A week or so ago, the WSJ carried an article about Merrill Lynch’s decision about paying millions of dollars in legal fees for former officers that had been convicted of wrongdoing. This is a controversial topic and I will be blogging some thoughts from TheCorporateCounsel.net’s advisory board in the coming days. Here is an excerpt from the article:
“Merrill Lynch’s onetime investment-banking chief, Daniel Bayly, and three others were convicted of fraud in a federal court in Houston last fall in connection with the so-called Nigerian barge transaction. Merrill bought a stake in some Enron electricity-producing barges off the Nigerian coast in 1999, allowing the energy company to book a $12 million profit. The jury agreed with prosecutors’ arguments that the transaction was fraudulent because Enron had secretly guaranteed Merrill against any loss.
Mr. Bayly was sentenced to 30 months in prison in April; another former Merrill official, James Brown, got 46 months. The other two, Robert Furst and William Fuhs, face sentencing tomorrow. All four are appealing.
Merrill has been paying the four men’s legal bills — $17 million as of Dec. 31, court records show. Corporations routinely pay the legal bills of directors and employees in civil or criminal proceedings arising out of their employment. Companies have the right to recover the money if the individuals are found to have violated their employment duties.
“If you are convicted of crime and it damaged the company, the company shouldn’t pay your legal expenses,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
[Daniel Bayly]
Merrill’s bylaws say it pays an employee’s legal bills until a “final disposition” of their cases, but they don’t say what constitutes final disposition. Some corporate-law specialists say a case isn’t final until appeals are exhausted. Others argue that Merrill could ask for its money back now that the employees’ presumption of innocence has ended.
“Once convicted, you no longer meet the standard” for financial aid, says Lawrence Hamermesh, a professor at Widener School of Law in Delaware.
When U.S. District Judge Ewing Werlein Jr. sentenced Messrs. Bayly and Brown, he refused their requests to remain free pending their appeals, suggesting he doesn’t think much of their chances. The two are expected to report to prison within weeks.
In an April 8 letter to Judge Werlein, federal prosecutors said Merrill had informed them it planned to pay the defendants’ legal fees through their appeals. A person close to the issue says Merrill is considering a cap on appeals costs. A Merrill spokesman says the question of whether Merrill will try to recoup the money “is premature in light of the pending appeals.”
The prosecutors complained about how much Merrill had spent to defend the men.
“Mr. Bayly alone now has four separate law firms representing him,” the letter said. In a hearing, prosecutors estimated Mr. Bayly’s wealth at upward of $60 million. Lawrence Robbins, a Bayly attorney, said he didn’t know his client’s wealth. “If I did I would keep it private and I would find it appalling for the government to make that information public,” he said. He added that Mr. Bayly’s team is down to three firms.
The prosecutors’ also questioned whether Merrill failed to abide by state law governing such matters in Delaware, where Merrill is incorporated. The state’s code says that before paying an employee’s legal bills, the company must first secure an agreement from the individual “to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified.” The prosecutors said Merrill hasn’t obtained such a commitment. The Merrill spokesman said the firm doesn’t believe that it is in violation of Delaware law, but declined further comment.
Under Delaware law, a conviction doesn’t automatically require the company to seek reimbursement because that doesn’t necessarily create the presumption that a “person did not act in good faith and in a manner in which the person reasonably believed” to be in the company’s best interest. Several former top Merrill executives signaled that they think that the past record of Mr. Bayly, for one, is worthy of support by asking Judge Werlein to show leniency.
Merrill might have difficulty arguing that the barge deal didn’t harm shareholders. The company in 2003 paid $80 million to settle a Securities and Exchange Commission complaint that it helped Enron commit fraud through that deal and others. It also settled with the Justice Department to avoid indictment.
The SEC lately has taken a harder line on companies paying employee legal fees. Last May, it fined Lucent Technologies $25 million for not cooperating in an investigation, partly citing the company’s legal-fee payments for employees. Lucent didn’t admit or deny wrongdoing.
