Following up on a recent blog, this Wachtell Lipton memo lays out this development: “Stockholders of Hilton Hotels Corporation recently approved a labor union-initiated proposal to amend Hilton’s bylaws to provide that Hilton “shall not maintain a shareholder rights plan [sometimes known as a `poison pill’] . . . unless such plan is first approved by a majority shareholder vote.” The passage of this proposal is lamentable as a matter of policy. It also puts a spotlight on the so-far-unanswered question of whether binding, shareholder-initiated bylaws of this nature are valid under Delaware law.
For very fundamental reasons, we believe that a binding bylaw of the type voted upon at the Hilton meeting is not valid under Delaware corporation law. Hilton, based on the opinion of Delaware counsel, reached the same conclusion, and has stated that its board will treat the proposal as a non-binding recommendation. We believe this approach is correct. Under Delaware Code Section 141(a), directors have not only the power, but the obligation to at-tempt actively and in good faith to protect and advance the interests of the corporation and its stockholders.
This fiduciary obligation requires that directors exercise their informed judgment in the circumstances as they appear from time to time. In our view, a majority of the voting shares may not in a bylaw limit the board’s power to take such action as the board itself believes in good faith is necessary or appropriate to protect and advance the interests of the corporation and its stockholders. Should a majority of shares wish to pursue a policy of board disempowerment, as the union is attempting to do with its bylaw proposal at Hilton, the corporation law does not leave them without means to do so. Stockholders are free to elect new directors with different views of the best way to advance the purposes of the corporation.
In addition, an amendment to the corporation’s certificate of incorporation could validly constrain the powers of the board. That these alternative avenues for the enhancement of shareholder power over management are more difficult to effect is not, in our view, a flaw of the long-existing law, but rather a recognition that the complex governance of the large modern business corporation is a most serious matter that requires greater deliberation than is likely to occur in a single vote on a bylaw amendment.
Moreover, the use of shareholder-initiated binding bylaws to disable directors from fulfilling their obligation to protect the interests of stockholders is bad policy. The statutory duty to be active in protecting the interests of all stockholders is never more important than when a company is evaluating a potential sale of control or responding to activist stockholders seeking to influence or control the company for self interested purposes.
A board’s ability to adopt and maintain a rights plan is among the most powerful and flexible tools available to enable directors to fulfill their obligations. Rights plans are also critical to the ability of a public company to conduct an orderly auction in the event the company seeks to sell itself. Repeated shareholder referenda are no substitute for board judgment, and are likely to prove impractical, ineffective and vulnerable to abusive tactics of small but vocal groups of shareholders whose interests may not be aligned with, or may be hidden from, stockholders generally. A bylaw that effectively demands director passivity at the very moments when active business judgment is most keenly needed contradicts the fundamental principles of our corporate law and does not serve the best interests of corporations or stockholders generally.”
Home Depot: Calling Off the Dogs
In the wake of shareholder outcry at the way Home Depot’s annual meeting was handled last week (as I blogged about a few days ago – also see this WSJ editorial), Home Depot issued this press release yesterday noting that next year’s shareholder meeting will return to “normal” (ie. shareholders will be permitted to ask questions and directors will attend).
In addition, the company announced that it intends to implement “majority vote measures” since a shareholder proposal seeking a majority vote standard received support from 56% of those voting. It will be interesting to see what those “measures” comprise of given that 10 of Home Depot’s 11 directors received high levels of withheld votes: over 30% (the only director not receiving a similar level is a brand new director). According to this WSJ article, these high levels are mainly due to anger over CEO pay. Depending on the math, if broker non-votes were not counted and a majority vote standard had been in place, this board might have been gone!
Interestingly, Home Depot has landed near the top of the ISS CGQ scoring system in recent years (99.6% right now) – which can be taken one of two ways, either the conduct of this meeting was an aberration or CGQ scores should be taken with a grain of salt…
June Eminders is Up!
The June issue of our monthly email newsletter is now posted.
Recently, the SEC approved the rule change to rename the Nasdaq National Market as the Nasdaq Global Market and to create the Nasdaq Global Select Market, a new tier within the Nasdaq Global Market with higher initial listing standards. Even though Nasdaq’s transition to an exchange has been delayed, it is proceeding with the Global Select Market – and the renaming of National Market to Global Market – so that these changes will be effective July 1st. The rule filing to do so under the NASD rules was filed a few days ago. As for the timing of Nasdaq’s transition to an exchange, it now looks like that might take effect on August 1st – see this Nasdaq Head Trader Alert.
