According to this Reuters’ article, Chairman Cox talked about “why” the rules changes were made and the Chairman illustrated how the December rule changes to the SEC’s new executive compensation rules were not intended to hide pay levels at a Reuters summit on Monday. It’s unclear if the Chairman addressed “why now and not back in July” at the summit, but earlier media reports stated that the Chairman had believed at the time the original rules were adopted that a vesting approach for reporting option grants in the Summary Compensation Table was included as part of the new rule package.
Not quite sure I bite on that explanation. Below is something I received from a member following up on what the NY Times’ Floyd Norris wrote in his own blog last week:
“For what it’s worth, after digging around in the July 26th Open Meeting webcast archive, I found out that (i) Chairman Cox described the FAS 123R full grant value treatment in his opening remarks at the Open Meeting (ii) the SEC Staff described this as well in its opening remarks and (iii) the first Q&A exchange between Cox and Corp Fin Director John White (listen to the webcast archive at the 30:52 mark of the meeting) explicitly covered this issue. White, in response to Cox’s question about the treatment of options under the new rules, laid this out quite plainly, including the difference between FAS 123R for financial reporting purposes and for compensation disclosure purposes in the SCT (see 31:04 mark of the webcast archive).”
This fact finding seems to cut across the grain that the Commission really didn’t know what standard it originally adopted and hopefully will put an end to such musings, such as done in yesterday’s WSJ op-ed. The op-ed states: “The SEC’s mistake is regrettable, but the agency might be forgiven for overlooking what was a relatively minor point in its gigantic 450-page July rule.” I think anyone closely following the rulemaking during the proposal stage would argue that this was not a “relatively minor point”; this was a hotly debated issue as reflected in the comment letters submitted last summer by many major organizations.
What to Do Now: How to Implement the December Rule Changes
Regardless of the “why,” what’s done is done and we turn to what we practitioners care about most: the “how to implement” aspect of the December rule changes. Don’t forget to tune into tomorrow’s CompensationStandards.com webcast: “The SEC’s December Rule Changes: How They Impact You.”
That webcast will be followed by another (and much longer) one next Thursday: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!.” Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com, we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers ended last week) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.
Whining about Semantics
I can’t help but whine about last week’s WSJ opinion column that did some whining of its own about Home Depot’s former CEO ‘severance’ package. The WSJ claimed that most of Nardelli’s $210 million payout wasn’t really severance at all because the terms for much of that package were set when he was hired years ago.
I got news for whomever wrote that piece: just because severance arrangements are negotiated well in advance of a termination doesn’t change the fact that they are indeed severance arrangements. In other words, don’t bother writing that others are not properly using terminology until you master it yourself!
And One More Wake-Up Call
This statement in the WSJ opinion column”>op-ed should serve as one more wake-up call to boards and advisors: “That contract can’t be abrogated now simply because the board has concluded it made a mistake.” The statement might be true for Nardelli because he is gone – but it certainly isn’t true for every other CEO who still holds their job today.
As we have written about numerous times, boards get an opportunity each year to revisit their past mistakes when they are set pay levels for the following year. Remember that’s one of the primary purposes of going through the exercise of creating a tally sheet – it enables boards to find out if excesses have been created and then the board has an action item to try to rectify them.
One of the first steps a board can take is to ensure properly worded clawback provisions are added to outstanding contracts – see more in our “Clawback Provisions” Practice Area on CompensationStandards.com.
Boards really need to take action here. It seems hardly a day goes by without another example of a senior manager getting fired and still taking millions of dollars home with them despite poor performance. Who wouldn’t want $10 million in severance for six months on the job? That’s what the just-fired COO of JC Penney walked away with; seems like managers are incentivized to perform badly with some of these poorly negotiated employment arrangements…
The New York City Bar Association has put together a pretty fascinating report – through a task force – on what role lawyers should play in corporate governance. The 298-page report – “Lawyer’s Role in Corporate Governance” – was just released a few weeks ago.
In this podcast, Tom Moreland of Kramer Levin – and the Chair of the NYC Bar’s Task Force that prepared the report – tells us more, including:
– Why did the NYC Bar Association decide to prepare this Report?
