Since the December 1st effective date of Securities Act reform, lawyers have been more careful about what constitutes the “disclosure package” as more writings are being considered a potential offer and filed as a free writing prospectus. 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.
Free Writing Prospectuses: The Fun Stuff
As noted in our “Analysis of Free Writing Prospectuses” – which includes samples of the various types of FWPs filed so far – approximately 3000 FWPs have been filed with the SEC since December 1st. As part of the survey noted above, we have included a question asking which of six notable FWPs you find the most interesting. Check it out and have some fun.
If you are aware of other interesting FWPs not on this list, please drop me an email and let me know.
Survey Results: Trading Policies for Outside Directors
Our June 2005 survey on blackout practices ended with a question as to whether outside directors were subject to restrictions. Our most recent survey followed up on that theme with the following results:
1. Are outside directors at your company subject to restrictions on trading in company securities?
– Yes – 100%
– No – 0%
2. If yes, are they subject to the same restrictions as senior management?
– Yes – 93.7%
– No – 6.3%
3. Are outside directors free to trade at any time when there are no restrictions or must they also preclear their trades (eg. with the compliance or legal department)?
– Must always preclear- 88.8%
– Only needs to preclear in limited circumstances – 6.3%
– Never needs to preclear – 5.0%
4. If preclearance is required, how long is the preclearance valid?
– Less than 3 trading days – 35.5%
– 3-5 trading days – 28.9%
– 5-10 trading days – 18.4%
– More than 10 trading days – 17.1%
During his testimony last week before the US House Appropriations Subcommittee regarding the SEC’s budget, Chairman Cox discussed how the SEC has made “great strides in increasing participation” by Staffers in the Commission’s telework program. He noted that “during the first half of this year, we increased our telework participation to more than 1,100 employees. This represents an increase of 532 over the level at the start of fiscal 2005.”
He also noted that “our evaluation to date of our Virtual Workforce pilot program within the Division of Corporation Finance, we are considering options for expanding the program to other divisions and offices within the agency.” This pilot program consists of Staffers who work from home 100% of the time; whereas the telework program consists of Staffers who work from home one or two days per week. Both efforts are part of an overall initiative within the federal government to encourage more teleworking (which saves $ on office space, etc.). I’m sure there are lots of ex-Staffers out there wishing they had never left…
Comments from Corp Fin’s Office of Global Security Risk
During his testimony, Chairman Cox noted that the Office of Global Security Risk issued comments to 137 companies over the past year. I believe these comments often come in this form:
“We note the several references to your operations in ___. Please identify for us the __countries in which you have operations. If any of these operations are in a country identified by the U.S. State Department as state sponsor of terrorism, or if you have other contacts with any such country, identify each such country for us. Advise us also whether your __subsidiary is in __, a country identified by the U.S. State Department as a state sponsor of terrorism.
If any of your operations or other contacts is with a country identified as a state sponsor of terrorism, please advise us of the materiality of those contacts to the Company, and give us your views as to whether those contacts constitute a material investment risk for your security holders.
If you have contacts with more than one such country, provide the requested information with respect to your contacts with the countries individually and in the aggregate. In preparing your response, please consider that evaluations of materiality should not be based solely on quantitative factors, but should include consideration of all factors, including the potential impact of corporate activities upon a company’s reputation and share value, that a reasonable investor would deem important in making an investment decision.”
On a related note, last Thursday, the SEC jointly released this special study with the Federal Reserve and Office of the Comptroller regarding sound practices to strengthen the resilience of the US financial system.
Grasso Pay Package ‘Shocked’ Board
Couldn’t resist this short article from Friday’s WSJ describing the NYSE Board’s “Holy Cow” moment: “A newly surfaced document calls into question whether the board of the New York Stock Exchange fully understood the scope of the pay package being offered to former Big Board boss Dick Grasso. That $188 million pay package is the subject of a lawsuit against Mr. Grasso by New York state’s attorney general, Eliot Spitzer, whose case argues that such compensation was inappropriate for the head of a what was then a nonprofit organization.
The NYSE’s board “did not receive detailed information from the compensation committee,” according to internal notes prepared by former New York Stock Exchange Compensation Committee Chairman H. Carl McCall and his assistant in 2003. Mr. McCall’s notes said he realized that the board was in the dark when he started chairing the NYSE’s compensation committee in June 2003. The NYSE is now part of publicly listed NYSE Group Inc.