Here are some issues not addressed by previous blogs about the impact of this transition:
– Delisting – Once Nasdaq becomes an exchange, a company will have to file a Form 25 to delist. The Nasdaq has filed a rule change to incorporate the SEC’s new requirements relating to delisting (Rule 12d2-2) into the rules of the Nasdaq exchange.
– Rule 144 – One issue that occurred to me is that when Nasdaq becomes an exchange, will affiliates who sell under Rule 144 have to file a Form 144 (if required under 144(h)) with both the SEC and Nasdaq as Rule 144(h) refers to the “principal exchange on which such securities are so admitted”? Our Rule 144 expert Bob Barron has authored a great 6-page article on this topic, located in our “Rule 144″ Practice Area. Nasdaq also has updated its FAQs on Exchange Registration to address the Form 144 question, where the penultimate paragraph states:
“After NASDAQ becomes operational as a national securities exchange, Section 16 and Form 144 filings related to Nasdaq-listed securities will have to be filed with NASDAQ. However, NASDAQ has requested, and expects to receive, relief from the Securities and Exchange Commission that will allow the electronic filing of Section 16 reports and Forms 144 through the SEC’s EDGAR system to satisfy the obligation to file these reports with NASDAQ. A copy of Section 16 and Form 144 Filings not made using the SEC’s EDGAR system should be sent to Listing Qualifications.”
More on Option Backdating
Following up on this blog from a few weeks back, we have been uploading articles, research reports and Form 8-Ks to the “Timing of Stock Option Grants” Practice Area on CompensationStandards.com at an incredulous rate. The most recent media reports are tossing out numbers like “10%” as to the number of companies at risk. That’s one figure cited in a NPR segment noted in this excellent memo – and this article quotes the Professor who uncovered this scandal as predicting that 20% of companies don’t timely report their option grants on Form 4! These numbers are so high! Maybe I am in denial, but I simply don’t believe that it could be so bad.
And as Mike Melbinger blogged about yesterday (and as noted in this WSJ article), McAfee just dismissed its General Counsel because of stock option “improprieties” during 2000. I imagine this will not be the last in-house lawyer to be handed his/her head – and reputation – over this type of issue.
What About Rule 10b5-1 Trades?
With the option backdating scandal being kicked off by an academic study from last year, perhaps it’s time to look at what other potential problems have been uncovered by studies. This recent LA Times article delves into a study by a Stanford Professor who claims that stock sales made under Rule 10b5-1 plans precede bad news more often than good news.
I was surprised at the results of this study, but perhaps the period of time covered (i.e. 2003 and before) may offer an explanation? We have posted a copy of the study and several related articles in our “Rule 10b5-1″ Practice Area. Thanks to Keith Bishop for keeping me on my toes!
It was mind-boggling to read Joe Nocera’s account of last week’s Home Depot annual meeting in his column in Friday’s NY Times (which followed this Wednesday article about CEO Nardelli’s pay package). Talk about a domineering CEO! I find it hard to believe in this day and age that a board – not to mention a CEO – could be so deaf to shareholders and apparently blind to what’s expected of them. It’s a textbook example of how not to hold a shareholders’ meeting.
I couldn’t resist calling up Rich Ferlauto, who is Director of Pension Investment Policy for the American Federation of State, County and Municipal Employees, to discuss – in this podcast – what it was like to personally experience the Home Depot annual meeting, as well as ask Rich how AFSCME’s shareholder proposals were received during this proxy season so far.
SEC Commissioner Campos Willing to Consider Notion of Shareholder Approval of Compensation Disclosure
If you listen to Rich’s podcast, you will hear how AFSCME’s proposals regarding shareholder approval of compensation disclosure have done quite well in their first year. As I blogged about yesterday, the House recently held a hearing on a bill that would require public companies to obtain such shareholder approval.
