I learned something the other day during a conversation about majority voting with John Johnston of Morris Nichols that I think is worth raising since the majority vote movement is in full swing. Morris Nichols has just written a memo entitled “The Nuts and Bolts of Majority Voting” that raises some significant concerns about the effectiveness – under Delaware law – of certain by-law amendments being adopted to implement majority voting.
As we know, a number of companies have adopted some form of a majority vote standard – and of those, some have elected to amend their by-laws to accomplish that, instead of amending their governance guidelines. For those Delaware corporations that have used by-law amendments like the one below, or are contemplating doing so, it sounds like a conversation with Delaware counsel may be in order. I just looked through Broc’s spreadsheet on those companies with majority voting standards and picked out this representative by-law provision:
“Except as provided in Section 3 of this Article II, each director shall be elected by the vote of the majority of the shares cast with respect to the director at any meeting of stockholders for the election of directors at which a quorum is present, provided that if at the close of the notice periods set forth in Section 13 of Article III, the Presiding Stockholder Meeting Chair (as described in Section 14 of Article III) determines that the number of persons properly nominated to serve as directors of the Corporation exceeds the number of directors to be elected (a “Contested Election”), the directors shall be elected by a plurality of the votes of the shares represented at the meeting and entitled to vote on the election of directors. For purposes of this Section, a vote of the majority of the shares cast means that the number of shares voted “for” a director must exceed the number of votes cast “against” that director. If a director is not elected in a non-Contested Election, the director shall offer to tender his or her resignation to the Board of Directors. The Governance and Nominating Committee of the Board of Directors, or such other committee designated by the Board pursuant to Section 5 of this Article II for the purpose of recommending director nominees to the Board of Directors, will make a recommendation to the Board of Directors as to whether to accept or reject the resignation, or whether other action should be taken. The Board of Directors will act on the committee’s recommendation and publicly disclose its decision and rationale within 90 days following the date of the certification of the election results. The director who tenders his or her resignation will not participate in the Board’s decision with respect to that resignation.”
The Morris Nichols memo points to those features of the current by-law provisions that are troublesome – and offers some alternatives. For example, they note that by-laws requiring a director to resign appear to be contrary to Section 141 of the DGCL, and that the new provision of Section 141(b) allows a director to tender an irrevocable resignation conditioned on the failure to receive a specified vote.
In other words, there is a way to accomplish the goal, but it requires the director to have made an election to resign in advance. For example, the annual D&O Questionnaire could include an advance irrevocable election to resign made by each director that the Board would then use if the director failed to gain the required vote. In addition, they raise concerns about the recusal provision and the language about contested elections.
Nasdaq Proposes Consistency Change for Related-Party Transactions
Last week, Nasdaq filed a proposed change to the threshold in its director independence rule from $60,000 to $120,000 to be consistent with the SEC’s new related-person rules.
Transcript Available: John Olson on “The Board Presentation”
Due to popular demand, we have posted a transcript of John Olson’s keynote presentation from our September executive compensation disclosure conference. The video archive of John’s remarks is still available at no charge – and continues to get rave reviews!
Last week, John White delivered another speech in his series on the SEC’s new executive compensation rules. Speaking before a group of CFOs, John discussed:
– CFOs’ involvement in the substance of disclosure, particularly the new Compensation Discussion & Analysis
– CFOs’ involvement in refining and adjusting disclosure controls and procedures
– CFOs’ involvement with compensation committee and its new Compensation Committee Report
What is a Director’s Duty to Go Beyond Management’s Board Book?
In the General Motor’s recent development – Jerome York quitting the board (York was placed on the GM board by 9.9% shareholder Kirk Kerkorian) – the issue of what is a director’s duty to look beyond the board materials prepared by management is raised. York claims one of the reasons he quit was because “I have not found an environment in the board room that is very receptive to probing much beyond the materials provided by management (and too often, at least in my experience, materials are not sent to the board ahead of time to allow study prior to board discussion).” This is an excerpt from York’s resignation letter filed as an exhibit to this Form 8-K. An interesting question that is discussed, among others, in our “Board Materials” Practice Area.
