According to ISS’ “Corporate Governance Blog,” the Executive Council of the Delaware State Bar Association’s Corporate Law Section has endorsed draft legislation to amend the Delaware General Corporation Law to enable shareholders to introduce an irrevocable change of bylaws on director elections, as well as provide for an irrevocable resignation of directors who fail to get a requisite number of votes. The proposal does not modify the default plurality standard.
The proposal would amend paragraph 216 of Section 5 of the DGCL to provide that a company bylaw adopted by a vote of stockholders that prescribes a required vote for director elections cannot be altered by the board without shareholder consent.
Another proposed revision seeks to get around the restrictions of Delaware’s “holdover” rule by adding a new provision that a director resignation may be made effective upon the occurrence of a future event or events, coupled with authority granted in the same section to make certain resignations irrevocable.
The proposed bill will be submitted to the Delaware legislature in the next week or two – and then it must be endorsed by the full Bar Association and then passed by the Delaware legislature before becoming law.
49% Support for Binding Majority Vote Proposal
Here is another item from ISS’ “Corporate Governance Blog“: This season’s first binding proposal seeking majority voting received more than 49% of votes cast at Honeywell this week, according to the proponent, AFSCME.
That showing was significantly higher than the 20% vote received by a binding AFSCME proposal at Paychex in October. The Honeywell vote is also noteworthy, because the company had adopted a director resignation policy. Before the April 24 vote, the best showing for a majority vote resolution at a company with a resignation policy was the 45% support at Hewlett-Packard in March for a non-binding proposal by the United Brotherhood of Carpenters and Joiners.
Majority Vote Standards in Articles of Incorporation?
And one last item from ISS’ “Corporate Governance Blog“: “Progress Energy filed in its proxy materials what is believed to be the first management proposal to change a company’s articles of incorporation to require a majority vote for the election of directors. Management is also proposing a resolution to hold annual board elections. The North Carolina utility’s annual meeting is May 10.
More than 20 companies have adopted a majority vote standard this year, primarily by revising their bylaws. Progress Energy appears to be the first to seek to make the change in its articles of incorporation. In North Carolina, as in most jurisdictions, articles of incorporation can only be amended if the change is proposed by the board and endorsed by shareholders, whereas bylaws can generally be revised by the board alone.
The Progress Energy proposal requires a majority of votes cast to pass, and abstentions and broker non-votes will not count as votes cast or against, the proxy statement notes. If approved, the new standard would apply for the company’s 2007 annual meeting. To overcome the North Carolina “holdover rule” which requires a director to serve until his or her successor is elected, the company adopted a director resignation policy in its corporate governance guidelines, which would become effective upon filing of the amended articles of incorporation.
Action on the resignation is left up to the governance committee, but if its members fail to gain majority support, the independent directors who did get elected can appoint a committee of independent directors to make a recommendation on the tendered resignation.”
May E-minders is Up
The May edition of our monthly newsletter is now available – sign up today to receive it on a complimentary basis.
Can anyone make heads or tails of this amended Form 8-K filed by National Presto Industries on April 25th (original filing date was April 13th). Appears that the company tried to set aside instructions from the SEC’s Division of Investment Management Staff, after which things got stranger and stranger…check out the 13 exhibits consisting of correspondence – including emails – between the SEC Staff, the company and the company’s independent auditor. This is not the company’s first scrape with the SEC; see this press release from 2002.
SEC Chairman Cox Testifies About Disclosure on the Hill
On Tuesday, Chairman Cox testified before the US Senate Banking Committee on the broad topic of improving financial disclosures. Here is a copy of his written testimony – and the FEI “Section 404 Blog” has notes about his oral comments, some of which address internal controls.
Last Thursday, the SEC finally approved the PCAOB’s auditor independence and ethics rules, which had been adopted by the PCAOB in final form last July (subject to the SEC’s blessing). In addition to addressing, pre-approval of tax services to audit clients, the new rules prohibit contingent fee arrangements for services provided to audit clients.
