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We presented a webcast today discussing the final Dodd-Frank whistleblower rules that the SEC adopted a couple of weeks ago.  It was a good discussion covering the range of challenges that companies are facing and expecting to face.  Based on questions raised by listeners both during and after the podcast it's apparent that many are struggling with how to continue to motivate employees to submit information internally through existing compliance systems, such as hotlines, rather than starting with the government.  Lots of variations on the theme: Can I provide by policy that employees are required to provide the company with information concerning suspected noncompliance? (yes) Can I enforce this policy by disciplining employees who take their complaints to the government first? (no) Can my policy state that employees should raise issues internally before going to the government? (generally not advisable, and in any case most companies have decided it's better not even to allude to the whistleblower bounty program)
7 years 7 months ago
Commenters to the SEC's proposed rules on listing standards for compensation committees, including issuers, law firms, consultants and organizations like the Society of Corporate Secretaries and Governance Professionals and the Chamber of Commerce, argued vehemently for the SEC to (a) narrow the definition of "advice" given by a consultant and (b) retain existing disclosure exemptions for consultants that work only on broad-based plans and non-customized data. The SEC may be surprised to find such passion surrounding what are merely proposed amendments to existing disclosure obligations. Disclosure would be required when a compensation committee has retained or obtained the advice of a compensation consultant, a change from the current rule which is triggered when a consultant plays a role in determining executive compensation. Commenters' discord stems from a proposed instruction indicating that "obtained the advice" could include whenever a committee or management has requested or received advice from a consultant, even in the absence of a formal engagement, a client relationship or any fees paid. The SEC suggests this change would have minimal practical impact, but commenters decried this instruction as being overly broad and captures all types of information generated by consultants, even casual conversations or materials soliciting potential clients.
7 years 7 months ago
Last week, the SEC proposed rules to implement Section 926 of Dodd-Frank's requirements to disqualify "bad actors" from issuing securities pursuant to Rule 506 of Regulation D.  (Rule 506 of Regulation D permits sales of an unlimited amount of securities to accredited investors and up to 35 accredited investors).  As required by Section 926 of Dodd-Frank, the bad actor provisions to be added to Rule 506 are substantially similar to those currently contained in Regulation A (an offering exemption for offerings not exceeding $5 million in a 12-month period) and would prevent issuers from issuing securities in reliance on Rule 506 if the issuer, its affiliates or predecessors, directors, officers, partners, managing members, 10% beneficial owners or underwriters, had been involved in a “disqualifying event”, such as a criminal conviction, court injunction or restraining order related to the sale of securities or other broker dealer activities.  The rules generally provide for a ten year lookback for disqualifying events.
7 years 7 months ago
The deadline for comments about the SEC proposed rules regarding compensation committees has passed, with 54 submissions sent.  While many commenters support the approach of directing the listing exchanges to adopt independence standards for compensation committees, taking into account issuer affiliation and source of compensation, several activists advocated for additional standards.  The Council of Institutional Investors (CII), AFSCME, AFL-CIO, among others, argued that independence is also impaired through other relationships, including:  (a) family linkages (employment of a director's family member by the company); (b) business, financial and personal relationships between directors and executive officers (a director is employed by a firm that advises management or affiliated with a non-profit that receives grants from executive officers); (c) any related person transactions involving directors and (d) relationships amongst directors (one director is instrumental to the nomination of another director).  Since none of the cited relationships have any particular relevance to the specific duties of compensation committees, it is clear that these rules are being viewed by activists as an opportunity to weigh in generally on director independence, which hasn't been up for consideration in some time.  More to come about other comments. Contact Ning Chiu. 