The notes became public by court order Wednesday after they came up during Mr. Spitzer’s deposition of Linda Scott, Mr. McCall’s assistant. They indicate that many board members were “shocked” when Mr. McCall gave them a “heads up” on the size of Mr. Grasso’s pay package.”
da Vinci Code Judge Embeds Own Code in Ruling
Who says that lawyers don’t have a sense of humor? UK Judge Peter Smith, who decided the case brought against Dan Brown involving “The Da Vinci Code,” embedded a coded message in his ruling: smithcodeJaeiextostpsacgreamqwfkadpmqz. This coded message has now been cracked. Judge Smith’s clerk confirmed that the judge is a “humorous type of person.”
Last Monday, I blogged about the new risk factor disclosure requirement to consider for the 10-Qs being filed over the next few days. A subsequent question was asked in our “Q&A Forum” about what to do if a company has no material changes to the risk factors described in its last Form 10-K (see #1712 in the Forum).
I like the approach that Coke took to this issue. As reflected in its Form 10-Q filed recently, Coke directs readers to its 10-K without expressly stating that there was “no material change.” This is the best approach I’ve seen so far. Here is what Coke disclosed:
“In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.”
More from the PCAOB on Inspections and Internal Controls
Possibly in response to the rising internal control audit costs, the PCAOB issued a statement yesterday on the approach it intends to take with regard to inspections of internal control audits during this year’s inspection cycle, which commences this month. The key emphasis will be on the efficiency of the auditors’ performance of internal control audits and the inspectors will be delving into whether the auditors have achieved the objectives of Standard No. 2 with the least expenditure of effort and resources. This will include an examination of how well auditors implemented the PCAOB’s guidance from last May (which was supplemented by the November 30, 2005 Report on the Initial Implementation of PCAOB Auditing Standard No. 2.)
This year’s inspection cycle will include the annual inspections of the nine firms – eight U.S. and one Canadian – that audit more than 100 public companies (as required per SOX Section 104). Additionally, the PCAOB will continue its three-year cycle of inspections of firms that audit 100 or less public companies.
Also yesterday, the SEC and PCAOB announced the panels for their May 10th joint roundtable on the second year of internal control reporting. A related briefing paper and agenda were also issued by the SEC.
Last Friday, the NYSE updated its Section 303A Annual and Interim Written Affirmations and Section 303A Annual CEO Certification for domestic companies. The changes appear to be minor, and include adding the company’s ticker symbol, eliminating references to the transition period for classified boards that expired last year and simplifying text.
Here is a full comparison of the 2006 forms to the 2005 forms. Note that if your company has already submitted its 2006 Section 303A Annual Written Affirmation, a new submission is not required.
According to ISS’ “Corporate Governance Blog,” the Executive Council of the Delaware State Bar Association’s Corporate Law Section has endorsed draft legislation to amend the Delaware General Corporation Law to enable shareholders to introduce an irrevocable change of bylaws on director elections, as well as provide for an irrevocable resignation of directors who fail to get a requisite number of votes. The proposal does not modify the default plurality standard.
The proposal would amend paragraph 216 of Section 5 of the DGCL to provide that a company bylaw adopted by a vote of stockholders that prescribes a required vote for director elections cannot be altered by the board without shareholder consent.
Another proposed revision seeks to get around the restrictions of Delaware’s “holdover” rule by adding a new provision that a director resignation may be made effective upon the occurrence of a future event or events, coupled with authority granted in the same section to make certain resignations irrevocable.
The proposed bill will be submitted to the Delaware legislature in the next week or two – and then it must be endorsed by the full Bar Association and then passed by the Delaware legislature before becoming law.
49% Support for Binding Majority Vote Proposal
Here is another item from ISS’ “Corporate Governance Blog“: This season’s first binding proposal seeking majority voting received more than 49% of votes cast at Honeywell this week, according to the proponent, AFSCME.
That showing was significantly higher than the 20% vote received by a binding AFSCME proposal at Paychex in October. The Honeywell vote is also noteworthy, because the company had adopted a director resignation policy. Before the April 24 vote, the best showing for a majority vote resolution at a company with a resignation policy was the 45% support at Hewlett-Packard in March for a non-binding proposal by the United Brotherhood of Carpenters and Joiners.
Majority Vote Standards in Articles of Incorporation?
