If you are a deal junkie, here is one you gotta check out! In this podcast, Rusty McGranahan of Skadden Arps provides some insight into what it’s like to do a deal under the new ’33 Act reform rules as he participated in the first Form S-3ASR ever filed (ie. for Temple-Inland), including:
– What was done differently in drafting the base prospectus?
– What was done differently during the offering process? Were any free writing prospectuses used?
– Did any issues arise on filing day?
– Did any issues arise in drafting the underwriting agreement? How about when delivering the legal opinions?
The SEC and Avian Flu
My wife sometimes thinks I’m a bit of the hypochondriac. I don’t think so – at least not any more than any other married man – but it is true that I have been worried about widespread outbreak of the avian flu long before the media started to carry daily articles about it. So I was relieved to see the SEC issue this interpretive release that will allow drug companies to immediately record sales of life-saving vaccines stockpiled by the federal government for future pandemics.
As noted by the US Senators pushing this move, current rules prohibit companies from recognizing revenue until the products were withdrawn from inventory – and that offered no incentives to fill orders (although that ain’t the reason that most drug companies gave up on vaccines as a primary source of business). The SEC’s interpretation may not be extended by analogy to other circumstances – drug companies may make the accounting change in the first quarter of their next fiscal year.
Court Rejects SEC’s Imposition of Civil Penalties against Directors in Early SOX Test
A week ago, Bruce Carton ran the guest post below from Nicolas Morgan of DLA Piper Rudnick Gray Cary:
If the SEC thought it would gain home court advantage by asking Congress to allow monetary penalties to be awarded in administrative proceedings under Sarbanes-Oxley, the DC Circuit has set the record straight. On November 15, 2005, in The Rockies Fund v. SEC, the DC Circuit scolded the SEC for arbitrarily and capriciously awarding “the harshest available penalties” against the Funds’ directors without any showing that their conduct “created a significant risk of substantial loss to others.”
The SEC accused the Fund of mischaracterizing and overvaluing certain holdings on its SEC filings, but the SEC failed to demonstrate in the administrative proceeding that such conduct put any investors at risk of loss. Sarbanes-Oxley permitted the SEC to seek civil penalties in an administrative proceeding presided over by an SEC administrative law judge rather than in a federal court action. However, the DC Circuit confirmed that the SEC must make the same evidentiary showing to obtain civil penalties no matter which forum the SEC brings its enforcement action in.
When filing your registration statements, don’t forget the new S-K Item 512 undertakings for Rule 415 offerings – FAQ #3 clearly says that you have to! The ’33 Act reform amended the provisos after Item 512(a)(1)(iii) and added 512(a)(5)-(6). There have been quite a few registration statements filed recently that do not include the new undertakings.
It appears that some companies simply forgot that revised undertakings are now required. Also be careful not to just copy a law firm memo’s form undertakings, as there are different undertakings for different contexts (eg. undertakings for Form S-8s vs. Form S-3s). Read the regulations first.
As examples, here are two Form S-3ASRs that appear to have provided the correct undertakings (of course, there are others that also have done it correctly): eBay and General Electric.
ISS Clarifies Majority Vote Positions
Yesterday, ISS posted 8 FAQs about its majority vote position, dealing with a number of issues that have been raised since its 2006 voting policies were released last month. For example, ISS clarified that it will review director resignation guidelines on a case-by-case basis and noted that no single form of a resignation guideline has been “precleared” by ISS. If you are facing a shareholder proposal on this topic, this is a “must read” document.
SEC Speaks at the Annual AICPA Conference
No fewer than 11 SEC Staffers spoke at the Annual AICPA Conference in DC over the last few days. This is not more than the number of Staffers that speak at PLI’s Annual SEC Speaks – but it is unusual that so many of the Staff’s speeches get posted on the SEC’s website.
Here are the 11 speeches – including this speech from Chairman Cox. Among other topics, the Chairman addresses greater competition beyond the Big 4; greater simplicity and transparency in financial reporting; and XBRL.
Going Private and Going Dark
Even though I knew today’s DealLawyers.com webcast – “Going Private and Going Dark” – would be well received by those interested in that area, I have to admit even I have been surprised by the huge level of interest in this topic. Perhaps the demand of those waiting to go private and dark is even greater than the fairly sizable number of companies that has already done so over the past few years.
Join the expert lawyers and banker who will spend some time analyzing the feasability of these apparently attractive options – and look for John Jenkin’s excellent 18-page memo regarding the state law issues for going dark and going private transactions that I just posted in the “Going Dark” Practice Area.
