We have posted a transcript from last week’s popular webcast regarding Conduct of the Annual Meeting.
Real-Time Disclosure is Here!
Yesterday, the SEC adopted new 8-K requirements that represent a fundamental change in the disclosure framework, moving toward the real-time reporting framework that Harvey Pitt first envisioned way back before Enron and SOX. There are quite a few changes in the final rules compared to the proposal, including 4 – rather than 2 – day filing deadlines (with no provision for an extension of the deadline).
There are 8 new items in 8-K, 2 existing items are expanded and 2 items are transferred from the periodic reports. There is a safe harbor from Rule 10b-5 for 7 of the new items – and the safe harbor extends only until the due date of the next periodic report for the relevant period in which the 8-K event occurred. Non-binding merger letters of intent are not required to be disclosed.
As the press release from the SEC bears out, this really could be a dramatic change in philosophy – one Commissioner said that bad information is worse than delayed information. However, early analysis of the new rules indicates that companies may still decide to hold off on making disclosure until they are ready to make complete disclosure – so they might miss the 4 day deadline by a few days and take a risk (rather than giving incomplete information to the market and taking a bigger risk).
For all companies, the effective date of the new rules is August 23, 2004 – so it takes effect after the 2nd quarter 10-Q deadline for calendar year companies. Five law firms already have put out memos on this SEC action – see B.26 of our “Sarbanes-Oxley Law Firm Memos.”
Securities Settlements and Myth of Opting-In
2003 was a historic year for securities settlements – and there is a trend for some institutional investors to “opt out” of class actions lawsuits. This effectively means that companies are faced with simultaneous class actions. Learn more from fellow blogger, Bruce Carton on 2003 Securities Settlements and Opting Out of Class Actions.
We have posted our own notes from PLI’s “SEC Speaks” from the Corp Fin panels.
The SEC’s Roundtable on Shareholder Access
Yesterday’s roundtable at the SEC was filled with star-studded panelists and was quite a program. The SEC did a great job of bringing in the best and brightest from all corners of the debate and it really brought those 13,000 comment letters to life. (About 150 attended live – I was surprised there were empty seats.)
To me, the most persuasive arguments were presented by Ira Millstein and Joe Grundfest on why the SEC should hold off on its proposed framework – and instead use a simpler model based on holding “true” elections of directors. They argue that the current plurality system is fundamentally flawed and that the SEC’s proposal doesn’t fix that problem (David Ruder called the proposal a Rube Goldberg solution and Carter Beese said it was prone to the law of unintended consequences).
Based on the way that Commissioner Harvey Goldschmid debated some of the corporate advocates, I doubt he is going to change his mind. Commissioner Campos read a statement early on and otherwise was silent. Chairman Donaldson asked a few questions but did not reveal if his leanings were changing at all. So I would hazard to guess that the Commission will bless its proposal sometime in a month or so, perhaps with some changes at the edges (although you never know and I could be wrong).
If the SEC does adopt its proposal, the head of the US Chamber of Commerce threatened to sue. A panel packed with academics provided a variety of arguments supporting the SEC’s authority to adopt its proposal. So the ultimate showdown might be a few years away in a court somewhere.
The Evelyn Y. Davis Show
In mid-afternoon, Evelyn Davis’ panel took the stage and Evelyn kicked it off with a 15-minute monologue. If I was Mark Burnett – the “vision” behind all those reality TV shows – I would grab Evelyn for her own show as soon as possible.
Evelyn was quick to mention how she had spoken to the CEO of Bank of America last week and advised him not to pay the SEC’s fine in the mutual fund scandal (and reported that the CEO was thinking about it!). She claimed that she had also spoken to SEC Enforcement Director Cutler a few days ago regarding the same. Not sure how this is relevant to the shareholder access proposal, but it made for a solid entertainment break from the weighty issues of the day. She is one of a kind. (By the way, Evelyn opposes the SEC’s proposal – because it discriminates against retail investors.)
