The SEC recently added this new beta version of an EDGAR search tool that allows for text searches. Give it a whirl…
And You Thought the American Proxy Season Was Crazy!
With the proxy season now behind most calendar year companies here in the US, I thought it would be interesting to note that nearly all Japanese companies hold their annual meetings within a few days of each other – after providing shareholders with just two weeks notice as to the agenda! This really causes problems for shareholders who want to follow more than a handful of meetings.
“Most Japanese firms send meeting agenda notices to shareholders just two weeks – the legal minimum – before annual meeting dates. The short notice leaves investors only a few days at most before voting deadlines to translate, analyze, and execute votes for their holdings.
Equally problematic is the concentration of shareholder meetings on a few days each year. The perennially lopsided distribution was illustrated again last year. Of the 80 percent of Japanese firms tracked by ISS that held their annual meetings in June, 83 percent scheduled their meeting on June 24, June 28, or June 29.
These hurdles to voting have sparked complaints by international investors since many began voting their Japanese shares in the early 1990s, as well as by Japanese institutions that have started to systematically vote their domestic holdings in recent years.
Two rules that have helped sustain short notice and meeting concentration practices remain in the law, but as companies take advantage of the dividend approval deregulation, their justifications may start to ring hollow.
Because shareholder approval of profit allocation has long been a requirement before dividends could be paid, there has been a rationale for requiring that each year’s annual shareholder meeting be held within three months of the fiscal year close, so that the year-end dividends could be paid in a timely manner. This requirement in turn presents a scheduling challenge, since audited profit figures are necessary for any profit allocation resolution, and they must be circulated to shareholders in meeting notices some time before the meetings.
In most international markets, annual meeting agenda notices reach shareholders three weeks or more before the meeting date, but Japanese companies have argued that they must rush to complete audits in time to meet even a two-week notice requirement. Even after the amendments, Japan’s company law would still allow companies to wait until just two weeks before the meeting date before mailing the agenda.
However, if the bulk of Japanese firms ultimately opt to waive this dividend approval requirement, this justification used to defend the old practices will vanish.
Some institutions this year are expected to vote for proposals to delegate dividend and profit allocation authority to Japanese boards, in the hope that this may one day lead to further legal and regulatory reform that will enable a more manageable proxy voting calendar in Japan. Other investors who have developed policies concerning dividends may oppose granting boards discretion over income allocation, concluding that there’s no guarantee that companies will then decide to actually hold their meetings substantially earlier.”
Section 404 and Small Business
In this podcast, Ralph Martino of Cozen O’Connor provides some thoughts on internal controls and the likely impact on smaller companies, including:
– Why do you think the SEC refused to exempt small public companies from the provisions of Section 404?
– Do you think Section 404’s long term effect on small public companies and their capital formation will be positive or negative?
– Do you think Section 404 provides material protection from financial fraud?
– What do you think the SEC was getting at when it stated – in its four-point plan – that it was going to work with the PCAOB in the application of Section 404 to small business?
Last week, the NYSE’s Proxy Working Group unanimously adopted six recommendations embodied in this Final Report and Recommendations. As I blogged last month, the principal recommendation is the one that would amend the NYSE’s Rule 452 (commonly known as the 10-day broker voting rule) to make director elections a non-routine matter. This means that brokers would no longer be permitted to vote the shares of beneficial owners who do not provide specific voting instructions within 10 days of the close of proxy voting. As many of you know, brokers typically side with the board and management when they vote for directors. Here is a related article from BusinessWeek.
Coupled with hedge fund activism, this could mean that directors who are subject to withheld votes will find it much more difficult to obtain a majority vote. Add in the growing majority vote movement and this is a whole new ballgame folks! It is not hard to find director elections this year where directors received a majority vote- but would not have done so if this rule had been effective.
I predicted as much for the recent Home Depot election. Consider how high the level of withhold votes was there without the extended media and Web campaign that took place at Disney a few years ago. Wake up and smell the coffee Mrs. Bueller, the playing field is shifting all around us! The NYSE wants the SEC to approve the rule change so it can be effective for the 2007 proxy season! Better lock in your favorite proxy solicitor now because demand is gonna be sky high!
Thankfully, the Proxy Working Group rejected the idea of totally eliminating broker voting, recognizing that it plays an important role in allowing companies to achieve a quorum for regular meetings.
The six recommendations from the Proxy Working Group are:
1. The elimination of discretionary broker votes for director elections by amending the NYSE’s Rule 452.
2. The SEC’s review of the OBO-NOBO rule to make it easier for companies to communicate with their street-name shareholders.
3. The NYSE’s engagement of an independent party to analyze and make recommendations to the SEC regarding the structure and amount of fees paid to ADP.
4. The SEC’s study of the role of groups like ISS and Glass Lewis that impact the voting decisions over shares in which they have no ownership and no economic interest. The Proxy Working Group believes that there is the potential for conflicts of interest and/or other issues given the multiple roles that such groups play in the proxy season.
5. The NYSE’s taking a lead role in efforts to educate investors about the proxy voting framework.
6. The NYSE’s monitoring of the impact of amending Rule 452 to make director elections a “non-routine” matter.
The NYSE Staff seeks comments by the end of June – it will share these comments with the SEC. After reviewing these comments, the NYSE Board will consider them and any proposed rule changes will then be filed with the SEC so that the SEC can then directly solicit additional public comment. So for those of you worried about the tight window period for commenting now, recognize that the public will have two opportunities to comment. Lots more to come on these groundbreaking recommendations!
Study on Investor Attitudes
As part of the NYSE’s Proxy Working Group process, they had this Investor Attitudes Study prepared by the Opinion Research Corporation to gain a better understanding of investors’ knowledge of the existing proxy voting process.