– What were you able to determine about the involvement of lawyers in those scandals?
– Did this conclusion lead the Task Force to make any recommendations for the future?
– What other recommendations in this Report would you like to highlight?
– What should lawyers do in light of this Report?
Mad as Heck and Not Going to Take It Anymore
Shutterfly Chairman Jim Clark, founder of Netscape, resigned from the company’s board (even though he is a 30% shareholder) complaining that Sarbanes-Oxley overly restricts the ability of large shareholders to participate in board functions, as noted in this resignation letter filed as an exhibit to a Form 8-K filed yesterday.
FIN 48: Slouching Toward Implementation
Here’s some great stuff from Jack Ciesielski’s AAO Weblog: “Last June, the FASB released an interpretation of Statement No. 109, which deals with income tax accounting. It was called Interpretation No. 48 (catchy, eh?), “Accounting for Uncertainty in Income Taxes” and quickly picked up the moniker “FIN 48.” Or, if you work in the tax department of a publicly-traded company, it became known by other, more colorful nicknames. I won’t go into those here; family publication and all that.
And I won’t go into details about the nuances of FIN 48, either; suffice it to say, it provides a framework for evaluating “uncertain tax positions” that companies take from time to time, that might either create/increase a tax asset or reduce a tax burden. Sometimes those tax positions are solidly defensible, and there’s little question that any tax assets recognized in the financial statements are going to be realized; sometimes the positions taken on tax returns are done so with fingers crossed in the hope that the taxing authorities are going to miss them. Any effect that “fingers crossed” positions may have on the financial statements – creation/increase in assets or reduction in liabilities – might be different from what shareholders (after it’s been asserted in the financial statements that these things are so.)
In studying balance sheets, investors want to see what is – not what managers wish for. And that’s what the effect of applying FIN 48 does: it forces managers to look at the odds of open tax positions being sustained under review by tax authorities. The standard might wring some water out of assets on balance sheets … IF it’s actually implemented. It’s supposed to be effective in years beginning after December 15, 2006. For calendar year companies, that’s right now.
Recently, the FASB has started receiving unsolicited letters about the interpretation, insisting that the standard-setter push back the implementation date – for example, this one from Tax Executives International. This is a standard that has gestated for over two years, has been exposed for comment, and issued in final form six months before implementation – and now firms decide that it’s too soon to implement it? Even more ironic, the IRS had even offered expedited reviews of issues with FIN 48 importance in order to enable them to meet the implementation deadline.
I’ve written a letter of my own to the FASB, urging them to stand pat on the implementation date. Feel free to send one of your own to FASB chairman Robert Herz, using this link. Tell him that you support their standard as it stands.”
And Paula Dubberly, Associate Director of the SEC’s Division of Corporation Finance, has joined the panel for the Thursday, January 18th webcast: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!.” Both Paula and David played key roles in writing the new executive compensation rules and will continue to do so in interpreting them.
Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com, we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers ended on Friday) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.
NYSE Proposes Automatic Suspension of Significantly Delinquent Filers
A few weeks back, the NYSE proposed a rule change to eliminate the NYSE’s discretion to allow a company to continue to be listed on the NYSE if it is over 12 months delinquent in filing an annual report. The NYSe proposed that its revised rules would become effective December 31, 2007. Comments are due by January 18th and the proposal is subject to SEC approval.
Under the NYSE’s proposal, if a company has not filed its annual report within 12 months of the required date, the NYSE will begin suspension and delisting procedures. Under current rules, the NYSE has the discretion to not commence such procedures in specified circumstances (egs. if delisting would result in investor harm or be significantly contrary to the national interest).
Recently, the NYSE has been criticized for using this discretion to allow Fannie Mae to continue to be listed for a long period of time without being current in its reporting. Last month, the NYSE gave Fannie Mae a deadline of the end of 2007 to file its 2005 reports.
Accounting Reform: How the Latest Developments Impact You
We have posted the transcript from our webcast: “Accounting Reform: How the Latest Developments Impact You.” Among other topics, the webcast covered FIN 48, which continues to be an issue for lawyers – read more about that in our “Tax Uncertainties” Practice Area.