As a frequent attendee of open SEC Commission meetings over the years, I was curious how the PCAOB’s first open meeting to deal with a substantive rulemaking would be run yesterday. Overall, the meeting was very well run and I was pleased to be handed copies of the releases that were approved during the meeting on the way out (and the releases were soon posted on the PCAOB website thereafter – in comparison, it takes the SEC a few days).
Another distinction was the meeting location – it was held at a hotel since the PCAOB HQ can’t accommodate large crowds (about 200 attended live – it was also webcast). Otherwise, the meeting was run much like a SEC meeting (e.g. plenty of lovin’ for the staffers who wrote the rules), with minor differences such as each Board Member reading a statement regarding the internal control adopting release – and only one Board Member, Dan Goelzer, who is a former SEC GC, asking questions.
Note that the SEC Chief Accountant is quoted in today’s paper as saying it would take the SEC around 6-7 weeks to vote on the PCAOB’s final rule.
Copyright Squabble Continues Between PCAOB and AICPA
During the part of the open meeting when the PCAOB proposed changes to its interim standards (which was necessary to accommodate the internal controls rulemaking), Board Member Kayla Gillan noted that the proposing release would only have excerpts from the applicable standards – and thus a lack of transparency – due to an ongoing dispute with the AICPA regarding copyright protection of the standards that the AICPA issued in the past. Dan Goelzer weighed in on this topic as well.
As I blogged about last year, I agree that the AICPA really has to get off the dime here and allow its standards to be transparent. This issue is emblematic of all that was wrong with the AICPA when it was the nominal watchdog of the profession.
SEC Proposes National Market System Changes
Here is a link to a Federal Register copy of the proposing release on proposed Regulation NMS applicable to the National Market System. This is a more manageable 91 page document – compared to the 346 page document on the SEC website. One proposal in particular would establish a uniform trade-through rule for all market centers, with certain exceptions. Comments are due by May 24.
I went to the PCAOB open meeting this morn – remarkably, the PCAOB already has posted its final internal controls release (with still is subject to SEC approval). For the most part, the final release incorporates changes recommended by the corporate community, with some notable exceptions.
One of these exceptions is that the final release retains the standard that requires the independent auditor to evaluate the audit committee’s performance as part of its internal control evaluation (however, the release makes clear that the full board of directors still is primarily responsible for conducting such an evaluation – and added a new element where the auditor must report to the full board if it believes the audit committee ineffectively oversees the company’s external financial reporting and internal controls). More about the PCAOB’s meeting tomorrow.
PLI’s “2004 SEC Speaks”
Thanks to Bryan Cave, we have posted some brief notes from remarks that Alan Beller and other senior SEC staffers made on Friday at PLI’s “2004 SEC Speaks.” We will be posting our own more extensive notes from the conference shortly.
Even More on Disney
A few more items of interest on last week’s historic meeting. Roy Disney and Stanley Gold did indeed engage in some solicitation efforts other than the media and the Web. They retained McKenzie Partners to assist in a solicitation campaign that included mailing letters to all Disney stockholders. They also hired a PR firm.
These solicitation efforts appear to have fallen within the scope of Rule 14a-2(b)(1), the proxy rule that provides an exemption from the filing and disclosure requirements of Rules 14a-3 through 14a-6. As for discretionary authority, this “no-vote” campaign didn’t push the election into a non-routine category – so the NYSE allowed discretionary broker voting on the election of Disney directors.
How Many Directors Get a 35% Withhold Vote?
Yes, I’m gearing up for tomorrow’s shareholder access roundtable hosted by the SEC – here is the final agenda and related materials posted by the SEC yesterday. I had to look twice – Evelyn Davis is on a panel! It should be quite a show!