New Whistleblower Decision Provides Clarification on Protected Activity
From a recent Gibson Dunn memo (related memos are posted in our “Whistleblowers” Practice Area): In one of the most important Sarbanes-Oxley ” “whistleblower” decisions to date, the Department of Labor’s Administrative Review Board (“ARB,” or “Board”) has reversed the decision of an Administrative Law Judge and ruled that FLYi, Inc. did not violate the Act. Platone v. FLYi, ARB Case No. 04-153 (September 29, 2006). The case, which was handled before the ARB by Gibson, Dunn & Crutcher LLP and Ford & Harrison LLP, provides important new guidance on what constitutes protected “whistleblowing” under Sarbanes-Oxley (“SOX”).
The complainant, Stacey Platone, was employed as a labor relations manager for FLYi (then known as Atlantic Coast Airlines). As part of its collective bargaining agreement with the Air Line Pilots Association (“ALPA”), FLYi paid certain pilots for time that they spent on union activities when they otherwise would have been flying. The union was then to reimburse the Company for this “flight pay loss.” Platone alleged – and reported to her superiors – that some pilots were abusing the system by intentionally scheduling flight time on days they otherwise would have taken off, but that they knew were reserved for union business. By then dropping the flights to attend to union-related business, Platone charged, the pilots were able to collect flight pay.
At about the same time, it was learned that Platone was romantically involved with a pilot who was an influential member of ALPA. After an investigation, her employment was terminated due to what the Company judged to be an undisclosed conflict of interest.
Platone filed suit under SOX, claiming that her employment was terminated because she had reported mail, wire, and securities fraud within the meaning of the Act. Specifically, she claimed, the alleged flight loss abuses were improperly funneling money to certain pilots at the expense of the union or – in the event the union refused reimbursement – at the expense of the Company. The ARB, overruling an earlier decision by an Administrative Law Judge, concluded that Platone’s internal reports did not constitute protected activity under SOX, and that FLYi’s decision to terminate her therefore did not violate the Act.
The ARB’s decision provides important guidance on protected activity under SOX:
– By its terms, protected activity under SOX includes reporting what one reasonably believes to be a violation not only of the securities laws, but also of the federal criminal mail, wire, and bank fraud statutes. However, the ARB made clear in Platone, an allegation of mail or wire fraud “must at least be of a type that would be adverse to investors’ interests” in order to be protected by SOX. Slip Op. at 15. Thus, in this case for example, to the extent Platone was reporting potential losses to the union (which reimbursed the flight pay loss), she was not engaged in Sarbanes-Oxley protected activity.
– Sarbanes-Oxley protected activity “must relate ‘definitively and specifically’ to the subject matter of the particular statute under which protection is afforded,” the Board said. The Act “does not provide whistleblower protection for all employee complaints about how a public company spends its money and pays its bills.” Id. at 16 (emphasis added). “Thus, for example,” the Board continued, “an employee’s disclosure that the company is materially misstating its financial condition is entitled to protection under [SOX].” Id. at 17. In this case, however, Platone “raised a possible violation of internal union policy and she expressed concern on how this might affect [FLYi’s] ability to collect a debt, but nothing approximating fraud against shareholders.” Id. at 18.
– Third, the ARB made clear, where the purported protected activity involves reported fraud against shareholders, the materiality of the potential loss is significant. The materiality of a misrepresentation or omission is a “basic element[ ]” of a securities fraud claim, the Board elaborated, but “Platone testified to less than $1,500 of potential losses” to FLYi. “It is unlikely that a reasonable shareholder would find a loss of less than $1,500 material.” Id. at 21. This statement by the Board contrasts with earlier pronouncements by Labor Department administrative law judges that materiality is irrelevant to SOX whistleblower claims.
Because Platone did not engage in protected activity, the ARB reversed the decision of the Administrative Law Judge and dismissed the complaint.
The ARB declined to address other issues in the appeal, including the important question of when a parent company that does not directly employ the complainant is a proper respondent under Sarbanes-Oxley. In another case before the Board, the Solicitor of Labor has submitted an amicus brief arguing that the familiar four-part “integrated employer” test should determine whether a company is a covered employer under the Act. See Brief of the Assistant Secretary of Labor for Occupational Safety and Health, Ambrose v. U.S. Foodservice, Inc., ARB Case No. 06-096 (Sept. 1, 2006).
