Today, the SEC’s “reporting up” rules become effective. Our “Quick Survey” (~100 respondents) reveals that 13% don’t intend to adopt a written policy; 24% say they are waiting for the SEC to decide about “reporting out” before adopting a policy; 47% say they are in the process of drafting a written policy and 15% have adopted one already. Thanks to Marty Wagner at Xerox for donating their “reporting up” policy to our library as “Sample 2” at http://www.thecorporatecounsel.net/member/FAQ/attnyresponsibility/index.htm.
The Delaware General Assembly recently amended Section 251(c) of the DGCL to delete the second sentence thereof (which permitted corporations, to agree in their merger agreements, to submit the merger agreement for stockholder adoption irrespective of whether the directors determine at any time subsequent to declaring the advisability of the merger agreement that the agreement no longer is advisable and recommend against its adoption). In lieu of previous DGCL Section 251(c), a new DGCL Section 146 has been adopted which essentially embodies the old DGCL Section 251(c) language.
This “‘force the vote” provision, when combined with a no-soliciation covenant (without a fiduciary termination right) and majority stockholder lockups (which operated to make a proposed third party stautory, long-form merger a fait accompli), was struck down in a 3-2 split decision by the Delaware Supreme Court in the Omnicare v. NCS case this past April as constituting a preclusive, coercive and draconian combination of terms. [Side note – One of the Delaware Supreme Court Judges who ruled against such combination of merger agreement terms – Judge Walsh – just retired and was replaced by high-profile Delaware Chancery Court Vice Chancellor Jack Jacobs]. The Omnicare decision, which was written with great breadth, was criticized by some in the M&A bar, including Cliff Neimeth and Cathy Reese of Greenberg Traurig in a recent article in the M&A Lawyer. It is unlikely that the Delaware legislature was reacting to Omnicare – but it is a bizarre development. We will keep you posted…
The SEC has taken the position that defendants who settle injunctive proceedings with the SEC – in which they neither admit nor deny the allegations – will be deemed by the SEC to admit the allegations for purposes of subsequent SEC administrative proceedings. See Mike O’Sullivan’s blog about this development in our Blog City – and the SEC’s announcement of its policy change in In the Matter of Marshall E. Melton and Asset Management & Research, Inc. at http://www.sec.gov/litigation/opinions/ia-2151.htm.
The SEC also has issued a 5-page paper to explain what persons must do when they respond to a subpoena or voluntarily provide information to the SEC staff at http://www.sec.gov/about/forms/sec1662.pdf.
On Friday, the NYSE responded to statements made by the Council of Institutional Investors regarding the Exchange’s corporate governance in a 10-page paper, which is at http://www.cii.org/pressreleases/CommentsNYSE.pdf.
I’ve had a number of requests for what Alan Dye said about the Section 16 changes on the “50 Nuggests” webcast – the following summarizes his comments:
Version 8.6 of the EDGAR Filer Manual became final on July 28, 2003. The new version reflects the filing procedures applicable to Section 16 reports filed on or after July 28.
As reflected in the new Manual, the reprogrammed electronic filing system addresses all but one of the seven “glitches” that existed in the version of the electronic filing system that was in use from May 5 until July 28. Of the six glitches that were addressed, only four were “fixed” in a way that allows insiders to report transactions the same way they were reported in paper filings. Specifically:
1. When an insider reports a transaction on Form 4 or Form 5, the insider may now report his or her total holdings of securities of the class involved in the reported transaction in the appropriate table (i.e., Table I or Table II), leaving blank the columns that call for transactional information. It is no longer necessary to report “holdings” in a footnote to a line on which a transaction is reported.
2. When reporting a gift, grant, award, or other transaction for which the insider neither pays nor receives consideration, the insider may insert in the price column (Column 4 of Table I or Column 8 of Table II) a footnote or, instead, a “0.” In paper filings, insiders typically left the price column blank in this context. The electronic filing system will not accept a report, however, if the price column is left blank.
3. When reporting a transaction in a derivative security that does not have a dollar-denominated conversion or exercise price (e.g., phantom stock that is convertible into common stock on a “1-for-1” basis), the insider may insert a footnote in Column 2 of Table II, and explain the conversion terms in the footnote (e.g., explaining that the security converts on a “1-for-1” basis). It is no longer necessary to insert a “0” in the conversion price column. In paper filings, insiders typically inserted “1-for-1” or similar words in Column 2. The electronic filing system will not accept a report, however, that does not include in Table II either a dollar amount or a footnote.
4. When reporting a derivative security for which the vesting date and/or expiration date is not known (i.e., phantom stock that pays out upon the insider’s retirement), the insider may insert (in Column 2 of Table II of Form 3 or Column 6 of Table II of Form 4 or Form 5) a footnote in the appropriate sub-column and explain the terms of the security in the footnote. It is no longer necessary to use a “dummy date” (i.e., “08/08/1988”).