According to a statement from Rich Daly, head of ADP’s brokerage group, during last year 99 panelists have submitted statements for the roundtable), there were 69 shareholder meetings of the Russell 2000 companies that resulted in at least one director getting a 35% withhold vote (and actually there were 137 directors that triggered that threshold at those 69 meetings). There is other interesting information in Rich’s statement regarding the changes to ADP’s system that would be required if the SEC adopting its proposed framework.
Thanks to Dave Felman of Hill, Ward & Henderson, we have posted these selected interesting excerpts from comments submitted on the SEC’s proposal in our “Shareholder Access Portal.”
In the “Shortest 8-K Contest,” Adam Savett of Cohen, Milstein, Hausfeld & Toll informs me that a recent 8-K filed by Charter Communications is only 22 words. I am confident that someone out there can even beat that…keep ’em coming.
Future of the Accounting Profession
AccountingWeb.com made me aware of this November report on the future of the accounting profession. This report was the result of a meeting between leaders from the worlds of accounting, finance, law, academia, investment banking, and journalism. Among other topics, the report covers:
– The Value of the Audit
– Regulation and Oversight in Flux
– What Went Wrong?
– Structural Challenges Facing the Accounting Profession
– What Should Financial Reporting Look Like in the Future?
– Improving Auditing and Financial Reporting Standards
– Licensing Issues: More Firms, More Depth
Nell Minow on Disney
After Disney’s meeting last Wednesday, the Chicago Tribune ran this op-ed by Nell Minow:
“When you wish upon a star, it may make no difference who you are, but these days when you are trying to get the support of your shareholders, who you are is of increasing importance. The latest chief executive officer to learn that lesson is Walt Disney Co.’s Michael Eisner. A stunning 43 percent of his shareholders refused to vote “yes” on his re-election to the board. This vote of no confidence led Disney directors Wednesday to replace Eisner as chairman, even though they had refused to do so before.
This comes at a time of great skepticism and concern about the independence and ability of corporate boards. Shareholders are painfully aware that distinguished directors like Henry Kissinger and Richard Perle were unable to prevent the CEO of Hollinger International from moving millions of dollars out of the company and into his own bank account because of a booby-trapped governance structure that gave CEO Conrad Black control of the voting shares. The charges against former executives of Enron Corp., WorldCom Inc., Adelphia Communications Corp., and Tyco International have highlighted the failure of the boards to provide effective oversight.
J.P. Morgan Chase & Co. and Bank One Corp. look very compatible in their pending merger as far as lines of business go, but they are far apart in corporate governance. Our firm gave Bank One’s board the highest grade in its industry, while J.P. Morgan’s was second to last. Shareholders may balk–or sell–unless the combined firm makes a commitment to best-in-class in terms of corporate governance.
The new chairman of Smith & Wesson’s parent company recently resigned because of press reports of his jail term for armed robbery in the 1960s. Even though his record since then has been impeccable, the increased scrutiny of corporate boards made it impossible for him to continue.
In the corporate raider days back in the 1980s, shareholders were quick to grab almost any offer that was higher than that day’s stock price. But today’s shareholders are sadder and wiser. They have seen their value siphoned off to raiders who paid only a fraction of what the companies were worth or to corporate executives granted hundreds of millions of dollars in golden parachutes and stock-option grants while doing little for their stockholders.
Shareholders want more than a couple of dollars a share. They want leadership they can believe in. Shareholders have to be able to rely on the board to represent their interest in building long-term shareholder value and not short-term CEO ego. Since mega-mergers often fail, the ability of the board to provide rigorous and objective analysis to a proposed deal, whether as acquirer or target, is essential.
Disney has been criticized for many years for a board that was overly cozy. In 1997, Disney directors were named Business Week’s “Worst board of the year” for overpaying Eisner and approving a huge guaranteed payment of more than $100 million to Michael Ovitz for his brief tenure as an executive. Many of the directors had direct ties to Eisner, including his lawyer, his architect and his son’s schoolteacher. As a result of shareholder pressure, Disney dramatically improved its corporate governance, adding outstanding new independent directors and adopting state-of-the-art policies to ensure that they provide more active and objective oversight.