In a recent speech, the SEC’s outgoing enforcement chief Stephen Cutler — his last day is today — said paying employees’ legal fees insulates them from the consequences of wrongdoing. “If an individual can look to his/her employer to pay the freight,” said Mr. Cutler, “what good have we done?”
Is Reimbursement of Legal Fees Spent on Contract Negotiations a Perk?
On a somewhat related point to the story above, I recently debated a member about whether reimbursement of legal fees for contract negotiations should be considered a perk. I think it should be – and this article supports that view, noting that a large union. AFSCME, is withholding its support for the head of the Cendant’s compensation committee citing the CEO high pay and perks, including a $165,000 reimbursement for legal fees in connection with his contract negotiations.
The reasoning behind considering reimbursement of legal fees as a perk is that it is not directly related to job performance. As a result, it arguably must be disclosed under Item 402 of Reg. S-K as “other annual compensation,” subject only to the minimum threshold requirements.
Another issue is whether there is a difference between reimbursement and simply paying the fees directly to the law firm. I think there is an argument that if the company pays the firm directly, the counsel works for the company and not the executive – a conflicts issue; but then again I am reminded that the rules regarding the existence of an attorney/client relationship is not a function of who pays the bills.
From a disclosure standpoint, I don’t think that it makes any difference as to whether the company pays the law firm directly or reimburses the executive – if the law firm is representing the executive, and the company ultimately pays the bill – then I think it gets picked up and must be disclosed. Let me know if you have different thoughts on any of these points.
Deceased Woman Deemed “Qualified Purchaser” By SEC Staff
Got your attention, huh. Same way Jay Gould of White & Case got my attention with his law firm memo about a recent no-action response from the SEC’s Division of Investment Management that addresses whether a settlor of a trust – who had been deceased for over 45 years – should be considered a qualified purchaser under the ’40 Act.
According to the law firm memo, this no-action response “appears to have expanded the universe of what the SEC considers to be a qualified purchaser. This is good news for hedge funds and those who market on behalf of hedge funds, as the letter, Trusts Under the Will of Marion Searle (pub. avail. March 29, 2005) should allow more individuals, dead or alive, to satisfy the qualified purchaser standard who did not meet the $5 million threshold at the time of contribution.”
On Friday, the last of the Corp Fin staff moved to the new DC headquarters – and our “SEC Staff Organization Chart” has been updated with all the new phone numbers.
Other staffers will be continuing to make the move over the next few months. As of now, all hard copy submissions continue to get sent to the old HQ address, 450 5th St.
Six Messages from Last Week’s Internal Controls Guidance
Finally got a chance to focus on last week’s batch of internal controls guidance from the SEC and PCAOB. Here are the top six messages I gleaned from them:
1. Its okay to talk again! – Management and outside auditors can resume their dialogue concerning accounting and internal control questions. For example, the sharing of draft financial statements that may be incomplete or contain errors do not contravene the applicable independence or auditing rules and standards. As I am sure outside auditors will be quick to remind you, management must always make the final call on reporting decisions.
2. “Reasonable Assurance” does not mean absolute assurance – SEC reiterates a sentence from the Staff statement when it notes that “[r]egistered public accounting firms should recognize that there is a zone of reasonable conduct by companies that should be recognized as acceptable in the implementation of Section 404.”
3. Its top down; not bottom-up – The agencies clarified that a top-down approach should be used, by beginning with company-level controls.
4. No need to control everything – After starting with the top, companies should then drill down to identify and test other accounts and processes that are relevant to internal control over financial reporting. No more controls to count paper clips – and this is particularly help for IT systems as only IT processes that impact financial data need to be covered by internal controls. The bottom line is that there is no need to use a checklist.
5. No need to test everything every year – The agencies want companies to focus on the areas of greatest risk to the integrity of their financial reporting. The testing and assessment of controls related to these areas of greatest risk may, and in most cases preferably would, take place throughout a fiscal year rather than just the period surrounding the year end close, and everything doesn’t have to be kicked each year.
