Although putting together a tally sheet is not as simple as it sounds in theory (i.e. adding up the various components of a senior managers compensation package), we are excited to add a very practical tool to CompensationStandards.com – an Excel spreadsheet to use as the basis for your tally sheets. This Comprehensive Tally Sheet was contributed by Task Force members Matt Ward of Aon Compensation Consulting and Joshua Lurie of eComp Data Services Groups.
Yesterday, the Corp Fin provided its first update to the Telephone Interpretations Manual in years – when the Office of Mergers & Acquisition addressed the topic of unbundling under Rule 14a-4(a)(3). This update is in the fifth supplement to the Telephone Interpretations Manual.
The Staff decided to provide this interp after watching companies throw the kitchen sink into merger proposals – including significant corporate governance and anti-takeover provisions. Apparently, the straw that broke the camel’s back was an attempt by Comcast/AT&T Broadband to include what was referred to as an “atypical governance proposal” – a provision that eliminated the election of directors for three years – in their merger proposal.
The new interp lays out when unbundling is required (and when it’s not mandated). According to the interp, unless immaterial, matters should be unbundled on a ballot if:
– the provisions in question were not previously part of the company’s charter or bylaws;
– the provisions in question were not previously part of the charter or bylaws of a public acquiring company; and
– state law, securities exchange listing standards, or the company’s charter or by-laws would require shareholder approval of the proposed changes if they were presented on their own.
Comparison of Rights of First Refusal and First Offer
If you can’t get enough of Carl’s wisdom – he was an advisor to Corp Fin in the early ’60s – you should review the interesting interview with him that is posted on the SEC Historical Society’s site.
For those of you tracking the crop of 8-Ks filed since the new rules took effect last month, my vote for the most bizarre (and immaterial) goes to Energas Resources. Is there such a thing as a non-8-K? If so, this would be one. Please email me if you find other interesting 8-Ks.
Last call for you to submit questions so that I can present them to our expert webcast panel this Thursday regarding “Reality Bites: More on the New 8-K Rules.” Not surprisingly, I already have received hundreds of questions (many are duplicative; some are not) and we will do our best to address as many as we can.
My email address is broc.romanek@thecorporatecounsel.net (or click on “Contact Broc” on the left side of this blog).
Impact of Sarbanes-Oxley on Non-Profits
Some practitioners are surprised to learn that certain provisions of Sarbanes-Oxley apply to all companies, including non-profits. Of course, most SOX provisions don’t apply to non-profits – but non-profits increasingly are taking steps to voluntarily comply with more provisions.
In my interview with John Corrigan on the Impact of Sarbanes-Oxley on Non-Profits , John provides specific examples of non-profits that voluntarily have taken steps to comply with various aspects of Sarbanes-Oxley.
Yesterday, Corp Fin issued its third Staff Legal Bulletin on shareholder proposals – SLB 14B. The big news is that Corp Fin has followed-up on its warnings and “clarified” its views on Rule 14a-8(i)(3) – which is the exclusion basis for false and misleading statements – by creating a more objective and higher standard for companies that seek to modify proposals and supporting statements.
Noting that nearly half of no-action requests now argue for modification under (i)(3) – which is a huge resource drain for Corp Fin – the Staff has narrowed (i)(3) so that it will only entertain modification of proposals and supporting statements if a company argues that they are materially false and misleading under the following 4 categories (the labels are mine):
1. Reputation Killer – statements directly or indirectly impugn character, integrity, or personal reputation, or directly or indirectly make charges concerning improper, illegal, or immoral conduct or association, without factual foundation
2. Objectively False Fact – the company demonstrates objectively that a factual statement is materially false or misleading
3. Crazy – the resolution contained in the proposal is so inherently vague or indefinite that neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires — this objection also may be appropriate where the proposal and the supporting statement, when read together, have the same result
4. Unrelated Supporting Statement – substantial portions of the supporting statement are irrelevant to a consideration of the subject matter of the proposal, such that there is a strong likelihood that a reasonable shareholder would be uncertain as to the matter on which she is being asked to vote
The SLB also contains a list of circumstances under which it won’t entertain (i)(3)
arguments anymore, such as unsupported or disputed facts, opinions, or facts that companies don’t like. The bottom line is that companies now face a much greater burden of proof to convince the Staff that something is false and misleading – so warn your CEO and IR officers now that next year’s proxy statement may contain language that they don’t like.
