ISS has released an updated version of its Proxy Season Scorecard, whose highlights include:
– Majority vote to elect director proposals received an average level of support of 47.8 percent, up from 43.7 percent in 2005
– Use performance-based vesting proposals received an average level of support of 41.5 percent, jumping more than nine percentage points from 2005
– Disclose political contribution proposals received an average level of support of 20.7 percent, which is more than double last year’s average
Majority Vote Standards: The New Proxy Card
Several companies that have adopted pure majority vote standards have tweaked their proxy cards (and voting instruction forms) to allow for shareholders to vote “against” director nominees – we have posted several of these samples in our “Majority Vote Movement” Practice Area. It is important to note that ADP has the systems in place for those companies who need to make similar changes.
Incorporation by Reference and Written Statements: The PSLRA’s Safe Harbor
We seem to get a fair number of queries about incorporation by reference in our Q&A Forum, so I thought it would be informative to repeat this development (and analysis) from a recent Wachtell Lipton memo: “The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) creates a “safe harbor” from liability under the federal securities laws for earnings projections and other forward-looking statements, both written and oral, that are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”15 U.S.C. § 78u-5(c)(1). In the case of oral forward-looking statements made by or on behalf of an issuer subject to Exchange Act reporting requirements, the statute provides that “meaningful cautionary statements” contained in an identified written statement may be incorporated by reference. Id. § 78u-5(c)(2).
Because the PSLRA’s “safe harbor” expressly permits incorporation by reference with respect to oral statements, shareholder plaintiffs have argued that a corporate defendant’s written statement (e.g., a press release) that incorporates by reference the “meaningful cautionary statements” contained in another written document (e.g., the corporation’s annual report) is not entitled to “safe harbor” protection.
This argument was recently rejected in Yellen v. Hake, 2006 U.S. Dist. LEXIS 47012 (S.D. Iowa July 7, 2006). The court reasoned that “[w]hile the Safe Harbor provision does not explicitly provide for incorporation by reference for written forward-looking statements,” a defendant’s ability to avail itself of the “safe harbor” in this manner was implicit in the statute. The court also noted that numerous federal courts have concluded that cautionary language is not required to be in the same document as the allegedly false statement for a defendant to get the benefit of the “safe harbor.”
Although the decision in Yellen offers some comfort that a press release containing forward-looking statements can come within the PSLRA’s “safe harbor” by incorporating by reference cautionary statements contained in prior SEC filings, the safer course remains for companies to avoid the issue altogether by simply repeating verbatim in their forward-looking press releases the same cautionary statements contained in their prior SEC filings.” We have posted a copy of this memo in our “Forward-Looking Information” Practice Area.
In the wake of the recent PCAOB rules on auditor independence, many companies have been updating their pre-approval policies regarding non-audit services. Some companies have even been cobbling new policies together that prohibit personal tax services from being performed by the independent auditor for persons in a financial reporting oversight role. In our “Pre-Approval of Non-Audit Services Policies” Practice Area, we have posted a sample of one of these new policies in a Word file.
The Big 2000
A few weeks ago, our “Q&A Forum” passed the 2000th question mark, which is really higher since a fair number of those include follow-ups. Quite a body of achievement if I must pat ourselves on the back as there is quite a bit of practical content buried in the Forum. I’m not sure if we can keep up with the growing pace of questions – and I remind you that we welcome your own input into any query that you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply…
Inspector General Recommendation: Continuous SEC Surveillance of Larger Companies
Last month, the SEC’s Office of Inspector General issued this report which recommends that the Division of Corporation Finance engage in continuous surveillance of larger companies. According to the report, this recommended program would be operated in a manner similar to that used by the SEC’s Office of Compliance Inspection and Examination for investment advisors. The report also recommends that Corp Fin better manage its workload and use risk factors more frequently during its preliminary screening of filings.