6. Restatements are not necessarily material weaknesses – Of course, in most cases restatements will be material weaknesses, but I have heard of quite a few instances in which there were strong arguments that a restatement did not rise to the material weakness level.
Material Weakness Disclosures Exceed 14%!
As I heard last week at a conference – and the reinforced in this article – a total of more than 14% of large public companies will have disclosed material weaknesses in this proxy season’s batch of 10-Ks when all is said and done.
AuditAnalytics.com states that among 2,963 accelerated filers that disclosed their Section 404 opinions as of May 15th, 12%, or 363, disclosed material weakness – and then taking into account expected material weakness disclosures from non-timely filers and those that relied on the SEC’s exemptive order – that percentage is predicted to exceed 14%. In comparison, at the SEC’s 404 Roundtable last month, speakers were saying they expected 8% of companies to disclose material weaknesses, just about half of what actually transpired.
Just read the newsletter for the ABA’s Committee on Federal Regulation of Securities – and kudos to Stan Keller for addressing SEC Commissioner Paul Atkin’s recent comments regarding the value of the SEC Staff’s informal guidance. In two recent speeches – one on April 4th and the other on April 27th – Commissioner Atkins expressed concern over the Commission continuing to allow the SEC Staff to set policy and effectively engage in rulemaking through interpretations, particularly focusing in areas other than Corp Fin.
In the Corp Fin context, Stan states the bottom line more artfully than I ever could: “The system of staff interpretation has worked well for many years and contributed to the SEC’s stature as a preeminent regulatory agency. We would all lose, and the quality of securities regulation would suffer, if this process were impeded or diminished.”
More than ever before, the community needs guidance from the SEC as we all try to deal with a lifetime of change condensed into a scant few years. The Commission is dealing with major changes on all fronts – not just Corp Fin matters – and there is no way that five Commissioners (with their miniscule staff) could keep up with the workflow that a thousand plus staffers struggle with today!
Imagine that the SEC used Commissioner Atkin’s model and the Administration failed to fill Commissioner slots as they open up; a not uncommon occurrence. It wasn’t that long ago that going to a Commission meeting meant watching Arthur Levitt and Steve Wallman in a two-man debate – as they comprised the entire Commission for a period of six months (for trivia buffs, see this timeline of Commissioners). Keep those telephone interps coming!
Trends in Securities Litigation
A member recently asked where to find studies regarding securities litigation trends. There are several of these every year, here are two of the latest that are in our “Securities Litigation” Practice Area:
Chairman Donaldson Testifies on Commission Disagreements
Yesterday, Chairman Donaldson testified before the Senate Banking Committee on market structure. During his testimony, he was asked quite a few questions about how the five Commissioners were getting along. Here is an excerpt from a Financial Times article:
“William Donaldson was yesterday forced to defend his leadership of the Securities and Exchange Commission after US lawmakers raised concerns about divisions inside the regulator.
Mr Donaldson, Republican chairman of the SEC, insisted he always strove for consensus at the regulator during its policy making. Republican lawmakers highlighted how Mr Donaldson had relied on the support of the two Democratic commissioners at the SEC to get controversial reforms approved.
The latest example came in April when Paul Atkins and Cynthia Glassman – the other two Republican commissioners at the SEC – voted against changes to stock trading rules.
Richard Shelby, Republican chairman of the Senate banking committee, said some people were “troubled” by how the changes were pushed through by three votes to two, because of concerns that the lack of consensus undermined the regulator’s credibility.
Senator Mike Crapo, another Republican member of the committee, said he found the divisions inside the SEC on contentious policy making “disturbing”.
Regulations to supervise hedge funds and improve governance at mutual funds have also been pushed through by Mr Donaldson and the two Democratic commissioners.