As noted in the Gibson Dunn memo posted in our “Auditor Independence ” Practice Area, the PCAOB’s new rules include several important matters for issuers to consider. As noted in this memo, “the PCAOB’s new rules include specific guidance regarding the manner in which audit committees are to pre-approve permissible tax services to be performed by the outside auditor. The rules also restrict an outside auditor from providing tax services to persons at an audit client who perform a “financial reporting oversight role” (other than directors). In addition, the PCAOB’s new rules provide that an auditor will not be deemed independent if the auditor (1) plans, markets or opines in favor of certain types of tax transactions for the audit client, or (2) provides tax services to an audit client for a contingent fee.”
According to this press release, Corp Fin’s long-standing practice of executing effectiveness orders in triplicate is going the way of the dodo bird. For those not doing deals, these orders are executed by Assistant Directors in Corp Fin, pursuant to delegated authority from the Commission, to officially declare a registration statement “effective.”
The orders are printed on old-fashioned triplicate paper, the kind you have to type up on a manual typewriter – and the typing permeates through the three layers, although the last layer is always a little hard to read. One copy is sent via regular mail to the issuer, one layer goes into some type of permanent record and one copy is probably sold on e-Bay (I am obviously in a joking mood today).
I have to be honest here, it saddens me to see this development as I view the time-honored ritual of typing up an effectiveness order and cornering an Assistant Director to sign it as one of the last remaining vestiges of the “old days.” Alas, no more microfiche, no more mimeograph. The SEC Historical Society should take a snapshot of a junior Staffer leaning over an Assistant Director’s desk with the multiple pages of an effectiveness order flapping in the wind.
As for the notion of a registration statement “going effective,” it has always struck me as odd that a deal could be held up on Wall Street because a junior Staffer was down at Starbucks throwing down a double latte rather than shepparding the proper papers through this process. In other words, unless the registration statement is on a form that allows for automatic effectiveness, a deal can’t go forward until the order is officially executed (even though all comments already are cleared by the Staff – or the registration statement was selected for a “no review” in the first place!). A very mechanical process – and one that will partially remain after this new development; now it will just be an electronic process rather than a paper one.
For you former (and current?) Staffers out there, remember shopping for an Assistant Director that might be amenable to signing your order if your own AD was out of the office? Some ADs had the reputuation of being difficult, such as quizzing you on the contents on the registration statement even though it was just a no-review! In hindsight, they probably were the smart ones – they just wanted the reputation of being unapproachable so that they weren’t hassled…
SEC Still Has Its Own Material Weaknesses
Last Friday, the GAO released this 29-page report covering the SEC’s financials for fiscal years ’05 and ’04 and noting that the SEC still has material weaknesses in its internal controls. The report concluded that many of the material weaknesses carried over from an earlier GAO report that I blogged about many moons ago. In the report, the GAO made 14 recommendations about how the SEC could improve its internal controls.
CalPERS Demands Meeting with UnitedHealth Group’s Compensation Committee
Wow! I was quite surprised to read – in this WSJ article and otherwise – that CalPERS had sent a letter to the head of UnitedHealth Group’s compensation committee to demand a telephonic meeting before the company’s annual meeting (which is next week – should be a humdinger) to learn more about the details of the company’s alleged options backdating practices. I know that activist funds have demanded meetings with directors before, but I can’t quite recall one soley over compensation pay practices nor one that was reported in the mainstream press.
Perhaps this is the start of a new practice by large shareholders? Of course, this is one of the more egregious examples of pay practices, as the lawsuits already have been filed – and UnitedHealth Group is making governance changes as fast as it can. [Speaking of UnitedHealth Group, read my reply contained in Saturday’s WSJ Online to last week’s Alan Murray column.]
If you intend on participating, please download the three sets of talking points before the webcast starts.