On both TheCorporateCounsel.net and CompensationStandards.com, we have posted an updated sample D&O questionnaire; updated for the new SEC rules. Note that this is a mere “sample,” so the typical disclaimers apply…
Sample Compensation Disclosure Checklist
Thanks to Todd Rolapp of Bass Berry, I also have posted a “compensation disclosure checklist” in a Word file in “The SEC’s New Rules” Practice Area of CompensationStandards.com. This is not a mock-up; rather it’s a document that can be used as a starting point to help get a head start on preparing next year’s proxy – you can use it to assign sections to the appropriate persons within the company responsible for gathering certain types of data (and it can help get people motivated and not drag their feet in getting this big job done).
Section 409A Deadlines Extended!
On Wednesday, the IRS and the Treasury Department issued a notice which deals with the Section 409A regulations, including discounted stock option grants (here are some memos analyzing this notice). Here is some analysis from “Mike Melbinger’s Compensation Blog” on CompensationStandards.com: I try not to blog twice in one day, but this news is too good not to share. Just moments after I sent my previous Blog, the IRS published Notice 2006-79, which provides transition relief from the December 31, 2006 deadlines of 409A by:
– Announcing that the final regulations will not become effective until January 1, 2008,
– Generally extending through 2007 the transition relief provided for 2006 in the preamble to the proposed regulations except with respect to certain discounted stock rights,
– Providing additional transition relief for certain payment elections in linked plans and certain collective bargaining arrangements, and
– Extending the amendment date for certain plans that took advantage of transition relief provided for 2005.
As promised, we have posted our Quick Survey on “What is a Perk?” with fourteen different scenarios for your input. I received dozens of other suggested scenarios from members – but I didn’t want to overwhelm you, so I picked the ones that appeared most likely to be universally applicable. Please take a moment to complete the survey now.
And thanks to Brink Dickerson of Troutman Sanders, we have posted this list of potential perks in CompensationStandards.com’s “Management Perks” Practice Area to help you identify the types of items/services you should be on the lookout for as you enhance your disclosure controls & procedures.
“Perk Tester” Flow Chart, Sample Board Presentations and More
In “The SEC’s New Rules” Practice Area on CompensationStandards.com, I continue to post all sorts of useful information, including a few sample PowerPoint presentations that can be tailored for a board presentation and a nifty flow chart from Lou Rorimer of Jones Day to help ascertain “what is a perk?”
Emissions Reduction as a Corporate Governance Issue
One area that I intend to cover more are the “social” issues that have emerged as real business issues. In this podcast, David van Hoogstraten of Hunton & Williams explains how emissions reduction has emerged as a corporate governance issue, including:
– In what ways are greenhouse gas emissions reductions now seen as a corporate governance issue?
– What are shareholders doing to push for more disclosure of emissions?
– How are the markets and investment banks fostering sustainable production as a hallmark of the well-governed company?
– Why do we see more internal evaluations of companies’ sustainability efforts?
– Why should lawyers be involved in the preparation of public environmental reports?
A few weeks back, the WSJ ran this article about the SEC Staff’s push for more companies to disclose their restatements under Item 4.02 of Form 8-K. Apparently, a lot of companies are restating without filing a Item 4.02 8-K – rather these companies are including the new financials in their next 10-Q or 10-K, despite the fact that FAQ 1 of the SEC’s 8-K FAQs says you can’t do that.
The Staff is busy issuing comment letters to companies who have not filed the Item 4.02 8-K, because investors rely on seeing a 8-K to signal that a restatement has taken place. The comments often ask the reasons why a Form 8-K wasn’t filed – rather than demand that one be made – because Item 4.02 isn’t triggered for every restatement, just “material” ones. So companies get an opportunity to argue why a 8-K wasn’t necessary.
Of course, companies aren’t going to always win this argument. Apparently, Inter-Tel (a company quoted in the WSJ article) apparently didn’t file the 8-K because they determined that the changes made in the restatement were immaterial to any prior quarter or reporting period, but the Staff reportedly asked that they go back and highlight the restatement in a specific filing.
How Does SAB 108 Work Here?