Mr Donaldson said almost 3,000 votes had taken place at the SEC under his leadership and 98 per cent were unanimous. He compared his record favourably to Harvey Pitt, his predecessor as SEC chairman, when he said 99 per cent of votes were unanimous.”
Think the courts are not getting serious about executive compensation? Today’s Washington Post has this article about how Vice Chancellor Leo Strine rejected a recent settlement between Fairchild Corp. and investors over allegations that the CEO and other senior managers received excessive and improper pay.
The Vice Chancellor stated that the settlement was inadequate – or more aptly put in this quote from the article: If the allegations in the lawsuit are true, the judge said from the bench, the proposed settlement amounted to a “cosmetic whimper.” This is remarkable as Delaware courts typically reduce legal fees as a cure for an inadequate settlement; they don’t reject the settlements outright as has been done in this case.
Among other things, the rejected terms of the settlement included:
– CEO would have cut his $2.5 million salary by 20%, another executive (who is the CEO’s son) would have taken a 15% salary cut – and there would have been shorter terms under amended employment agreements for these two executives
– CEO would have paid $1.5 million through an advance from a retirement plan
– two executive would have had to pay back millions of dollars of golden parachute or “change of control” payments that were paid due to a prior subsidiary sale
Also challenged were interest-free loans, advances on retirement payments, payments for an apartment in Paris and Steiner-affiliated aircraft, and legal costs paid for senior manager’s defense of a lawsuit in France.
If you wish to see the original complaint that alleges breaches of fiduciary duty and disclosure regarding the way the CEO and other executives were being compensated, it is still posted in the “Compensation Litigation” Portal on CompensationStandards.com.
Annette Nazareth: Next Commissioner?
Not for several decades has there been a SEC Staffer who was promoted to SEC Commissioner to work alongside his or her former bosses. But that is what will happen if Market Reg Director Annette Nazareth replaces outgoing Commissioner Harvey Goldschmid, as was rumored in the WSJ and NY Times yesterday.
The WSJ reported that “Senate Minority Leader Harry Reid (D., Nev.) is expected to write Mr. Bush today recommending Annette Nazareth for the opening on the five-member SEC. He deferred to Sen. Charles Schumer, a Democrat who represents New York, home to much of the U.S. securities industry, to make the recommendation. Ms. Nazareth “is just the person the SEC needs,” Mr. Schumer said through a spokesman.”
Back in the ’50s, ’60s and ’70s, it was not uncommon for Staffers to become Commissioners. In fact, some of the best Commissioners came directly from the Staff, including Irving Pollack (Enforcement Director), Byron Woodside (Corp Fin Director), Manny Cohen (Corp Fin Director) and Phil Loomis (General Counsel).
Harvey Goldschmid was the SEC’s General Counsel in the late 1990s – but the Commission composition turned over by the time he became Commissioner in 2002.
Most Recent Monthly Columns
The May column for Carl’s Corner is entitled: Shareholder Rights’ Agreements: Voting Rights, Board Structure and Assuring Distributions.
And on DealLawyers.com, Steve Glover’s May column is “Spin-Off Basics – Part 2.”
According to footnote disclosure in the equity plan compensation table of its proxy statement, Delta Airlines has relied on the financial distress exception to the NYSE’s shareholder approval rules – and the NYSE staff has accepted the company’s application of the exception. [Here is how the process works: the NYSE’s rule allows for exceptions in the case of financial distress – the NYSE staff reviews each fact pattern to be sure that the company is properly applying the rule. The NYSE doesn’t technically grant the exception.]
Delta adopted two broad-based plans at the end of 2004, with a total of 62 million shares reserved – and these plans create potential dilution of 44% (and now the total potential dilution of all Delta’s plans are over 80%! Note that Delta has three shareholder proposals related to compensation on their ballot).