No surprise that the study results show that investors generally are confused about proxy mechanics since so few of us professionals fully understand how it all works. In fact, I was floored that 25% of the respondents understood that their brokers get to vote in their place if they didn’t respond. My guess is that no more than 5% of shareholders would have understood that…
Broker Votes vs. Broker Non-Votes
Some of you may wonder what is a “broker non-vote” – and how it differs from a “broker vote”? They are one and the same thing, just different terminology (except sometimes people refer to broker non-votes as being “non-routine” meeting agenda items for which brokers aren’t entitled to use discretion to vote; this stuff is confusing!). One of my favorites John Wilcox, formerly of Georgeson and now at TIAA-CREF, taught me long ago that the proper terminology is “broker non-vote” because the broker gets the discretion to vote due to non-voting of the beneficial owner.
But it’s entirely a “tomato, tomahto” thing and reminds me of this recent exchange among academics regarding whether “shareholder” or “stockholder” is the appropriate term under Delaware law…
As I blogged a month ago, the SEC recently announced that it will use EDGAR to post notices of effectiveness for registration statements (and post-effective amendments). The SEC has now begun posting these notices on this web page – and here is an example of what these online notices look like. Notices of effectiveness can also be found by searching for the EDGAR form type “EFFECT.”
The SEC states it will post these notices on the morning after the filing is declared effective and will no longer mail out paper copies (although it will continue to notify registrants by telephone that a registration statement or post-effective amendment has gone effective).
Who could possibly care about all this? Well, I guess it’s a big deal for the associates and paralegals who no longer will have to try to track down paper notices for a deal closing; they often were mailed by the SEC weeks and weeks after effectiveness in the past.
Alan Beller Rejoins Cleary Gottlieb
Following the footsteps of former SEC General Counsel Giovanni Prezioso, Alan Beller has decided to also return to his old law firm, Cleary Gottlieb Steen & Hamilton. Alan will practice in the firm’s New York office.
Yesterday, the SEC announced that it had woo’ed Andy Vollmer from his partnership at Wilmer Hale to serve as Deputy General Counsel of the SEC. Andy, who specializes in internal investigations, will nicely complement General Counsel Brian Cartwright, who specialized in Corp Fin issues during his private practice days.
Remembering Ken West – In Gratitude and Deep Respect
I am sad to say that Ken West passed away recently. Those of you that heard Ken speak at last year’s “2nd Annual Executive Compensation Conference” know what a source of strength he was for all of us endeavoring to “do the right thing.” Below is a remembrance from Don Delves (and here is a brief article written by Ken for Directors & Boards):
“The corporate governance community lost one of its finest members with the recent passing of Ken West. As long-time Chairman of the NACD, Governance Consultant to TIAA-CREF, and board member, Ken fostered a tremendous amount of positive change in the operation and effectiveness of countless boards. He worked quietly, behind the scenes, gently wielding a big stick and systematically persuading wayward boards to adopt better practices.
He did so as a gentleman and veteran business leader, talking to other business leaders about how they might operate with greater integrity and higher standards. Ken used his position as an extraordinarily well-liked and well-respected member of the director community to challenge that community–our community–to recognize our shortcomings and to be our best. He was also a mentor and advisor, encouraging many of us to take thoughtful, measured and sometimes risky stands for changes we thought were in the best interests of company and shareholders. We will miss Ken for his candor, his courage and his friendship.”
My first thought in reading the OFHEO report was to compare it with Richard Breeden’s “Restoring Trust” WorldCom report – which is now three years old. The Breeden report seemed so novel at the time; the Fannie Mae report is also fascinating, but not as shocking since we have all read so many of these things by now.
To get some guidance on what boards should not do, I recommend focusing on pages 287-330 of the OFHEO report; here is a smattering of the many lessons from the report that I found worth considering:
1. Boards should question any fast-tracked settlement of whistleblower claims (pg. 281 of the PDF)
2. Any failure of the audit committee is also a failure of the Board (p. 283)
3. Boards should ensure the audit committee charter doesn’t limit the ability of the audit committee to challenge management (p. 293-294)
4. Audit committees should actively oversee the internal audit department, including ensuring that the internal auditor’s compensation is not tied to corporate performance (p. 296-298)
5. Compensation committees should ensure that their charter doesn’t create a bias in their oversight role (nor should the charter include standard statements that they can’t comply with, such as “pay-for-performance” and reliance on stock-based compensation to align management’s interests with shareholders) (pg. 310-312)
6. Compensation committees shouldn’t allow management to script out their meetings in advance (p. 313)
7. Compensation committees shouldn’t allow the CEO to influence which independent compensation consultant they hire (p. 314)
8. Boards need to stay informed about the corporate strategy (p. 315)
9. Boards need formal policies as to how (and when) to approve large transactions and if (and when) management needs to inform directors about them (p. 319)
10. Boards need to act fast in a crisis, including launching an independent investigatons (p. 324-329)
Check out tomorrow’s SEC Historical Society annual meeting, which includes this free webcast program: “Who’s Counting? The Critical Role of Financial Reporting in the Capital Markets.”
Growing Importance of Computer Forensics in Litigation
In this podcast, Stephanie Weiner, Director of Computer Forensics in BDO Seidman’s Litigation & Fraud Investigation practice, provides some insight into why computer forensics will begin to play an even greater role in trial preparation (ie. beginning December 1, 2006, when new Federal Rules of Civil Procedure go into effect) as new rules require parties to discuss issues pertaining to discovery of electronically stored information (ESI) at the initial rule conference, including:
– What is ESI, and what role does it play in court cases?
– What questions should you ask to determine if ESI is accessible or non-accessible?
– How can computer forensics assist in establishing a timeline to comply with electronic discovery requests?
– What is the impact of electronic discovery on budgets and what are some ways to minimize cost?
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.