The SLB also contains a reminder about how to draft defect notices, such as pulling directly from Rule 14a-8(b). It addresses when supporting legal opinions should be submitted – and how it might entertain requests that don’t meet the 80-day deadline in Rule 14a-8(j) for “good cause.”
How the Staff Processes No-Action Requests
The final part of Staff Legal Bulletin 14B sheds light on how Corp Fin processes no-action requests – and this includes some interesting items, such as:
– Since all materials are eventually placed in the public domain, the Staff seeks all arguments in writing and states that it won’t discuss substantive matters over the phone.
– The Staff might fax a response – rather than mail it, which often means that commercial databases find it first – if you include all your contact info as well as all the contact info of the proponent. In other words, if you want it faxed – which you do so that you find out first what the response is – obtain the proponent’s fax number and provide that to the Staff.
Stock Ownership Guidelines With “Hold ‘Til Retirement” Provisions
On CompensationStandards.com, we have posted two new practice pointers from Robbi Fox regarding “hold ’til retirement” stock ownership guidelines – one that is a survey and one that lists companies that presently have such provisions in their guidelines. To see all the practice pointers we have posted, see this chronological list that you can check under the “Practice Pointers” button on the home page.
To access these pointers today, register for the October 20th Major Compensation Conference now!
Way back when, the FASB proposed a Exposure Draft that would provide that ESPPs be deemed noncompensatory only if: (1) its terms are no more favorable than those available to all holders of the same class of shares; and (2) substantially all eligible employees that meet limited employment qualifications may participate on an equitable basis.
At its August 25 meeting, the FASB Board tentatively decided to modify that guidance, and at its September 8th meeting made further modifications. FASB cautions that these conclusions are tentative and may be changed – and become final only after a final Statement is issued.
Thanks to Mike Holliday for providing the current tentative conclusion on accounting for ESPPs after these meetings: An ESPP is not compensatory and does not involve recognizable compensation cost if all three of the following conditions are met:
1. (a) The terms of the ESPP are no more favorable than those available to all holders of the same class of shares OR (b) any discount under the plan results in proceeds not less than proceeds that would be received in an offering of shares issued to third parties by other means, e.g., through an underwriter. A discount of 5% or less from market price complies with this criterion without further justification. [The addition of (b) is a change from the Exposure Draft.]
2. Substantially all eligible employees that meet limited employment qualifications may participate on an equitable basis.
3. The ESPP does not incorporate option features. An example is given for a plan where the purchase price is based on the share price at date of grant and permits an employee to cancel participation before the purchase date and get a refund, which is considered a compensatory plan. [This condition is not in the Exposure Draft.]
Everything You Wanted to Know About SOX
Now that Sarbanes-Oxley is more than two years old – and some younger lawyers might need a primer in the new law – we have created a Sarbanes-Oxley Practice Area, complete with a list of comprehensive memos (some more than 200-pages long!).
How to Get Your Name on the SEC’s Website – Submit a Rule-Making Petition?
Here is proof that the Web now makes it easier to get your name in lights, even on government websites. Recently, an enterprising pair submitted a rule-making petition to the SEC that seeks a new listing standard forcing companies to have an “Earnings Rating.” “Earnings Rating” is a trade-marked term (hmmm, I wonder by whom?), which is an assessment of the quality of a company’s reported earnings. Like a credit rating, Earnings Ratings would be a secondary look at auditors’ work and be publicly available. The issuance of these ratings would be made by a private enterprise (hmmm, I wonder who would run this enterprise?).
On Friday, Delaware Chancellor Chandler granted portions of Michael Ovitz’ motion for summary judgment – and denied the rest. Ovitz won regarding his culpability for entering into his employment contract (because he was not yet an employee) – but will have to defend the part of a shareholder suit over his $140 million severance package (because he was an employee when he entered into that arrangement). The trial starts October 18th.
Meanwhile, expect more fireworks at next year’s Disney annual meeting as Roy Disney and Stanley Gold have called on Disney’s board to reject CEO Eisner’s offer to retire in 2006 as well as Eisner’s choice of President Robert Iger as his successor. The two former board members said they would propose an alternate slate of directors if Disney’s board does not launch an immediate search for a new chief executive and announce that Eisner will step down from the board at the end of the search. The two former board members said a new CEO should be in place before Disney’s next shareholder meeting in early 2005. Eisner has not indicated yet whether he would seek to remain on Disney’s board or remain as a consultant.