Juxtapose these stealth restatement situations to newly-issued SAB 108 which states, as noted in this press release: “The Staff will not object if a registrant records a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial – quantitatively and qualitatively – based on appropriate use of the registrant’s previous approach.” SAB 108 describes the circumstances where this would be appropriate as well as the required disclosures that must be made.
I guess the bottom line here is to go ahead and clean up the balance sheet to correct those immaterial errors – but if you determine that you need to restate, don’t skip the 4.02 8-K filing.
New FAS 158 on Pension Plan Accounting
On Friday, the FASB issued FAS 158 on “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Here is a summary of FAS 158. This is quite a complex statement that covers retiree health care benefits in addition to pension plans. The impact on companies will vary – and could be quite significant for some. The resulting balance sheet changes could have effects on contractual provisions (e.g. loan agreements) and measurements for other purposes, such as net worth or shareholder’s equity.
FAS 158 requires employers to recognize the overfunded or underfunded status of a defined benefit post-retirement plan (other than a multi-employer plan) in the statement of financial position, measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation. It also would recognize – as a component of other comprehensive income, net of tax – the gains or losses and prior service costs or credits that arise during the period, but pursuant to FAS 87 and 106 are not recognized as components of net periodic benefit cost. There also are disclosure requirements.
The recognition and disclosure requirements are effective for fiscal years ending after December 15, 2006 – so it will apply this year for calendar year companies. There are separate effective date and transition provisions for a new measurement date requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position.
FAS 158 is phase one of the FASB’s project on pension and other post-retirement benefit plans. Phase two will address other issues, including income statement treatment of pension plan adjustments.
As overvoting has been my pet peeve for quite some time, I’m pretty excited about tomorrow’s webcast – “Understanding Overvoting and Other Tricky Voting Issues” – where a group of experts will educate us about what overvoting is all about and why you should care.
Education is important because there is so much misinformation out there on the topic and it’s pretty hard to pin down exactly what is going on “behind the scenes” when it comes to director elections. For example, did anyone find it peculiar how it was reported that it would take one month for tabulators to finalize the results of the recent contested election at Heinz? One month!
As evident from this press release, the NYSE is paying more attention to overvoting issues these days as it recently fined UBS, Goldman Sachs and Credit Suisse for permitting overvotes to occur. Here is an excerpt from the NYSE’s press release:
“There are no standard industry procedures that govern a Tabulator’s approach to dealing with over-voting. Depending upon the procedure implemented by the Tabulator, certain customers’ voting instructions may not be represented as originally given. Enforcement’s investigations have not uncovered any instance in which an over-vote improperly affected the outcome of a proxy vote or any instance in which a shareholder who attempted to vote was disenfranchised.
However, by submitting an over-vote, a member firm subjects its customers to the risk that the Tabulator would not accept their votes. Through an under-vote, a member firm subjects its customers to disenfranchisement by the broker-dealer’s own actions.”
In my view, it’s only a matter of time before an overvote will “improperly affect the outcome of a proxy vote” as majority vote standards become more common and investors increasingly challenge boards and management. At a minimum, the time clearly has arrived for standard industry procedures! Floyd Norris of the NY Times recently focused on overvoting and related issues in this column, “Time to Bring Share Lending Into the Light.” And we have posted some overvoting articles in our “Annual Stockholders’ Meetings” Practice Area.
The Impact of Short Selling Tactics
Among the topics to be discussed on tomorrow’s webcast is how lending shares and short selling plays into the quagmire of vote outcomes. Naked short selling has caught the attention of the SEC, as the agency recently proposed to amend Regulation SHO (see our new “Short Sales” Practice Area). And there are groups whose sole purpose is to tackle this issue, such as the National Coalition Against Naked Shorting.
Companies with smallish floats likely are the most vulnerable to short selling tactics in elections. One of our webcast panelists, Carl Hagberg, supports that view and disagrees with those that assume that small floats would lead automatically to higher borrowing costs. Carl believes that those that don’t think illiquid companies are vulnerable fail to account for the facts that (a) you only need to borrow stock for one day (ie. the record date) to get the votes; (b) a lot of “lenders” never even have stock to “lend” – and no one can ever tell since the “loan” is effected by a mere “bookkeeping entry”; and (c) there no penalties if the stock never really moves (who’s checking? no one!) – or if bookeeping “errors” are simply reversed later! Carl’s latest issue of his Shareholder Service Optimizer shows how there is fairly compelling evidence that the Hewlett-Packard/Compaq merger would not have been deemed to have been approved by shareholders “but for” overvoting making the difference.