According to a report from IRRC, the use of the financial distress exception is rare and must be based on audit committee documentation and other factors. Here is the disclosure in footnote 2 of Delta’s table:
“During the December 2004 quarter, we adopted, as part of the Shared Reward program, broad-based pilot and non-pilot stock option plans due to the substantial contributions made by employees to our out-of-court restructuring efforts. We did not seek shareowner approval to adopt these plans because the Audit Committee of our Board of Directors determined that the delay necessary in obtaining such approval would seriously jeopardize our financial viability. The NYSE accepted our reliance on this exception to its shareowner approval policy. A total of 62,340,000 shares of Common Stock may be issued under these plans.”
More Practice Pointers on CompensationStandards.com
New practice pointers continue to be added to CompensationStandards.com – yesterday, I added nearly ten from Towers Perrin and Mercer Consulting, among others. I also added Professor David Yermack’s latest version of his much-talked about airplane perks paper – this one includes a section indicating that a company’s decision to begin disclosing the aircraft perk is highly correlated with shareholder lawsuits for securities fraud. See the updated paper in the “Airplane Use” Practice Area.
We have a lot of momentum for our October 31st “2nd Annual Executive Compensation Conference,” with Stanford Directors’ College and Harvard Law School’s Program on Corporate Governance colloborating with us – and John Reed and other current/former CEOs joining us to speak on responsible compensation practices. More details to come in the next few weeks – but you might want to get a jump on reserving a room at the Chicago Hyatt Regency since last year’s hotel was sold out early (don’t forget to mention the NASPP when you book a room to get the group rate).
What Happens If You Flunk Your 404 Exam?
There are so many good law firm memos on TheCorporateCounsel.net that I am always trying to figure out a better way to highlight them. One idea is to occasionally include them in my blog. Here is a Foley Lardner memo that emanated from a panel discussion – which included NYSE and Nasdaq representatives – that addressed what companies should do if they have internal control problems. It is “short but sweet” and in our “Internal Controls” Practice Area. Law firm memos on the new SEC and PCAOB internal controls guidance also are now posted there (scroll to bottom).
Early yesterday, I updated my blog about the PCAOB’s guidance on their internal-controls requirements – see both the PCAOB’s new FAQs 38-55 and the Board’s policy statement.
Meanwhile at the SEC, the Commission itself issued a statement – plus the Corp Fin staff also issued its own statement on management’s 404 report.
How Is Your Board Deciding to Implement Option Expensing?
As should be evident by now, under the FASB’s 123(R) standard, each company has some flexibility about how to implement option expensing – and the decision about how to do so should have quite an impact on the company’s bottom line. As the numerous NASPP webcasts on this topic – as well as the other resources on the NASPP’s site – make clear, this decision is one that requires some board attention. Learn more in this interview with Mike Melbinger on the Board’s Decisions for Stock Expensing.
SEC Filings Don’t Tell the Whole Pension Story
Today’s Washington Post carries an interesting column by Allan Sloan about the discrepancies between pension valuations disclosed in SEC filings by distressed companies compared to the amounts that the Pension Benefit Guaranty Corporation derives when it terminates the plans of those companies.
On an unrelated note, the SEC Staff released a scathing report yesterday on pension consultants and conflicts of interest.
Is Cisco Kidding?
Last week, I blogged about Cisco’s attempt to create employee stock options that are market traded. Here is some commentary on this idea from Ron Fink’s CFO Blog (not that I agree with Ron, just noting other’s views):
“Cisco’s latest idea for reducing the reported cost of employee stock option grants sounds as if it depends on a poorly performing derivative instrument (see B5 of the WSJ for a better description). How else describe a security that institutional investors could buy but not sell, making them wait as long as five years to convert it to common stock?
Yes, the price of the derivative may suffer as a result of these limitations. And in doing so, that could conceivably establish a market value for the underlying securities—the option grants—that is lower than what might be recorded under the option pricing models that are acceptable to the FASB.
But if the security is such a lousy deal, why would anyone buy it? And if it’s not so lousy, wouldn’t the resulting dilution to EPS offset the benefits?
