Mark Borges blogged yesterday about the long-awaited Reg S-K 402 revisions, noting that this article in Wednesday’s St. Louis Post-Dispatch suggests that the disclosure project is back on the front burner and could be expected soon.
The Washington University Law School in St. Louis held a corporate governance conference last week at which Commissioner Roel Campos and Corp Fin Director Alan Beller spoke, indicating that possible areas for revision include pension disclosure, board compensation committee reports and requiring disclosure of a “total compensation” figure. Additionally, as Broc has blogged on September 21 and August 15, Chairman Cox has been voicing his opinion in the last few weeks about the need for change in the executive compensation disclosure area.
Is it possible that the Commission can move quickly enough to update the rules before next proxy season? It’s possible, but it would be very tight. However, as Mark points out, if the Commission proposes changes before the end of the year, the proposals could very well influence companies’ 2006 disclosures, even if they are not yet adopted or in effect.
“New Issue” Rules in Effect Nov. 2
The NASD issued a notice to members this week advising that the “new issue” rules will go into effect November 2, 2005. As Broc previously has blogged about on September 22 and September 19, Rule 2790 replaces the Free-Riding and Withholding Interpretation (IM-2110-1), and is “designed to protect the integrity of the public offering process.” It requires that: (1) NASD members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including NASD members and their associated persons, do not take advantage of their insider position to purchase “new issues” for their own benefit at the expense of public customers.
Likely to happen even before the Disney case’s appeal is decided by the Delaware Supreme Court, another executive compensation lawsuit is headed to trial in the Delaware Court of Chancery. This trial is calendared for February 2006 before Vice Chancellor Lamb – and results from the former CEO and COO of Valeant Pharmaceuticals receiving cash bonuses upon spinning off a subsidiary of the company.
The company is alleging that the two men breached their fiduciary duties of loyalty and good faith and unjustly enriched themselves, among other charges, by granting and paying themselves and other directors and officers approximately $48 million as a cash bonus at the completion of an IPO of a minority interest in one of the company’s subsidiaries.
More information, including a copy of the Second Amended Complaint filed against the company’s former Chairman/CEO and its former COO/Director, is posted on CompensationStandards.com in the “Hot Box” on the home page.
In addition, don’t forget that our “2nd Annual Executive Compensation Conference” will open with a panel on director duties and liabilities featuring Delaware Supreme Court Chief Justice Myron Steele; Delaware Vice Chancellor Stephen Lamb; and Professor Charles Elson, Director of the U. of Delaware Center for Corporate Governance.
Updated Majority Vote Chart
Fyi, we continue to update our “majority vote chart,” which lists those companies that have adopted some form of voluntary corporate governance guideline regarding the tendering of a director resignation in the event a majority of votes are withheld from that director. Companies that recently have taken the step of adopting some version of this guideline include Microsoft, Wells Fargo, Avnet, Gap and United Technologies.
Last week, the ABA Director Voting Task Force issued a press release indicating it has received 36 comment letters and that its next meeting is set for early December (and that companies adopting voluntary guidelines is a positive development). The press release claims the comment letters are posted and provides a URL – but it doesn’t work.
I am speaking on this topic today at the Society’s Chicago Annual Chapter Meeting. Next week, I will be providing analysis about the legal consequences of adopting voluntary guidelines regarding director resignations.
Webcast Transcript on ’33 Act Reform and Seasoned/Unseasoned Issuers is Up!
We have posted the transcript for the webcast: “Drilling Down: Seasoned/Unseasoned Issuers and Voluntary Filers Doing Offerings After the ’33 Act Reform.”
One of our members said it better than I could about this recent Chief Executive article: “I work in the law department at a public company in the midwest. Although this Chief Executive article isn’t about stock options, restricted stock or a perk awarded to directors or executive officers, I still think it is rather heinous that a publication “flaunts” the fact that executives are, in effect, using shareholder money to buy their cars. I find this article in strict contrast to “CEOs Who Have Set an Example” on Compensation Standards.com and just thought it might be of interest for one of your more succinct words of wisdom and insight.”
Trading Restricted Stock on an Exchange?
Last Wednesday, this NY Times article analyzed the new Restricted Securities Trading Network, a platform that has been built to trade “restricted stock.” I don’t know about you, but the article seemed a little off.
Sounds like the reporter is confusing restricted securities (a la Rule 144) with restricted stock, which may be registered on S-8 but nevertheless is illiquid. I don’t see how there could be a market for restricted stock, so the issue must be whether there’s a market for restricted securities that are not yet eligible for resale under Rule 144, like the market for Rule 144A stock that’s open only to QIBs. If that’s the case, I would think that any user of this new service should be asking a number of questions, such as what’s the applicable ’33 Act exemption (Section 4(1 1/2)?) – and what practical hurdles must be overcome (eg. will the transfer agent require a legal opinion for each trade, since the shares will be legended?). Thanks to Alan Dye for his insight here.