The Disney board’s decision to select an independent director as chairman is, ironically, proof that it is stronger than its shareholders think. If Disney had not made a great deal of progress in strengthening its corporate governance over the past year, the board would not have been in a position to act so quickly and decisively. This decision will give shareholders a little more confidence in the board in the short term. But Eisner and the board will need to continue to prove themselves by communicating more effectively with investors on CEO succession and compensation and overall strategy and by continuing to add strong, experienced directors to add additional depth and independence.
Indeed, shareholders will insist on more from all corporate boards. A record number of shareholder proposals on issues like executive compensation and splitting the chairman and CEO positions will get record levels of support this year, and director candidates will get a record level of scrutiny. And that will lead to stronger, more effective and more responsive boards, essential for the credibility of public companies.
The vote at Disney reflects a new understanding in the investor community that corporate governance is an element of risk assessment of any investment and that vigilance in pursuit of improved governance is not just the price of shareholder democracy–it is a very good investment.”
I frequently get asked where are the best resources on private companies. I like Skyminder.com because it provides ratios and financials on private companies worldwide. Hoovers.com is probably a more reliable source, but does not have the same range of information as Skyminder. Both of these are subscription services. Forbes.com/private500 is a free list of the largest private companies – but there is no in-depth information available.
Wow! The preliminary withhold vote on Michael Eisner, based on voting prior to the meeting (of course subject to final count and confirmation of inspector of election, and all the other disclaimers announced by Disney) was 43% yesterday. This is an extremely high number considering the highest withhold vote on a Fortune 100 director last year was in the mid-20s (for an “Enron” director who still sits on Lockheed Martin’s board).
Considering that roughly a quarter of the votes cast were broker non-votes – who routinely support management – more votes were actively cast against Eisner than for him. And this is all due to a media/Internet campaign against Eisner – with no proxy solicitator involved, a remarkable achievement. Also noteworthy is that three other “targeted” directors of Disney also received withheld votes in the low-20% range.
It will be interesting to see how these historic results are used to make arguments at next week’s SEC roundtable on shareholder access (eg. an argument that the proposed trigger thresholds can be easily reached and thus don’t need to be lowered versus an argument how investors would bother to actively vote if they knew their votes had consequences).
The NASD has sent out its Notice to Members 04-13 announcing the adoption of major amendments to the NASD’s Corporate Financing Rule–Rule 2710. The amendments were approved by the SEC on December 23, 2003 and the SEC approval order was published in the Federal Register on December 31, 2003.
As more fully explained in my interview with Suzanne Rothwell, these rule changes effect a new approach to underwriting arrangements. The Notice to Members summarizes the amendments and provides clarification regarding the application of Rule 2710 to straight debt and derivative securities. The Notice also includes the text of the amendments.
At last week’s Institutional Shareholder Services conference, Corp Fin Deputy Director Marty Dunn noted that the staff is on pace to receive about the same number of exclusion requests as last year (and last year was a record). However, it was also noted that more proposals were either being negotiated out of the proxy statement or placed on the ballot without opposition (in fact, over 30 proposals were withdrawn while the SEC staff was processing an exclusion request just during the past month).
So, it appears that this year likely will see a new record number of proposals. In fact, Carol Bowie of IRRC states in today’s NY Times that the number of proposals dealing with corporate governance topics will be over 900 this year, up from 500 last year. That 900 corporate governance proposals nearly equals the record-setting number of overall proposals set last year of just over 1000. So I wouldn’t be surprised if this year’s number of overall proposals falls at well over 1300.