The “3rd Annual Executive Compensation Conference”
On CompensationStandards.com, we have just posted the agenda for the “3rd Annual Executive Compensation Conference.” As the more than 3000 that took in each of the first two conferences can attest, more practical guidance is gleaned from this conference than any other. And with the SEC’s new proposals raising the profile of compensation practices to even higher heights, you will not want to miss this year’s Conference.
This year’s Conference will be held on Thursday, October 12th in Las Vegas – and by nationwide live video webcast. CLE credit in most states – and ISS credit for directors – is available. Register today!
Early Bird Discount: Act Now!
Act before May 31st and receive an additional 50% off the firmwide rate to the “3rd Annual Executive Compensation Conference.” This special rate of $995 will enable everyone in your company or firm to access the live video webcast of the Conference (as well as access the video archive of the Conference and all the course materials). This is a tremendous savings for both law firms and companies whose directors need to get up-to-speed. Applies to companies and firms that have a firmwide license to CompensationStandards.com.
According to ISS’ “Corporate Governance Blog,” Sprint Nextel shareholders supported an AFL-CIO shareholder proposal on majority voting at its annual meeting last week with 66.4% of the votes cast. That follows a 61.7% showing at Novell on April 6th for a United Brotherhood of Carpenters and Joiners proposal. These early votes suggest that majority voting will receive significant investor support this season at companies that have not adopted board election reforms, such as director resignation policies and majority vote standards.
However, majority vote proposals continue to receive less support at companies that have adopted resignation policies (which companies retained plurality voting). Last week, similar proposals received 37.5% at Wachovia and failed to reach a majority at Burlington Northern Santa Fe. Electronic Data Systems reported that a majority elections resolution got 32% support, but that tally counted abstentions as votes against. In February, all three companies director resignation policies.
These votes are consistent with earlier results, where majority vote proposals failed to pass at Morgan Stanley, Hewlett-Packard, Ciena and Analog Devices, all of which had adopted resignation policies. More to come: majority vote proposals will appear on the ballot at 24 companies this week alone!
Final Report from the SEC’s Small Business Advisory Committee
Yesterday, the SEC’s Small Business Advisory Committee submitted its 241-page final report to the SEC. The FEI’s “Section 404 Blog” has a summary of its contents. Here is a statement from Chairman Cox on the report.
What Now After Dabit
There’s been lots of commentary after the recent US Supreme Court’s case on SLUSA, Merrill Lynch v. Dabit (including all these law firm memos). In this podcast, John Stigi of Sheppard Mullin Richter & Hampton provides some insight into the decision – and one more coming up – and analyzes the lay of the land in its aftermath, including:
– What did the US Supreme Court decide in Dabit? Why is the decision important?
– What other US Supreme Court case will be decided soon that might further impact securities class actions?
– What do you think the plaintiffs’ bar plan of action might be now?
Study: AIM Market Could Be the New Nasdaq
According to this Reuters article, a recent study suggests that the London Stock Exchange’s AIM market is the new Nasdaq, one reason why the Nasdaq has bought a 15% stake in the LSE. Learn more about what AIM is all about – and how (and why) a company might list on AIM – on our May 11th webcast: “How to Go Public on the London Stock Exchange’s AIM.”
Listening to Meredith Cross of Wilmer Hale at a local seminar last week, I was reminded that, under the new ’33 Act reform, companies are now grappling with how to handle the risk factor discussion in their upcoming Form 10-Qs.
For those of you that just filed Form 10-Ks recently, you will recall that the reform amended Form 10-K to require companies to describe – under the caption “Risk Factors” and only “where appropriate” – the risk factors described in S-K Item 503(c) that are applicable to the company. As the adopting release clarified, “a risk factor discussion in a Form 10-K may not be necessary or appropriate in all cases, depending on the issuer.”