Some Thoughts on Why We Need Option Expensing
Yesterday, I posted this rebuttal by Lynn Turner, Managing Director of Research for Glass Lewis and a former SEC Chief Accountant, to the points made by former US Senators Bob Dole and Tom Daschle in this WSJ opinion editorial. Lynn provides strong support for the FASB’s move to require options expensing.
Next Wednesday, Paychex shareholders will vote on a binding shareholder proposal from ASFCME which would require the board to change the company’s bylaws, stipulating, “directors shall be elected by a majority of the shares present in person or represented by proxy, provided a quorum is present at the meeting.” In Sunday’s NY Times, this mandatory bylaw proposal was discussed in this article.
As noted in ISS’s Friday Report, ISS has supported non-binding majority elections proposals this proxy season, but recommended against AFSCME’s binding proposal at Paychex on the grounds that it does not differentiate between contested and uncontested elections. As ISS noted in its analysis: “Dissidents in a contested election would be subject to the same majority standard as management nominees. The majority vote standard becomes more difficult to achieve because of the complicating impact of withhold votes, as well as the division of votes between two candidates for the same seat. In a case where no candidates win a majority of the votes cast, the holdover rule would favor the incumbent directors, thus creating a form of takeover defense for the management nominees. While the risks of these types of scenarios are small, they do exist.”
“ISS, which applies stricter scrutiny to binding proposals, would have supported the AFSCME resolution had it stated that plurality voting would apply in contested elections,” said Martha Carter, senior vice president and director of U.S. research at ISS. ISS’ position could have profound implications for the majority vote movement.
Court Rules that There is No Private Right to Sue Under Section 304
More than a handful of members emailed me this recent article from Law.com – the article is about the recent opinion of Neer v. Pelino from U.S. District Judge Stewart Dalzell, who became the first judge to address the question of whether §304 creates an implied private right of action.
Judge Dalzell ruled that §304 – which calls for disgorgement of profits and bonuses from top corporate executives in the wake of an alleged accounting fraud – does not provide a private right of action for shareholders to file a derivative suit. Rather, the Judge found that Congress clearly intended for §304 to be enforced only by the SEC. We have posted the 23-page opinion in our “SEC Enforcement” Practice Area.
Changing Relationships Between Auditors and Their Clients
In this podcast, Nils Okeson, a Partner of Alston & Bird, explains how auditor/client relationships have changed as there is a greater emphasis on the independence of outside auditors in the wake of Sarbanes-Oxley, including:
– How has all of this affected the relationship between issuers and their auditors (or, from the other point of view, between auditors and their “clients”)?
– Both the SEC Staff and the PCAOB have issued public statements addressing some of these concerns, including the “chilling effect” on communications between auditors and issuers that has reportedly occurred. What impact will these public statements have?
– Looking ahead then, what do you see going forward? Will relationships return to what they used to be, or is this simply the new reality?
– Some companies observe that changing auditors in a quest to get better service (whatever that might be) or to find a more cooperative relationship is not a realistic alternative. What can companies do to improve the situation? How can they be proactive about it?
On Saturday, the WSJ ran this article about how CEOs are using company jets for personal use. Reflecting the efforts that the media is now willing to put in to chase a CEO pay story, the WSJ reporter cross-referenced a public database of golf scores to generate many of the lurid details for the front page article.
In the article, my favorite quote is courtesy of Professor Charles Elson, who called it “disgusting” for a company to guarantee its CEO 100 hours of free personal flight time. “A corporate aircraft isn’t supposed to be a shuttle to a vacation home,” says Mr. Elson. “We pay CEOs enough. They can afford to pay to fly to their vacation homes.”
I leave it to Ron Mueller and Mark Borges to flesh out the disclosure implications of airplane personal use on their panel – “What Now Needs to Be Disclosed in the Proxy Statement” – during the “2nd Annual Executive Compensation Conference.” Remember how reasonably this conference is priced – only $495 for CompensationStandards.com members that attend live in Chicago or by video webcast – and only $995 for everyone in your company or firm to access the conference by video webcast! Register today!
Today’s Webcast: “Internal Controls Update: The Big 4 Speak”
The PCAOB has released the first 2004 inspection report for one of the Big 4 firms – this report for KPMG. The other 2004 Big 4 reports should be available soon.