It seems to me that Silicon Valley’s time and efforts would be better spent on producing new technology instead of methods of limiting the impact of an accounting rule. After all, investors may simply ignore the hit to earnings and focus on cash flow instead. Or is that what really concerns the tech lobby?”
Lot of members asking how to find the SEC Staff’s comment letters on the SEC’s site. Here is some insight from Brink Dickerson: Comment letters are starting to appear in the SEC’s EDGAR database. They are assigned one of two form types, “upload” for letters generated by the SEC staff, and “corresp” for letters generated by filers. As with other filings, they are indexed by filer name, so the primary way to access the letters is to search for the filer and then look for the form type. To search across filers, go to the EDGAR archives – which is within the “Search for Company Filings” area on the main EDGAR page – and search for “form-type=” either “upload” or “corresp.”
So far the selection is not that large, with twenty-four examples – but it should grow at the rate of roughly 300 letters per month. Further, except in a few cases, the letters available so far are either just the correspondence or just from the SEC – but not both.
And here is some further insight from Howard Dicker: Here is a list of all SEC comment letters and responses that the SEC has posted on EDGAR so far.
Note that SEC staff comments have a “Form Type” of “UPLOAD” – and company responses have a “Form Type” of “CORRESP.” Most comment letters posted so far (at least those that do not relate to ’40 Act or asset-backed issuers) appear to pertain to comments on changes in accountants disclosed on Form 8-K (Item 4.01). My cursory review also indicates that the Staff issued the comment letters regarding this item within a few days of the company filing a Form 8-K.
From the most recent draft of the SEC’s EDGAR filer manual, cover letters that include responses will also be posted on the SEC’s site – but no cover letters are uploaded yet (perhaps because when the SEC staff asks a company to respond to comments, they ask that the company respond as “correspondence”).
The Art of the Private Equity Deal
Lately, there are articles written almost daily about how private equity funds are primary players in today’s M&A – such as this article from Thursday’s WSJ about how “Private-Equity Players Turn to Bigger Prey.”
Stay tuned for the DealLawyers.com webcast – “The Art of the Private Equity Deal” – set for June 14th, during which three of the top outside counsel doing private equity deals and the general counsel at a large private equity fund will discuss the latest strategies (as well as the fundamentals) implicated in doing deals with funds. Try a no-risk trial to DealLawyers.com today – get access to this webcast and many more resources on the site for only $195 per year.
PCAOB Releases Internal Controls Guidance
Today, the PCAOB released guidance to help companies and their auditors comply with internal-controls requirements. The staff guidance, in question-and-answer form, is accompanied by a policy statement that may have more of an impact. The guidance addresses some stumbling blocks for companies, including the scope of internal-controls reviews – and the policy statement aims to put technical guidance in context and reiterate the need for auditors to use a flexible, risk-based approach, avoiding a one-size-fits-all model.
In addition, the SEC Staff released this statement on internal controls. More on all this manana…
As noted in this article, there is some controversy over companies that have accelerated the vesting of their underwater options in an effort to create higher earnings after they are forced to implement the FASB’s 123(R) standard.
On the NASPP site, there is a Bear Stearns report that has a chart of 102 companies – all of which have a market cap over $600 million – that have accelerated vesting of their underwater options. The chart includes numerous details about each company’s situation. Bear Stearns predicts more companies will be taking such action – and estimates that over $1 billion of option expense for future periods has been avoided by these companies. The NASPP site has other resources on accelerated option activity as well, including a June 9th webcast – “Q&A on FAS 123(R)” – during which Paula Todd of Towers Perrin and Reginald Oakley of the FASB are bound to answer questions on this technique.
Cisco Exploring Market-Traded Employee Options
Yesterday, both the NY Times and WSJ reported that Cisco Systems is considering the use of market-traded employee options as a possible solution to the huge option expense it will soon incur under the FASB’s new 123(R) standard. Here is the NY Times piece:
“Adding a new twist to the continuing fight over the expensing of employee stock options, Cisco Systems is seeking regulatory approval for a novel financial instrument that could allow the company to assign a lower value to the stock options than under current valuation models.