7 years 7 months ago
In an important development defining when Revlon duties apply to a mixed cash and stock deal, the Court of Chancery last week applied Revlon to a deal where target shareholders would receive roughly 50% in cash and 50% in stock, with target shareholders owning an aggregate of 45% of the surviving company. Previously, the Delaware courts had not established the precise bounds of when the heightened Revlon standard of review applied in deals with mixed consideration. Vice Chancellor Parsons recognized that this case obviously falls between the 33% cash out that the Supreme Court held did not trigger Revlon in Santa Fe and the 62% proportion of cash consideration that Vice Chancellor Lamb determined would trigger Revlon in Lukens. “Assuming the Court’s analysis in Lukens was correct, as I do, this case is necessarily approaching a limit in relation to the Supreme Court’s holdings in Santa Fe and Arnold, which, again, involved a stock for stock transaction,” he states. However, he notes (for the second time), “my conclusion that Revlon applies here is not free from doubt.” This case (Smurfit-Stone Container) is consistent with the finding earlier this year in Occam Networks, where Vice Chanceller Laster found that Revlon would likely apply to a roughly 50/50 cash and stock deal where target shareholders would own about 15% of the resulting entity. Read the decision in In re Smurfit-Stone Container Corp. Shareholder Litigation (C.A. No. 6164-VCP) (Del. Ch.
7 years 7 months ago
The SEC held an open meeting today at which it adopted final rules implementing the whistleblower provisions in the Dodd-Frank Act. As expected, the final rules do not require employees to first report allegations through a company’s corporate compliance system before coming to the SEC, despite numerous comments by members of the corporate community urging the SEC to do so. The rules do contain additional provisions that purport to incentivize whistleblowers to report their concerns internally first although it is unclear what practical effect these provisions can reasonably be expected to have. Our Client Newsflash summarizing the final rules is available here. We also expect to hold a webcast on the final rules in the coming weeks. Contact Richard Sandler.
7 years 8 months ago
May is high season for annual shareholder meetings for U.S. public companies, so we wanted to update the findings that we shared in our last memo on the subject.  As of the end of last week, 802 large accelerated filers reported the voting results from their shareholder meetings. Regarding approval of “say-on-pay”, so far: Large Accelerated Filers bySay-on-Pay Vote(as of May 20, 2011) 90-100% Approval 540 80-89% Approval 126 70-79% Approval 65 60-69% Approval 40 50-59% Approval 14 40-49% Approval 9 30-39% Approval 7 20-29% Approval 1 0-19% Approval 0 Total 802                          In other words, less than 17% of large accelerated filers reported say-on-pay results below the 80% approval level, and less than 9% reported results below the 70% approval level. A total of 16 large accelerated filers have lost their say-on-pay votes, and all of them received “against” recommendations from ISS.  To date, large accelerated filers with “against” recommendations have averaged 64% approval, while those with “for” recommendations have averaged 92% approval.  We believe the total number of public companies, including large accelerated filers, that have lost their say-on-pay votes is 26.
7 years 8 months ago
Questions have come up about whether companies can declare how frequently they intend to hold say-on-pay votes in the Form 8-K announcing annual meeting results within four business days after the meetings, or whether they must wait and make the disclosure in an amended Form 8-K.  While this seems to demand a simple "why not" response, the confusion stems from the fact that careful readers of the rules noted that the Form 8-K itself only provides for disclosing future frequency in an amended 8-K, to be filed no later than 150 days after the end of the meeting and 60 days before the 14a-8 shareholder proposal deadlines.  The instructions do not appear to be exclusive, and if a board has made a decision there seems to be no reason to later prepare an amendment and make two filings.  In fact, at least half of the companies that have announced annual meeting results so far have gone ahead and declared their future intentions with respect to the frequency of say-on-pay, in particular where (a) the board recommended annual and (b) votes were overwhelmingly in favor of annual.  Contact Ning Chiu.
7 years 8 months ago
Credit Card companies have a new pitch - "0% Interest on Balance Purchases & Transfers Until XX/1/2012". The idea is to give you credit, with no interest on the outstanding balance for 12 months. And, as an added bonus, the offering company will even take your balance, on which you are being charged 20% from another card, and let you move it, AT NO INTEREST, for the same period. Sounds too good to be true? It is!!First, all of these offers looked at closely, contain a "nominal" fee for making the balance transfer - like 5% of the amount of the transfer. That is a one time immediate capture fee, meaning they get paid by increasing your balance by that 5%. One could say that it's still a bargain because it's only 5% instead of 20%. However, if you pay the entire balance off in 3 months, you paid a rate of 20% annualized, versus paying the old card 20% balance off in 3 months which has the same effective rate. Well, same rate so you are no worse off than if you kept the old card. WRONG!That 5% fee get added to your principal balance because it's a fee, not interest. So, instead of paying interest on $5,000 (which is the amount transferred in this example) you pay interest on $5,250.