I beg to differ. I understand that a large portion of the overall US market cap consists of the huge capitializations of a relatively small group of companies – but these companies typically also have the most resources to devote to compliance matters. And as a general matter, it is my understanding that more frauds are perpetuated at smaller companies compared to larger ones. So using scant SEC Staff resources to continuously oversee the General Electrics of the world doesn’t seem like the best way to protect investors…
And we just added a senior actuary from Towers Perrin – Tim Marnell – to the “The New Retirement Pay Tables” panel. When you hear what Tim has to say, you will realize how challenging those tables (and the related SCT column) will be!
A few Conference items to note:
1. Ensure you are registered, particularly if you delegated getting registered to someone else in your office. I have interacted with several members who thought they had registered – but it hadn’t happened yet. We are dreading the inevitable last-minute rush during the week of Labor Day. Please don’t procrastinate!
2. Ensure your registration is in the form you want it to be. Our experience with our popular annual Executive Compensation Conferences is that a lot of people show up in-person for the Conference – but they had only registered for webcast attendance (which is a little cheaper). We won’t turn away those people at the door, but the processing takes some time. Save yourself the hassle!
In reviewing this salesforce.com proxy statement, I saw something I haven’t run into for a while: disclosure about the Rule 10b5-1 sales plans that have been implemented by various officers and directors – in a separate section following the discussion of employment contracts and certain transactions, the company identifies which officers and directors have entered into such plans on page 17.
While I’ve seen plenty of Rule 10b5-1 plans disclosed in press releases and Form 8-Ks, this is only the second time I’ve seen the topic covered in a proxy statement (Plantronics has had similar disclosure in its proxy statements for each of the past two years). Note that I am not advocating that companies make such disclosure nor do I claim that’s it’s required – I’m just pointing out some novel disclosure…
The Law Firm That We Know All Too Well
Some wise guy has written a fictitious book – “Anonymous Lawyer: The Novel” – about a crude law firm. I figure I don’t need to read the book since I’ve already lived it (and re-lived it in my nightmares).
Much more interesting is the author’s hilarious web site for the fake firm. My favorite lawyer is Patrick Weinberg – reminds me of my own associate skills back in the day!
Last Thursday, the US Attorney General and the SEC brought criminal and civil charges against three former senior Comverse Technology executives for alleged option backdating manipulation. Here is the SEC’s press release – and here is the SEC’s complaint. Courtesy of the “WSJ Law Blog,” here is the Criminal Complaint, which includes quite a bit of detail about the alleged fraud.
My favorite part of the complaints are when they reveal that the former Comverse executives secretly inserted fictitious names amid the names of actual employees on proposed option grantee lists, which then were submitted to Comverse’s compensation committee for approval. This is what Jimmy Rockford would have done in the corporate world (if Jimmy ever went to the “dark side”)! And it gets better – the former Comverse CEO is AWOL and on the lam! Some pretty crazy stuff – movie material perhaps? Read more about the Comverse allegations on Bruce Carton’s “Securities Litigation Blog.”
Unanimous Written Consents: Analysis of Proper Effective Dates
Alan Dye points out that the Attorney General’s and SEC’s case against the former Comverse executives confirms what we wrote in the March-April 2006 issue of The Corporate Counsel – about it being improper to treat a unanimous written consent as being effective “as of” an earlier date than the date the last signature was obtained. In e-mails to us, we had a few members question our view, but we stood our ground – and now it’s apparent that the government is taking the position that the grant date is the date on which the directors sign the consent and can’t be some earlier date specified in an “as of” sentence in the consent.
The government also appears to be questioning the practice of not including a date line next to each signature line – it’s perceived as a practice that is intended to facilitate backdating. So here’s today’s practice tip: start using datelines!