There clearly are a lot of thorny issues involved – although why some of these issues are thorny is beyond me. For example, if the brokers can keep track of who gets a dividend, why can’t they keep track of who has voted? And why is the disclosure about the ramifications of having one’s shares lent so unclear in most brokerage agreements (what a place for plain English!)? We shall learn more about these tricky issues during tomorrow’s webcast.
October Eminders is Up!
The latest issue of our monthly email newsletter is now posted.
Responding to numerous member requests who are grappling with “what is a perk?,” I am in the process of compiling items/thresholds to include in an online survey to help gauge what consensus there might be among practitioners in this area. Please email me any items/thresholds that you want folks to vote upon – your identity will remain anonymous.
At Last! An Opportunity to Comment on ISS’ Proxy Policies
Last week, ISS commenced its first-ever public comment period, allowing anyone to provide input into its 2007 proxy policies. In the past, input was privately solicited from a small diversified group of market players. In my mind, this comment opportunity is at least as important as the SEC’s rule-making process. With director elections no longer routine, ISS’ proxy policies are more important than ever.
The comment period ends next week on October 11th. ISS has made it very easy to submit comments – you can submit your thoughts using their online form; no need to write a separate letter. There are online forms for these six topics:
And ISS wants to hear from everybody, individuals as well as groups. Take advantage of this opportunity or else they might conclude that we don’t want it and not offer it next year! ISS intends to announce its 2007 policies in mid-November.
Investors: Mad about Backdating and Ain’t Gonna Take It Anymore
Speaking of ISS, I taped the bonus panel for the “3rd Annual Executive Compensation Conference” with Pat McGurn and Martha Carter of ISS last week and some of the information was staggering. I knew backdating was a big deal – but getta load of this:
“In ISS’ 2006 Policy Survey, 85% of the respondents indicated that backdating of stock options is very problematic, on a scale of “not at all problematic” to “very problematic.” In situations where a company admits to backdating, 78% of the respondents supported recoupment of the windfall associated with the backdating as a remedy at the company. (Other actions included resignation of any executive involved, including the CEO, and the resignation of the company’s chair of the compensation committee.)” Clawback provisions clearly are “in.”
Next Thursday, hear this ISS bonus panel as well as catch the panel about “how to do clawbacks?” On October 12th, join the 2000 that will participate in Las Vegas – or the more than 3000 that will watch by nationwide video webcast – for the “3rd Annual Executive Compensation Conference.” To be able to understand the practices that you will be describing in the CD&A, etc., you need to attend this major one-day conference that has become a “must” for all directors and all those involved with executive compensation. Note that registration rates are more than half-off for CompensationStandards.com members.
By looking at our agenda for this Conference, you can see that this year’s conference will be even more crucial than before to watch live or by archive. Register today.
Keeping Abreast with Mark Borges: More Analysis and SEC Guidance
I just posted an October Supplement on CompensationStandards.com that compiles the latest blogs from Mark Borges. Mark continues to amaze with his daily insights into the new executive compensation rules, including some recent notes he took on an ABA teleconference in which he participated with Corp Fin’s Associate Director Paula Dubberly.
With more attention being paid to director compensation – and in light of the SEC’s revised requirements for disclosure of director compensation – boards should be re-examining all director perks that previously seemed harmless and determine whether their disclosure is worth the perk. As part of this re-evaluation, companies should ensure their disclosure controls & procedures capture all gifts provided to directors.
As I mentioned at our Conference a few weeks ago, companies should consider adopting a policy regarding gift-giving to directors to assist those responsible for collecting perk data and drafting the proxy disclosures perform their job. Of course, this policy can be fairly simple if the company’s policy is that directors are not permitted to receive any gifts over a de minimus value – as some governance experts believe that there aren’t any sound reasons for directors to receive gifts from people outside the company or even within the company (unless they receive something of insignificant value, such as a token gift at a dinner).