As noted in this Washington Post article, the PCAOB’s report cites numerous faults in 18 audits performed by KPMG. In one case, mistakes exposed by the PCAOB led an unnamed client to restate earnings. The inspection entailed a review of only 76 audits of KPMG’s nearly 1,900 publicly traded clients between June and October 2004.
Yesterday, the Treasury Department and IRS issued proposed regulations on deferred compensation under Section 409A of the American Jobs Creation Act. Section 409A governs plans and arrangements that provide nonqualified deferred compensation to employees, directors or other service providers and the proposed regulations provide a framework for implementing those.
The proposed regulations (which are 238 pages) identify which plans and arrangements are covered under Section 409A, outline operational requirements for deferral elections and permissible timing for deferred compensation payments made under the rules. The rules also extend the deadline for documentary compliance with the new rules for one year, to December 31, 2006.
In his Compensation Blog, Mike Melbinger will be providing his analysis on the proposed regulations in the days to come. His initial thoughts on the regs are:
“One of the areas of most interest to many readers will be the discussion of SARs. Recall that SARs issued by private companies and SARs that could be settled in cash came in for harsh treatment under the initial guidance on 409A.
Here the newly released proposed regulations bring good news. The regulations treat stock appreciation rights similarly to stock options, regardless of whether the stock appreciation right is settled in cash and regardless of whether the stock appreciation right is based upon service recipient stock that is not readily tradable on an established securities market. However, because the IRS remains concerned that manipulation of stock valuations, and manipulation of the characteristics of the underlying stock, may lead to abuses with respect to stock options and stock appreciation rights (collectively referred to as stock rights), the regulations contain more detailed provisions with respect to the identification of service recipient stock that may be used to determine the amount payable under stock rights excluded from the application of section 409A, and the valuation of such stock.”
Another great place to learn more about the proposed regs is at the upcoming NASPP Conference in Chicago November 1 – 3.
SEC Not so Free with Information for FOIA Requests
This article by Bloomberg discusses a recent report by the Coalition of Journalists for Open Government that found the SEC turns down more FOIA requests for non-public information than almost every other government agency, including the CIA and the Pentagon. Of the 25 U.S. departments and agencies in the report, only the Small Business Administration and the National Archives turned down more requests.
According to the report, the SEC granted only 34% of the 3,830 FOIA petitions it processed during the 2004 fiscal year and almost 20% of those denials that were appealed were overturned.
And the SEC’s backlog of 8,635 requests (at its 2004 year-end) was bigger than all but four agencies surveyed. The public filed 9,325 requests with the SEC from October 2003 to October 2004. All but 690 of the 3,830 FOIA petitions the SEC ruled on that year were holdovers from fiscal 2003, so when the SEC closed the books on 2004, it still faced 8,635 pending requests.
Like he has done over the past several years, in this text interview, Lou Hering of Morris Nichols covers how the Delaware legislature recently enacted a number of amendments to three of Delaware’s four “alternative entity” statutes in its latest legislative session.
Senator Frist and Insider Trading
Bound to be gobs and gobs of media coverage – some of it with questionable legal analysis – regarding the SEC’s probe into trades conducted by Senator Frist through some blind trusts. An article in today’s WSJ reported that the matter is now a formal investigation. Professor Bainbridge in his blog provides his own insights into the viability of a possible violation.
Survey Results from Shearman & Sterling
Recently, Shearman & Sterling released its annual survey on corporate governance practices of the 100 largest U.S. public companies (the survey is posted on GreatGovernance.com). Among the trends revealed by the survey:
– Poison pills and staggered boards are in decline. The number of companies with poison pills fell by 19%, and the number of companies with a staggered board fell by nearly 30%.
– A majority of companies continue to exceed the minimum independent director requirements of the NYSE and Nasdaq.
– Despite substantial attention to the issue, there has been little change in the number of companies at which different individuals serve as chairman of the board and chief executive officer (19%, up from 14% in 2003).
– Grants of stock options as a component of director compensation decreased to 55% from 70% in 2003.
– The number of shareholder proposals for majority voting in director elections has seen the largest increase, from no such proposals included in the proxy statements of the Top 100 companies in 2003 to 15 such proposals in 2005, fueled primarily by the demise of the SEC’s proxy access proposed rule.
When fiscal year 2006 starts on October 1st, the SEC will likely be operating under a continuing resolution as it normally does (under which fees remain at their current rates) – see last year’s blog as to why this is an annual rite. Once Congress approves the SEC’s ’06 budget, registration fees will go down to $107.00 per million from $117.70 per million.
