I don’t know if you’ve seen the Delaware Chancery Court’s opinion in the eBay/ Goldman “spinning” case yet, but it may be worth a look. Chancellor Chandler is a thoughtful and balanced judge, but it seems to me that he went a lot farther than he had to in his decision. In only 15 pages, he manages to lower the bar for claims of demand futility in derivative actions, expand the business expectancy concept in corporate opportunity cases to include investments in equities, liberally construe the ability of plaintiffs to make aiding and abetting claims against third parties – and even imply that directors with stock options that haven’t vested may not be “independent.”
Like most of what’s going on in Delaware today, I don’t think Chancellor Chandler is breaking new legal ground – but he seems to be applying existing doctrines in a much more plaintiff-friendly way than I think he would have before the recent governance reforms.
We have posted a couple of law firm memos about the case in Section E.27 “Corporate Opportunity” of our “Sarbanes-Oxley Law Firm Memos.” Thanks to John Jenkins for jogging my memory on this one!
Below is an interesting March 8th news article from Institutional Dealers’ Digest about the film “Billy Dead” that recently conducted an online IPO that was halted by the SEC (if you ever are faced with gun-jumping, don’t forget to see our sample “Risk Factors Regarding Gun-Jumping” in the “Disclosure Analysis & Samples” Practice Area):
“Less than two weeks after Civilian Capital raised the curtain on its initial public offering of Billy Dead Inc.-the first IPO for an individual movie ever attempted in the U.S.-the Securities and Exchange Commission has called “Cut.” According to SEC filings, Civilian Capital was asked to halt its offering and clarify any risks to investors before it could proceed.
Civilian, a NASD-registered broker/dealer, wants to raise up to $7.8 million to finance the production of its first film-“Billy Dead,” a murder mystery set to star Ethan Hawke that was originally slated to start production this spring. To fund the film, Civilian last Nov. 13 launched an online offering of 900,000 shares of Series A preferred stock in Billy Dead’s holding company, at $8.75 each. But shortly thereafter, Civilian returned investors’ initial funds, a move it credits to extensive news coverage of the offering that made it difficult for investors to adequately assess the offering’s risk.
Billy Dead’s latest prospectus details a number of inaccuracies and overly optimistic statements about the company that were presented by the media. (Full disclosure: IDD was first to report on the potential IPO, as far back as May 14, 2001, following up on news of registration of the shares in an Apr. 28 story and a Nov. 17 article about marketing the shares. But none of the IDD stories was cited among those containing the hype that caused the deal to be yanked.)
Civilian’s pulled IPO shows how risky it can be for companies in the process of raising capital to talk to the media, especially at a time when the SEC has been trying to become a more vigilant watchdog for investors. A spokesman for the SEC says it does not track how often IPOs are pulled, nor would it give any guidance on its reasoning. Industry observers, however, were not surprised to learn that the offering had been tabled. They say that the SEC has become more exacting in its interpretation of securities laws. Calls to Civilian were not returned.
If Civilian has become mum, it could be because its prior efforts to cultivate the media backfired. In a new prospectus filed Feb. 13, 2004, the company states that it stopped the offering on Dec. 8 “in order to reduce the risk of investors’ possible reliance on news reports and articles, or information which appeared on the underwriter’s website in a manner which was insufficiently balanced.” Underwriter Civilian Capital then returned investors’ money.
The prospectus details several of the news stories and Internet reports published in November and December 2003. It appears that after one or two news organizations misreported information about the offering, the errors snowballed when other reporters writing follow-up stories pulled incorrect information from the earlier ones.
First off, the prospectus cites a Nov. 19, 2003, article from the Associated Press that incorrectly reported the Billy Dead offering as a Nasdaq IPO, when the shares were actually slated to trade on the Over the Counter Bulletin Board (OTCBB). “These statements, which were additionally stated in slightly altered forms in other articles and reports, are erroneous,” says the new prospectus.
The prospectus also hints that some news stories carried overly optimistic comments from Civilian’s management when it was supposed to be in the quiet period after filing for the IPO.
“In an article in The Economist dated Dec. 2, 2003, Barry Poltermann, President of Civilian Capital, is quoted as saying that the offering is on track to close.'”
The prospectus goes on to name a Bloomberg wire article first published on Nov. 13, 2003, that was reprinted in various publications, including the Chicago Tribune, that quoted Poltermann’s views about the offering’s success: “My confidence is off the charts,'” he told Bloomberg. “I’ve been working on this for four years. We wouldn’t do it if we weren’t extremely confident.” Civilian’s plans to launch another six film IPOs and raise up to $60 million by the end of 2004 were also reported in the articles.