FCPA, Options Backdating, and D&O Exposure
Kevin LaCroix’s “D&O Diary Blog” contains some excellent analysis of how the Foreign Corrupt Practices Act figures into the option backdating scandal, including this prior post about how one of the dangers from an FCPA enforcement proceeding is the possibility of follow-on litigation. Kevin also explains how the recent securities fraud lawsuit settlement below provides a glimpse into the way FCPA violations can spawn follow-on litigation:
“On August 9, 2006, Willbros Group announced that it had settled the 2005 class action lawsuit that had been filed against the Company and several of its directors and officers. The Complaint alleged that the company had been the subject of numerous of numerous investigations “because the Company engaged in a campaign of illegal and illicit bribery of foreign government officials in Bolivia, Nigeria and Ecuador to successfully obtain construction projects.” The Complaint alleged that the company was forced to restate several years of financial statements and to establish a reserve to accrue for possible fines and penalties for FCPA violations. The Complaint alleged that as a result of these violations, the Company had misrepresented its true financial condition. The Complaint alleged that the company’s share price declined 31% when these matters were disclosed.
In its August 9 press release, the Company did not disclose the amount of the securities class action settlement, but the press release did state that the amount of the settlement would be funded by the company’s insurance carrier.
The Willbros settlement illustrates the growing D & O risk that increased FCPA enforcement activity could represent. The threat is not so much from the underlying FCPA enforcement action itself; any FCPA fines and penalties likely would not be covered under most D & O policies. Rather, the threat is from the potential liability that could arise in any follow-on civil action, including any follow-on securities fraud lawsuit like the one filed against Willbros Group. Any settlement or judgments incurred in a follow-on action, as well as defense expenses, would usually be covered under the typical D & O policy.
As FCPA enforcement actions grow in number and magnitude, this exposure could pose an increasingly greater D & O risk.”
Yesterday, SEC Chairman Cox appointed Erik Sirri as the new Director of the Division of Market Regulation, the last remaining senior SEC post that was vacant. It has been open since Annette Nazareth moved up to Commissioner last year.
Eric currently is a Finance Professor at Babson College and served as the SEC’s Chief Economist back in the late ’90s, back when I was worked for Commissioner Unger – so I have seen Erik in action. It is not unheard of for an economist to be head of Market Reg – Rich Lindsey moved up from Chief Economist to Market Reg Director in the mid ’90s.
SEC’s IM Staff Provides No-Action Relief After Goldstein
Last Thursday, the Division of Investment Management Staff gave this no-action response to the American Bar Association’s Subcommittee on Private Investment Entities to provide guidance to the hedge fund industry following June’s decision from the US Court of Appeals for District of Columbia Circuit, Goldstein v. SEC.
The Goldstein decision vacated Rule 203(b)(3)-2, the intent and effect of which had been to require the registration of a substantial number of investment advisers to hedge funds. As Chairman Cox noted in this recent testimony on the Hill, the SEC has decided not appeal the Goldstein ruling – instead, the SEC will go back to the drawing board and propose new hedge fund rules in the near future.
Alleged Section 409 Violation: The Quoza Story
A new monitoring service from Quoza claims to track whether companies are posting their press releases on their websites before – or exactly – at the same time that information is otherwise disseminated. The origins of this service appears to be based by the requirement in Section 409 of Sarbanes-Oxley for companies to disseminate information on a “rapid and current basis.”
Apparently, Quoza’s software repeatedly checks the IR and PR web pages of companies – and Thomson began to block this monitoring/tracking software because it causes “performance degradation and impairs its ability to accurately understand website traffic, usage trends and analytics.” Thomson operates the IR and/or PR web pages for a number of public companies. From what I gather, Thomson has requested a Cease & Desist order – and Quoza has made a number of complaints against Thomson, some of which are detailed on this page. Quoza also has sent this e-mail to a number of companies:
“You are in violation of section 409 of the Sarbanes- Oxley Act. Please stop blocking access to your website. This email is to inform you that www.quoza.com is launched and available to the public. We invite you to visit www.quoza.com and read the ‘Why Us’ section on the site. This section is self-explanatory and highlights the need and the mission to bring timely reporting, transparency and equal access to all material and mosaic news of your company to the masses and the small investor. Our objective is to bring all investors a fair system in real time that monitors information that leads to investment decisions. One way we do this now is bringing clear illustration thru compliance reports that show some locations where and possibly when information was distributed.