5. When reporting a derivative security that has multiple fixed vesting dates, the insider may insert a footnote in the “date exercisable” column (Column 2 of Table II of Form 3 or Column 6 of Table II of Form 4 or Form 5) and explain the vesting terms in the footnote. It is no longer necessary to insert the first vesting date, accompanied by a footnote (although an insider may choose to do so).
6. Insiders may now insert an address in Box 1 of Form 3, Form 4, or Form 5, and need not leave the address box blank. If, however, the insider leaves the box blank, the electronic filing system will complete the box automatically, using the insider’s address as it appears in his or her Form ID.
The glitch that the SEC chose not to fix is the requirement that, when reporting multiple transactions, the total holdings column (Column 5 of Table I or Column 9 of Table II) reflect a running tally of the insider’s holdings. In paper filings, insiders typically left the total holdings column blank until the last line on which a transaction was reported.
The most important upshot of the reprogrammed e-filing system is that some third-party “filers” reportedly have not yet been updated – so that attempts to make filings with these filers get rejected by the SEC’s system. Be careful to check the SEC’s Edgar database after you make a filing to ensure it is successful! The Romeo & Dye Section 16 Filer is upgraded and compatible with the SEC’s latest changes – and its still free through 9/30 (and then still has the lowest price – yet one of the best – filers available) – check it out at http://www.section16.net/Filer/index.htm.
For TheCorporateCounsel.net subscribers, we have posted the transcript of yesterday’s “50 Nuggets” webcast at http://www.thecorporatecounsel.net/member/audio/07_30_03_transcript.htm. Please give me feedback/pushback on any of the nuggets and whether you liked format of program – broc.romanek@thecorporatecounsel.net. I hope to update the transcript with tidbits as i get feedback from the community.
Yesterday, SEC chairman Donaldson gave a one-year anniversary of SOX speech at http://www.sec.gov/news/speech/spch073003whd.htm. Nothing much new was said – but some of the Q&A was interesting, particularly the focus on the media on getting some of the former Enron execs in jail (for which the SEC has no authority).
You got the sense that his tenure might ultimately be judged on whether these alleged fraudsters at Enron and other scandal-ridden companies go to the “pokey.” And the answer to the shareholder access question indicated that it was quite likely that the SEC will adopt rules quickly in this area.
Yikes, the SEC is moving fast as promised on shareholder access. It has scheduled an open meeting for next Wednesday, August 6th, to consider proposing rules regarding disclosure of nominating committee activities and board/shareholder communications (but note that the proposed SRO corporate governance listing standards have languished for nearly a year, go figure). See http://www.sec.gov/news/digest/dig072903.txt.
Happy birthday Sarbanes-Oxley! The SEC got a nice birthday present regarding third-party liability when JP Morgan and Citigroup settled for big $$$ for their involvement in the Enron scandal. See http://www.sec.gov/news/press/2003-87.htm.
The SEC’s General Counsel, Giovanni Prezioso, has released a letter he sent to the State Bar of Washington regarding the attorney conduct rules at http://www.sec.gov/news/speech/spch072303gpp.htm. Washington’s State Bar has proposed a rule that would conflict with the SEC’s new Rule 205. Part 205.3(d)(2) provides that “an attorney appearing and practicing before the Commission in the representation of an issuer may reveal to the Commission, without the issuer’s consent, confidential information related
to the representation to the extent the attorney reasonably believes necessary…” to prevent certain specified harm. The State Bar’s proposal would prohibit Washington lawyers from disclosing confidential information to the Commission that Rule 205 would permit them to disclose.
It should be noted that the ethical rules of most – if not all – states prohibit the revelations allowed under Rule 205 unless a higher threshold is met. There has been a debate as to whether the permissive provision adopted by the SEC would preempt the prohibition set forth in the ethical rules of the various states. In this letter, the SEC’s General Counsel is taking the position that Rule 205 would preempt state law under the supremacy clause – and that a state bar can’t discipline an attorney, appearing and practicing before the Commission, who in good faith, reveals to the Commission without the issuer’s consent, confidential information related to the representation to the extent the attorney reasonably believes it is necessary to achieve one of the objectives of Part 205.3(d)(2).
Importantly, the SEC’s General Counsel does not address whether a state bar could discipline an attorney who in good faith believes such a revelation is necessary if the bar later finds that the belief was not reasonable. Thanks to Ken Winer for his help deciphering the GC’s letter!