Pension Plans to Disclose Votes?
Last week, Senator Ted Kennedy said he would press US pension plans to disclose proxy votes on the stocks they hold – as mutual funds began to do a few weeks ago – in response to a GAO report urging Congress to pass legislation to make their proxy votes public, in an effort to ensure that pension managers act in the best interests of the workers whose nest eggs they are overseeing. Not surprisingly, the GAO report found that pension plans face the same potential conflicts of interest that mutual funds face when they vote.
CalPERS has been widely recognized as a leader in the shareholder activist movement for some time – yet, now both CalPERS and CalSTRS are being pushed by the California State Controller’s office to do even more. The Controller wants these two pension giants to look at executive compensation as a comprehensive program – not just a set of guidelines to use when voting proxies – with a program foundation based on these 4 concepts:
1. Executive compensation policies should link a substantive portion of compensation to achieving key performance targets;
2. Executive compensation policies should be fully transparent to shareholders and should be regularly submitted for shareholder approval;
3. Executive compensation should be evaluated over an appropriate time period (e.g., three to five years), not at just a single point; and
4. Executive contracts should be disclosed in easy-to-understand language in the proxy statement to allow shareholders to evaluate the link between pay and company performance.
Wilson Chu does it again on the Deal Guys Blog with a nice blog containing some insightful analysis into the advisability of adversarial negotiation tactics that I guess can be best characterized as profane. Wilson’s blog links to the actual voicemail left by an associate that has created quite an Internet buzz. Feel free to provide Wilson with feedback as some already have done…
Section 404 Guidance Manual
We have added a pretty nice 43-page Section 404 guidance manual from Deloitte & Touche to our “Internal Controls” Practice Area.
As we believe that this issue of The Corporate Counsel is unique – and can make a difference, the Sept-Oct issue has just been posted on the lower left side of the home page, in a publicly accessible section of CompensationStandards.com – we provide a html version and a PDF version. This issue contains the last 5 steps of our 12 steps to responsible compensation practices, finishing up what was started in the May-June issue (which also is still available on the site on a complimentary basis).
Note that both of these issues contain links are to materials and memos that can only be accessed by those that sign up for the October 20 Major Compensation Conference. Register now and gain immediate access!
SEC Begins to Post Amicus Curiae Briefs
I could be wrong, but I believe that the SEC just starting posting amicus curiae briefs on its “Briefs” web page. Anyways, there are two recent 2nd Circuit ones posted now: one JP Morgan Chase brief addressing whether the lengthened statute of limitations in Section 804 applies to actions brought after the enactment of Sarbanes-Oxley for claims that had already lapsed under the previous limitations period – and the WorldCom brief that addresses whether the fraud-on-the-market presumption of reliance is applicable to analysts’ public material misreresentations.
The “J” Code Can Kill Ya
Alan Dye has some nice analysis in his Section16.net Blog this week, responding to the Tuesday WSJ article regarding exchange funds. He notes that in his model form on exchange funds (Model Form 157 in the Romeo & Dye Section 16 Handbook, posted on Section16.net) that he advocated using code “S” – but drew a little resistance when he first made that recommendation, proving the benefit of being candid in reporting insiders’ transactions.
Yesterday, Delaware Chancellor Chandler heard a plea from attorneys for former Walt Disney president Ovitz to remove Ovitz from the list of defendants in the shareholder suit over his $140 million severance package – based on the argument that Ovitz didn’t owe a fiduciary duty to Disney when his severance agreement was drafted because he was not yet an employee.
It is an interesting argument because the Sept-Oct issue of The Corporate Counsel, which is being printed today, has this quote from a colleague: “The court in Disney made it pointedly clear [at pgs 29-32 of the opinion] that the executive has a fiduciary duty here as well. Query whether a committee could bootstrap that into some leverage: ‘We think you, Mr. Executive, have a fiduciary duty to the company and its shareholders to be sure that the package was fair and appropriately authorized and if you don’t cooperate with our re-examination under a
review that applies the proper process and asks the right questions, we think you are breaching your fiduciary duty, and therefore providing a basis for us to terminate you, Mr. Executive.’ In other words, the executive may have a self-interest in having the committee re-evaluate the existing compensation arrangements and defending the pay by being able to show that the committee had thoroughly considered it.”
