We have posted the 56-page settlement as an “Alert” on the home page of TheCorporateCounsel.net. And analysis of the settlement from Wachtell Lipton and Davis Polk are posted under “The Latest” on GreatGovernance.com.
Complimentary Special Supplement of The Corporate Counsel
On CompensationStandards.com, we have posted the Special Supplement to the Nov-Dec issue of The Corporate Counsel on a complimentary basis. It provides a great recap of our October 20th executive compensation conference.
Sarbanes-Oxley Q&A with Treasury Secretary John Snow
Last week, the Treasury Secretary did this interview with Business Week on corporate reform. He seems to suggest that regulators have gone too far in enforcing corporate reform and there is a need for more balanced enforcement – but he also believes SOX shouldn’t be modified.
Download Streaming Audio for Your Car
For those that wish to listen to one of our audio webcasts in your car – and I won’t make any “pinhead” jokes as I like to listen to legal mumbo jumbo in the car myself – you can burn a CD from streaming audio by using RecAll Pro, available on Sagebrush.com.
For folks with MP3 players, have you seen All Sound Recorder XP? You can record streaming audio (e.g., Sirius or XM radio, PLI or other webcasts) off your PC and save it as an MP3, which you can transfer to your MP3 player.
On the heels of the announcement that WorldCom directors agreed to pay $18 million out of their own pockets to settle a lawsuit, it was announced that Enron directors have agreed to pay $13 million personally as part of a settlement reached in October (like the WorldCom settlement, the Enron settlement still needs court approval).
We will be posting analyses of these settlements soon in the “Hot Topics” area of CompensationStandards.com. And we have launched a “Form 8-K Disclosure” Practice Area on that site that includes a number of recently filed 8-Ks that are relevant to the Bonus Segment of the January 13th webcast – “What NOW Needs to Be Disclosed in the Proxy Statement” – during which Alan Dye will cover the SEC Staff’s latest positions on 8-K compensation disclosures.
To gain access to this critical webcast, enter a No-Risk Trial today! If you are undecided, don’t forget our unconditional full refund policy: If at any time you are not completely satisfied with CompensationStandards.com, simply tell us and we will refund the entire cost of the year’s subscription.
Slow Death for CalPERS and CalSTERS?
Last week, it was reported that California Governor Schwarzenegger endorsed plans to partially phase out the California state defined-benefit public pension plans (e.g., CALPERS and California State Teachers’ Retirement System) to 401(k) type plans. A state lawmaker and a taxpayers group has filed a proposed ballot initiative that would require new hires to participate in 401(k) type defined-contribution plans, possibly as early as 2007. Also, current employees would be able to transfer their retirement benefits into a 401(k) type plan.
This movement towards defined contribution plans has profound implications for shareholder activism as state funds traditionally have been among the more active investors – and money managers for mutual funds have not been.
Another Day, Another Blog
On CompensationStandards.com, Mike Melbinger of Winston & Strawn has picked up the mantle and begun blogging on his Melbinger’s Compensation Blog. Below is one of Mike’s first entries:
Open Market Purchases Under Formula Plans
In drafting a new equity incentive plan for an NYSE-listed client, we encountered a question about the formula plan rules under FAQ D-1 of the shareholder approval rules. The company wants (and provides in its shareholder approved plan) to add back shares that are repurchased by the company using the cash paid upon the exercise of options. The question was: how closely do we need to match the open market purchases we make (or have made) with the cash we have received (or will receive) from option exercises?
Specifically, we wondered:
– whether there was some temporal requirement to match the proceeds with the purchases (i.e., could we get replenishment credit for shares purchased in the open market in the second quarter of 2004, even if there were no proceeds from option exercises until the third quarter of 2005)?
– Do we only look at this on a quarter-by-quarter basis, or a year-by-year basis, and match cash proceeds and purchases within the quarter (or year) without regard to the specific date on which the proceeds/purchases occurred?
– If there were excess cash proceeds for any quarter, could we carry those over to the next quarter? Could we carry over excess purchases?
– Could we take cash proceeds from a current quarter and match them against purchases made in a prior quarter?
We discussed these questions with an attorney for the NYSE, who advised that company can choose any logical, workable arrangement that it desires. We agreed that the company would want to include in the plan or committee procedures, some specifics about cash received during what period, purchases made during what period, etc. – so it can accurately ascertain how many shares are to be considered available under the plan at any given time.