You may or may not be aware that we have had serious problems with one of the operating units of your subcontractor, The Thomson Corporation, stock symbol [TOC] which handles your website press release pages. They have been blocking and disrupting our attempts to bring timely reporting, transparency and equal access of your news to the masses.
The Thomson Corporation [TOC] is a company that has many services to add value to and integrate information. The Thomson Corporation [TOC] sells their services to many large financial institutions and the elite and helps distribute these services fast. Most of corporate America has been working to comply with section 404 of Sarbanes-Oxley. We note on our site that section 409 of Sarbanes-Oxley requires public corporations to distribute material information on a “Rapid and Current Basis”. We would like to caution you that the blocks placed by The Thomson Corporation on access to all your news that is material and non-material (mosaic) disrupts our ability to bring your news to the masses on a rapid and current basis. This increases the liability for your company and places your company in violation of section 409 of Sarbanes-Oxley. It is clearly a conflict of interest for The Thomson Corporation to handle and control access to your press releases on your website, while using this information to sell value added services to large financial institutions and the elite.
Your company can increase fairness and distribution by releasing all material and non-material (mosaic) information on your website, at the very same time such information is released, distributed or sold to large financial institutions and the elite anywhere else. By releasing all material and non-material information on your website, even if any non-material information is later determined to be material, you can demonstrate that the information has been made widely available thru your website. This also reduces your company’s liability and exposure.
Quoza gives the public the ability to extract your news from your company website, rather than the masses reading your edited company news on a third party websites. You are in total control of how you want your news story to be presented on your website along with other marketing material. Quoza’s method of giving the public the ability to extract news from your company website carries with it marketing advantages for your company at no additional costs. Quoza’s compliance reports on your news stories can also serve as a tool to decrease your company’s exposure and liability by bringing transparency and equal access to all your material and non-material (mosaic) information.
Quoza is offering a 24-hour free trial period to all general subscribers and corporate sponsors. We believe once you view our product by visiting www.quoza.com and read ‘Why Us?’ you will cooperate with us by asking The Thomson Corporation to stop blocks on our attempts to bring timely reporting and transparency of your company news on your web pages to the masses.
You can demonstrate your support for Quoza by becoming a corporate sponsor for an annual sponsorship USD 5000 per year. This fixed annual sponsorship fee is open to first 100 corporate sponsors at this time. The regular site sponsorship fee is USD 10,000 per year. You can also register as a general subscriber, which costs only USD 15.95 per month, but paid on an annual basis for a total cost of USD 191.40..
As a Corporate sponsor, Quoza will provide the service of giving the public the ability to extract news for your company directly from your website, along with the news time compliance reports. This service provided for news of corporate sponsors will be free to everyone and not just reserved for Quoza’s paid subscribers.
We look forward to your support in our mission to bring timely reporting, transparency and equal access to all your material and non-material information. If you need to contact us you can do so through the contact us section on the registration page. If you want one of our representatives to call you, please include your contact information and the best time to reach you in your email.”
My ten cents: This may very well be a novel case for a court to determine whether automated processes, such as crawlers, spiders, and other applications that scrape data or perform automated retrieval of content, are considered to be to legitimate users of web sites. In addition, I believe most of us presumed that the SEC’s adoption of new Form 8-K rules in 2004 (ie. “real-time” disclosure) took care of what Congress envisioned in Section 409 of Sarbanes-Oxley. It will be interesting to see how this plays out…
On Friday, the SEC posted the 436-page adopting release for its executive compensation disclosure rules. The compliance dates appear on page 2 – but you should also read pages 195-197 for more information about those important dates, including transition details. And thanks to Faegre & Benson for this useful Table of Contents to slap on your copy of the adopting release. Hours after its issuance, Mark Borges already had made his first stab at analyzing the adopting release in his “Proxy Disclosure Blog.”