To clarify the uncertainty of these statements, the latest prospectus goes to great lengths to point out there is no assurance that even the Billy Dead offering will be completed, or that Civilian’s plans for other film IPOs will come to fruition. “When considering the merits of this investment, investors should not rely on any representations of confidence made by the underwriter in their ability to raise sufficient funds to close this offering, or plans of the underwriter to pursue similar film offerings in the future,” it states.
A third problem hinted at in the prospectus was one journalist’s own interpretations of the offering’s risks and how they might be offset. Citing a Dec. 15, 2003, article from Business Week, the prospectus indicates that the journalist went too far by discussing hypothetical returns for the film and contingency plans Civilian might use to pay back investors if “Billy Dead” were to make an unsuccessful box office debut.
“This hypothetical scenario was not based on any information provided to the author by management or Civilian Capital,” states the prospectus. “We believe the author analyzed information that appears in the Management’s Plan of Operation’ section of this prospectus and based the potential returns upon his estimates and assumptions that are inherently subject to significant uncertainties and contingencies, primarily concerning the timing and cost of the Film’s distribution. Billy Dead, Inc. has never made, and does not intend to make, any public financial projections about the performance of the film Billy Dead, Inc. was formed to produce.”
Why the SEC Acts
Bankers say there are a variety of reasons the SEC can halt an offering. “But it’s usually because of the CEO or CFO mistakenly giving a quote when they shouldn’t have,” says the head of equity capital markets for one midsize firm. That’s why most securities firms go out of their way to avoid the media once they have filed an offering, he explains.
“It’s rare the SEC would penalize a company for hype if the company had nothing to do with it,” adds the banker. Once an offering is tabled, however, the costs can be significant. The refiling charges and associated legal fees are one thing; then there’s the risk that slowing up a deal could scare off investors, who have long been leery of Hollywood.
After failed efforts by the Street to fund limited partnerships for groups of films in the 1980s, bankers say investors have since shied away from anything exclusively film-related. Only investments in major entertainment conglomerates-such as The Walt Disney Co. and Time Warner Inc., whose returns are not solely tied to the performance of films-have been able to attract mainstream investors.
Nonetheless, the financial success of a few recent independent films has piqued investors’ interest. But such success stories are still few and far between. Indeed, the profitability of independent films reported in conjunction with Civilian’s offering showed up as another SEC concern, according to Billy Dead’s prospectus.
“Both [a] CBS Marketwatch Internet article and the Associated Press article referred to [Civilian] officials as stating that in certain instances low-budget films have a greater chance at profitability than more costly projects,” it states. “These statements attributed to Mr. Fuhrman [Billy Dead Inc.’s CEO] or to representatives of Billy Dead, Inc. have been repeated, sometimes in slightly altered forms, in several other press articles.”
Another example cited is a quote from Poltermann that aired on NPR’s “On the Media” program on Nov. 21, 2003. “I’m not saying that it’s still not a very risky game,” Poltermann is quoted as saying. “The movie business is hit-driven. But it doesn’t have to be Blair Witch Project’ or My Big, Fat Greek Wedding’ to do very well. In fact, last year Y Tu Mama Tambien’ was actually more profitable [on] a return-on-investment basis than My Big, Fat Greek Wedding.'”
The new prospectus says these statements are “not balanced representations of potential film profitability because they do not represent the fact that numerous films or groups of films released at the same time were less profitable than the cited films or groups of films.”
Remember that Seinfeld episode where Kramer effectively killed Elaine’s phone number (I think he gave out her number as a fax line). That’s when Elaine had to get a new phone number because the “212” area code wasn’t available to her – which thus rendered her undateable.
Well, the same type of thing is happening at the SEC’s HQ. So many new staffers have been hired that the omnipresent “942-” prefix is no longer available. Instead, new staffers have phone numbers with a “824-” prefix. And for the trivia buffs, what is the difference between 942 and 824? Answer is that you subtract a one from the first digit and flip the order of the last two…
And Even More “SEC Speaks” Notes
These PLI “SEC Speaks” notes are from the panel with staffers from the Office of Chief Accountant.
PCAOB News
After a long search, the PCAOB has hired the head of its enforcement arm – Claudius Modesti formerly served as an assistant prosecutor in the U.S. Attorney General’s office for the Eastern District of Virginia.
In anticipation of the April 28th annual shareholders meeting, I just received my copy of the General Electric proxy statement in the mail. Below are some interesting tidbits:
1. Severance Pay – As publicized last week, GE will now allow shareholders to approve any severance packages for the Named Executive Officers if a severance package is worth more than 2.99 times an executive’s salary and bonus. However, GE doesn’t currently enter into employment agreements nor severance arrangements with its NEOs.
This development is also noteworthy because the Teamsters Affiliates Pension Plan had a similar shareholder proposal on GE’s ballot last year that was narrowly defeated. So GE probably took this action in response to that voting result.
2. Number of Shareholder Proposals – The GE proxy statement includes 15 shareholder proposals that collectively run 20 pages. Nearly a third of the entire proxy statement! Last year, GE had 13 shareholder proposals.