And one last item from ISS’ “Corporate Governance Blog“: “Progress Energy filed in its proxy materials what is believed to be the first management proposal to change a company’s articles of incorporation to require a majority vote for the election of directors. Management is also proposing a resolution to hold annual board elections. The North Carolina utility’s annual meeting is May 10.
More than 20 companies have adopted a majority vote standard this year, primarily by revising their bylaws. Progress Energy appears to be the first to seek to make the change in its articles of incorporation. In North Carolina, as in most jurisdictions, articles of incorporation can only be amended if the change is proposed by the board and endorsed by shareholders, whereas bylaws can generally be revised by the board alone.
The Progress Energy proposal requires a majority of votes cast to pass, and abstentions and broker non-votes will not count as votes cast or against, the proxy statement notes. If approved, the new standard would apply for the company’s 2007 annual meeting. To overcome the North Carolina “holdover rule” which requires a director to serve until his or her successor is elected, the company adopted a director resignation policy in its corporate governance guidelines, which would become effective upon filing of the amended articles of incorporation.
Action on the resignation is left up to the governance committee, but if its members fail to gain majority support, the independent directors who did get elected can appoint a committee of independent directors to make a recommendation on the tendered resignation.”
May E-minders is Up
The May edition of our monthly newsletter is now available – sign up today to receive it on a complimentary basis.
Can anyone make heads or tails of this amended Form 8-K filed by National Presto Industries on April 25th (original filing date was April 13th). Appears that the company tried to set aside instructions from the SEC’s Division of Investment Management Staff, after which things got stranger and stranger…check out the 13 exhibits consisting of correspondence – including emails – between the SEC Staff, the company and the company’s independent auditor. This is not the company’s first scrape with the SEC; see this press release from 2002.
SEC Chairman Cox Testifies About Disclosure on the Hill
On Tuesday, Chairman Cox testified before the US Senate Banking Committee on the broad topic of improving financial disclosures. Here is a copy of his written testimony – and the FEI “Section 404 Blog” has notes about his oral comments, some of which address internal controls.
Last Thursday, the SEC finally approved the PCAOB’s auditor independence and ethics rules, which had been adopted by the PCAOB in final form last July (subject to the SEC’s blessing). In addition to addressing, pre-approval of tax services to audit clients, the new rules prohibit contingent fee arrangements for services provided to audit clients.
As noted in the Gibson Dunn memo posted in our “Auditor Independence ” Practice Area, the PCAOB’s new rules include several important matters for issuers to consider. As noted in this memo, “the PCAOB’s new rules include specific guidance regarding the manner in which audit committees are to pre-approve permissible tax services to be performed by the outside auditor. The rules also restrict an outside auditor from providing tax services to persons at an audit client who perform a “financial reporting oversight role” (other than directors). In addition, the PCAOB’s new rules provide that an auditor will not be deemed independent if the auditor (1) plans, markets or opines in favor of certain types of tax transactions for the audit client, or (2) provides tax services to an audit client for a contingent fee.”
According to this press release, Corp Fin’s long-standing practice of executing effectiveness orders in triplicate is going the way of the dodo bird. For those not doing deals, these orders are executed by Assistant Directors in Corp Fin, pursuant to delegated authority from the Commission, to officially declare a registration statement “effective.”
The orders are printed on old-fashioned triplicate paper, the kind you have to type up on a manual typewriter – and the typing permeates through the three layers, although the last layer is always a little hard to read. One copy is sent via regular mail to the issuer, one layer goes into some type of permanent record and one copy is probably sold on e-Bay (I am obviously in a joking mood today).
I have to be honest here, it saddens me to see this development as I view the time-honored ritual of typing up an effectiveness order and cornering an Assistant Director to sign it as one of the last remaining vestiges of the “old days.” Alas, no more microfiche, no more mimeograph. The SEC Historical Society should take a snapshot of a junior Staffer leaning over an Assistant Director’s desk with the multiple pages of an effectiveness order flapping in the wind.
As for the notion of a registration statement “going effective,” it has always struck me as odd that a deal could be held up on Wall Street because a junior Staffer was down at Starbucks throwing down a double latte rather than shepparding the proper papers through this process. In other words, unless the registration statement is on a form that allows for automatic effectiveness, a deal can’t go forward until the order is officially executed (even though all comments already are cleared by the Staff – or the registration statement was selected for a “no review” in the first place!). A very mechanical process – and one that will partially remain after this new development; now it will just be an electronic process rather than a paper one.