Last month, I blogged about the French data protection agency – the CNIL – issuing draft guidelines that could resolve some of the conflicts in the whistleblower area between Sarbanes-Oxley and EU data protection laws.
Last week, the CNIL issued final guidelines and we have posted a redlined versions of them – translated into English – in our “Whistleblower” Practice Area, marked from the draft guidelines. Much thanks to Mark Schreiber of Edwards Angell Palmer & Dodge LLP Boston for those!
In addition, Mark and his partner Jeff Held have conducted this podcast to provide analysis of what the final guidelines mean, including how US companies can now comply with both US and French law simultaneously.
Speaking of France…
Just flew back from a long weekend in Paris (my wife’s b-day present); my first trip there and it was unbelievable. I need to get out more! Found cheapie plane tickets – taxes cost more than the flights!
SEC to Act: Accelerated Filers, Best Price Rule and Deregistration of FPIs
The SEC announced yesterday that it will hold an open Commission meeting next Wednesday, December 14th at 10 am, to consider the following three items:
1. The adoption of the proposed amendments to the “accelerated filer” definition in Rule 12b-2, the new definition of “large accelerated filer” and the proposed amendments to the final phase-in of the Form 10-K and Form 10-Q accelerated filing deadlines. We have posted numerous law firm memos on the accelerated filing definitions and deadlines.
2. The long-awaited proposal of amendments to the “best-price rule” (Rule 14d-10) for issuer and third-party tender offers. According to the Sunshine Act notice, the proposals “would clarify that the best-price rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer and should not apply to consideration offered and paid according to employment compensation, severance or other employee benefit arrangements entered into with employees or directors of the company that is the target of a third-party tender offer.”
3. The proposal of a new rule that would enable foreign private issuers to terminate their Exchange Act registration and reporting obligations and the proposal of a rule amendment that would apply the exemption from Exchange Act registration under Rule 12g3-2(b) to a class of equity securities immediately upon the effective date of the issuer’s termination of effectiveness regarding that class of securities.
Last week, the SEC brought its first action for a violation of the 1934 Act Section 13(k) prohibition of personal loans to executive officers. The administrative proceeding was brought against the CEO and CFO of Stelmar Shipping, a foreign private issuer. The issuer had claimed that the extensions were mere “advances” and not loans.
In the Fall of 2003, Stelmar’s CEO and CFO authorized interest-free loans from the issuer to themselves – note they were not approved by the board. During the course of the 2003 audit, the outside auditors learned about the loans and concluded that they were prohibited by Section 13(k). In March 2004, Stelmar reported the violation on a Form 6-K containing its proxy. (Interestingly, the issuer also imposed a financial fine of $50,000 and $30,000 on the CEO and CFO, respectively.) Stelmar was acquired early this year, but the CEO and CFO remained employed by Stelmar until (close to) the time of the acquisition.
Ultimately, the CEO and CFO agreed to a cease-and-desist order with the SEC.
PCAOB Member Gradison Named Acting Chairman
On Friday, the SEC named PCAOB Board Member Bill Gradison as Acting Chairman of the PCOAB. At the inception of the PCAOB in 2002, Gradison was named to a two-year term and was reappointed in 2004 to an additional five-year term.
Former PCAOB Chairman William McDonough’s resignation was effective as of last Wednesday, November 30th.
DealLawyer.com’s Webcast Transcript Now Up!
The transcript for the DealLawyer.com’s webcast, “The Latest on Special Negotiating Committees,” is now available.
We have created a list of underwriting agreements that have been filed with the SEC that seem to take the ’33 Act reform into account. We will periodically update this list. Among the agreements filed so far are:
– Thomas Weisel Partners S-1 underwriting agreement (Buy.com, 11/28/05) (Note: form of legal opinions not included)
First Automatic Shelfs and Free Writing Prospectuses Filed
The race to file automatic shelfs is on. Temple-Inland was first at 9:04 am – and the first FWP was filed by Platinum Underwriters Holdings at 9:29 am.
Here are some Form S-3ASRs filed yesterday (stands for “S-3 automatic shelf registration”):
– Temple-Inland (12/1/05)(pay-as-you-go and included a “description of securities” section)
– XL Capital Ltd (12/1/05) (pay-as-you go and included a “description of securities” section)
– Golden West Financial (12/1/05) (registered $2B of debt, pay-as-you go and included a “description of securities”)
Death of the BlackBerry?
Yesterday’s papers carried stories about how RIM has lost yet another critical patent lawsuit – and how the odds of BlackBerry service continuing are not looking too good.