A lower value for the options, which under new accounting rules will have to be recorded as expenses on Cisco’s books starting this July, would reduce the impact expensing will have on Cisco’s profits and could lead other companies to adopt something similar. The company said that if it employed a traditional valuation standard like the Black-Scholes model for expensing its stock options, its reported profits would fall by roughly 20 percent.
Options give employees the right to buy stock for as long as 10 years at a price set when the option is issued, and thus can become very valuable if the stock rises over that period.
Cisco’s proposal is to create a market by selling new securities based on the employee options. By doing so, the company potentially could be changing the terms of the debate on expensing stock options. But details of the securities Cisco decides to sell, and the way it markets them, could prove crucial in determining how the approach works in practice.
The issue is important for Cisco because it grants options to all employees and because it will be one of the first companies to come under the new accounting rule that requires options to be expensed. That rule, adopted by the Financial Accounting Standards Board after a long and bitter debate, goes into effect on June 15 for fiscal years beginning after that date. Cisco’s fiscal year begins July 31.
In its last fiscal year, Cisco granted 188 million options to employees. It disclosed that had it been forced to take the value of options as an expense, its net income would have fallen by 28 percent, to $3.2 billion.
The securities would be sold only to institutional investors. Cisco would sell new securities when it issued options to employees, and would then use them to value those options on its books.”
A New Twist on the Quiet Period
Apparently, Led Zeppelin guitarist Jimmy Page entertained the NYSE with the band’s “Whole Lotta Love” at the opening bell Wednesday to kick off Warner Music Group Corp.’s IPO – but a few weeks earlier, one of the bands under contract to Warner had threatened to disturb Warner’s quiet period by trying to get out of its contract.
On May 3rd, the WSJ reported that Linkin Park wanted to end its contract with Warner because it was unhappy with the financial implications of the company’s IPO. Since Linkin Park is responsible for 10% of Warner’s sales, the mere threat by them to leave could have caused a problem in the quiet period – particularly since management was unable to publicly respond due to the quiet period’s restrictions. But it looks like Warner was able to get its IPO off the ground. That’s a new one for me, a client trying to get out of its contract – or renegotiate – and using the quiet period for leverage.
On the heels of yesterday’s farewell party for outgoing SEC Enforcement Director Stephen Cutler, Deputy Director Linda Chatman Thomsen has been promoted to take his place. Linda’s roots at the SEC stretch back to 1995, when she joined the Staff as a litigator and she rose through the ranks until becoming Deputy in 2002.
Delaware Supreme Court Limits California’s Long Arms
Thanks to John Jenkins of Calfee Halter for this analysis: With its recent decision in VantagePoint Venture Partners v. Examen, the Delaware Supreme Court soundly rejected California’s controversial efforts to apply its corporate statute to the internal affairs of foreign corporations with substantial ties to the Golden State. This case involved a claim that Section 2115 of the California Corporations Code governed the question of whether a separate class vote by the holders of preferred shares was required to authorize a merger transaction involving a Delaware corporation.
Traditionally, the so-called “internal affairs doctrine” has held that relationships between a corporation and its stockholders are governed by the laws of the state of its incorporation. Section 2115 of the California Corporations Code represents a departure from that traditional approach. That statute purports to apply to corporations that, although they may be incorporated elsewhere, have substantial business activities in California and substantial ownership by California residents.
Section 2115 is sweeping in its scope. As the Delaware Supreme Court noted: “if Section 2115 applies, California law is deemed to control the following: the annual election of directors; removal of directors without cause; removal of directors by court proceedings; the filing of director vacancies where less than a majority in office are elected by shareholders; the director’s standard of care; the liability of directors for unlawful distributions; indemnification of directors, officers, and others; limitations on corporate distributions in cash or property; the liability of shareholders who receive unlawful distributions; the requirement for annual shareholders’ meetings and remedies for the same if not timely held; shareholder’s entitlement to cumulative voting; the conditions when a supermajority vote is required; limitations on the sale of assets; limitations on mergers; limitations on conversions; requirements on conversions; the limitations and conditions for reorganization (including the requirement for class voting); dissenter’s rights; records and reports; actions by the Attorney General and inspection rights.”