Earlier this month, SEC Commissioner Campos touched on this topic – and other issues related to executive pay- in this rousing speech. Here is an excerpt from that speech:
“Let me touch on a few of the comments that I found most interesting (although this is certainly not an exhaustive list):
Advisory Vote by Shareholders. A number of commenters have suggested that we require companies to put the compensation report to an advisory shareholder vote, or that we seek an amendment of exchange listing requirements to require such advisory votes. Alternatively, commenters have recommended that we codify a no-action position of the Staff that has allowed shareholders to include in proxies non-binding resolutions that ask for an advisory shareholder vote on the compensation report. As an aside, I’ll also note that Congressman Barney Frank has introduced a bill that would, among other things, require shareholder approval of compensation plans.
These are definitely intriguing suggestions, and, if adopted, no doubt would provide shareholders the clearest and most direct voice in executive remuneration. Apparently, the United Kingdom and Australia have an advisory vote requirement on the compensation report, and there appears to be some evidence that this may have some effect in curbing excessive executive pay. For example, one study in the United Kingdom found that executive pay is declining, and another article noted that the typical British CEO makes only a little more than half of what the typical U.S. CEO makes. In any event, having the shareholders cast an advisory vote on this subject would very likely improve transparency in this area, and for this reason alone, I think it is a topic worthy of additional discussion. Of course, requiring shareholder votes, even advisory ones, is not something that the Commission has done frequently, and so I think that we’ll need to look carefully at our powers in this regard.
Disclosure of Performance Targets. Another topic that comment letters touched upon is the fact that the proposal does not require the disclosure of specific quantitative or qualitative performance-related factors considered by the compensation committee or by the board in determining executive compensation. Apparently, the argument for not including such a requirement would be to avoid forcing companies to disclose confidential commercial or business information that would have an adverse effect on the company. This is certainly understandable.
On the other hand, without disclosure of these performance-related factors, it becomes difficult for shareholders to determine whether the targets are appropriate and whether executives have actually met the targets. Perhaps a middle alternative would be to require disclosure after the fact: that is, maybe it would be effective and appropriate to require companies to disclose the particular quantitative or qualitative performance-related factors after the time period for which the factors apply. Some commenters take the position that this would make the executive compensation process more transparent, yet alleviate concerns about disclosure of confidential information. However, companies might still be concerned that disclosure of specific targets even after the fact raises confidentiality issues that might ultimately harm the company. In any event, given the comment letters on the subject, this is an issue that we at the Commission should consider, and I intend to approach it with an open mind.
I could continue and recite at great length some of the insightful comments that have been submitted to us, but if I were to do so, I would surely eat up the time that has been set aside for questions. Rest assured that our Staff is carefully reviewing the comment letters right now, and all of us on the Commission will pay very close attention to the public’s suggestions on this topic.”
PCAOB Proposes Annual Reporting by Audit Firms
Last week, the PCAOB proposed rules that would require audit firms registered with the PCAOB to submit annual and special reports. These reports would be publicly available on the PCAOB’s website, subject to confidential treatment requests. You might recall that Section 102(d) of Sarbanes-Oxley provides that each registered audit firm must submit an annual report to the Board (and may also be required to report more frequently to provide information specified by the Board or the SEC).
The reporting framework proposed by the Board includes two types of reporting obligations. First, the proposal would require each registered firm to provide basic information once a year about the firm and the firm’s issuer-related practice over the most recent 12-month period. Second, the proposal identifies certain events that must be reported within 14 days.
The Board also proposed rules that, in certain circumstances, would allow a successor firm to succeed to the registration status of a predecessor firm following a merger or other change in the registered firm’s legal form. In other circumstances, the proposed rules would allow for temporary succession for a transitional period of up to 90 days while the firm seeks registration.
At first blush, the concept of an audit firm filing annual reports seemed odd to me. But these annual reports would not really be akin to a company’s glossy annual report nor would they contain clearly objectionable information (like a firm’s client list). Still, it will be interesting to read the comments on this one because auditors might have strong opinions here…
Corp Fin Director John White delivered this speech on Thursday regarding the need for input into internal control matters, for both large and small companies. In the speech, John emphasizes the need for a different type of input now that a small business exemption is off the table. John notes that most of the energy expended by the small business community so far has related to obtaining the exemption – now, the SEC, PCAOB and COSO need input into how to shape the guidance that was promised a week ago as part of the regulatory four-point plan.