We also considered that it might be difficult to match purchases made in a prior period with cash received in a subsequent period, because the company would be making purchases without knowing how much cash it had to fund them.
However, even in this situation, the company probably could create a formula that includes in the plan only such number of previously purchased shares as are covered by subsequently collected money.
The “formula” we would include in the plan is that there will be added to the plan a number of shares that can be purchased in the market by the company with the cash received from option exercises.
Now that such disclosures are foremost on everyone’s minds, we are updating – on a daily basis! – our list of the latest disclosures filed by companies that have disclosed that they have identified material weaknesses and/or significant deficiencies. This list resides in our “Internal Controls” Practice Area.
And we are happy to announce that David Lynn, Chief Counsel of the SEC’s Division of Corporation Finance has just been added to our next webcast: “Demystifying Internal Controls Disclosures.”
FASB Under Fire on the Hill
According to the January 4th issue of the Congressional Record (at pg. H35), language has been included at Congressman Oxley’s request that changes the jurisdiction over the FASB from the Commerce Committee to the House Financial Services Committee.
For decades, the Commerce Committee has had oversight responsibility for the FASB and generally has been supportive of the FASB. On the other hand, the House Financial Services Committee’s leadership has led the Congressional efforts to block the FASB rule on expensing options – and in the past, also opposed other FASB efforts, such as fair value accounting for derivatives.
A few years back, when Rep. Billy Tauzin was named chair of the Commerce Committee, there was a memorandum of understanding between him and Rep. Oxley that transferred jurisdiction of the SEC from the Commerce Committee to the Financial Services Committee. However, at that time it was agreed that Tauzin would maintain jurisdiction over the FASB. However, with Tauzin leaving the House, Oxley once again pressed for – and now has received jurisdiction over the FASB.
By the way, those of you interested enough to read the Congressional Record will only see this obscure statement: “9. Jurisdictional Issues. Based on discussions with the relevant committees, the further mutual understandings contained in the final two paragraphs of the “Memorandum of Understanding Between Energy and Commerce Committee and Financial Services Committee” dated January 30, 2001, shall no longer provide jurisdictional guidance.”
“Conference Notes” Practice Area
As part of the New Year’s cleansing of TheCorporateCounsel.net, we have created a “Conference Notes” Practice Area – with recent additions including the ABA’s Fall Meeting (from Perkins Coie) and the AICPA National Conference (from Davis Polk).
Note that the clean-up of our home page didn’t result in the removal of any content. Some of it has just been moved to more logical spaces (such as the “Rule 144 Q&A Forum” being moved to the toolbar) – and we created some new items, like the “Hot Topics Box.”
We have just added a special bonus segment to the January 13th webcast on CompensationStandards.com – “What NOW Needs to Be Disclosed in the Proxy Statement” – during which Alan Dye will cover the SEC Staff’s latest positions on 8-K reporting of salary and bonuses. In response to many requests for clarification in this murky area, Alan will provide practical guidance and examples of what to do.
Apart from this bonus, join Jesse Brill, Ron Mueller of Gibson Dunn and Mark Borges of Mercer Consulting as they provide the latest guidance on how to overhaul your upcoming disclosures in response to Alan Beller’s speech, such as how to deal with airplane and other perks and what to include in the compensation committee report. Here are Questions to Ask NOW When Drafting Proxy Disclosures!
To gain access to this critical webcast, enter a No-Risk Trial today! If you are undecided, don’t forget our unconditional full refund policy: If at any time you are not completely satisfied with CompensationStandards.com, simply tell us and we will refund the entire cost of the year’s subscription.
Personal Liability for Ten Ex-Worldcom Directors
Yesterday, ten former outside directors of WorldCom tentatively agreed to pay $54 million – including $18 million out of their own pockets – to settle part of a class-action securities lawsuit. The proposed deal – which still needs to be approved by the judge – would be the largest of its kind and requires the 10 directors to pay more than 20% of their combined net worth. The company’s D&O insurance carriers would pick up the remaining $36 million. (In comparison, $1.5 million was paid by 12 former Enron outside directors from their own pockets in May 2004 – which was unprecedented in itself.)
What is particularly noteworthy is that none of the 10 settling directors were alleged to have directly participated in the accounting fraud that led to WorldCom’s collapse. The lawsuit is slated to go to trial soon, with the remaining defendants including more than 15 investment banks that underwrote WorldCom’s bond deals before the company collapsed – and two remaining outside directors who are discussing a similar settlement.