In the “Compensation Committee” Practice Areas on both CompensationStandards.com and TheCorporateCounsel.net, we have posted a number of recently amended compensation committee charters, tweaked by companies to adapt to the SEC’s new rules as well as other considerations.
Look at First Disclosures under the SEC’s New Executive Compensation Rules
Yesterday, the SEC posted the federal register version of its December amendments (comments are due January 29th for these “interim final” rules). In addition, we posted the January supplement of Mark Borges’ latest blogs on executive compensation disclosures, which include several analyses of the SEC’s December rulemaking as well as a look at the first disclosures made under the new rules.
We have wrapped up our latest survey; this one on compensation and disclosure committee meetings – and the results are repeated below (and don’t forget to take our latest survey on related party transaction policies):
1. In the wake of the SEC’s new compensation disclosure rules, our compensation committee has the following people attend their meetings:
– General counsel – 57.6%
– Securities law counsel – 33.7%
– Employee benefits law counsel – 8.5%
– Head of Human Resources department – 59.4%
– Other member of Human Resources department – 24.5%
– Corporate secretary or assistant corporate secretary – 50.0%
2. Does someone from your independent auditor attend your disclosure committee meetings:
– No; no one from the independent auditor attends any disclosure committee meetings – 66.3%
– Some; someone from the independent auditor attends some of the disclosure committee meetings (e.g. just selected meetings such as those relating to financial reports or earnings releases) – 18.4%
– All of them; someone from the independent auditor attends all of the disclosure committee meetings – 15.3%
3. If someone from your independent auditor attends some or all of your disclosure committee meetings, the:
– Independent auditor requested the right to attend – 29.0%
– Company requested that someone from the independent auditor attend – 71.0%
4. If someone from your independent auditor attends some or all of your disclosure committee meetings, what is the purpose for attendance:
– To function as an active participant in the deliberations of the disclosure committee – 32.4%
– To serve in an advisory capacity and answer questions if asked – 35.3%
– To monitor and record the activities of the disclosure committee – 20.6%
– Other – 11.8%
As I blogged about a few months back, a group of institutional investors sent letters to major companies seeking to elicit more disclosure about how those companies utilize compensaiton consultants. The disclosure sought exceeds the requirements adopted by the SEC last August.
Specifically, the investors sought disclosure about whether the companies hire compensation consultants that provide services to the company beyond advising on CEO pay and whether the companies have a policy prohibiting such perceived conflicts. So far, 18 of the 25 companies that received the request have responded – and most of them said they have taken steps to ensure the independence of consultants who advise their boards on executive pay. Here are the response letters from the 18 companies – and a January 2nd press release from the investor group.
On pages 49-50 of its proxy statement last year, Pfizer was the first company to provide such disclosure by naming their compensation consultant, discussing what they are engaged for, noting other work done for the company and the dollar amount of the fees, pointing out that it is the compensation committee that has engaged the consultant, and describing the consultant’s involvement with compensation committee meetings.
Now, Vineeta Anand of Bloomberg reports in this article that General Electric will provide similar disclosure to Pfizer’s in this year’s proxy statement. I imagine that many – if not all – of the 18 other companies that responded to the institutional investors will do the same…
January Eminders is Up!
The January issue of our monthly email newsletter is now available.
SEC Releases Two Economic Studies on Mutual Fund Governance
As part of the re-proposal of the SEC’s mutual fund governance rulemaking, the SEC’s Chief Economist has issued two reports – here and here – that outline the difficulties in evaluating the benefits of a rule requiring 75% of mutual-fund directors to be independent. The 60-day comment period commenced from the release of these reports on December 29th. Here is an article from today’s WSJ describing the two reports.
As we know that executive compensation is foremost on director’s minds these days, we have posted the Winter 2007 issue of our new practical print newsletter for you to read and share with your directors about executive compensation practices – at no charge!
The new newsletter – Compensation Standards – will help keep directors abreast of the latest executive compensation practices and to help them glean practical pointers that can assist them in performing their challenging duties. Try a no-risk trial to Compensation Standards today. You have our permission to forward as many copies of the Winter 2007 issue as you like to directors and CEOs and others that might benefit from it.