With just a few weeks left, folks are registering in droves for our two-day Conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – which will be held live in Washington DC at the Marriott Wardman Park on September 11-12. Rooms are filling up fast – here is how to obtain special room rates.
If you come to Washington DC to take in the conference, you still will get access to the video archive of the Conference, which will be important when you actually sit down to draft – and review – disclosures during the proxy season. The Conference is still available by videoconference if you can’t make it to Washington DC on those days (and the Conference will be archived if those dates are conflicted for you).
If you haven’t yet, check out this detailed conference agenda to understand the types of challenges you should expect to face from the new rules.
Sample Executive Compensation Disclosures
Even in advance of our comprehensive Conference coming up in a few weeks, many of you are – wisely – drafting mock disclosures to figure out how the SEC’s new rules impact your unique circumstances. To assist you, we have organized a horde of Mark Borge’s blogs from the past year – each of which provides analysis about how a particular company attempted to meet a component of the SEC’s then proposed rules – in these sample disclosures. These sample disclosures are posted in CompensationStandards.com’s “The SEC’s New Rules” Practice Area.
As new proxy statements are filed, you can be sure that Mark will be analyzing how they stack up against the new SEC requirements in his “Proxy Disclosure Blog.”
Insider Trading Law Quirk?
A few bloggers are eating up the story about Dallas Mav’s owner Mark Cuban’s new ShareSleuth.com site (which I blogged about pre-launch) and the revelation that Mark is selling short in some of the companies for which the site does investigative reporting to find a company’s warts. Gary Weiss does a juicy job – and has been battling Cuban – in his blog: see Round I, Round II and Round III. And Bruce Carton gives us the full-on legal analysis in his “Securities Litigation Watch” Blog.
Like last year’s blowout with Hootie & the Blowfish, this year’s NASPP Annual Conference – in Las Vegas – will include a special entertainment event. The NASPP, along with Fidelity Investments, is excited to announce that immediately after the Gala Opening Reception on October 10th, all Conference attendees are invited to join the NASPP and Fidelity on the beach at Mandalay Bay for an exclusive private concert featuring Huey Lewis & The News!
The concert is offered to NASPP Conference attendees only. There is no additional charge to attend – but space is limited and you must register with Fidelity in advance. Alas, major conferences will never be the same for me…
The Pension Protection Act of 2006
Last Thursday, the US Senate passed the Pension Protection Act of 2006, a pension reform bill approved by the House of Representatives on July 28th. The Act addresses a wide range of employee benefit-related issues, including the first change to the definition of “plan assets” under ERISA since 1986. Among many other changes, this Act will now permit managers of hedge funds, funds of funds and other investment vehicles that accept investments from public and private, non-US and US ERISA plans – that do not otherwise qualify for an exception or exemption from the plan asset rules – to accept significantly more capital from ERISA plans.
Former SEC Secretary Jack Katz on an “Overlawyered” SEC
Former long-time SEC Secretary Jonathan “Jack” Katz penned an editorial for Tuesday’s WSJ, following up on Harvey Pitt’s recent editorial about the SEC being over-lawyered. Jack agreed with Harvey’s identification of the problems at the SEC – but Jack doesn’t think that hiring more economists and fewer lawyers solves the problem.
Instead, Jack wants the SEC to play a more active role in monitoring rules once they’re adopted: “Over-lawyering is not merely a reflection of the personnel working at the SEC, it’s also a product of the institution’s definition of itself.” Jack’s thoughts are consistent with recently departed Commissioner Glassman’s emphasis on the need to discern the real-world implications that SEC rule-making initiatives will have before the so-called problem-solving is effectuated. It’s rather jolting to see Jack’s name on something other than an SEC order – and he certainly has a world of experience as he sat “in the room” for more than two decades at the SEC.