In addition, John reminds us of the PCAOB’s announcement a month ago about how this year’s inspections of audit firms will include analysis about how those firms conduct AS 2 audits – and that the SEC will be involved in this process as “the SEC’s inspectors will be inspecting the PCAOB inspectors.” For those dealing with internal controls, this is an important speech as it asks a number of questions as if it were a proposing release.
Presidential Memo: National Intelligence Director’s Power to Exempt Internal Controls, Etc.
Earlier this month, President Bush issued this memorandum that enables the Director of National Intelligence to exempt companies from the books and records and internal controls provisions of the Foreign Corrupt Practices Act. This shift in authority was accomplished without much fanfare and is only receiving coverage due to this article from Business Week. As noted in the article, the memo has the unrevealing title: “Assignment of Function Relating to Granting of Authority for Issuance of Certain Directives: Memorandum for the Director of National Intelligence.” Here is a transcript of a NPR interview with the Business Week article author.
The hubbub involves a little known provision in the ’34 Act. The Presidential Memo transfers the authority granted to the President under Section 13(b)(3)(A) of the ’34 Act, which states:
“With respect to matters concerning the national security of the United States, no duty or liability under paragraph (2) of this subsection shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph shall set forth the specific facts and circumstances with respect to which the provisions of this paragraph are to be invoked. Each such directive shall, unless renewed in writing, expire one year after the date of issuance.”
As someone who used to work at a defense contractor, I can imagine some – but not too many – scenarios where a company would want to bury the fact that it was working on a “black program” from its independent and internal auditors (as these programs are on a “need to know” basis). But the timing of this authority transfer is odd given the high profile of internal control exemptions today and in light of criticisms of this Administration being too secretive, etc.
The provocative thing is that there likely is at least one company out there that needs this relief now – otherwise, why would the President bother to sign the memo without a perceived need for it. We have posted a copy of the Presidential Memo in our “Foreign Corrupt Practices Act” Practice Area.
House Hearing Held on Executive Compensation
Last Thursday, the House Financial Services Committee finally held a hearing on Barney Frank’s bill on executive compensation – Rep. Frank was forced to use a parliamentary rule to force the majority Republican leaders of the committee to convene the hearing. Here is the prepared testimony delivered at the hearing – and here is a LA Times article and an article from Business Week about the hearing.
Yesterday’s conviction of Enron’s former CEO and CFO was greeted with the fanfare of The Wizard of Oz – and rightfully so given the symbol they have come to represent. I shudder to think if they had been found innocent as investors might have pushed Congress into creating Sarbanes-Oxley II. Of course, we still need to weather the appeals process for Skilling and Lay…
The NY Times has this nice count-by-count explanation of the verdicts. And FEI’s “Section 404 Blog” has links to all the articles, charts and remarks that I would have done – including this cool USA Today chart about the verdicts – so I point you there if you have an unfathomable appetite for more news about the convictions.
More on Vonage’s FWPs and Rule 134 Communications
After I blogged about Vonage’s unique use of a blast voicemail on Tuesday, the company filed an amended registration statement with this new statement under “Directed Share Program” on page 140:
“Our initial email communication to prospective participants in the Vonage Customer Directed Share Program and the first page of the website identified above (from which a reader could access a detailed “frequently asked questions” section about the Vonage Customer Directed Share Program) did not include an active hyperlink to the prospectus contained in our most recently filed registration statement relating to this offering as required pursuant to Rule 433 under the Securities Act. The email communication and the information on the first page of the website therefore might be viewed as not having been preceded or accompanied by a prospectus meeting the requirements of the Securities Act. As a result, it is possible that the e-mail communication and the first page of the website could be determined to be an illegal offer in violation of Section 5 of the Securities Act, in which case recipients could seek to recover damages or seek to require us to repurchase their shares at the IPO price.
In addition, our initial voicemail communication to prospective Vonage Customer Directed Share Program participants, which communication may contain only limited information pursuant to Rule 134 under the Securities Act, included the Internet address at which prospective participants could obtain additional information about the Vonage Customer Directed Share Program, including a copy of the prospectus contained in our most recently filed registration statement relating to this offering. However, the voicemail did not include the name and address of a person from whom such a prospectus could be obtained. The inclusion of the Internet address in the voicemail might be viewed as incorporating into the voicemail information that is beyond the scope permissible under Rule 134. In addition, the omission of the name and address of a contact person means that the voice mail would not be entitled to the “safe-harbor” provided by Rule 134. As a result, it is possible that the voicemail could be determined to be an illegal offer in violation of Section 5 of the Securities Act, in which case recipients could seek to recover damages or seek to require us to repurchase their shares at the IPO price.