Marty did confirm that the sole “opt-in” trigger proposal so far is the Marsh & McLennan one. The staff did allow the exclusion of a proposal – Verizon Communications (2004 Lexis 200 Jan. 18, 2004 – and rejection on reconsideration, 2004 Lexis 271, Feb. 10, 2004) – that was similar to an opt-in proposal – but the proposal changed the definition of “qualifed shareholder” from what the SEC proposed in its shareholder access framework. So, the staff allowed exclusion under Rule 14a-8(i)(8) regarding election of directors.
By the way, hats off to Marty for always making his panels as entertaining as possible. He never disappoints.
SEC to Consider Adopting 8-K Proposal
Next Thursday, the SEC is holding an open Commission meeting to adopt the 8-K proposals that have been outstanding for nearly two years (see this bunch of law firm memos on the outstanding proposal). The SEC will also propose changes to 20-F to lighten the financial reporting load for certain non-US issuers.
Demise of Poison Pills?
Yesterday, the Wall Street Journal ran an article illustrating how shareholder activism has caused an increasing number of companies to dismantling poison pills – and preventing companies from installing new pills. For a number of years now, shareholder proposals asking companies to either dismantle a pill or adopt a policy to not adopt pills have received majority votes. The article notes that 12 companies have dismantled pills so far this year – compared with 29 in all of ’03 and 18 in all of ’02.
In response to a number of requests regarding what controlled companies are disclosing in the wake of the new SRO standards – from which controlled companies can “opt out” of certain provisions – I have created a new “Controlled Companies” Practice Area which links to a dozen proxy statements filed recently by controlled companies.
“Shortest 8-K Ever” Contest
Just to have a little fun in our mundane legal lives, I have commenced a contest to find the shortest 8-K ever filed – or furnished – with the SEC. The first entrant is this recent 8-K furnished by Global Crossing that announces the hiring of an advisor to explore alternatives regarding one of its business units – it consists of one sentence with about 35 words. I know there are shorter ones out there, so please forward your entrants!
SEC Proposes Changes to Regulation of Stock Exchanges
Last week, the SEC proposed Regulation NMS applicable to the National Market System. One proposal in particular would establish a uniform trade-through rule for all market centers, with certain exceptions. There is a 75-day comment period. The SEC has now posted the proposing release – but it’s a monster of a PDF at 346 pages.
To get you in the mood for our Wednesday webcast – “Conduct of the Annual Meeting” – which will include two panelists reporting from the Disney annual meeting (including one who is Disney’s Delaware lawyer), here is the recently unsealed 1996 letter from Michael Eisner to Michael Ovitz as well as the recent letter from Comcast’s CEO to Eisner regarding Comcast’s proposed acquisition.
Corp Fin’s Advice to Oil & Gas Industries
Last week, Corp Fin advised they had sent out an accounting advice letter – sort of a “global comment letter” – to all companies that they have identified as being in the oil and gas production business. In posting this letter on the SEC’s website, the staff noted that companies that did not receive the letter – but which have subsidiaries or operations in oil and gas production – should nevertheless consult the letter in preparing their filings.
FAS 69 requires specific, unique disclosures about oil and gas production; some uncertainty was thrown in, however, by the recent adoption of FAS 143 (re: asset retirement obligations) and how that affects the FAS 69 disclosures. (FAS 143 did not amend FAS 69.) This new letter gives the staff’s views on how the recognition of a liability for an asset retirement obligation and the related depreciation of the asset and accretion of the liability under FAS 143 interplay with four specific disclosure areas mandated by FAS 69: Capitalized Costs; Results of Operations; Costs Incurred; and Standardized Measures. I wonder if this is the start of the staff periodically posting global comments applicable to specific industries – a concept that has been kicked around in Corp Fin for over 5 years.
Understanding the Impact of Forensic Accounting on Fraud Investigations
From my days as the enforcement liaison from Corp Fin (on an interim basis when the guru in this area, Mary Kosterlitz, was out on maternity leave – Mary now leads a team of staffers in Corp Fin in this function), I have always known that forensic accounting is necessary to parse accounting fraud – and that these investigations are very complex.