Now, companies must consider another new disclosure requirement – to “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K.” A challenge is presented because the SEC stated in the adopting release that “we discourage, unnecessary restatement or repetition of risk factors in quarterly reports.” Thus, the SEC doesn’t appear to want a “cut and paste” of the 10-K risk factor section in the 10-Q, but rather an update of any risk factors described in the 10-K.
It remains to be seen how closely the SEC Staff will enforce this “discouragement,” as some companies may wish to follow their established routine of including all risk factors in each Form 10-Q, either for forward-looking safe harbor purposes or for the benefit of investors who may not know that they otherwise would need to search back through earlier filings to determine what other risks exist for that particular company.
To help you sort through this predicament, in our “Form 10-Q” and “Securities Act Reform” Practice Areas, we have posted a list of companies that already have been faced with complying with the new 10-Q requirement.
Are These Hedge Fund Results Real?
Wondering where the next large scale fraud is going to come from? I think Floyd Norris might have hit the nail on the head in his column in Friday’s NY Times. Maybe I’m getting paranoid in my old age, but there always is a “next” big wave of fraud and it seems like it usually emanates from the latest “too good to be true” investment vehicle.
Handling Whistleblowers
In this podcast, Phil Johnston, Special Counsel of Nexsen Pruet, a former CEO of two public companies and a co-author of the Corporate Governance Leadership Blog, provides some insight into what works in implementing a whistleblower compliance program, including:
– In the overall scheme of compliance, how important is Section 301(4) of Sarbanes-Oxley?
– Not-for-profits are also implicated by Sarbanes-Oxley as Section 301(4) makes it a crime to retaliate against a whistleblower. How have not-for-profits reacted to this new law?
– Based on your own experiences from serving on a director on five different public company boards, what do you see as the biggest mistakes that companies typically make in implementing their whistleblower compliance programs?
– I understand you have done research in the whistleblower cottage industry, including visiting a number of service providers. What should boards consider in selecting a service provider?
Yesterday, the SEC’s Small Business Advisory Committee held its final meeting. The Committee has until April 23rd to formally submit its final report with any finishing touches to the 150-page draft final report that was approved yesterday. The ball is now in the SEC’s court; Corp Fin Director John White remarked during the meeting that the SEC will have an open mind regarding the Committee’s recommendations. No timetable for that consideration was announced.
Learn more from FEI’s “Section 404 Blog,” including their two pages of notes from the meeting.
17,000 Comments on the SEC’s Executive Compensation Proposal!
With the April 10th deadline safely behind us – although comment letters will continue to dribble in, such as the forthcoming ABA letter – I thought it would be a good time to link to letters submitted from the more noteworthy market participants rather than have you slug through the nearly 17,000 letters that have poured in on this hot topic.
That number is a little misleading because the AFL-CIO was successful in having its members send in over 16,000 letters of this variety! Quite an impressive mobilization of the troops (unless software was used to bombard the SEC with a bunch of identical comment emails – wonder if that’s possible?)!
The comment letters listed below are in no particular order (and apologies to the many others that submitted letters – it’s dizzying to scroll through and pick through the list of comment letters on the SEC’s site):
You may find a recent survey regarding December year-end companies that filed their 10-Ks late both interesting and useful. As widely reported, the number of late filers declined 30% from last year (although still triple from ’03 levels), which could be expected given that this is the second year of internal controls and companies (and their auditors) had more of a “grip” on their 404 obligations this time around (remember that last year was a record year for 12b-25 filings, as noted in this blog).
Note that only about 25% of the companies filing late also reported a material weakness, down from around 50% last year. This is a little surprising as an inability to be able to close your books and get your financial reports done within two and a half months should be a pretty good indicator that you don’t have adequate internal controls. Also check out the interesting statistic that over 80 companies filed late for both the past two years – these companies were much more likely to report a material weakness (in fact, it’s surprising that not all of these companies didn’t report a material weakness given they were late two years in a row). We have posted the recent Glass Lewis survey (and this addendum) in our “Rule 12b-25″ Practice Area.