For you former (and current?) Staffers out there, remember shopping for an Assistant Director that might be amenable to signing your order if your own AD was out of the office? Some ADs had the reputuation of being difficult, such as quizzing you on the contents on the registration statement even though it was just a no-review! In hindsight, they probably were the smart ones – they just wanted the reputation of being unapproachable so that they weren’t hassled…
SEC Still Has Its Own Material Weaknesses
Last Friday, the GAO released this 29-page report covering the SEC’s financials for fiscal years ’05 and ’04 and noting that the SEC still has material weaknesses in its internal controls. The report concluded that many of the material weaknesses carried over from an earlier GAO report that I blogged about many moons ago. In the report, the GAO made 14 recommendations about how the SEC could improve its internal controls.
CalPERS Demands Meeting with UnitedHealth Group’s Compensation Committee
Wow! I was quite surprised to read – in this WSJ article and otherwise – that CalPERS had sent a letter to the head of UnitedHealth Group’s compensation committee to demand a telephonic meeting before the company’s annual meeting (which is next week – should be a humdinger) to learn more about the details of the company’s alleged options backdating practices. I know that activist funds have demanded meetings with directors before, but I can’t quite recall one soley over compensation pay practices nor one that was reported in the mainstream press.
Perhaps this is the start of a new practice by large shareholders? Of course, this is one of the more egregious examples of pay practices, as the lawsuits already have been filed – and UnitedHealth Group is making governance changes as fast as it can. [Speaking of UnitedHealth Group, read my reply contained in Saturday’s WSJ Online to last week’s Alan Murray column.]
If you intend on participating, please download the three sets of talking points before the webcast starts.
The “3rd Annual Executive Compensation Conference”
On CompensationStandards.com, we have just posted the agenda for the “3rd Annual Executive Compensation Conference.” As the more than 3000 that took in each of the first two conferences can attest, more practical guidance is gleaned from this conference than any other. And with the SEC’s new proposals raising the profile of compensation practices to even higher heights, you will not want to miss this year’s Conference.
This year’s Conference will be held on Thursday, October 12th in Las Vegas – and by nationwide live video webcast. CLE credit in most states – and ISS credit for directors – is available. Register today!
Early Bird Discount: Act Now!
Act before May 31st and receive an additional 50% off the firmwide rate to the “3rd Annual Executive Compensation Conference.” This special rate of $995 will enable everyone in your company or firm to access the live video webcast of the Conference (as well as access the video archive of the Conference and all the course materials). This is a tremendous savings for both law firms and companies whose directors need to get up-to-speed. Applies to companies and firms that have a firmwide license to CompensationStandards.com.
According to ISS’ “Corporate Governance Blog,” Sprint Nextel shareholders supported an AFL-CIO shareholder proposal on majority voting at its annual meeting last week with 66.4% of the votes cast. That follows a 61.7% showing at Novell on April 6th for a United Brotherhood of Carpenters and Joiners proposal. These early votes suggest that majority voting will receive significant investor support this season at companies that have not adopted board election reforms, such as director resignation policies and majority vote standards.
However, majority vote proposals continue to receive less support at companies that have adopted resignation policies (which companies retained plurality voting). Last week, similar proposals received 37.5% at Wachovia and failed to reach a majority at Burlington Northern Santa Fe. Electronic Data Systems reported that a majority elections resolution got 32% support, but that tally counted abstentions as votes against. In February, all three companies director resignation policies.
These votes are consistent with earlier results, where majority vote proposals failed to pass at Morgan Stanley, Hewlett-Packard, Ciena and Analog Devices, all of which had adopted resignation policies. More to come: majority vote proposals will appear on the ballot at 24 companies this week alone!
Final Report from the SEC’s Small Business Advisory Committee
Yesterday, the SEC’s Small Business Advisory Committee submitted its 241-page final report to the SEC. The FEI’s “Section 404 Blog” has a summary of its contents. Here is a statement from Chairman Cox on the report.
What Now After Dabit
There’s been lots of commentary after the recent US Supreme Court’s case on SLUSA, Merrill Lynch v. Dabit (including all these law firm memos). In this podcast, John Stigi of Sheppard Mullin Richter & Hampton provides some insight into the decision – and one more coming up – and analyzes the lay of the land in its aftermath, including:
– What did the US Supreme Court decide in Dabit? Why is the decision important?