7 years 8 months ago
It has been frustrating for companies who want to benefit from the substantial cost-savings provided by the SEC notice and access rules to discover that they must also comply with the Department of Labor (DOL) ERISA rules regarding electronic communications to employees, if for example the employee shareholders hold company stock through a 401(k) plan that is registered on a Form S-8.  As a practical matter, using notice and access for employee benefit plan participants has proved prohibitively difficult.  The ERISA rules permit electronic delivery of documents only to participants who have the ability to access them at their regular place of work, and who have access to the company's electronic information system as an integral part of their duties.  Even for those participants, administrators must try to ensure actual receipt of the documents and provide notice about the documents' significance.  For participants who do not meet this test (e.g., former employees and current employees who do not work at computers) an affirmative consent, with specific content requirements, is required.
7 years 8 months ago
Companies considering new equity plans should take note that Fidelity (a large shareholder of just about every public company) has adopted a new voting policy for equity plans.  As of March 2011 its policy focuses on burn rate rather than dilution.  Fidelity will vote “no” on a plan if:   (A) the company’s three-year burn rate on equity awards is greater than:   - 1.5% for Russell 1000 companies; - 2.5% for companies not in the Russell 1000; - 3.5% for companies with a market cap below $300M; and   (B) the burn rate is not otherwise acceptable to Fidelity based on circumstances specific to the company or plan.   Note that this test is based strictly on company size and, unlike the ISS test, takes no account of industry practice.  (ISS applies a limit equal to the greater of 2% or one standard deviation from the average burn rate for the company’s industry group). Fidelity's new policy will tend to particularly impact companies in the tech sector and in other industries with high share usage rates.  If a company fails the Fidelity test, Fidelity may contact the company and try to get the company to commit to reduce its future burn rate or make other changes in exchange for Fidelity’s support.  Our sense is that Fidelity may be getting push-back from companies in a number of industries, so it would not be surprising if Fidelity reconsiders its approach.   Contact Edmond FitzGerald.  
7 years 8 months ago
As was rumored, the SEC has announced that it will hold an open meeting at 9:30 a.m. EDT on May 25, 2011 to consider the adoption of final rules implementing the Dodd-Frank whistleblower provisions. The SEC's announcement is here.  We'll be focusing on the open meeting with great interest. Our memo from last November on the proposed rules is here. Our webcast on the proposed rules is here. Contact Bill Kelly.  Contact Richard Sandler. 
7 years 8 months ago
When the SEC decided to eliminate the ability of brokers to vote on a discretionary basis without specific client instruction for director elections in July 2009, many predicted that it would seriously affect the ability of directors to obtain majority support.  The concern proved to be a false alarm.  As a result, when the Dodd-Frank Act required the elimination of broker discretionary voting for executive compensation matters, including say-on-pay, there wasn't nearly the same chatter.  But it turns out that given the closeness of many of the failed say-on-pay votes, the reported broker non-votes would have made a real difference.  We calculated that 7 of the 21 companies reporting failed votes so far would have passed, in some cases by a decent margin, if the non-votes had actually been counted as "for" say-on-pay, which is not an unreasonable assumption given these discretionary votes generally favored management.  For one company, there were more broker non-votes reported than "for" votes. 
7 years 8 months ago
This year a group of investors begin asking companies to host a "fifth analyst call" for institutional investors to take place after the proxy statement is issued and designed to focus on corporate governance.  Occidental Petroleum became the first company to sponsor such a call in late April, hosted by the lead director and audit committee chair, and the compensation committee chair. In this IR web report, Dominic Jones questions whether Occidental's call, which was not publicly announced or publicly available, may have implicated Regulation FD in light of the fact that (a) the call was held 2 days before the company announced earnings and (b) the stock closed 2.5% higher after the call, beating the results of the S&P 500 and its peers on that day. According to various reports, the company has not made any comments about the call.  The hosts and advocates of the call, Railpen Investments and F&C Asset Management, released a statement indicating 50 investors participated, and the call focused on the proxy statement and governance matters and included a "lively" Q&A. 