Section 2115 would have subjected the merger at issue in this case to a separate class vote by the holders of the company’s preferred stock, notwithstanding the fact that the certificate of designation called for the preferred to vote on an as-converted basis with the common as a single class.
The Delaware Supreme Court rejected the plaintiff’s efforts to invoke Section 2115, holding instead that the internal affairs of a Delaware corporation remain a matter of Delaware law. In so doing, the court reviewed a wide variety of federal, Delaware and California decisions involving the internal affairs doctrine – and concluded that it had no doubt that the California courts would also apply Delaware law under the circumstances of this case. The court opinion and several law firm memos on this case is up in our “California Corporations” Practice Area.
Transcript of Reg FD Webcast is Up!
We have posted the transcript of our popular webcast: “The Latest Regulation FD Practices.”
For Photo Lovers Only
This Flickr Blog contains some very cool photos – new ones added daily. And this Mars Rover Blog has nice photos of Mars – ever wonder what Mars looks like?
Several members recently have inquired as to whether Nasdaq was seeking to delist companies that had filed disclaimed internal control opinions. [A “disclaimed opinion” is an attestation that essentially provides no opinion; compared to an adverse attestation which lists one or more material weaknesses.]
Although I am uncertain as to whether Nasdaq is taking this position across the board, it does appear that it is sending delisting letters to some companies on the basis that their 10-Ks are incomplete due to disclaimed 404 opinions. In fact, one of these companies, Advanced Energy, has put out a press release indicating that it intends to fight Nasdaq over this issue through the Nasdaq’s hearing process.
Disney Dissidents Sue the Company and the Board
Roy Disney and Stanley Gold are at it again. The dissidents of Walt Disney sued the company Monday in Delaware Chancery court, alleging that the directors made false statements to shareholders about the search for a successor to CEO Michael Eisner. In light of this allegedly bad disclosure, they seek to void the election of the Disney directors, force another election and disclose the board to disclose all the details regarding how they selected a new chief executive.
As you might recall, Disney and Gold withheld their support from Disney’s board at the company’s shareholder meeting earlier this year. The lawsuit asserts they would have run an alternate slate of directors if they had known that the company and a majority of the board members “did not intend to stand by their public statements about engaging in a bona fide CEO selection process.” And the complaint outlines a pattern of action taken by the Disney board during its CEO selection process that Gold and Disney claim shows the company never seriously considered anyone but the insider that was tapped as the successor, Robert Iger. Here are the letters that Gold and Disney have written to the board over the years.
Setting aside the fact that I have never seen extensive disclosure about CEO succession – as this process is often conducted in the dark – this lawsuit is consider a longshot by experts as explained in this article for more “legal” reasons.
Learn more about CEO succession in our upcoming June 8th webcast – “Managing D&O Departures and Arrivals” – which I just lengthed by 15 minutes because it became obvious that the expert panel has so much interesting ground to cover during a prep call we held yesterday. I also recently added an expert on D&O background verification to the panel. In addition, I just posted a new survey on director recruitment and background verification – check it out!
Throw Your Name in the Hat: PCAOB’s Standing Advisory Board
It’s that time of year when the PCAOB is soliciting names for their standing advisory board. The advisory board consists of 30 members with expertise in a variety of fields, including accounting, auditing, corporate finance, corporate governance, and investing in public companies. Two years ago, the first members were selected to serve staggered two- and three-year terms (but going forward, all terms will be two-years) – the PCAOB is seeking nominations to fill the 14 slots that are now open. Self-nominations are welcome!