We believe we would have meritorious defenses to any legal actions based on claims of alleged defects in the email, website or voicemail. The website through which the Vonage Customer Directed Share Program is being conducted requires each prospective investor to open an electronic copy of a prospectus meeting the requirements of the Securities Act prior to making a conditional offer to purchase shares of our common stock. It is, therefore, impossible for someone to place an order (or to open an account to do so) in the Vonage Customer Directed Share Program without first having received a copy of the required prospectus. As a result, we believe that the risks to us relating to any such potential claims are not significant.”
FASB’s New Standard: Accounting For Uncertain Tax Deductions, Etc.
Recently, the FASB adopted a new standard that will require companies to disclose additional quantitative and qualitative information in their financials about uncertain tax positions. A final Interpretation reflecting these decisions are expected to be issued in June and would take effect in 2007.
As noted in this KPMG report (posted in our “Contingencies” Practice Area), the FASB initially proposed that a company would have to conclude it was “probable” (ie. likely to be able to sustain an uncertain tax position such as for an aggressive position on intercompany pricing or an aggressive tax deduction) if it was calculating its income taxes for its financial statements on that basis. At its May 10th meeting, the FASB has decided to lower the threshold required to recognize a financial statment benefit for a position taken for tax return purposes from ‘probable’ that the position will be sustained, as the exposure draft proposed, to a ‘more-likely-than-not’ that the position will be sustained.
This issue arose when two of the Big Four firms used the higher standard and the other two used the lower standard. The SEC Staff weighed in with a statement that the threshold under current accounting guidance should be the higher standard. The lower “more-likely’than-not” standard is effectively a standard that says there is a 51% or better chance the tax position will be sustained; the “probable” standard would have required companies to conclude it was a significantly higher chance they would be able to sustain an aggressive tax position before they could have used it to report their taxes for financial statement purposes.
Now all of the Big Four auditors, as well as other firms, will be using the new lower standard when it is officially issued. The FASB also decided to require further disclosure in connection with the relaxed threshold.
Learn practice nuggets from the experts – such as why Home Depot’s audit committee report contains more useful information for investors than do most other proxy statements (but curiously, Home Depot is under fire for making its financials less transparent by deciding to stop giving comparable-store sales numbers, a key retail-industry benchmark as noted in this recent WSJ article).
The US Post Office Weighs In on E-Proxy
In the analysis of e-Proxy comment letters submitted to the SEC from my blog a few months ago, I neglected to mention this hilarious 13-page comment letter from the US Postal Service.
The Post Office obviously has a vested interest in “keeping those proxy statements coming” – I imagine this is the first time they have ever submitted a comment letter to the SEC. For example, look at page 3 of their letter for a discussion of “consumer expectations and preferences.” Consumers? Not investors? Maybe the SEC has a broader – double secret? – mandate than the one they have owned up to…
No-Holds-Barred Responses to Investor Queries
Continuing on the theme of something light for the 3-day holiday: Expeditors International is notorious for its no-holds-barred responses to investors’ questions, which it publishes regularly on Form 8-K under Item 7.01. They can be pretty darn funny. Here are my favorite lines from the latest edition…
– “Sustainable?” Given enough time, the sun is not sustainable, however, we think it is a good bet that there will be daylight tomorrow.
– This was not an “open-ended, broad question” it was an interrogation that left us exhausted just reading it. We did not ‘indulge” your question, we endured it.
– If you seriously are buying into this thinking, you have been sipping the integrator Kool-Aid. Hopefully you haven’t swallowed, but just in case you have, let us attempt to provide some financial Ipecac here in hopes that we can induce vomiting before your investment psyche is permanently altered.
We have posted the transcript from the popular DealLawyers.com webcast: “How to Handle Hedge Fund Activism.”
Chairman Cox’s Interview
In the op-ed section of Saturday’s WSJ, SEC Chairman Cox gave this interesting interview. Here are a few observations:
– As a former politician, the new Chairman sure knows how to make friends with the media. For example, the interviewer writes “My pen stops. This is not how regulators speak” when the Chairman uttered the same thought likely spoken by each of the 27 prior chairs of the SEC (ie. the SEC should arm investors with information to protect themselves).
