Even though the SEC already has delayed the effective date once, my money is that the SEC will again delay the effective date of the Section 404 internal control reports. Right now, “accelerated filers” are required to file their first report for fiscal years ending after June 15, 2004 (all others can wait until their fiscal years end after April 15, 2005).
Since the PCAOB still has not acted on its proposal to set attestation standards, “something’s has gotta give” as Jack Nicholson would say. [personal note – due to a receding hairline, back in college days I would pretend that my name was “Pat Nicholson” and Jack was my uncle – no girls bit that I can recall.]
Not surprisingly, the number of companies that are disclosing that they have deficiencies in their internal controls has slowly grown. In fact, there have been rumblings that the SEC would be disappointed if there failed to be a significant number of these disclosures. We have updated our list of sample disclosures in this area at Internal Controls – Deficiencies and Weaknesses Identified in the “Disclosure Analysis and Samples” Practice Area.
Don’t forget tomorrow’s special webcast – “Alan Dye on the Latest Section 16 Developments” – for members of the NASPP and Section16.net. You can ask questions and learn the latest Section 16 practice tips from Alan Dye!
An audio archive and transcript will be posted following the live webcast. The non-member fee for this special webcast is $495. If you wish to access this important program, you may simply take advantage of a no-risk trial to Section16.net or the NASPP.
If you have not renewed your Section16.net or NASPP membership for 2004, you will not be able to access the webcast – scroll down to yesterday’s blog for info about how to renew right away!
ISS Releases Updated Voting Policies
As Pat McGurn predicted in our October webcast – “The Wildest Proxy Season Ever: Forecast for 2004” – ISS has amended its voting guidelines for this year. This update includes many significant changes, the most drastic of which will affect stock-based incentive plans. The new policies are effective for shareholder meetings held on – and after – February 1, 2004.
We have launched an exciting new monthly feature – “Carl’s Corner“! This feature is written by well known lawyer, Carl Schneider who is Of Counsel and former Chairman of Wolf, Block, Schorr and Solis-Cohen’s Corporate Law Department in Philadelphia.
Carl’s first feature is about how to use – and not use – boilerplate in corporate agreements. Carl has a unique way of conveying practical guidance on matters that many of us take as a “given” without pausing to reflect – so check this “Corner” out! [If you are seeking the PLI Notes that formerly resided where “Carl’s Corner” now sits, they are in our “Notes from Conferences” section of “Sarbanes-Oxley Law Firm Memos.]
Ill Will on the 6th Floor?
Last Wednesday, SEC Commissioner Roel Campos issued a dissent to the SEC’s enforcement settlement regarding the Heartland Group. It is extremely rare for a Commissioner to issue a dissent in an enforcement action (much more common to do so regarding a rulemaking, albeit even that is quite rare).
As I blogged about back on December 14th, the SEC took the unsual action to go after the independent directors of this mutual fund in this settlement. Campos believes the Commission was too lenient with the Heartlands independent directors and more meaningful sanctions should have been levied against the directors.
Add this dissent to the well-publicized split over shareholder access (Donaldson, Campos and Goldschmid are “for”; Atkins and Glassman are “against”) and you can easily envision a not-so-peaceful co-existence on the 6th floor of 450 5th St. these days (all of the Commissioners have their offices on the 6th fl. of the SEC’s HQ).
By the way, it appears that a SEC roundtable on shareholder access will be held sometime in late January/early February.
Grace Period Over!
If you have not renewed your subscription to either TheCorporateCounsel.net or Section16.net, please be aware that you won’t have access to the sites starting today.
If you have experienced problems accessing content on our sites, we apologize and are working hard to fix them. In the meantime, try using “TheCorporateCounsel.com” instead of “TheCorporateCounsel.net.” In many cases, this has solved any inability to access content.
Just in case you didn’t notice, after the FAQs were first released, the NYSE staff confirmed that 401(k) plans, 423’s and parallel excess plans are exempt from the shareholder approval requirement portion of the rule (notwithstanding FAQ 1) – but also confirmed that these plans are subject to approval by the independent compensation committee or the majority of independent directors as well as the requirement that NYSE be notified when the exemption is used.