By the way, I am in the process of conducting an interview with someone on the notable December 15th opinion and order in the WorldCom litigation – here is the 159-page opinion if you want to get a preview. This is posted in our “Securities Litigation” Practice Area.
Inside the Beltway: Trade Groups, Firms Push to Ease Tough Federal Scrutiny
A member emailed me a link to this Washington Post article yesterday about lobbying on the hill against Sarbanes-Oxley and other laws, along with a note that said: “Have lobbyists have found a way to dine out on SOX indefinitely?”
For example, I just added this new 21-page checklist from Davis Polk, which includes a variety of sample Section 302 certifications (remember that companies will need to revise what they have used in the past, whether they will be filing 404 management reports for the first time or taking advantage of the transitional 404 deadline relief that the SEC passed last month), a great 404 compliance chart, and more. If you have anything that might be useful to others for this proxy season, please let me know.
SEC Acts on “Reporting Out” Case
Yesterday, the SEC filed civil fraud charges against TV Azteca and three current and former TV Azteca officers and directors for allegedly engaging in an elaborate scheme to conceal the Chair’s role in a series of transactions through which he personally profited by $109 million. The SEC complaint also alleges that the officers sold millions of dollars of TV Azteca stock while the Chair’s self-dealing remained undisclosed to the market place.
You might recall that this situation involves a case of “reporting out” by the company’s outside counsel. Here is what the SEC’s press release states about that:
“TV Azteca filed the false reports with the SEC, concealing Salinas’ involvement in the Unefon debt transactions, despite receiving advice from its U.S. counsel that these transactions were material, reportable transactions under U.S. federal securities laws. While the company provided general disclosure of the transactions, it refused to reveal information crucial to investors: that Salinas was behind the transactions and personally profited from them. TV Azteca’s resistance led to the eventual resignation of its U.S. counsel, who told the company’s board of directors and management that it was resigning consistent with its obligations under Section 307 of the Sarbanes-Oxley Act.”
Below is an interesting summary of Equilar’s analysis of FAS 123 assumptions for how large companies value their options (as disclosed in their proxy filings). As footnote disclosures begin to appear in income statements by mid-2005 (for those companies who haven’t adopted FAS 123 already), focus will turn to their assumptions. Equilar looked at the most recent 3 years of filings for 472 companies in the S&P 500, focusing particularly on expected volatility assumptions as well as expected terms.
Here are the highlights of Equilar’s survey:
a. Expected Term Assumptions
– For expected term assumptions there has been little change in the past three years with the median (5.0 years), the 25th percentile (4.5 years) and the 75th percentile (6.0 years) remaining constant for each of the past three years.
– While there has been little change at the summary level, this masks the fact that over 56.3% of companies have changed their assumptions in the last three years; 28.8% of S&P500 companies increased their terms with a median increase of 17.5% and 27.5% of S&P500 companies decreased their terms with a median decline of 19.1%.
b. Volatility Assumptions
– For expected volatility assumptions, there has been an increase in the median volatility from 35.7% in 2001 to 36.5% in 2003. The 25th percentile and 75th percentile levels were little changed at 29.7% and 47.0% respectively.
– As one would expect, almost all companies (91.3%) had a change in their expected volatility assumptions over this three year period; 46.5% of companies increased their expected volatility assumptions with a median increase of 10.2% and 44.8% of companies decreased their expected volatility assumptions with a median decrease of 10.0%.
Want to Improve Your Internal Controls – Try Not Performing Your Duties?
Who would have thought that internal controls could be improved by
adopting a board-approved policy requiring that officers and employees not
perform their duties? Check out this December Bulletin from California’s Department of Financial Institutions regarding its position that institutions should relieve officers and employees from their duties for two consecutive weeks each year.
While I understand the Department’s logic, it struck me as amusing that a government agency would criticize someone for failing to prohibit its officers and employees from performing their duties. And although this is amusing, it would not be surprising for type of policy to find its way into the internal controls morass at public companies under circumstances for which it might make sense. Thanks to Keith Bishop for pointing this tidbit out and all this analysis!
Perils and Promises of Electronic Data Discovery
In the world we live today, I’m not sure we can learn enough about the perils of electronic discovery. Learn more in this interview with Tom Barnett on the Perils and Promises of Electronic Data Discovery.