– The Chairman hit the nail on the head when he focused on one of my pet peeves: the inane way that EDGAR displays forms, etc. How many investors do you think recognize “DEF 14A” as a proxy statement?
– I am not sure I agree that XBRL will “cut down on costly errors.” I worry that it will create more new ones as companies (or vendors they hire) mistag their financial data. Tagging errors for XBRL will be more significant than EDGAR or HTML errors because it means that a number gets pushed to a different line item in the financials.
– While I completely agree that the SEC should not (and cannot, since it doesn’t have the authority) to regulate executive compensation levels, I disagree with the statement that CEO pay is set by “market forces.” As I flesh out in Realism #1 of my “Open Letter to All Journalists,” that statement seems to be bandied about without careful thought as to what it really means.
Enron’s Legacy
As long as I am blogging about the Saturday WSJ op-ed pages, I can’t help but rebut this column about how we didn’t need all this new regulation. I agree that Sarbanes-Oxley went overboard, but what do you expect from Congressional legislation? I read the op-ed as basically arguing that if Scrushy and all those fraudsters avoided jail, then there must not have been any widespread issues ripe for reform.
For those of us dealing with these issues on a daily basis, I think most of us would agree that numerous practices have changed “for the better.” Put aside your anger about 404 and think about the bigger picture. [Although remember that in Year 1 after the implementation of Section 404, 17% of companies reported a material weakness. And that’s just large companies – imagine how high that percentage would be if 404 was implemented across the board!]
Here is a list of recent changes that I think illustrate how most companies (and their advisors) are in much better shape today compared to before SOX:
1. Boards no longer conduct one-hour board meetings just several times per year.
2. Outside auditors will no longer do whatever it takes to keep the business.
3. CEOs and CFOs (and some directors) now actually read 10-Ks and 10-Qs before they are filed.
4. Outside lawyers are more careful about who they represent and what they advise.
5. Employees are more apt to blow the whistle on financial mischief and companies are more careful handling these complaints.
6. Investors are more active in keeping boards accountable.
Of course, some serious fine-tuning to the new rules are necessary, particularly as oversea listings of companies grows by leaps and bounds – and I am increasingly concerned about the balance of power shifting to shareholders, particularly those that are in it for the “greenmail.” But I remain convinced that some reform was necessary and that there could be a much higher level of fraud being perpetuated today “but for” Sarbanes-Oxley and the related rulemaking that followed.
More on XBRL
Last week, Corey Booth, Chief Information Officer of the SEC, gave an enlightened speech on the SEC’s efforts to implement XBRL reporting. Over the past year, Corey has noticed significant variation in how pilot companies translate their numbers into XBRL, even on relatively basic issues – and he notes that this variation suggests that significant subject matter knowledge is needed to effectively create an XBRL document (as the preparer must be comfortable with both the technological and accounting aspects of the standard). He also noted little growth in demand for XBRL information from investors – so he doubts that mandatory XBRL filing will be required before voluntary adoption has become widespread.
This all jibes nicely with my recommendation that the SEC go slow here. However, it still is apparent that the SEC will push this initiative – yesterday, it issued a press release announcing three more companies have joined the pilot program. And it’s fascinating that yet another Brazilian-based company has signed up for the pilot program, continuing that country’s very significant representation among the volunteers.
Next Tuesday, May 30th, you might want to check out AEI’s XBRL Conference in Washington DC – it’s free (but you need to pre-register).
Last week, the annual legislation amending the Delaware General Corporation Law was introduced. Among other things, the bill addresses some of the majority voting issues raised recently by investors. As is customary, the Council of the Corporation Law Section of the Delaware Bar Association proposed the changes, which are expected to be approved.
I was able to catch up with a member of the Council that worked on the draft bill, John Grossbauer of Potter Anderson & Corroon, to discuss this development in this podcast, including:
– What does the Delaware bill say?
– How does it compare to the ABA’s recommendations for the Model Business Corporation Act?
– When is the Delaware legislature expected to act?