– What other US Supreme Court case will be decided soon that might further impact securities class actions?
– What do you think the plaintiffs’ bar plan of action might be now?
Study: AIM Market Could Be the New Nasdaq
According to this Reuters article, a recent study suggests that the London Stock Exchange’s AIM market is the new Nasdaq, one reason why the Nasdaq has bought a 15% stake in the LSE. Learn more about what AIM is all about – and how (and why) a company might list on AIM – on our May 11th webcast: “How to Go Public on the London Stock Exchange’s AIM.”
Listening to Meredith Cross of Wilmer Hale at a local seminar last week, I was reminded that, under the new ’33 Act reform, companies are now grappling with how to handle the risk factor discussion in their upcoming Form 10-Qs.
For those of you that just filed Form 10-Ks recently, you will recall that the reform amended Form 10-K to require companies to describe – under the caption “Risk Factors” and only “where appropriate” – the risk factors described in S-K Item 503(c) that are applicable to the company. As the adopting release clarified, “a risk factor discussion in a Form 10-K may not be necessary or appropriate in all cases, depending on the issuer.”
Now, companies must consider another new disclosure requirement – to “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K.” A challenge is presented because the SEC stated in the adopting release that “we discourage, unnecessary restatement or repetition of risk factors in quarterly reports.” Thus, the SEC doesn’t appear to want a “cut and paste” of the 10-K risk factor section in the 10-Q, but rather an update of any risk factors described in the 10-K.
It remains to be seen how closely the SEC Staff will enforce this “discouragement,” as some companies may wish to follow their established routine of including all risk factors in each Form 10-Q, either for forward-looking safe harbor purposes or for the benefit of investors who may not know that they otherwise would need to search back through earlier filings to determine what other risks exist for that particular company.
To help you sort through this predicament, in our “Form 10-Q” and “Securities Act Reform” Practice Areas, we have posted a list of companies that already have been faced with complying with the new 10-Q requirement.
Are These Hedge Fund Results Real?
Wondering where the next large scale fraud is going to come from? I think Floyd Norris might have hit the nail on the head in his column in Friday’s NY Times. Maybe I’m getting paranoid in my old age, but there always is a “next” big wave of fraud and it seems like it usually emanates from the latest “too good to be true” investment vehicle.
Handling Whistleblowers
In this podcast, Phil Johnston, Special Counsel of Nexsen Pruet, a former CEO of two public companies and a co-author of the Corporate Governance Leadership Blog, provides some insight into what works in implementing a whistleblower compliance program, including:
– In the overall scheme of compliance, how important is Section 301(4) of Sarbanes-Oxley?
– Not-for-profits are also implicated by Sarbanes-Oxley as Section 301(4) makes it a crime to retaliate against a whistleblower. How have not-for-profits reacted to this new law?
– Based on your own experiences from serving on a director on five different public company boards, what do you see as the biggest mistakes that companies typically make in implementing their whistleblower compliance programs?
– I understand you have done research in the whistleblower cottage industry, including visiting a number of service providers. What should boards consider in selecting a service provider?
Yesterday, the SEC’s Small Business Advisory Committee held its final meeting. The Committee has until April 23rd to formally submit its final report with any finishing touches to the 150-page draft final report that was approved yesterday. The ball is now in the SEC’s court; Corp Fin Director John White remarked during the meeting that the SEC will have an open mind regarding the Committee’s recommendations. No timetable for that consideration was announced.
Learn more from FEI’s “Section 404 Blog,” including their two pages of notes from the meeting.
17,000 Comments on the SEC’s Executive Compensation Proposal!
With the April 10th deadline safely behind us – although comment letters will continue to dribble in, such as the forthcoming ABA letter – I thought it would be a good time to link to letters submitted from the more noteworthy market participants rather than have you slug through the nearly 17,000 letters that have poured in on this hot topic.
That number is a little misleading because the AFL-CIO was successful in having its members send in over 16,000 letters of this variety! Quite an impressive mobilization of the troops (unless software was used to bombard the SEC with a bunch of identical comment emails – wonder if that’s possible?)!
The comment letters listed below are in no particular order (and apologies to the many others that submitted letters – it’s dizzying to scroll through and pick through the list of comment letters on the SEC’s site):