The Latest Internal Control Fee Studies
As widely reported, two new studies – one from FEI and another from CRA – have been released indicating that the costs of 404 compliance has gone down, while audit fees have increased. Rather than rehash the study findings, you can read this NY Times article or look at the studies themselves which we have posted in our “Internal Controls” Practice Area.
By the way, the SEC and PCAOB announced yesterday that they have set their next internal controls roundtable for May 10th.
Practical Considerations: Implementing a Majority Vote Standard
We have posted the transcript from the popular webcast: “Practical Considerations: Implementing a Majority Vote Standard.”
More on the Perils of Conducting the Internal Investigation
From Bruce Carton’s “Securities Litigation Watch“: Not too long ago, a lawyer or firm getting hired to conduct an internal investigation into a company’s possible securities law violations was the beginning of a usually lengthy, no-lose gravy train. Get a team together, map out all the documents and witnesses from which to gather information, bill heavily while collecting all of this information (and then while writing up a brilliant report), collect a big check, and move on.
Lately, however, some downside seems to be emerging in the internal investigation business. We first observed in November 2004 that prosecutors in the Computer Associates criminal case charged the former CEO of the company with obstruction of justice based on statements he made not to any government official but rather to the company’s outside counsel (Wachtell Lipton), which was conducting an internal investigation of the matter. In a sense, the prosecutors’ “deputized” the lawyers conducting the internal investigation by taking the position that a false statement made to an outside lawyer conducting an internal investigation is obstruction of justice when the outside lawyer is doing the investigation with the purpose of giving that information to the government.
Next, we discussed in this post the SEC’s reported Wells call threatening enforcement action against a lawyer who conducted an internal investigation into possible financial fraud at Endocare. The underlying article did not say exactly what the lawyer did to provoke the SEC, but the company had earlier issued a press release last year saying the probe the lawyer conducted found no “intentional wrongdoing by management.” The article referenced a speech by then SEC Enforcement Director Stephen Cutler, in which he stated that he was “concerned” that some lawyers hired to investigate signs of fraud might have helped cover it up.
As also discussed in the article, one former SEC assistant enforcement director noted that if the SEC proceeded with this case, other lawyers might think very hard before taking on company investigations and “there will be some firms who look at this and say we will never do another….” Notably, the SEC does not appear to have proceeded with any lawsuit against the lawyer in the nearly year and a half since the Wells call was reported.
Most recently, an article by Lynn Hume in today’s Bond Buyer states that the San Diego city attorney intends to sue the law firm Vinson & Elkins for an internal investigation report that he says was a “whitewash” that failed to hold city officials fully accountable. The city attorney claims that V&E was part of an effort to “help the people that were under investigation escape responsibility because that’s where the money was.”
With proxy season in full swing, I fear picking up the paper in the morning since it seems like there is a new story of a CEO making a killing at the expense of shareholders each and every day. Since our CompensationStandards.com mission attempts to focus on the positive – such as these CEOs That Have Set An Example – I have refrained from carping on some of the mind-numbing CEO pay levels that have been disclosed recently.
I can’t help but wonder how the boards reacted at these companies when they realized that they have doled out pay packages that have reached payouts in the aggregate that exceed a billion dollars (yes, that’s billion with a “b”). You would think that their reaction would be a “Holy Cow” moment. If not, maybe they have served on the board too long?
And as Mike Melbinger has been discussing in “Melbinger’s Compensation Blog,” it appears that the culture of greed has spawned more allegations of suspicious timing of option grants to senior managers. [Get a load of today’s WSJ story about the UnitedHealthcare CEO who now wants to rein in his – and other senior managers – pay. Easy for him to say now that he has over $1.6 billion in unrealized option gains. With rampant allegations of option-backdating, this guy is backpedaling fast.]
On his “Proxy Disclosure Blog,” Mark Borges has provided numerous examples of what companies are disclosing now about perks – and there have been a fair number of interesting disclosures. Mark’s analysis of proxy statements as they have been filed has been invaluable to those of us grappling with the SEC’s changing expectations.