Clarifying the SEC’s Latest Section 404 Deadlines
In last week’s press release on Section 404, the SEC stated that there will be a new short postponement of the effective date for the rules implementing Section 404 for non-accelerated filers – this statement noted that all filers will nonetheless be required to comply with the Section 404(a) management assessment for fiscal years beginning on or after December 16, 2006. Quite a few members were confused because under the existing deadline – emanating from Release 33-8618 from September 2005 – non-accelerated filers are not required to comply with the rules under 404 until the first fiscal year ending on or after July 15, 2007.
As Alan Dye was quick to point out to me, the key difference between the SEC’s two statements is that the new one refers to the beginning of a fiscal year and the older one refers to the end of a fiscal year. However, the upshot of the SEC’s latest announcement is that there is no real change for companies with fiscal years that coincide with the calendar year.
Remember that the SEC’s September 2005 release established two extended deadlines: fiscal years ending on or after July 15, 2006 for foreign private issuers meeting the accelerated filer deadline and a July 15, 2007 for non-accelerated filers. Under its latest announcement, the SEC does not intend to extend both deadlines as the upcoming extension will be limited only to non-accelerated filers (but of course any foreign private issuers that also happen to be non-accelerated filers will get the benefit of that extension).
Fielding Those Option Back-Dating Phone Calls
I’m being told that institutional investors and investment bankers are calling the investor relations departments at companies and giving them the third degree about whether those companies have any “backdating” issues. Hopefully, the IR folks remember Regulation FD because I would love to know which companies are going to confirm they have backdating issues too – I could sell short and retire. A lot of fishing going on. And of course, the IR folks need to be sure that their companies don’t have the problem before they say they don’t…
In my blog last week on this topic, I forgot to mention that the most recent issue – March/April – of The Corporate Counsel contains extensive analysis of issues posed by options-backdating. In addition, in the “Timing of Stock Option Grants” Practice Area on CompensationStandards.com, we have now added some research reports and an article analyzing the issues as well as several complaints filed in lawsuits against some of the companies accused of backdating.
On Thursday, it was announced that President Bush nominated Kathleen Casey to serve as an SEC Commissioner – she currently serves as the Staff Director and Counsel for the Senate Banking Committee, having previously worked as Chief of Staff and Legislative Director for the Committee’s chairman, Senator Richard Shelby (R-Al.). Ms. Casey will replace Commissioner Cynthia Glassman, who announced earlier this week that she will not serve a second term and would leave the agency after her term expires next month.
Ms. Casey, whose term would extend to the middle of 2011, is subject to confirmation by the Senate. I doubt she will have any problem securing confirmation, but I thought it would be useful to provide an overview of the confirmation process (and here is Senate Rule XXXI, which governs confirmation hearings) for those that want to learn about what’s involved in a confirmation.
The First Blast Voicemail Free Writing Prospectus?
In our “Free Writing Prospectuses” Practice Area, we have uploaded this interesting voicemail recording (give it a few seconds to load) from Vonage that appears to solicit interest from its customers in its upcoming IPO (more specifically, the Directed Share Program that will receive an allotment in the IPO). Perhaps the first blast voicemail free writing prospectus? I found this letter to customers filed as a FWP, but I’m not sure if that FWP (or any of the other FWPs filed by Vonage) relate to this v-mail. Perhaps this one?
Per Rule 405 – and footnote 97 of the adopting release for the Securities Act reform – “written communications” includes broadly disseminated or “blast” voice mail messages. So it would seem like a blast voicemail FWP would be required to be filed (and since Vonage is an unseasoned issuer, the blast email would need to be accompanied or preceded by a prospectus pursuant to Rule 433(b)(2) if it were an FWP) – however, since the voicemail and the customer letter are essentially word-for-word, perhaps this FWP is intended to cover both forms of communication. Remember that Rule 433(d)(3) essentially says you don’t need to file if the “FWP does not contain substantive changes from or additions to a FWP previously filed.”
Or perhaps the blast voicemail is intended to be a Rule 134 communication, which now permits more procedural information about directed share programs (note the voicemail includes the statement required by Rule 134(b)(1)). It’s a brand new ballgame and the rules certainly have changed.
Don’t forget to take our new survey on how many pieces typically constitute the “disclosure package” as well as the largest disclosure package you have worked on to date – and which one of six FWPs filed to date is the most interesting.