I know how life without a BlackBerry is unthinkable for many of you – but take it from a guy who has managed just fine without it, you will feel much freer without that beast ruling your life! I’ll never forget sitting on a panel with a dude who was checking his BlackBerry as he was speaking from the dais. Free Willy!
December Eminders is Up!
We have posted the December issue of our monthly email newsletter.
Yesterday, Corp Fin issued 25 FAQs that flesh out the ’33 Act reform. According to a Cleary Gottlieb alert, highlights of the FAQs include:
– If an underwriter agrees not to use a free writing prospectus without the consent of the issuer, the issuer’s consent, in and of itself, will not constitute authorization or approval of the free writing prospectus for purposes of determining whether it is an “issuer free writing prospectus.” However, if the issuer’s actions amount to “adoption of or entanglement with” the free writing prospectus—a determination that will turn on the particular facts and circumstances of the situation—the issuer will be considered to have approved or authorized the free writing prospectus.
– Item 10(e) of Regulation S-K, which restricts the use of non-GAAP information in documents required to be filed with the SEC, does not apply to free writing prospectuses, unless they are included in, or incorporated by reference into, a registration statement or included in an Exchange Act filing. Regulation G, which restricts the use of non-GAAP information in public disclosures by issuers required to file Exchange Act reports, does apply to free writing prospectuses used by such issuers.
– Canadian issuers filing annual reports on Form 40-F under the Multi-Jurisdictional Disclosure System cannot qualify as “well-known seasoned issuers.”
– Convictions of an issuer or a subsidiary in a non-U.S. court of certain felonies or misdemeanors, such as larceny, robbery and the making of false reports, will result in ineligibility of the issuer under the definition of “ineligible issuer.”
– Notice that a sale was made pursuant to a registration statement, which is required by Rule 173 when a final prospectus is not delivered, may be made within two business days following the date of settlement.
I’m sure we will continue to see guidance from the SEC Staff as the reform is so broad in scope and there will be so many unanswered questions as we deal with the new rules in practice – such as how will confidential treatment requests relating to automatically effective shelfs be processed?
’33 Act Reform: Now Effective!
Remember that the ’33 Act reform rules become effective today! There are lots of resources in our “Securities Act Reform” Practice Area, including notes from the recent ABA Fall Meeting regarding the NASD’s positions in the WSKI shelf context. There also are numerous law firm memos on what companies should do with their outstanding shelfs, including this new memo from Cleary Gottlieb.
Just as I was reading this Washington Post article about all the vacancies at the SEC’s top levels, I received an email that the SEC’s General Counsel, Giovanni Prezioso, announced he is leaving at the end of the year to return to the private sector (destination unknown yet). Here is the SEC’s press release.
By the way, the Post article provides a pretty nice overview of what is happening at the SEC these days, including a handful of quasi-inside scoop (eg. Commissioners are socializing outside the building! News at 11!).
PCAOB Issues Report on Initial Implementation of AS No. 2
Yesterday, the PCAOB issued a 19-page report discussing issues identified in the course of its monitoring of the implementation of Auditing Standard No. 2, the internal controls guidance from the PCAOB.
No real surprises here – the PCAOB found that both auditors and issuers faced enormous challenges in the 1st year of implementation, including strains on available resources; a shortage of staff with prior training and experience in designing, evaluating, and testing controls; and the limited timeframe that issuers and auditors had to implement Section 404.
The PCAOB gave a warning shot as it said that its monitoring (mainly conducted through the inspection process) revealed that some audits performed under these difficult circumstances were not as effective or efficient as AS No. 2 intends and as the PCAOB expects they can be in the future. In its report, the PCAOB identified specific areas in which auditors should become more effective and efficient “by obtaining sufficient evidence for an opinion in a manner that appropriately conserves time and other resources.”
At yesterday’s open Commission meeting, the SEC proposed an alternative model of proxy delivery – a project the SEC calls “E-Proxy.” Here is the SEC’s press release and here is Chairman Cox’s opening statement. Below are notes from the open Commission meeting:
– Purpose of E-Proxy – The proposals are intended to facilitate the use of technology in the proxy solicitation arena. The SEC is proposing an alternative notice and access model for satisfying Rule 14a-3 that people performing proxy solicitations could rely on.
– Posting Proxy Materials– For an issuer proxy solicitation, the issuer must post proxy materials on a website that is publicly available (but the SEC’s website doesn’t count). The posted proxy materials must be substantially identical to any printed version of the proxy materials.
– Delivery of Notice – The issuer would be required to deliver a “notice of availability” at least 30 days prior to the shareholder meeting. Banks and brokers and their agents must forward the notice of availability to the beneficial shareholders. No other shareholder communications can be delivered with the notice, but a proxy card can be delivered with a notice (though it is not required).