Yesterday, the SEC issued two releases to grant smaller companies and many foreign private issuers further relief from compliance with Section 404 of Sarbanes-Oxley. This relief reflects the “next steps for Sarbanes-Oxley implementation” announced in May and includes some new initiatives not previously announced. Here is the related press release – and below is a summary of the SEC’s actions:
– Accelerated Foreign Private Issuers Get One More Year – In this adopting release, the SEC extended its Section 404(b) auditor attestation deadline for those foreign private issuers that also are accelerated filers (but not those that are large accelerated filers, who still must meet the earlier deadline of fiscal years ending on or after the July 15th that just passed) to fiscal years ending on or after July 15, 2007. Note that foreign private issuers still have to file their Section 404(a) management reports under the existing deadline of fiscal years ending on or after the July 15th that just passed.
– Proposed Five-Month Deadline Extension for Non-Accelerated Filers – In this proposing release, the SEC proposed to extend the Section 404(a) management report deadline for non-accelerated filers (both US companies and foreign private issuers) to fiscal years ending on or after December 15, 2007 – and would extend the Section 404(b) auditor attestation deadline for non-accelerated filers to fiscal years ending on or after December 15, 2008. If this proposal is not adopted, non-accelerated filers would have to begin filing their Section 404 reports for fiscal years ending on or after July 15, 2007.
The SEC also proposed to deem the Section 404(a) management report included in a non-accelerated filer’s annual report (as well as for foreign private issuers that are accelerated filers (but not large accelerated filers)) during the first year of compliance to be “furnished” rather than “filed” for purposes of Section 18 of the ’34 Act, unless the filer specifically states that the report is to be considered “filed” or incorporates it by reference into another filing.
– Proposed One-Year Relief for New Filers – In this proposing release, the SEC proposed a one-year stay for companies coming off IPOs (as well as those doing registered exchanges or any other first time filers with the SEC, regardless if they are US companies or foreign private issuers), so that they would not have to provide any Section 404 reports (ie. neither a management report nor an auditor attestation) in their first annual report. However, this relief would not be available if a company already had filed at least one Section 404 report.
More on Nasdaq’s Transition as an Exchange
In connection with Nasdaq’s transition to an exchange (see more in this blog), the SEC’s Market Reg and Corp Fin Staff issued this no-action letter that essentially permits companies and third-parties to satisfy, through EDGAR filings, their obligations to provide copies of most ’33 Act and ’34 Act filings to Nasdaq. Thanks to Alan Singer of Morgan Lewis for the heads up!
More on Blue Sky Issues and Nasdaq’s Exchange Transition
Recently, I blogged about possible blue sky issues related to Nasdaq’s transition to an exchange. Showing that I am indeed fallible, I overlooked Footnote 7 in Nasdaq’s amended rule filing which states that “The Nasdaq Global Market, including the Global Select segment, will be the successor to the National National Market. As such, Nasdaq believes that all securities listed on the Global Market, including those on the Global Select Market, will be “covered securities,” as that term is defined in Section 18(b) of the Securities Act of 1933, 15 U.S.C. 77r(b).”
Given that the SEC was silent on this point when it approved Nasdaq’s rule filing, practitioners can take some comfort that the position in this footnote holds some water.
By the way, we are still waiting for the SEC to approve Nasdaq’s rulemaking petition to designate securities listed on the Nasdaq Capital Market (f/k/a Small Cap) as “covered securities.” This rulemaking petition was made in February and I understand that the Nasdaq intends to file some changes to its Capital Market listing standards soon to address comments from the SEC Staff reviewing the petition, so some progress is being made…
On Monday, Corp Fin Director John White addressed the ABA’s Business Law Section in Hawaii. I couldn’t swing that hall pass, but the program was available via teleconference. We have put together notes from John’s remarks and posted them in our “Conference Notes” Practice Area. John covered some ground on the new executive compensation disclosure rules – and he did say that the adopting release will be available this week, coming in at over 400 pages!
Now that the adopting release will be out soon, you need to act fast to reserve a hotel room for our Conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – which will be held live in Washington DC at the Marriott Wardman Park on September 11-12. Rooms are filling up fast – here is how to obtain special room rates.