And companies are acting to rein in perks: Mark Borges recently noted in his blog that Molex’s proxy statement disclosed that the compensation committee had recently adopted a perquisite pre-approval policy. Under this policy, certain (unspecified) perquisites and maximum amounts for such perquisites have been pre-approved by the compensation committee. And, the committee must separately approve any perks not specifically included in the policy or amounts that exceed the maximum amounts in the policy.
– Who should have the authority to give gifts to directors (from either outside or inside the company)?
– What should be addressed in a director gift policy?
– How should gift giving to directors be tracked?
The Latest on Internal Controls Testing
In this podcast, Ben Termini of BDO Seidman’s Risk Advisory Services Group describes the latest trends in internal controls testing, including:
– How can businesses reduce the number of controls tested on a daily basis (by as much as 60 percent without impacting effectiveness)?
– What daily controls are considered “key” controls?
– How does the more focused scope of daily control testing affect monthly, quarterly and annual testing?
– What are entity level controls? And why are they so critical to an effective internal audit program?
– What are general computer controls – and why are they imperative to ensuring efficient automated controls?
– How does the size of a company impact controls? Does “one size fit all”?
Motion to Win!
A little Friday fun, I am told that this is a real pleading that was filed! Reminds me of some of the handwritten notes I would see from disgruntled investors when I worked at the SEC …
In response to heavy demand, we have posted three sample equity grant policies in the “Timing of Stock Option Grants” Practice Area on CompensationStandards.com. These are in Word – and one of the samples relates solely to new hires.
John White on Director’s Role in the SEC Comment Letter Process
In this speech entitled “An Expansive View of Teamwork: Directors, Management and the SEC,” SEC Corp Fin Director John White appeals to directors to take a more active role in the SEC comment letter process by at least receiving copies of the SEC comment letters and responses from the company – and not allow management to “shield” directors from those documents.
As part of his series of speeches on the topic, John also spoke about the SEC’s new executive compensation rules – for example, see this excerpt about the director’s role in preparing the CD&A:
“I mentioned very briefly that your CEO and CFO will now be called upon to certify your company’s Compensation Discussion and Analysis. As I also said earlier, that section of your company’s disclosure must address the policies and decisions related to executive compensation. One objection that we heard to having that section be company disclosure is that it unfairly makes the CEO and CFO responsible for board and compensation committee actions that are outside the officers’ “jurisdiction”, for lack of a better word.
Your compensation committee report, as well as any consultations and discussions you may have about your CD&A section, can help provide your officers with the necessary insights and understanding they need in making their certifications. And this, in fact, is a two-way street. Your own comfort and your own knowledge can be equally fortified and improved through this process. And if you become more involved and more adept with these issues, that will inure to the benefit of your shareholders and investors more generally, which of course comes full circle to your overlap with the SEC.
The Commission has carefully structured a disclosure system in this area designed to further the interests and address the needs of investors. I hope you can see it in many ways as also offering the potential of furthering your interests and addressing your needs as directors. One important footnote — I would encourage you again to take a look at my remarks on principles based disclosure. They highlight and explain this crucial concept and, I believe, may help you and your company in drafting and evaluating your CD&A sections in the future.”
Late SEC Filings as Bond Defaults: New York State Court Weighs In
A few weeks ago, I blogged about how some investors are leveraging late SEC filings as a way to accelerate repayment of outstanding bonds. Here is news of a recent development in this area from Davis Polk (and this memo is posted in our “Late SEC Filings” Practice Area):
The Supreme Court of New York, New York County (New York State’s trial level court) on September 18, 2006, issued an opinion in The Bank of New York v. BearingPoint, Inc., a litigation where a central issue was whether a company’s failure to file Exchange Act reports when required by the SEC constituted an Event of Default under a convertible bond indenture.
In the BearingPoint litigation, the company failed to file, within the time period required by the SEC, its annual and quarterly reports on Form 10-K and 10-Q for a variety of publicly announced reasons, including the existence of material weaknesses in the company’s internal controls and financial accounting. Following the company’s failure to file those reports within the SEC-prescribed time period, certain holders of its 2.75% Series B Convertible Subordinated Debentures sought to declare an Event of Default under the covenant default provisions as set forth in Section 7.01(g) of the indenture. The particular covenant under which holders alleged a default was Section 5.02 (entitled “SEC and Other Reports”) which provides:
“[T]he Company shall file with the Trustee, within 15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC, copies of its annual report and of the information, documents and other reports (or copies of such portions of any of the foregoing the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall comply with the other provisions of TIA Section 314(a). [Emphasis Added.]”