– What is “Notice” – The notice must contain information about the meeting (date, time, place, etc.); the address of the website where the proxy materials are posted; a toll free phone number and an email address that shareholders may use to get paper versions of the proxy materials; and a description of matters to be acted on at the meeting and the recommendations of the company.
– Making Paper Available – The issuer must respond to any requests for paper copies within two business days.
– Proxy Card – The proposal would permit companies and other soliciting parties to deliver a proxy card with the notice of availability, but does not require them to do so. There was much discussion about concerns that shareholders would vote based on the information in the notice rather than in the proxy statement – and the proposing release will ask a series of questions about whether the proxy card should be delivered with the notice of availability or whether it should only be allowed to be delivered with the proxy materials.
– Non-Issuers Too – Soliciting persons other than issuers would also be permitted to follow the proposed alternative model as well – these persons would be required to deliver notice at least 30 days before the meeting or within 10 days of the issuer filing proxy materials. As permitted under current rules, other solicitors would not have to solicit all shareholders, but would be permitted to target certain shareholders.
– What is Not Affected – The SEC indicated that the proposed amendments would have no impact on any state law obligations regarding soliciting proxies or holding annual meetings, and would not apply to business combination transactions.
– When New Rules Will Be Effective – The rules probably will not be implemented in time for the 2006 proxy season. There is a 60-day comment period.
FASB Tentatively Relaxes Standard on Tax Benefits From Uncertain Positions
Last week, the FASB tentatively adopted a “more likely than not” threshold for uncertain tax positions. If adopted, this would be a much more workable position than the “best estimate” method proposed in July.
In working on its final interpretation of FAS No. 109 to be issued in the first quarter of 2006, the FASB voted to pull back from a standard espoused in an exposure draft that the best estimate of the impact of a tax position be recorded only if that position “is probable of being sustained on audit based solely on the technical merits of the position.”
Deferred Compensation: Actions Employers MUST Take by End of the Year
If you deal with deferred compensation, I hope you are aware of Section 409A and the latest proposed IRS regulations – and the laundry list of things you need to do by the end of December. If not, look no further than yesterday’s blog by Mike Melbinger who provides such a laundry list.
Yesterday, I went into a blogging frenzy on the DealLawyers.com Blog regarding the proposed – and controversial – transaction by Sovereign Bancorp, which has been amended so that the NYSE would allow it to proceed without a shareholder vote. Rather than repeat that lengthy blog, here are the primary topics I addressed to help you determine whether it’s worth visiting that blog:
– Dissecting the Shareholder Approval Issue
– The NYSE’s Trap for the Unwary?
– The Use of Treasury Shares or Cash to Avoid Shareholder Approval
– A Final Thought on State Law vs. SRO Regulation
Companies Go Public With Auditor Liability Caps
Yesterday’s WSJ carried an article with the title above that dissected the growing practice of limiting auditor liability through provisions in engagement letters. The article noted that two companies have disclosed the fact that they have limited their auditors liability in these proxy statements: Sun Microsystems’ proxy statement (page 17) and Silicon Graphics’ proxy statement.
Both companies disclose they have entered into an engagement letter with their outside auditor and then add: “That agreement is subject to alternative dispute resolution procedures and an exclusion of punitive damages.” Expect more investors to be seeking disclosure about limited liability to help them decide whether to ratify an auditor’s engagement – and I agree that this type of disclosure is a good idea.
Regarding the overarching point about the wisdom of limiting auditor liability, I have been urging companies for some time to push back on these so-called standard provisions in auditor engagement letters – learn more in our “Auditor Engagement Letter” Practice Area. Let me know if you have had any success pushing back recently!
UK Legislation on Auditor Liability and Engagement Letters
Following on the theme above, there is some interesting legislation introduced in the United Kingdom that would not only require auditors to disclose the details of their engagement letters, including any liability caps – but also require companies to obtain shareholder approval of these arrangements!
The proposed legislation would also create a lot more transparency regarding changes in auditors, giving investors a greater voice in that process as well. This legislation is part of a long-term review of UK corporate law that started in 1998.
On Wednesday, the NYSE posted these proposed Section 303A rule changes regarding director independence, disclosure mechanics and other clean-up changes. [Oddly, the proposal states that the changes were approved by the NYSE board way back on April 7th. Typo?]
SEC Filing Fees Reduced
On Wednesday, the SEC released Fee Rate Advisory #5, which reduces the fees paid to register securities by 9.1% effective yesterday, November 27th. On November 22nd, President Bush signed H.R. 2862, the appropriations bill that includes funding for the SEC and the reduced rates became effective five days later – so that the fees due now are $107.00 per million registered.