Director Recruitment Developments
In this podcast, Dick McCallister, Managing Director of Boyden Global Executive Search, describes the latest trends in director search and recruitment, including:
– What is driving the need for international experience on boards?
– What industries are at the forefront of this movement?
– Where are companies finding directors with global experience?
– What other skills are most in demand on boards today?
– How are searches for financial experts faring these days?
For Accounting Purposes, Katrina Considered “Ordinary”
According to this AccountingWeb.com article, the EITF of the FASB has reportedly determined that – for financial reporting purposes – the devastation wrought by Katrina does not meet these two criteria: “infrequent in occurrence” and “unusual in nature.”
Compare that to the musings a few weeks back in the DealLawyers.com blog about MAC clauses…
Looks like Gretchen Morgenson of the NY Times and I have some of the same sources – she beat me to writing about the intriguing Form 8-K filed recently by Corinthian Colleges. This 8-K includes a 4-page letter from a resigning director that outlines the multiple problems he has witnessed during his tenure on the Corinthian board.
Rather than rehash the essence of Gretchen’s fine article, I thought I would provide some analysis as to the lay of the land regarding 8-Ks filed under new Item 5.02 when directors resign:
1. If there are no disagreements, disclose that fact. Most 8-Ks filed due to a director resigning disclose that there were no disagreements between the director and the company left behind. Many of these helpful 8-Ks go on to disclose the reason for the departure (egs. pursue other opportunities; health or age limitations; personal reasons).
2. Don’t raise questions in investors’ minds by not addressing the reason for departure (as required by Item 5.02(a)(1)(iii)) – such as “the resigning director did not give a reason for his decision in his letter” as noted in this Form 8-K filed by Monmouth REIT.
3. Train directors in the art of drafting resignation letters – providing reasons for the departure in the letter as well as the 8-K, including noting there were no disagreements that led to the departure, immensely help. Letters that raise questions by being silent as to “why” – such as this vague letter from a LitFunding director – don’t help, particularly if the 8-K itself doesn’t address the reasons for departure.
4. For me, the worst are 8-Ks that merely state that a director has resigned via a written communication – but the company fails to file the written communication as an exhibit to the 8-K as required by Item 5.02(a)(2) (and fails to disclose whether there were any disagreements). See the Form 8-Ks filed by Scan Optics and Power2Ship. Perhaps these companies had nothing to hide, but we don’t know from their scant disclosures.
5. The bottom line is that if there are disagreements between a resigning director and the rest of the board or management, don’t try to hide the disagreement – face it and explain it if you wish. So far, I have found about 10 8-Ks that fall in this category, including the Corinthian Colleges’ 8-K noted above and this one from Torvec that I blogged about a few months ago. I have posted a list of the 8-Ks that disclose disagreements in our “Director Recruitment” Practice Area.
“Stock Splits” Practice Area
We have created a new “Stock Split” Practice Area that includes a number of sample checklists that cover a timeline of required actions.
On Friday, PCAOB Chair William McDonough announced that he will resign his position November 30 or when his successor is in place, whichever is sooner. Here is the related press release. Even though I only heard him speak once, Chairman McDonough was one of the more charismatic speakers I have heard.
SEC Chair Cox has big shoes to fill when he selects a new PCAOB Chair. Here is Chairman Cox’s statement about Chairman McDonough’s departure. The process of selecting new PCAOB Board members is something quite new – it will be interesting to see if Chairman Cox renominates Kayla Gillan for another term, as I hear that she is more than willing to serve again.
On Friday, the SEC posted the adopting release related to delaying the 404 deadline for smaller companies – as well as the proposing release related to the new accelerated filer definitions and deadlines for such companies.
Go Figure! HealthSouth Whistleblower Receives Longest Sentence of Them All
Last Thursday, the primary whistleblower in the HealthSouth fraud case got a longer sentence than all the other HealthSouth executives that have been dragged through the criminal process so far. US District Judge Robert Propst sentenced former finance chief Weston Smith to 27 months in prison, ordered him to pay $1.5 million in forfeited assets and spend one year on probation after his release – the Judge acknowledged the disparate range of sentences that have been imposed and essentially invited Mr. Smith to appeal his sentence to the 11th US Circuit Court of Appeals.
Meanwhile, former HealthSouth CEO and Chair Richard Scrushy – acquitted for his role in the fraud and who still sits as a HealthSouth director – is angling to get back on the management team (and the company’s Chair recently resigned). Here is the company’s press release responding to Scrushy’s recent criticism of management over the company’s poor earnings. The SEC’s civil lawsuit against Scrushy has yet to come – and odds are he will be barred from serving as an officer or director of a public company once that lawsuit is finalized.