For a more humorous – and more critical – take on recent perk disclosures, check out Michelle Leder’s footnoted.org. Below is one of my favorites from the related party category…
Driver’s Ed on the Company Dime…
From footnoted.org: “As with many professional sports, making it to the top of the professional racing circuit can take years of hard work and plenty of near-death experiences. Michael Waltrip, pictured here with his car, is one of the success stories. Now Waltrip’s company is helping two sons of Aaron’s Rent (RNT) executive Bill Butler train to become race car drivers courtesy of the company. In the proxy that the company filed on Friday, the company noted that Aaron’s is sponsoring Waltrip’s “driver development program” and that the two drivers participating in the program in 2005 are Butler’s sons. But here’s the real kicker: Aaron’s estimates that it paid $890K last year to train Butler’s sons and will spend nearly $1 million this year on the program.
So what exactly are the Butler boys — known as KBIII and Brett — learning for this money? This article that was sent out to Aaron’s franchisees details the program:
During the work week, KBIII and Brett learn about the cars they race and how to build them, repair them and make them perform faster. They train their bodies for the rigors of racing. They learn strategies for winning races. Then, come the weekend, they put it all to the test.
We’re guessing that since dad — Aaron’s Sales and Lease Ownership President Bill Butler — only made $425K last year, paying twice that amount to teach your sons to be professional drivers was probably out of the question. But getting the company that you work for to pay for that training and counting it as a marketing expense, seems like a very creative use of accounting rules.”
Personal aside: I don’t know about you, but I hated driver’s ed. Creepy phys ed teacher and I already could drive better than him. Can you believe there is a forum where folks discuss bad driver’s ed experiences…and then you have this movie entitled “Hell’s Highway – The True Story Of Highway Safety Films”…
This article from Sunday’s NY Times touches on the other half of the majority vote debate – what to type of integrity exists in today’s voting process now that votes in director elections could mean much more than they do today? The article parses a recent study entitled “Vote Trading and Information Aggregation” from a group of professors that found, over a two-year period, that there was a significant spike in the number of borrowed shares on the typical record date. And they found an almost-as-big decline in such shares, on average, the day after those record dates. In their opinion, the only plausible explanation is that traders borrowed shares solely to acquire votes.
This is not “new” news really, as there have been reports going back a while of funds buying votes without economic risk. In fact, when DealLawyers.com was launched at the end of 2004, one of the first queries in that Q&A Forum (ie. #3) dealt with the ability of such a hedge fund to use Schedule 13G (as opposed to Schedule 13D) when such an arrangement resulted in the fund holding more than 5% of a company’s stock.
What About Overvoting?
Interestingly, the NY Times article (and the study) doesn’t delve into the topic of overvoting – a topic that I was interviewed about last year (see this related blog). This issue and more surely will draw more scrutiny of the voting process, which may very well be tested in court when director elections are too close to call under a majority vote standard.
My Ten Cents on the SEC’s Journalist Subpoena Saga
I know the First Amendment is important, even more so now that I call myself a “journalist” when folks ask what I do for a living (and if you ever lived in DC, you know that is the first question you get asked at a cocktail party). But I still can’t believe how much press was given to the SEC’s new policy regarding journalist subpoenas – since Chairman Cox first noted that the policy was forthcoming a month ago, I must have read two dozen articles about the topic.
As this NY Times article noted last Friday, “Before the Gradient inquiry, officials said they could recall no other instances of subpoenas of journalists other than in some well-known insider trading cases involving journalists in the 1980’s and 1990’s. In those cases, unlike the Gradient inquiry, the reporters were the subjects of the investigation.” Sure sounds like the SEC’s Enforcement Division wasn’t abusing their power in this area…at least not before the latest hubbub (which, depending on what really happened, appears to an isolated case at most).