Revised Executive Pay Settlement Approved in Fairchild Case
Also on Wednesday, Delaware Vice Chancellor Strine approved Fairchild’s revised settlement of a shareholder lawsuit alleging that the company’s Chairman and CEO received excessive compensation. The terms of this revised settlement were the subject of a blog from last month.
You know overpaid executives has become a mainstream topic when “Jeopardy” has a category entitled “Forbes Top Executive Salaries.” Yes, an episode of Jeopardy that I saw over the weekend included this category. And I am proud to say I did quite well on it! But not so well in the other categories – either that show has gotten tougher in my old age or I am fading…
The Blog about Wall Street? Really?
Yesterday, the NY Times ran a brief article about a one-month old blog that allegedly gives the inside scoop on Wall Street. I ran a “Whois” search on who owns the blog’s URL and came up with the Brownstone Media Group. Then, I googled “Brownstone Media Group” and came up with nothing but this blog about renovating properties in Brooklyn.
Although there is sparse contact information on either blog, the renovation blog does include an “advertisement” for the new Wall Street blog. So some sort of connection seems to exist between the two. This took all of two minutes to uncover. Maybe I don’t know enough about Wall Street – but Brownstone doesn’t strike me as part of the Wall Street establishment.
Think the NY Times was had? The article says the blog is run by an anonymous 30-something banker – but all of the blog entries are merely snippets or commentary regarding articles run in mainstream business publications. There is nothing in the way of real inside scoop or any other indicia that shows the blogger has any more Wall Street experience than Barney Rubble. I could be wrong but me thinks this is some sort of Web hijinks…
Last Thursday, the US Senate added an amendment to a broader tax bill approved by the Senate that would require all employees – not just officers – to pay tax on the company’s actual cost of providing them personal travel on corporate aircraft. This Dayton amendment isn’t part of a tax bill that is now pending in the House of Representatives. After the House passes its version, the two bills would go to a conference committee to be reconciled before being presented to the President for his approval.
Senator Dayton’s proposed amendment to the Code would require the inclusion in income to the employee of the greater of the fair market value or actual cost of such use (less any payment made by the executive, which is severely limited under Part 91 of the FARs). Senator Dayton’s amendment would presumably eliminate the non-commercial aircraft valuation rules of Treasury Regulation 1.61-21(g). [Interestingly, in arguing in favor of his amendment, Sen. Dayton cited this article from the WSJ, which showed a pattern of CEOs traveling on their company jets to play golf. This illustrates how the media plays a role here.]
In short, the days of using the “SIFL” rates to value personal use of employer-provided aircraft would come to an end – and the modest income attributable to personal use flights would grow significantly. The benefit to the company from this would be that, since a large number is being included in the executive’s compensation, it is likely that the entertainment disallowance to the company would be reduced, if not eliminated. Even if the proposed changes are not enacted into law, it seems likely that some Congressionally crafted changes will be passed eventually. Thanks to Stewart Lapayowker of Akerman Senterfitt for helping sort through this!
SEC Issues Draft RFP for EDGAR
Yesterday, the SEC issued a press release about a draft RFP that contemplates a significant, multi-year project to update EDGAR. The last RFP for EDGAR was back in 1998 – and even though the current EDGAR contract doesn’t expire until later next year, buying anything under federal procurement rules takes a long time.
The question is whether the SEC will select a new contract that places a large burden on companies or will they try to do something that can be done internally without issuer burden. As I blogged recently, I get a little nervous about constant talk about the need for “interactive data.” That suggests companies would have to create it.
One thing that could come out of this new contract is some sort of new “Financial Data Schedule.” This might be a template (perhaps with XBRL tags in the background) that would permit automated analytics of financial statements by both the SEC and analysts. Many of you will recall how a Financial Data Schedule was eliminated a few years back due to its uselessness – but one could be created with more value this time around.
One tension in all this is the differing needs of investors, analysts and regulators. I am not convinced that interactive data will help analysts much because they each seem to have their own approaches to normalizing and organizing corporate reports. Something like XBRL may help a bit, but it is far from an automated solution for them.
On the other hand, regulators need flags to go up or bells to ring that point them in a particular direction that allows them to better target their resources. They can dig in after the flag goes up and take it from there – more like the IRS. Again, XBRL might help – but it is not an automated solution for them either. If companies will be asked to bear most of the costs necessary to create interactive data, the benefits for the marketplace should be clearly shown.