The SEC’s December Executive Compensation Rule Changes: Help is on the Way!
To help all those trying to sort out the SEC’s surprise December amendments to its executive compensation rules, we just announced a new Part 1 of our January Web Conference to address how you should implement the amendments in a webcast to be held next Thursday, January 11th: “The SEC’s December Rule Changes: How They Impact You.” [And if you can’t wait til next Thursday for guidance, Mark Borges already has blogged four different times providing analysis on the amendments in his “Proxy Disclosure” Blog.]
And then, following up where our September two-day executive compensation disclosure conference left off, catch the rest of our critical 2-Part Web Conference on Thursday, January 18th – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!“- which will provide you with all the latest guidance about how to overhaul your upcoming disclosures in response to the SEC’s most recent positions on the new executive compensation rules as well as the latest thinking on how to face the most difficult issues, such as how to deal with airplane and other perks and what to include in the CD&A.
Because this essential 2-Part Web Conference will be accessible only to those that are 2007 members of CompensationStandards.com, we urge those of you who have not yet renewed for 2007 to do so now (all memberships expired at year end; grace period for non-renewers ends this Friday) – and anyone not a member should try a no-risk trial. If you need to renew, please renew online if you can as our HQ is overwhelmed right now.
Floyd Norris: A Little More on the SEC’s Forgetful Chairman
The NY Times columnist, Floyd Norris, has really been going after the SEC for adopting changes to its executive compensation rules so soon before the proxy season and without asking for public comment. In addition to a couple of scathing columns, Floyd has posted additional thoughts on his blog, including this one (he has others, including this one):
“My column today points out that the staff of the Securities and Exchange Commission knew — and told the public — things that Christopher Cox, the commission chairman, now says were unknown to him. It also points out that those things were discussed in January by him at the S.E.C. public meeting when the rules were proposed. The column has links to documents, but may make readers work too hard to find them. The explanatory documents, which the S.E.C. put out in August, a month after the commission voted, can be reached here. The relevant part is on pages 56 to 58.
The January conversation can be linked to here. A reader then has to go to the Jan. 17 meeting, and watch a video. The important part starts at about 24 minutes and 50 seconds into the video, when Mr. Cox engages in a conversation with Alan Beller, who was then the director of the commission’s division of corporation finance.
‘If I might turn next to stock options,’ Mr. Cox stated, ‘the proposal today would require the disclosure of the fair value of stock option awards as of the date that the option is granted to an executive officer. That distinguishes it in some respects from the reporting otherwise for financial reporting purposes.’ This point is the one that Mr. Cox now says he did not know was in the rule when the commission approved it in July. The commision changed the rule just before Christmas.
Mr. Cox told me tonight that he had remembered the January conversation, and that I misunderstood him if I thought he had not. But he repeated that he wrongly believed that section had been changed by July, and blamed the error on miscommunication amid staff changes at the commission. In January, Mr. Beller said the S.E.C. had tried timing conformity in the past, only to reject it because it was viewed as less informative and ‘excessively confusing.’ That is not a bad description of the rule the commission came up with in December.”
As we recently wrote about in the November-December issue of The Corporate Executive, increasing the strike price – or even fixing the exercise date – ordinarily cannot be effected without the consent/agreement of option holders (except, possibly, where there is a strong plan provision allowing the board/administering committee to unilaterally amend outstanding options), even to increase the exercise price, as deemed necessary or advisable to comply with applicable (e.g., tax) laws.
In an apparent effort to offset the foregone compensation, some companies are offering additional new options, restricted stock, or even cash bonuses in exchange for the consent. Under these circumstances, companies, in effect, are offering to buy existing stock options in exchange for materially amended options, etc. and/or cash. The Staff generally takes the position that option holders are presented with an economic investment decision, and not “merely a compensation decision,” if they are asked to consent to an increase in the exercise price of options – or even just adjust the exercise date.