Vonage’s Directed Share Program
Looking at Vonage’s Amendment No. 5 to the Form S-1, I see that up to 13.5% of the IPO shares are reserved for a “Directed Share Program.” This level seems a tad high, as 5-10% is the normal range (although there were deals in the ’90s with programs over 15% if I recall correctly). And the angle to offer shares through a program to customers is novel, although not unheard of as Boston Beer and Annie’s Homegrown come readily to mind.
I wonder whether this high level is due to (i) a calculation by the underwriters that VOIP subscribers tend to be more affluent and tech-savvy and therefore this is a good way to attract some new high-end retail clients to their private bank or (ii) they are worried that the deal is too large and this is a good way to soak up demand by going out to the true-believers. Based on my conversations with folks that have tried Vonage’s service, my guess is that it’s the latter (which is supported by this recent WSJ article which describes a high level of customer complaints).
This WSJ article from last week notes that the SEC has ramped up its examination of options timing and is now conducting reviews of about 20 companies. 20 companies! This truly has been shocking to me as I had assumed it would be a half a dozen bad apples at the most. It’s a good reminder to push back if you ever are placed in the position of doing something that “doesn’t feel right.”
Some companies are claiming their processes legally involved backdating. For example, in this Form 12b-25 filed by Affiliated Computer Services, the company notes “the Company has granted stock options principally utilizing a process whereby its compensation committee or special compensation committee, as applicable, would approve stock option grants through unanimous written consents with specified effective dates that generally preceded the date on which the consents had been executed by all members of the applicable compensation committee. In connection with option grants to senior executives, the historical practice was for the Company’s chairman, who during periods prior to September 2003 was also a member of the Company’s compensation committee, to engage, on a relatively contemporaneous basis with the effective date specified in the written consent, in individual telephonic discussions with each of the members of the applicable compensation committee, during which the committee member would indicate his approval of the option grants in question.” It will be interesting to see if the company’s Chair can prove he made all these phone calls for each grant.
It’s breathtaking to look at the scope of some of the restatements announced so far – UnitedHealth might restate three years worth of financials due to option back-dating, trimming off $286 million of net income! This is precisely why we included a panel on how to design internal controls for compensation matters in our “1st Annual Executive Compensation” Conference (video archive of that panel and more are in the “Internal Controls” Practice Area of CompensationStandards.com). I would imagine that auditors are paying closer attention to compensation items now.
Remember that these CEOs and CFOs had to sign a certification saying their financial statements were correct (and if backdating did occur, the financials could well have been incorrect). They also would have signed representation letters to the auditors. My guess is it will be tough for executives to argue they knew nothing about the backdating, if in fact things had been backdated. Perhaps this is why a federal prosecutor is looking into all of this.
In the “Timing of Stock Option Grants” Practice Area on CompensationStandards.com, we have posted a host of resources, including links to a number of Form 8-Ks filed by companies under investigation and the complaints filed in two lawsuits against UnitedHealth. Also some good stuff today in Jack Ciesielski’s “AAO Weblog.”
XBRL Alternatives
Following up on my blog about XBRL alternatives a few weeks ago, in this podcast, Michael Becker, Director, Global Disclosure & Financial Reporting Services of Business Wire, talks about “EarningsDirect,” an XBRL templated service being offered by Business Wire in conjunction with CoreFiling, including:
– What is the difference between what services you offer and what the SEC is trying to accomplish in its pilot programs so far?
– How have your clients found your offerings? What questions do they ask?
– How about analysts? Do they seem to be interested in using the data that your clients provide through your services?
A number of law firms (and their clients) have begun putting out press releases in advance of the deadline for filing a lead plaintiff motion, often indicating their intention to file a lead plaintiff motion.
Last week, Bernstein Litowitz Berger & Grossmann LLP and the Police and Fire Retirement System of the City of Detroit put out this release regarding the securities class actions pending against Bausch & Lomb Inc. in the United States District Court for the Southern District of New York. The release indicated the Police & Fire Retirement System’s intention to both file an expanded complaint and a lead plaintiff motion.
The previous week, Kahn Gauthier Swick, LLC and WestEnd Capital Management, LLC put out this release regarding the securities class actions pending against Pixelplus Co., Ltd., also in the Southern District of New York. This release simply noted that WestEnd had retained Kahn Gauthier to pursue claims, with no mention of lead plaintiff issues.”