If you come to Washington DC to take in the conference, you still will get access to the video archive of the Conference, which will be important when you actually sit down to draft – and review – disclosures during the proxy season. The Conference is still available by videoconference if you can’t make it to Washington DC on those days.
If you haven’t yet, check out this detailed conference agenda to understand the types of challenges you should expect to face from the new rules.
Corp Fin Phone Interps: Regulation AB Interps Updated
Earlier this week, Corp Fin updated its Telephone Interpretations pertaining to Regulation AB, adding these items: 11.02 – 11.04, 15.02, and 17.03 – 17.05. Phone interp aficionados will recall that the Reg AB interps were the first new interps since Harvey Pitt became SEC Chair. No word on when the other interps will be updated…
How to Develop a Whistleblower Compliance Program Today
We have posted a transcript of our popular webcast: “How to Develop a Whistleblower Compliance Program Today.”
Litigation Update: How the Courts are Ruling on Stock Compensation
– What the courts are saying about contract ambiguities and other employment disputes
– Tips on how to stay out of court
– What the IRS is saying about equity compensation tax shelters
– How to keep abreast of recent legal and regulatory developments
A handful of members dropped me a line responding to my query last week regarding silence in anti-dilution provisions of stock option plans and FAS 123: the question of whether as a matter of contract construction, an option plan (or warrant) that was silent about adjustment could be adjusted if the stock was split.
For example, Professor David Yermack of New York University noted that a seven-year old Delaware case – Sanders v. Wang, 1999 Del. Ch. Lexis 203 (11/8/99) – considered the very issue of a Computer Associates equity compensation plan that was silent about what to do in the event of a stock split. A very large restricted stock award to the CEO and several top managers was split in line with the company’s stock splits. A shareholder sued, alleging waste of corporate assets, since the plan had no provision for such an adjustment to a share award. The court agreed and ordered the top three executives to return the extra shares – 9.5 million shares since their restricted stock plan had no provision for increasing the inventory of shares when the stock split – which cost them close to $600 million on paper. Interestingly, Dick Grasso was one of the outside directors/defendants in the suit.
And Ken Stuart of Holland & Knight noted that in December 2001 – in Reiss v. Financial Performance Corporation, 97 N.Y.2d 195, 764 N.Y.S. 2d 658 (2001) – the New York Court of Appeals held that where a warrant was issued without any provisions for adjustment in the event of a stock split (or a reverse stock split), the Court would not read such provisions into the warrant in the case of a one-for-five reverse split. Thus, the holder could exercise for the full number of shares stated in the Warrant and not the after-split amount. The lower court had relied on a First Circuit case – Cofman v. Acton Corp., 958 F2d 494 (1992) – which had held that the parties there had not given any thought to dilution and that an essential term of the contract was missing, so it could be given effect by the court. However, the N.Y. Court noted in dicta that if they were dealing with a forward stock split, they might give effect to dilution on the theory that the holder did not intend to acquire nothing.
Is It Time to Merge the SEC and CFTC?
In Saturday’s WSJ, former SEC Chairman Arthur Levitt opines that the SEC and CFTC should be merged into one in this editorial. I’m not sure many would disagree since the two agencies have overlapping constituencies to some extent. But why stop there? There are a number of federal agencies that should be merged out of existence – but the “gov” is so tough to downsize. That’s why we have six federal agencies to regulate financial institutions (Fed Reserve, OCC, OTS, FDIC, OTS, NCUA)…
Spinning Off: ADP’s Proxy Delivery & Voting Business
Last week, ADP announced plans to spin off a combination of its brokerage, securities clearing and outsourcing divisions – which includes the proxy delivery and voting services that it offers to its broker clients (which result in services offered to beneficial owners). The spin-off is expected to be in the form of a tax-free dividend, paid by the middle of next year.
Since mother ADP is not expected to control the new spun-off entity, it should give more freedom to the folks running the proxy delivery/voting services to be innovative, etc. – and it shouldn’t adversely impact companies or their shareholders.