The company’s presentation of the investment decision to the option holder implicates the SEC’s issuer tender offer Rule 13e-4 and requires the company to file a Schedule TO in advance of the offer being presented to the option holders. (Companies contemplating financial restatement may face another problem as tender offers for employee stock options filed on Schedule TO generally must be accompanied by current financial statements.)
It appears some companies might liberally interpret Corp Fin’s limited class 2001 exemptive order on repriced options as authorizing them to “fix” backdated options for (1) previous employees and (2) defer any cash consideration and/or substitute non-cash consideration into a subsequent year in order to avoid the ill tax consequences presented by §409A. These companies should think again because the exemptive order doesn’t say a thing about extending the offer to former employees or relief from “prompt payment.” Nor should these companies necessarily rely on the Clorox’s issuer tender offer that was recently conducted.
Availability of the SEC’s 2001 Exemptive Order
Back in 2001, the SEC adopted a limited class exemptive order to address issues implicated by exchange offers for repriced options. Reliance on the SEC’s exemptive order was conditioned on, among other things:
– the issuer being eligible to use Form S-8;
– the options subject to the exchange offer being issued under an employee benefit plan as defined in Rule 405 under the Securities Act; and
– any substitute securities offered in exchange for existing options being issued under such an employee benefit plan.
The availability of Form S-8 when issuing an option to a former employee of the issuer is based on that employee receiving the option while employed by the issuer and then exercising the option on S-8 after leaving. If the Form S-8 is not available (e.g. because the person is no longer an employee when a replacement option is issued), issuers will need to rely on another exception from the ’33 Act or register the issuance of the new options.
An issue also exists in construing the Rule 405 definition of employee benefit plan, which “means any written purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan or written compensation contract solely for employees, directors, general partners, trustees (where the registrant is a business trust), officers, or consultants […]” If former employees are being issued new options but do not fall into one of the other enumerated categories, new options issued to former employees will not be options issued under an employee benefit plan. Note that when Microsoft employees transferred their options to JP Morgan in late 2003, Microsoft amended its plan to remove the transferred options so that Microsoft would not rupture the 405 definition based on the “solely” requirement.
Prompt Payment Issues
When the exemptive order was issued in 2001, the scope of the order’s relief was limited to Rule 13e-4(f)(8)(i) and (ii), the all-holders and best-price provisions. The repricing offers that gave rise to this exemptive order, however, were generally structured to award substitute options on a deferred 6-month and one day payment schedule if certain conditions were met. This payment schedule was driven by the accounting policies in existence at that time. This payment schedule was also technically in conflict with the prompt payment rules. Based on the accounting requirements, however, the Corp Fin Staff generally did not raise objections to the payment schedule.
§Section 409A appears to require that any cash amounts paid in connection with an option repricing be paid in the year after the option repricing (i.e. offers completed in 2007 would require payment in 2008). If true, this payment schedule could contravene the SEC’s prompt payment rules. In the absence of any Staff relief, therefore, issuer tender offers conducted in accordance with IRS §409A are required to comply with the SEC’s prompt payment rules. Although issuers may have legitimate compensation concerns as to why they may wish to defer payment of tender offer consideration for an extended period, issuers should first consult with the Staff before tender offer payments are deferred.
Today is a National Holiday: SEC is Closed
Remember that today’s national day of mourning for former President Gerald Ford means that the SEC is closed and that any filings otherwise required to be made today will be due instead on January 3rd – as the SEC will treat today just like yesterday (ie. New Year’s Day) for 8-K purposes (ie. not a business day). EDGAR is closed too. And remember this old blog regarding counting days for tender offer purposes…
The “League Tables”: Battle for the Top
I always love this stuff. On Saturday, the WSJ ran this article about the battle to obtain top ranking for Thomson Financial’s all-important league tables regarding deal advisors (and here’s an article from today’s WSJ about the top deals of ’06):
“Citigroup lost a bid Tuesday to win credit for arranging a $30 billion deal in Norway that might have vaulted it to the top of one closely watched list of busiest advisers on European merger-and-acquisition deals. After days of wrangling, Thomson Financial declined to give the banking titan “league table” credit for writing a fairness opinion – a relatively minor role in the merger process – that endorsed Norsk Hydro’s planned $30 billion sale of energy assets to Statoil.