Although the Indenture clearly states that the company had no obligation to file SEC required reports until those reports were actually filed with the SEC, the court nonetheless ruled that the company’s failure to file those reports when required by the SEC constituted an Event of Default under the indenture.
Section 314(a) of the Trust Indenture Act does not specify a time period during which a company must file SEC required reports, but merely states that an issuer must file SEC reports with the indenture trustee. The court reasoned that a reading of the indenture that required the company to file those reports whenever it actually filed them with the SEC would frustrate the purpose of Section 314(a) the TIA which, according to the court, “was to make BearingPoint’s financial information available to Series B Debenture Holders … [so that] investors can make informed decisions about their investment and guard against the risks attendant to incomplete information.”
The BearingPoint decision is the New York trial court’s opinion upon summary judgment. As a result, it is not certain whether other courts would reach a different conclusion or whether, upon appeal, the New York Court of Appeals would affirm the trial court’s decision. In addition, because Section 314 of the TIA does not directly incorporate the filing requirements described above into every TIA qualified indenture and only obligates an issuer to make those filings as a matter of statute, the court did not address whether a failure to comply with Section 314 would have any effect on an indenture that did not expressly incorporate that section. Moreover, where the indenture does incorporate Section 314 of the TIA, as did the BearingPoint indenture, the court did not address contractual remedies other than acceleration that could have been included in the Indenture, such as a mandatory increase in interest rates.
A guest blog from Jesse Brill: Since time is of the essence – and we all face a formidable challenge – when we sit down to draft and review the new CD&A for the upcoming proxy season, we can understand the appeal of getting your hands on a mock-up CD&A. We have reviewed a few mock-ups that law firms have drafted and – at least, so far – they tend to provide the kind of pap that the SEC is trying to get away from.
The mock-ups punt on analysis and give the impression that the sample is a good starting-off point. We disagree – and we have decided not to post any samples yet because we believe we would be doing a disservice to those of you trying to comply with the SEC’s (and shareholder’s) expectations.
We urge law firms drafting samples to underscore the critical analysis that is expected. Otherwise, clients will fall into the trap of merely disclosing all the generalities and boilerplate that the SEC and shareholders do not want to see. If we find a good sample, we will immediately post it and make everyone aware that it’s reliable as a sound example. Of course, every company’s circumstances are different and each CD&A should be unique.
Remember that there is guidance out there available for you as you sink your teeth into a CD&A. We encourage you to read our complimentary Special Supplement to the September-October 2006 issue of The Corporate Counsel before you begin to consider your CD&A. For directors, you should check out this complimentary issue of Compensation Standards, which has a lead article on the board’s role in the CD&A process.
What You Need to Do Now: On October 12th, join the 2000 that will participate in Las Vegas – or the more than 3000 that will watch by nationwide video webcast for the “3rd Annual Executive Compensation Conference.” To be able to understand the practices that you will be describing in the CD&A, you need to attend this major one-day conference that has become a “must” for all directors and all those involved with executive compensation. Note that registration rates are more than half-off for CompensationStandards.com members.
By looking at our agenda for this Conference, you can see that this year’s conference will be even more crucial than before to watch live or by archive. Register today.
Webcast Attendees: Time to Test Your Connection
As always, for those attending the “3rd Annual Executive Compensation Conference” by video webcast, we strongly advise that you ensure you have the proper connection and equipment before the Conference. You should act now to test your ability to access video as you will not be able to test after Thursday, September 29th.
It’s That Time of the Year Again – End of the SEC’s Fiscal Year
When fiscal year 2007 starts on October 1st, the SEC will likely be operating under a continuing resolution as it normally does (under which fees remain at their current rates) – see last year’s blog as to why this is an annual rite. Once Congress approves the SEC’s ’07 budget, registration fees will go down to $30.70 per million from $107.00 per million. See the SEC’s latest fee rate advisory.