The plaintiffs in the Disney case seek more than $200 million – that’s a lot of personal liability! The four-week trial is set to begin on October 18th – just two days before our “Executive Standards – Meeting the New Standards” conference.
PCAOB Releases Summary of Big 4 Inspection Reports
Last week, the PCAOB released limited inspection reports for each of the Big 4 audit firms. These reports are based on 16 different audits, conducted over a 6-month period last year, and identified significant audit issues missed by the Big 4. The reports express concerns about each audit firm’s internal control systems.
Significant for companies is that the PCAOB found that these auditors allowed clients to incorrectly classify some debt as a long-term liability – and in several cases, the PCAOB staff asked the auditors to convince their clients to restate financial statements (but did not name which clients).
In a statement, the PCAOB laid out the differences between public and non-public portions of inspection reports, as the PCAOB is mandated by Section 104(g) of Sarbanes-Oxley to not disclose quality control defects found at an auditor for a period of 12 months after the date of an inspection report.
Also noteworthy is that the PCAOB reaffirmed in its statement that an auditor can voluntarily release any portion of an inspection report. This is significant because we have heard that auditors have been rejecting requests from clients that seek copies of inspection reports that implicate them – and the rationale provided for these rejections is that the PCAOB requires that inspection reports be kept confidential. Footnote 9 on page 4 of the PCAOB’s statement refutes this argument – and companies might consider including provisions in their engagement letters requesting copies of these reports (as Alan and I recommended in Nugget #5 of our 50 Nuggets II webcast a while back).
Lastly, these four inspection reports (scroll to the bottom to find them) are valuable because they provide detailed descriptions of the type of matters that the PCAOB is focusing on – as well as a description of the types of procedures the PCAOB will use during their inspections – although both of these likely will change as the PCAOB moves from “limited” to “full” inspections this year.
New “Poison Pill” Practice Area
We have created a new “Poison Pill” Practice Area – breaking out some of the content from the “Mergers & Acquistions” Practice Area that has continues to grow.
We have posted the Agenda & Speakers for our “Executive Standards – Meeting the New Standards” conference set for October 20th – available live in San Fran or by video/audio webcast.
It took so long for us to develop the program because each speaker was closely vetted during long hours of phone conversations – to ensure the program will be much more responsible and practical than any conference ever conducted before it. We hope you agree – look at the bulleted descriptions of each panel to see if our efforts have paid off.
We have also added a reasonable firmwide rate for multi-office law firms – only $2999 for anyone in your firm to access the webcasted conference, live or archived – as well have access to all the resources of CompensationStandards.com! So register now!
The SEC has issued proposed changes to the NYSE governance listing standards. The amendments – as was summarized in our September E-Minders – are intended to make clarifying language changes consistent with interpretations provided by the NYSE in response to questions and in its published FAQs, and also changes to Section 303A.02 to align it more closely with the similar standards of other listing markets.
Note the NYSE initially filed the amendments with the SEC on August 3rd and requested SEC approval on an expedited basis – but an amendment was filed on August 30th deleting the expedited approval request. The new SEC release states that the amendment also makes changes to the proposal’s description – and replaces the original filing in its entirety.
The SEC’s Recruitment Video
The SEC has posted a short recruitment video in its continuing efforts to find more staffers – starring role for John Stark of Enforcement and Paul Roye of IM (nice cameo by the dapper Keir Gumbs). It’s a nice video (with some repeated odd scenes of kids on their bikes, I guess to give the feel of investor protection).
In its ongoing efforts to find accountants, the Corp Fin web page now features a rotating banner in the top right corner – “CPAs Wanted.”
Getting a lot of questions on this topic lately, so to determine the possible impact of shorter deadlines on earnings release practices – as well as gauge whether companies already have adjusted their earnings release practices – we just posted a Quick Survey on Earnings Releases and 10-Qs. Please take the survey now!
Delaware Developments Regarding Alternative Entities
A lot of movement on the laws regarding LLCs, limited partnerships and partnerships during this year’s legislative session in Delaware. I just conducted this interview with Lou Hering on Delaware Developments Regarding Alternative Entities – Lou was on both committees that were instrumental to make these changes happen.