Citigroup was appointed by Norsk Hydro on Dec. 18, the same day the deal was announced. Thomson, whose league tables are cited by investment banks to validate their deal prowess, requires banks to prove they were hired before deals are announced to be granted credit. A Citigroup spokeswoman declined to comment.
Dealogic, a rival to Thomson Financial, on Thursday gave Citigroup credit for the Norsk Hydro assignment. It and Thomson rank the banking titan second behind Goldman Sachs Group Inc. as the top global adviser on mergers.
Citigroup lobbied hard for the Norsk Hydro credit, people close to the company said, because it would have given it dominance in the European league tables. According to Dealogic, the deal vaults Citigroup one notch up in the European rankings to third place. But in Thomson’s rankings, the Norwegian deal would have let Citigroup leapfrog Morgan Stanley to first place as adviser on European deals. Morgan Stanley is credited in the Thomson table with $482 billion of deals, a hair’s breadth ahead of Citigroup’s $473 billion.”
With Sarbanes-Oxley in the rear-view mirror for 4 years now, one would think that this would have been a quiet year for corporate governance developments. To the contrary, it was arguably the most dramatic year of change in recent history. Here is a snapshot of some of the more significant developments:
– The majority-vote movement matured at an incredible pace. Within the span of a single year, over half of the Fortune 500 adopted some form of policy or standard to move away from pure plurality voting for director elections. This trend is likely to continue as it’s the governance change that investors seek the most.
– An area not touched by Sarbanes-Oxley – executive compensation – continued to be inspected under a microscope by both investors and regulators. The SEC adopted sweeping changes to its compensation disclosure rules and investors became more willing to challenge companies that continue outlandish compensation policies. And House Democrats intend to consider executive compensation legislation early in 2007. [Today’s WSJ and Washington Post contain articles in which Rep. Barney Frank expresses displeasure over the SEC’s recent change in its exec comp rules – and we have announced a January 11th webcast just on these new changes. More on all this next week.]
– More and more hedge funds and private equity funds found “value” in using governance as an entree into forcing management to alter strategic course or to put a company into “play.” The recent hiring of Ken Bertsch, a former TIAA-CREF governance analyst who had been working for Moody’s, by Morgan Stanley is an indicator that using governance as a “big stick” is likely to continue.
– The recent sale of the two primary proxy advisory services – ISS and Glass Lewis – at handsome premiums is a pretty good indicator that governance as a skill set can be quite profitable.
– The re-opening of the SEC’s “shareholder access” proposal – spurred by a recent 2nd Circuit decision – was unthinkable a year ago. But it’s now reality.
– The proposed elimination of broker votes in 2008 – via a rulemaking from the NYSE – means that the 2008 proxy season promises to be the wildest yet. But 2007 surely will be wild enough.
One thing we know for sure – we can’t predict what the New Year will bring! Happy Holidays!
Some Thoughts from Professor John Coffee
In an interview with the Corporate Crime Reporter, Professor John Coffee waxes on problems with the McNulty Memo and the Paulson Committee Report.
A Conservative Year for Holiday Cheer
Fried Frank took it easy in this year’s annual festive message. Each year, the firm issues an alert at the end of the year which focuses on a true – and zany – government prosecutorial act. No food fraud to report on this year…
More and more members are e-mailing me their stories (or posting their queries in the Q&A Forum) regarding their challenges in getting a PIPEs registration statement processed by Corp Fin. Today’s WSJ includes this article about how the Staff is “increasingly reluctant to sign off on transactions involving “private investments in public equity.”
Deputy Director Marty Dunn is quoted as follows: “We have not told anyone that they cannot do these deals, we’ve just told them that they have to register them appropriately.” Mr. Dunn says SEC staffers hope to provide clarification early next year on when registrations for shares issued in connection with PIPE transactions may be done in a secondary offering, and when a primary offering would be needed.
As the article notes, it doesn’t help that the Enforcement Division is having success finding insider trading involved in some of these deals. The D&O Diary Blog covers the latest Enforcement developments regarding PIPEs – and the “SEC Actions Blog” has an interesting discussion of the latest Enforcement case against Friedman Billings Ramsey that involves a unique theory.
