Right before yesterday’s popular 8-K webcast (audio archive available now; transcript in about a week), we posted a new 30-page inhouse 8-K policy. Among other features, it includes a description of the roles for each member of the disclosure committee and a great process flowchart.
SEC Brings Enforcement Action over GE Compensation Disclosures
Picture proof that you don’t want to miss Alan Beller’s lunchtime speech at the October 20th Executive Compensation Conference – and hear how the SEC is getting tough over compensation disclosures – is yesterday’s settlement with GE over the failure to fully describe the substantial benefits it had agreed to provide Jack Welch under an employment and post-retirement consulting agreement.
If you read – and you should read it! – the administrative proceeding release, you will get the sense of how Enforcement appears to be upset with disclosure counsel’s role in this action. In addition, Enforcement doesn’t appear happy with how the GE board of directors accepted the lowball estimate of the value of Welch’s retirement benefits.
On CompensationStandards.com, we have many practice pointers devoted to perks and retirement benefits (not to mention our Model Section for the Compensation Committee Report) – but one of the most provocative is a chapter on Plane Perks written by David Kay Johnston, a NY Times reporter (we thought so highly of this chapter that we paid the publisher for the rights to reproduce it) and that chapter starts off with a discussion of GE.
I know that I prattle on about the October 20th Conference – but if you are disclosure counsel, you should realize that this conference is for you; it is not just for benefits counsel. Evidenced by the SEC’s GE action and the pending Tyson Foods action (not to mention the judiciary and the IRS activity in this area), the regulatory and liability standards in this area are changing right now – and you are at risk.
It is akin to how we all became corporate governance experts two years ago – compensation is what truly drives the governance bus and this conference (along with the CompensationStandards.com resources) will bring you up-to-speed quickly. So join the 400+ that have already registered for the conference – in person or by webcast – by registering now and gain immediate access to CompensationStandards.com!
A common question these days is what should my Section 404 management report look like? I hear that the national offices of the Big Four are working on forms for what they would like to see from their clients – but they have not released these forms yet. In the meantime, we have posted some sample management reports that companies have voluntarily filed as well as model forms from the AICPA (these are posted in our Sample Document Library and Internal Controls Practice Area). Thanks to Bob Hayward of Kirkland & Ellis for the heads up!
From what I’ve gleaned from the PCAOB releases, these reports should be pretty short and conclusory – more like an auditor’s letter than a full-blown, detailed report, as Auditing Standard No. 2 does not seem to contemplate a detailed discussion of what happened during management’s assessment and testing.
Perhaps a more interesting question is whether the Big Four will develop checklists of the types of issues they will seek during their assessment process, or what type of records they will create to evidence the diligence performed to support their attestations.
Today’s 8-K Webcast
Thanks for the scores of questions for “Reality Bites: More on the New 8-K Rules” – I hope to extend the program beyond the hour slated for the webcast and have the panel answer as many as we can. Had one good suggestion to change webcast title to “Real Time Bites”!
I finally changed my blogging software – so that my blog entries are now word-searchable and you can also register to receive emails when I blog. Still tweaking the “look and feel” for the next few days. Kool Aid Man says “Oh yeah!”
Tackling This Year’s Auditor Engagement Letter
I am receiving lots of questions regarding strong-arming from the Big Four (aka the “Mighty Big Four”) during negotiations over auditor engagement letters, including issues regarding:
– Getting auditors to agree that their providing materials to the PCAOB or the SEC does not constitute a waiver of any privileges or doctrines available to the company or its counsel
– Getting clients comfortable with the dispute resolution mechanism
– Getting notice from auditors if the PCAOB requests documents relating to the audit of the client
Please let me know if you have any thoughts on these subjects – there appears to be a real need to share on this one…
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.