Happy New Year! Here is my first annual – and admittedly lame – attempt at an “In/Out” List:
– Internal Controls/Controlling CEOs
– Just Vote No Campaigns/Shareholder Access
– Real-Time Disclosure/Abstaining from Disclosure
– Pay-As-You-Go/Pay-When-Ya-File
– SEC Comments on the Web/SEC Comments by FOIA Request
– Independent Auditors/The Company’s Auditors
– Tally Sheets/Mega-Grants
– Bloggers (voted “Men of the Year” by ABC!)/Weekly Print Newsletters
I know, not really off to a rousing start this year…if you have any suggestions, please email them to me and I will add them to this list.
Time to Renew!
As all our subscriptions are based on a calendar year, some of your subscriptions may have expired over the weekend. You can renew online below for any of these fine print or online publications:
Year in Review for NYSE and NASD – and Looking Forward for PCAOB
Here are memos reviewing what happened in 2004 at the NYSE and the NASD.
Last week, the PCAOB approved a revised budget for 2005 – which includes nearly a 50% increase in staffing. This press release notes that the PCAOB might have to increase its already relatively high wages to attract new hires (fyi, the PCAOB pays considerably more than the SEC to its staffers).
Earlier this week, Corp Fin reversed an earlier decision and is now allowing Disney to exclude a shareholder proposal regarding shareholder access. Disney had appealed Corp Fin’s earlier decision to the full Commission – but Corp Fin reversed its position upon reconsideration before the Commission got a chance to act on the appeal. According to today’s Washington Post, the proponents will still appeal this reversal to the full Commission (to learn more about the appeals process, see this chapter I wrote).
As I blogged about on December 20th, Corp Fin’s original Disney decision was not consistent with positions the SEC staff took last year on proposals submitted to Qwest Communications and Verizon Communications. But Corp Fin appeared justified in their original Disney decision based on a footnote in the proposing release regarding Rule 14a-11.
I’m not sure what tipped the scale to cause the reversal – but I believe that the proponents didn’t qualify under the parameters set forth in footnote 74 of the access proposing release (perhaps the 1% ownership threshold).
Sample Insider Trading Policies
We have tripled the number of sample insider trading policies – now nearly 80 samples! – in our “Insider Trading Policies” Practice Area, including indicating the date on which each policy was last amended.
Here is the SEC proposing release putting out for comment the separate proposals of the NYSE and NASD regarding the allocation and distribution of shares in IPOs. Comments are due 21 days from publication in the Federal Register.
The proposed rule changes respond to several of the recommendations of the NYSE/NASD IPO Advisory Committee, which issued a report with 20 recommendations in May 2003. Topics covered include: Quid Pro Quo Allocations; Spinning; Flipping; and IPO Pricing and Trading Practices – book-running lead manager reports to the issuer’s pricing committee; lock-up agreements; application of returned shares to offset the existing syndicate short position or if no short position exists, to unfilled customer’s orders at the public offering price; and Market Orders.
The NYSE and NASD proposals generally appear to be substantively consistent, with some language and format differences and differences in the Definitions Sections – and they should be read in conjunction with the SEC’s proposed amendments to Regulation M regarding IPOs and other public offerings. The SEC has specifically asked for comments on any differences between its Regulation M proposals and the NYSE and NASD proposals, particularly regarding penalty bids and quid pro quo allocations, which may present compliance or interpretive issues. Thanks to Mike Holliday for all of this analysis!
Environmental Disclosure
We have created a new Environmental Disclosure Practice Area, an area that is likely to become increasingly important as the recent success of social shareholder proposals illustrates how this is becoming a more crucial agenda item for investors – and other entities like the GAO push the SEC to upgrade its disclosure requirements in this area.
Maybe the holidays are taking their toll on me – but I believe this updated Current Accounting and Disclosure Issues Outline was just posted by the SEC even though its dated November 2004. The old one was from 2001.
The False Claims Act and the Beauty Queen
From someone that reads too many law firm memos, I appreciate Fried Frank’s annual gag memo. This year’s memo is about a Beauty Queen – and as always – is based on a true story.
NYSE Forms for Non-US Issuers
The NYSE has posted Section 303A Annual Affirmation Forms customized for non-US issuers, including an Exhibit B. These are different than the US forms, because the requirements are different for Foreign Private Issuers.