Problems with Empty Voting
From ISS’ “Corporate Governance Blog”: Reuters ran an article recently entitled “MergerTalk: Hedge Funds Find New Ways to Sway Votes,” which looks at the practice of empty voting. The practice of “empty voting” entails borrowing shares prior to a record date, which then gives the borrower the voting rights. Once the record date has passed, the borrower returns the shares and effectively controls a large number of votes without a continuing economic interest. Some critics say this creative share borrowing is being done to manipulate voting outcomes and seriously undermines corporate governance transparency for large shareholdings.
The story specifically cited hedge fund’s ability to purchase over-the-counter (OTC) equity swaps, obtaining large blocks of shares for voting without any true ownership. Holders are also not required to disclose their current assets in OTC swaps, nor are the banks that structure the swaps. Henry Hu, a University of Texas Law Professor, recently came out with a study on the practice of share lending and empty voting and is advocating fixing the disclosure system to make this practice more transparent.
Industry and academic focus is growing on instances where manipulating the vote is the objective, but similar problems can exist through normal sharelending, even if the motivation is benign. What are your thoughts on the practice of share lending and its impact on voting as well as the practice of “empty voting”…widespread problem or an anomaly to be watched?
A Boom Year for Mergers and a Furious Pace for Law Firms
On Friday, the NY Times ran this article about how busy law firms were doing deals this year. It notes the impact this has had on associate bonuses and quotes one partner on how he recently had to do his first all-nighter. Geez, I did all-nighters pretty regularly when I was at my law firms (and even do them occasionally in this job). My favorite quote was from Peter Lyons: “If you’re an M.& A. lawyer and you’re not busy now, it’s time to find something else to do for a living.”
In a surprise move, the SEC adopted interim final rules late Friday, which more closely conform the amounts reported for stock-based awards in the Summary Compensation Table and other tables to the expense for such awards reflected in financial statements as dictated by FAS 123(R). These new rules go into effect for this coming year, as they are effective upon publication in the Federal Register. Note that the SEC is also soliciting comment on these rule changes, so it’s possible that the SEC may take further action addressing them (including their effective date). Here is the SEC’s press release – and here is the adopting release.
This holiday gift from the SEC has a hint of Festivus to it. Perhaps a feat of strength from the Commission? Or a subtle way for the agency to air a grievance?
What The New Rules Mean for You: Modifications to Align with FAS 123(R)
The purpose of the SEC’s new rules is to more closely align the SEC’s disclosure requirements with the accounting dictates of FAS 123(R). The bottom line of these new rules for us means that the value of equity awards granted in a particular year will now be spread out over a number of years instead of all in the year of grant – and this will change who are the highest paid executive officers when determining NEOs.
So the good news is that the new rules should reduce anomalies arising from one-time grants and are more consistent with other parts of the SEC’s compensation disclosure rules (such as reporting cash compensation as it is accrued or as performance goals are met). But the bad news is that a lot of companies have already done a lot of work preparing to make disclosures under what suddenly are “old” rules – and under the new rules, companies will have to reassess who are their “Named Executive Officers.”
The rule changes will impact the value of equity awards that are reportable in the Stock Awards and Option Awards columns of the Summary Compensation Table, as they will now be amortized over the same period – and in the same manner – as they are accounted for under FAS 123(R) (with some exceptions; for example, the SEC requires a “no forfeiture” assumption in the case of service-based awards for SCT purposes – so if a company’s FAS 123(R) expense assumes any service-based forfeitures for the NEOs, the SCT amount and the corresponding amount in the financials will differ). Under the new rules, there likely also will be changes in the amounts disclosed in the Grants of Plan-Based Awards Table as well as the Director Compensation Table.
Coming Soon! Stay tuned: we are planning a bonus segment to cover how you should implement these new rules in connection with our January 18th Web Conference: “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!” This critical Conference will be available to 2007 members of CompensationStandards.com at no charge – so renew your membership for 2007 or try a no-risk trial today.