The NYSE staff revised FAQ 19 to clarify this through the addition of a second paragraph – below is the revised FAQ 19:
“19. When will an amendment to a 401(k) plan be considered a material revision?
Only if it affects the company stock aspects of the plan in a way that is otherwise a material revision. For example, adding to or changing investment funds – other than a company stock fund – to such a plan would not be considered a material revision.
401(k) plans are exempt from the shareholder approval requirement of the rule, but the Exchange does require listed companies to seek and obtain approval by their independent compensation committee or a majority of their independent directors for any material revision to an exempt plan. In addition, the Exchange must be notified when a listed company utilizes an exemption (see questions 22 & 26).”
If you have not renewed your subscription to either TheCorporateCounsel.net or Section16.net, please be aware that you won’t have access to the sites starting this Saturday.
Our New Shareholder/Director Communications Survey
We have posted a new Quick Survey on Shareholder Communications with Directors – so please weigh in!
The final results are available from our “Director Education/Orientation” survey.
IRS Comes to Its Senses Regarding Confidentiality in M&A
In February 2003, the IRS issued tax avoidance regulations that created a broad category of transactions for which disclosure was required if they included conditions of confidentiality. In the minds of many practitioners, the category was created too broadly because it included many transactions that couldn’t have any tax avoidance consequences, including many M&A transactions.
As a result of this bizarre position, many practitioners have been recommending that the confidentiality provisions of most M&A agreements be modified to exclude tax-related matters.
On December 29th, the IRS came to its senses and issued new regulations that narrowed the category so that it no longer affects traditional M&A. So, the recommended modification to exclude tax-related matters is no longer needed in most cases.
Learn more from recent law firm memos on this topic posted in the “Confidentiality Agreements/Privilege” section of our Mergers & Acquisitions Practice Area.
If you have read our January E-Minders, you already know about this action that I consider as the early favorite for “craziest action by a regulatory agency” for 2004. ADP Investor Communication Services has been informing companies of a new issue that could affect the ability to deliver proxy materials via bulk mail. According to ADP, the U.S. Postal Service recently changed its interpretation of its rules that determine if mail qualifies for Standard Mail (formerly known as “3rd class bulk”). This change revolves around the inclusion of what is considered personal information when using Standard Mail.
ADP provides telephone/Internet voting and householding services by the use of unique control numbers. Apparently, the Postal Service challenged ADP on documents containing instructional language for voting and enrollment processes that referred to these control numbers and deemed this information as personal – thereby disqualifying the materials from being processed as Standard Mail. As a result, ADP is changing its forms to conform to the new interpretations.
However, the Postal Service is applying its new interpretations to any reference to personal information contained in any enclosure in the mailing, including the proxy statement. This results in a conflict with the SEC’s plain English movement. For example, the common statement in proxy statements that a shareholder should vote via the telephone or Internet by entering “your” control number on the enclosed form may preclude the mailing from qualifying as Standard Mail. This potentially could force a company to deliver its proxy materials via First Class which would be much more expensive.
ADP recently met with John Nolan, Deputy Postmaster General, to address this personal information issue and Mr. Nolan assured ADP that the Postal Service would work with ADP to make them aware of any issues and arrive at a cure. I suspect we will be hearing more on this issue as the proxy season unfolds.
The first proxy statements addressing the new SEC requirements regarding disclosure of the shareholder/director communication process are starting to be filed. The new requirements are applicable to any proxy statements that are mailed on or after January 1st.
For example, here is the disclosure from SunAir Electronics, whose proxy statement was filed yesterday:
“The Board provides a process for stockholders to send communications to the Board or any of the Directors. Stockholders may send written communications to the Board or any the Directors c/o Secretary, Sunair Electronics, Inc., 3005 S.W. Third Avenue, Fort Lauderdale, Florida 33315. All communications will be compiled by the Secretary of the Company and submitted to the Board or the individual Directors on a periodic basis. It is the Company’s policy that the Directors who are up for election at the Annual Meeting attend the Annual Meeting. All of the nominees up for election at the 2002 Annual Meeting of Stockholders attended the 2002 Annual Meeting of Stockholders.”