7 years 8 months ago
In case you missed it, Dr. Erik Roelofsen, a researcher at the Rotterdam School of Management at Erasmus University, published an interesting study surveying over 400 sell-side and buy-side analysts and portfolio managers about their views and experience with one-on-one meetings with management.  He reports that about 47% of investors and analysts say that they frequently receive material information in these one-on-one meetings.  If this is at all accurate, this is an eye-opening result and reinforces the need for careful consideration of the timing, manner, ground rules and objectives of these sessions.  Reports like this may also attract regulatory scrutiny.Contact Richard Sandler. 
7 years 8 months ago
Today's WSJ piece on what are sometimes called "nondeal road shows" is on one level a nonstory; as the story concedes, the practice is not a new one. But coming as it does on the heels of last week's Rajnaratnam verdict, the story provides a good hook to remind companies and senior executives of the perils of private unscripted meetings with hedge funds and other large investors. The effort that companies invest in their disclosure controls and procedures can be significantly undercut by an injudicious remark blurted out after the second bottle of Petrus (and yes, the wines tends to be very good indeed at these dinners). The company may not be aware of the issue until the stock moves the next day, and by then it may be too late to fix (and in any case the SEC may take the view that the communication was "intentional", in which case there is no fix under Reg FD). What's sometimes not understood is that hedge funds themselves would often rather not participate in these events in light of the compliance risks that these interactions pose. But in a competitive world it can be difficult to stay away if you think that other investors will be there.
7 years 8 months ago
The debate on the Dodd-Frank whistleblower provisions is continuing on several fronts, with the SEC rumored to be close to finalizing its rule proposals and Congress considering proposals to address some of the (perhaps) unintended consequences of the original legislation.  A link to this week's House hearings is here.  At this stage of the legislative debate the parties seem mostly to be staking out extreme positions, from the Chamber of Commerce on one side to the AFL-CIO on the other.  Our memo from last November on the SEC proposal is here. Our webcast is here.  If you'd like to order a genuine Davis Polk whistle, well, you're out of luck.   It seems fair to assume that the SEC rules will take effect before Congress will be able to act.  The hope is that the SEC will pay attention to the host of comments it received (including from Davis Polk), particularly with respect to preserving the central role of corporate compliance systems.  The challenge, though, is that some of the worst features of the system are to some extent hardwired into the statute.   Contact Bill Kelly.  
7 years 8 months ago
Although it often looks like proxy season 2011 is a one-topic event, say-on-pay is just one item on proxy cards.  Recent data reminds us that say-on-pay may even be the least controversial item.  ISS reports that as of May 9, shareholder proposals calling for declassifying boards (annual election of directors) won as much as 95% and 81% approval rates at MEMC Electronic Materials and Alcoa, respectively.  Average support so far for nine proposals is 69%, up from 61% last year.  Shareholder proposals on majority voting are also faring well, averaging 57% support at 14 companies, including 78% at SkyWest. Recognizing the increased probability of getting these types of results, companies that receive such proposals often go ahead and implement without putting the shareholder proposals on the ballot.  Companies seeking management proposals to amend governance documents for declassification and majority voting have won more than 96% approval this year.  Contact Ning Chiu.
7 years 8 months ago
The Bankruptcy Court for the District of New Jersey (Kaplan, J.) recently held that hotel revenues (including revenues generated from room occupancy, food and beverage sales, catering, gift shop purchases, spa, and related hotel services) do not constitute “rent” within the meaning of the Third Circuit decision of In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995).  Therefore, even if they are absolutely assigned to the secured lender, hotel revenues can be used by the debtor as cash collateral to pay its ordinary and necessary operating expenses and to reorganize.  In re Ocean Place Dev., LLC, No. 11-14295 (Bankr. D.N.J. Mar. 31, 2011).
7 years 8 months ago
The Bankruptcy Court for the District of New Jersey (Kaplan, J.) recently held that hotel revenues (including revenues generated from room occupancy, food and beverage sales, catering, gift shop purchases, spa, and related hotel services) do not constitute “rent” within the meaning of the Third Circuit decision of In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995).  Therefore, even if they are absolutely assigned to the secured lender, hotel revenues can be used by the debtor as cash collateral to pay its ordinary and necessary operating expenses and to reorganize.  In re Ocean Place Dev., LLC, No. 11-14295 (Bankr. D.N.J. Mar. 31, 2011).
7 years 8 months ago