3. Voluntary Reporting of Quasi-Business Use of Aircraft – In footnote 2 of the Summary Compensation Table, GE discloses the incremental value of the personal use of aircraft by the chair and vice chair – even though that use is considered by GE to be a business expense (because GE’s updated executive security program requires that those two officers use company aircraft for personal travel). So this detailed information is available in a footnote, but not included in the “Other Annual Compensation” column.
4. Format of Proxy Statement – It’s printed on 5″ by 8″ tissue paper with one-eight margins. This baby is compact and light-weight. It’s not easy to read – but the online version of the proxy statement is quite nice. Clearly the way to go to save trees!
Demystifying Delisting of Securities
I have always found the deregistration of a company’s securities to be quite confusing (and when I was in Chief Counsel’s office in Corp Fin, it was a common question from callers).
Thanks to research wunderkinds Marissa Andrea and Cindy Alfieri of Agilent Technologies, below are more resources regarding private companies (it’s a follow-up to my March 5th blog – all of which is now part of the our new “Private Company Research” Practice Area):
Subscription-Based Services
1. VentureSource and VentureExpert – These are Venture Capital databases that monitor private start-up activity. The focus is finally moving beyond US-centric and there are several deals involving Canadian, Israeli and European startups now.
2. ORBIS – This database searches private and public European company info. The information reported is coming from mandatory government filings (whether you’re a private or not – it’s a European requirement), rather than as information that companies voluntarily submit. There are about 5 million companies from Europe profiled, 110,000 from Japan, 1.4 million from the US. There is a product in ORBIS called Zephyr that you can use for M&A information.
3. DataStarWeb (Dialog, a Thomson company) – This database is heavy with European company information. It’s very strong in pharma/biotech but contains industry information across the board.
4. Dun & Bradstreet – If a company report is not available on the D&B database, one can be requested for a fee. Although, since D&B obtains some of its information by phoning the company with a questionnaire – but the information is only as accurate or complete as what the private company is willing to disclose. Other D&B information is gathered from what is available in public records: Secretary of State Filings, UCC, liens, and so on.
Free Information
1. BRB Publications – BRB Publications is well known in the public records retrieval industry and has gathered links to state and county sites containing public records data. Often, when you are unable to find anything at all on a private company, at the very least you should be able to uncover a Secretary of State or other public filing that can confirm basic information about the company (for example, when and where the company incorporated).
2. US Patent & Trademark Office – If intellectual property is your main concern, checking the USPTO’s free databases will reveal a private company’s patents/trademarks, if any.
3. Wayback Machine – What if the private company no longer exists, but you still need information? Try the Wayback machine! If the company had a website and if the Wayback Machine captured it, you might be able to get some basic information about the company.
4. Regional Newspapers – You can find out a lot of information about a private company by looking at regional newspapers where the company is either headquartered or residing as a subsidiary.
Don’t Forget to Ask Yourself – Is It Really a Private Company? Some companies masquerade as privates but are really subsidiaries of a public company, so you should check the Directory of Corporate Affiliations. If it is a subsidiary of a public company, check the parent’s annual report for additional references to the subsidiary.
In the face of the first potential “opt-in” proposal – one that might have triggered the SEC’s shareholder access framework, Marsh & McLennan nominated a director candidate put forth by four pension plans (who combine to own 1.3% of the company’s equity). As a result, the shareholder proposal was withdrawn by the pension plans.
The investor nominee is a former US Attorney in New York, who now works at Dorsey & Whitney. This is an interesting development and might be a harbinger of what will typically happen when companies receive “opt-in” proposals. Historically, it has been rare that a company would acknowledge investor involvement in the selection of a nominee.
Another Exchange Heard From
A little late to be addressing this question, but someone asked in our Q&A Forum whether AMEX follows the NYSE or Nasdaq as to when the new governance standards take effect (i.e. do the new disclosures have to be included in this year’s proxy statement)? I have confirmation from the AMEX staff that they follow the Nasdaq approach – so AMEX-listed companies must include the new disclosures in this year’s proxy statements.
A number of well-known compensation consultants and compensation critics have signed on to help monitor the forum and answer questions. Within its first hour, there were nearly a dozen – many of them provocative – questions posted!
Yesterday, at Hewlett-Packard’s annual meeting, a majority of shareholders cast votes in favor of a shareholder proposal that requested that the company expense options. Management had vigorously opposed the proposal.
According to TheStreet.com, shareholders cast 1.2 billion votes in favor of the measure and 921 million against. In 2003, the company’s net income of $2.5 billion would have been reduced $762 million to $1.8 billion if the company had expensed options using the fair-value method. Annual earnings would have been cut from 83 cents to 59 cents.
