEOs — it’s not just a matter of envy. It has reached a point where it has some macroeconomic significance.
People at Harvard, Lucian Bebchuk and others, have shown the percentage of the profit of these top 1,500 corporations that goes to compensation for the top three officials has reached almost 10 percent. We’re talking, now, about significant numbers. When Lee Raymond gets $400 million when he leaves ExxonMobil, and the pension is shorted, the pension fund, we’re not just talking about envy.
So yes, we are going to be working on this, and when it gets to committee, we’ll be dealing with it. The SEC — I have one small difference with what they did, but the SEC has made some real gains in requiring corporations to be more open about what kind of compensations there are. And that’s all compensation. It’s stock options, and it’s retirement, and what happens if there’s a change in the corporation.
And by the way, one of the things that we don’t do enough of in this business of ours and yours is to talk about the predictions of doom that didn’t happen. We’re often beating our breast because something bad happened, and we didn’t predict it. What about all the bad things that we predicted that didn’t happen?
Two that come to mind, to me, are same-sex marriage in Massachusetts and expensing stock options. In both cases, enormous negative consequences were predicted and, of course, none have materialized.
I do think it’s time to have a hearing. When we voted on preventing the accounting officials from requiring that stock options be expensed, we heard terrible predictions about the negative effects this would have on the valuation, particularly, of technology companies. It has not happened.
FRANK: And I got to say — and I voted against that bill. So yes, I am saying I told you so.
One of the most common lies in human existence is when people say, “Oh, I don’t like to say ‘I told you so.'”
I do not know anyone who doesn’t like to say “I told you so.”
(LAUGHTER)
And I have personally found that as one of the few pleasures that improves with age.
(LAUGHTER)
I can say I told you so and enjoy it without taking a pill before, during or after the operation.
And we told them so about this. So I think that — again, there’s a lot less fragility in this economy than people think.
But, yes, we have got to find some way to give shareholders — maybe it’s automatic or maybe it’s whatever shareholders want to — but shareholders have to be the check.
By the way, the shareholders we’re talking about now — we’re not talking about this or that individual somewhere off in the country. You’re talking about a very sophisticated set of institutional investors. You’re talking about CalPERS. You’re talking about other pension funds run by public officials or by unions.
There are entities out there representing groups of shareholders who are sophisticated and thoughtful, and I believe corporations would benefit greatly by their increased participation.
In response to so many requests for a practical M&A print newsletter about deal practices, we have created a new newsletter: Deal Lawyers. Just like its sister publication, The Corporate Counsel, Deal Lawyers is tailored for the busy dealmaker, bi-monthly issues that do not overload you with useless information – rather, this newsletter will provide precisely the type of information that you desire: practical and right-to-the-point. As in all our publications, this newsletter will include analysis of timeless “bread and butter” issues that you confront time and again.
To illustrate how Deal Lawyers will provide the same rewarding experience as reading The Corporate Counsel, we have posted the Jan-Feb issue of Deal Lawyers for you to check out at no charge. Feel free to share it with your deal-minded brethren. This issue includes pieces on:
– What the New “Best Price” Rule Means for You
– The New “Best Price” Rule: Financing Issues and Answers
– The New – and Tricky – SEC “Change-in-Control” Disclosures
– What Private Equity Firms Want in a Lender
– The “Sample Language” Corner: Acquiring the California Corporation
Try a no-risk trial today; we have special introductory rates and a further discount for those of you that already subscribe to The Corporate Counsel.
The Evolving ‘Best Price’ Rule
We have posted the transcript of our DealLawyers.com webcast: “The Evolving ‘Best Price’ Rule.”
NYSE and NASD Propose Changes to Research Analyst Rules
On Thursday, the SEC posted a proposing release that would amend NASD and NYSE rules regarding research analysts’ conflicts of interest. The proposed amendments would implement certain recommendations from a Joint Report issued a year ago by the NYSE and NASD.
Among other things, the proposals would change rules regarding disclosure of conflicts; quiet periods; restrictions on review of research reports by non-research personnel; and restrictions on personal trading by research analysts. The proposing release identifies those instances where the NYSE and NASD proposals are different.