For TheCorporateCounsel.net members, we have launched our “Blog City,” which consists of five different sets of practitioners – with varying areas of expertise – blogging for your enjoyment. I like to think that the paper analogy to this new concept is the use of columnists in your daily paper – so find a blogger or two that matches your particular interests and personality today at http://www.thecorporatecounsel.net/blog/blog_city.htm.
We also have posted two interviews: one with LaDawn Naegle and Randy Wong on how to file CEO/CFO certifications this quarter at http://www.thecorporatecounsel.net/member/InsideTrack/07_29_03_Naegle.htm – and the other with Caroline Gottshaulk on how SOX impacts voluntary filers at http://www.thecorporatecounsel.net/member/InsideTrack/07_25_03_Gottschalk.htm
Effective today, the SEC has tweaked Edgar so that CEO/CFO certifications must be filed as Exhibits 31 (for Section 301 certs) and 32 (for 906 certs) – rather than under “signatures” and as exhibit 99. In addition, earnings releases and blackout period information must now be filed under the 8-K items that were originally intended (ie. the SEC’s interim fix of using Item 9 is no longer in effect).
Also, the SEC has commenced a 6-month trial to allow same-day Edgar filings to be received at 6 am EST – 2 hours earlier than the 8 am official start time. See http://www.sec.gov/info/edgar/ednews/edchanges728.htm.
This SEC press release is curiously silent about the changes to the Section 16 e-filing system that are supposed to take effect today (as noted in this SEC final release from last week adopting updated Edgar Manual 8.6 – http://www.sec.gov/rules/final/33-8255.htm).
Based on what we know, we expect the SEC’s changes to not fix all the snags that currently exist. As a result, we have added a session to this Wednesday’s webcast where Alan Dye will explain these traps and offer possible solutions – join us Wednesday for “50 Nuggets in 50 Minutes” at http://www.greatgovernance.com/programs.html#50nuggets.
On yesterday’s ABA webcast on “Reporting Up,” there was an interesting discussion on when in-house counsel can be considered the “supervisor” of outside counsel. Richard Humes, Associate General Counsel of the SEC (speaking on behalf of himself and not the Commission) expressed the view that this scenario could exist in certain circumstances.
In other words, if an in-house lawyer is acting as “supervisory attorney,” within the meaning of Rule 205.4, for all outside securities lawyers who are appearing and practicing before the Commission in the representation of the issuer, and one of those outside securities lawyers reports evidence of a material violation to the inhouse attorney, that outside lawyer is then relieved of any further Rule 205 obligations with respect to that evidence. [I will blog more after I listen to the program again – and note that more complete notes from this webcast will be in the upcoming August Eminders.]
This interpretation of Rule 205 could be quite problematic in practice – and create some unwieldly results as companies might be pressed to engage in active review of their outside counsel’s reporting up policies. Of course, it is unreasonable for both companies and their outside counsel to be negotiating policies on a “one-off” basis. And I can’t imagine how a mid-level in-house lawyer who has asked a senior partner in a firm to review his or her work would intuitively view themselves the “supervisor” of that partner. More to come…
As my blogging software gave me fits this week, I pondered “what if you blog and no one can hear you” – or as Don McLean put it “the day the blogging died.” Anyways, I am back in the saddle…
On July 28, 2003, EDGAR Release 8.6 will take effect. A list of the changes set forth in the Release is listed below. The two worth noting are:
1. Form 8-K will now permit the filing of Items 10, 11, 12 and 13. As you may recall, the SEC issued interpretive guidance indicating that issuers should file all earnings releases required to be filed under Item 12 under Item 9 until the EDGAR system was updated. Accordingly, all Item 12 filings (earnings releases and other releases of results of operations for completed fiscal periods) made on or after July 28, 2003 can be filed as Exhibit 12.
2. The EDGAR system will now recognize Exhibit 31 (302 certifications) and Exhibit 32 (906 certifications). Accordingly, for all 10-Ks and 10-Qs filed on or after July 28, 2003, the CEO/CFO certifications can be filed as Exhibits 31 and 32 (as opposed to filing to the 302 certifications after the “Signatures” section and filing the 906 certifications as Exhibit 99).
Note: Although the effective date will technically be the date of publication in the Federal Register, which should occur on or about July 28th (the final rules adopting Release 8.6 were just released yesterday), I think companies are safe implementing these changes on July 28th. Thanks to Amy Seidel of Faegre & Bensen!
Rumor has it that the SEC’s July 28th changes to the Section 16 e-filing system will not fix all the glitches. However, it is likely that the changes will start allowing CEO/CFO certifications to be filed under the new proper items. In other words, the EDGAR system will be reprogrammed to permit filing of 8-K Items 10, 11, 12 and 13. If correct, this will have a big effect on those making earnings announcements and filing second quarter 10-Qs.