In addition, all but one of H-P’s directors received the support of over 90% of the votes cast, including its audit committee members – despite the urging of CalPERS for shareholders to vote against these five audit committee members because they approved Ernst & Young as both the H-P’s auditor and tax adviser. CalPERS has taken this position universally this year – and as a result, it has voted against the audit committee members at a number of companies.
CalPERS had more success with the director that works for Dewey Ballantine, while the law firm provided legal services to H-P. Last week, CalPERS publicly criticized the director for having a “poor attendance record and a business relationship with the company that CalPERS believes could impair his objectivity.” The preliminary voting results show that this director received withhold votes from over 30% of the votes cast.
Ethics Programs – The Role of the Board: A Global Study
In our “Code of Ethics” and “Compliance Training” Portals, we have posted an executive summary of a 2003 report from The Conference Board on the role of the Board in the design, implementation, and monitoring of corporate ethics programs. The full report can be purchased for $140 ($35 for Conference Board members) at the Conference Board website.
Besides NASPP Chair Jesse Brill, who will moderate, the panelists are:
– Peter T. Chingos, National Director Executive Compensation for Mercer. Peter has been a leading light in the field of executive compensation for over 25 years and consults with numerous boards, CEOs and managements. Peter is also a member of the NASPP’s Advisory Board.
– George B. Paulin, President and CEO of Frederic W. Cook and Co., Inc George is one of only three people in the past 15 years to receive our Best Compensation Idea Award. His just published piece Best Compensation Ideas Features and Practices should be on everyone’s “must” reading list.
– Tim Sparks, President, Compensia, a newly formed consulting firm specializing in providing counsel to boards, compensation committees and senior management. Many of us know Tim as a nationally recognized compensation lawyer and former senior partner and member of the Executive Committee at Wilson Sonsini Goodrich & Rosati. Tim has written and spoken extensively on executive compensation issues and serves on the NASPP Advisory Board.
Real-Time Disclosure Adopting Release Posted
The SEC has posted the adopting release with the new Form 8-K amendments – this is a PDF 133-page document double spaced. I am cooking up a May webcast on the topic…
Electronic Application for Form IDs
In a welcome development, the SEC has proposed amendments mandating the electronic filing of applications on Form ID for access codes to file on EDGAR. The SEC is taking comments until April 5th – and expects to launch the new system in late April, possibly after little further notice.
By that time, a related new online filing system accessed through an EDGAR Filer Management website is scheduled to be completed.
[My final four: Duke (champion), Gonzaga, UConn and Wake Forest. Go Terps!]
As many of us know, yesterday was the deadline for calendar-year, accelerated filer companies to file their 10-Ks. This year’s deadline is 75 days after the company’s fiscal year end. So far it doesn’t look like the tightened deadline has been problematic for most companies as only about 50 companies have filed a Form 12b-25 (although the deadline for filing those is not until the end of today) and quite a few companies filed their 10-Ks well before yesterday’s drop-dead date.
Those of us that have been around for more than a decade might fondly recall the days before EDGAR when lines of Federal Express trucks stretched a few blocks in front of the SEC’s HQ – as many companies waited until the last day to ship their 10-Ks to the SEC’s Filing Desk. Dem were da days…
Impact of Forensic Accounting on Fraud Investigations
Thanks to Kimberley Drexler, we have posted our notes from the MD&A workshop panel at SEC Speaks.
SAB 105 and Treatment of Derivatives
Last week, the SEC issued Staff Accounting Bulletin No. 105 – SAB 105 – which summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments.
Regarding when to implement SAB 105, the SAB states that the staff will not object if companies that have not already been applying SAB 105 accounting continue to account for loan commitments as derivatives as they have in the past for those commitments entered into on – or before – March 31, 2004. However, for any loan commitments entered into subsequent to that date, the staff expects all companies to apply SAB 105 to them.
SEC Proposes International Accounting Standards for Foreign Private Issuers
On Thursday, the SEC proposed amendments to Form 20-F that would allow foreign private issuers to change their basis of accounting to international accounting standards. These standards are known as International Financial Reporting Standards or “IFRS”. The SEC already has posted the proposing release.
With its proposal, the SEC seeks to ease the burdens that foreign private issuers may face when they adopt IFRS for the first time, while still improving the quality of financial disclosure they provide to investors. It is noteworthy that companies located in the European Union are required to adopt IFRS in 2005.
Today, Form 20-F requires foreign private issuers to include 3 years of audited financial statements. The proposal would allow these companies- for their first year of reporting under IFRS – to include only 2 years of audited financial statements in their SEC filings and require any company that adopts IFRS for the first time to provide disclosure related to exceptions from IFRS on which it relied, including a reconciliation from its prior methods of accounting. The new regulations would apply to companies that publish IFRS financial statements for the first time for any fiscal year beginning no later than January 1, 2007. There is a 30-day comment period.