UGI Corp.’s Proxy Statement (also filed yesterday) indicates that this company was not prepared for the SEC’s action:
“The Company is considering the establishment of procedures by which Shareholders can send communications to the Board of Directors or to the non-management directors as a group. The Company will post those procedures on its website upon their adoption.”
Bert Denton has been one of the more controversial activists for some time – but now some of his ideas have come into their own as part of governance reform. Members can learn more in this interesting interview with Bert Denton on Improving Shareholder Returns With Better Governance.
And yes, I am getting new blogging software this year. This software doesn’t allow for columns…
Out During 2003/In for 2004
– Harvey Pitt/William Donaldson
– CEO Perqs/CEO Certs
– AICPA/PCAOB
– Peek-a-Boo/P-Cob (nah, just checking to see if you’re paying attention)
– Reporting “Up”/Reporting “Out”
– Private Analyst Meetings/No Earnings Guidance
– Walk with Your Feet/”Just Vote No”
– “Elevator Music”/MD&A with Feeling
– Non-Audit Services/Internal Controls Documentation Services
– Weekly Industry Newsletters/Blogs!
Of Course, Don’t Forget to Renew
A New Year means that your membership should be renewed because all of our subscriptions run on a calendar year. You can renew online, fax or regular mail by going to our “Renewal Center” and keep this puppy afloat.
And for law firms, its never too late to enter into a firmwide license and avoid the hassle of id’s and passwords (and save money to boot).
Over the past few weeks, severance pay has dominated the news headlines. We have last week’s SEC enforcement action against the former CEO of Vivendi that included his relinquishment of $25 million of severance pay (which consisted of the amount he negotiated when he resigned). The SEC’s action was the first use of Section 1103 of Sarbanes-Oxley (because the SEC froze the payment before it was made pending its investigation) and the amount has been placed in escrow, with the intent to pay shareholders under the Fair Funds provision of SOX.
The NYSE is considering suing Dick Grasso to recoup some of the severance payments it made (and Grasso is allegedly considering suing to get some of the money he left behind). And the Office of Federal Housing Enterprise Oversight has sued the former Freddie Mac CEO and CFO to recoup severance payments made to them after they were fired this summer.
Shareholders have been more actively speaking out on severance pay. Quite a few shareholder proposals that sought to limit severance pay got majority votes this year, including one at Qwest last week.
The recent NACD Blue Ribbon Commission Report on Exec Comp recommends that severance pay should be limited to 2x-3x of base pay (not other forms of comp), with reductions in cases where the CEO is asked to leave over performance issues or eliminated entirely if the CEO resigns for another position or “for other reasons.” It also recommends that the package size be tied to tenure through a vesting formula that requires a certain period of service (eg. 5 years) to receive the maximum benefit.
The Most Overlooked Features on TheCorporateCounsel.net
I thought I would close out the year by noting some valuable features on TheCorporateCounsel.net that might not be well known:
Over the past year, there has been significant growth in the number of companies that require or encourage officers and/or directors to maintain certain levels of stock in their companies. Several studies show that nearly half of large companies now maintain them for officers (up from a third) and about a third of large companies maintain them for directors.
On Christmas Eve, the WSJ ran a lengthy article about the SEC weaknesses as detailed by a 270-page report prepared by SEC staffers and McKinsey consultants. The report is non-public and was commissioned by then-Chair Harvey Pitt.
The article indicates that the report is fairly critical of the agency as being too reactive and not having sufficient resources to do its job. Two telling statistics: only 33% of enforcement investigations are generated internally and 15% of them come from reading the morning papers.
Corp Fin is assailed for having an “assembly line mentality” for focusing on achieving numerical targets of reviews and picking “smaller, easier-to-review filings rather than more complex ones.” I wonder how much McKinsey got paid to come in and tell them all these well known facts. I coulda done it for half…
