We suggest that public companies consider the following when planning for 2009:
Notice of Internet Availability
All companies are still given the choice of providing proxy materials by Internet or using the “full set” delivery option. In 2008, large accelerated filers that elected to use the full set delivery option were required for the first time to include a notice of Internet availability and other disclosures. Those rules will become applicable to all other issuers in 2009. Accordingly, pursuant to Rule 14a 16(n), in 2009 all issuers must:
Include a short notice of Internet availability that is incorporated into the proxy and form of proxy. Post on their Web site (or another specified address) their proxy and annual report. The posting must be in a format convenient for reading online and printing. In 2008, many issuers used PDF format. Linking to the SEC Web site does not satisfy the rules. The registrant must maintain the anonymity of users who view the materials, which means the registrant must refrain from using tracking cookies. See Rules 14a 16(b), (k) and (n). Include information on how to obtain directions to be able to attend the meeting and vote in person. See Rule 14a 16(d)(8).
Updating Officer and Director Questionnaires and Recognizing the Importance of Careful Completion
NASDAQ recently amended its independence standards to increase the amount of compensation a director or immediate family member may receive during a 12-month period from $100,000 to $120,000. The amendment was meant to conform NASDAQ’s independence standards to the SEC changes to the rules governing disclosure of related party transactions. Likewise, the NYSE also changed its bright-line standards that directors and immediate family members may receive during a 12-month period from $100,000 to $120,0000. These changes should be reflected, as applicable, in each company’s officer and director questionnaire.
In addition to updating officer and director questionnaires, we recommend that each public company reemphasize to each director and officer the need to carefully complete the questionnaires. In a recent SEC enforcement action, a director was recently required to disgorge more than $120,000 in director fees because it was determined that the director was not independent on the boards he served. The director failed to disclose his relationships with the outside auditors. This could have been avoided if the officer and director questionnaires had been carefully completed.
We encourage each company to update its disclosures in light of recent economic and market events. Appropriate disclosures to consider include the effect and anticipated effect of the economy in the management discussion and analysis and in the risk factor section of Form 10 K.
The SEC will continue to focus on compensation disclosures included in the proxy statement. At this time, we believe the most useful guidance is a speech given by John White, Director, Division of Corporation Finance, on October 21, 2008. Some of the highlights of Mr. White’s speech follow:
The SEC will continue to focus on any omission of performance goals from the Compensation, Discussion and Analysis (CD&A). If performance goals are omitted from the CD&A because disclosure would cause competitive harm, the SEC suggests an analysis be prepared contemporaneously with preparation of the proxy statement to justify the omission. Where performance goals are omitted because of a competitive harm analysis, the issuer must disclose how difficult it is to achieve the goals. According to the SEC, this disclosure should be as detailed as possible so as to clearly address the criteria determining undisclosed target levels, and it must directly establish the connection between the achievement of the performance objective and the characteristics of the incentive payment to which the goal applies. Where a company benchmarks a material element of compensation, the SEC expects the company to identify the companies that compose the peer group used for benchmarking purposes. The SEC also expects meaningful disclosure that provides insight into the basis for setting the peer group and the relationship between actual compensation and the data utilized in benchmarking and peer group studies.
Knowing Your Status as an Issuer
Recent volatility in the stock market has affected most issuers’ share prices and market capitalizations. This can have important effects on SEC disclosure obligations and ability to file certain kinds of registration statements. For instance, market capitalization at the end of an issuer’s most recently completed second fiscal quarter determines an issuer’s classification as a “large accelerated filer,” an “accelerated filer,” a “non-accelerated filer,” or a “smaller reporting company.” Those categories determine an issuer’s SEC reporting obligations in certain circumstances. Likewise, an issuer’s classification as a “well-known seasoned issuer,” a “seasoned issuer” or another issuer affects an issuer’s ability to file certain kinds of registration statements. We recommend that each issuer understand its current categorization and the effect it has on the issuer.
Election of Directors
In Levitt Corp. v. Office Depot, Inc., the court considered questions surrounding Office Depot’s advance notice bylaw. One issue considered was whether Office Depot’s notice of the annual meeting permitted director candidates not included in the company’s proxy statement to be nominated at the meeting. The court held that Office Depot’s notice of the meeting was not so narrowly tailored as to exclude the nomination of additional directors at the meeting. As a result, public companies with advance notice bylaws should consider rephrasing the notice of the meeting to exclude nominations not made in accordance with the advance notice bylaw. For instance, many public companies use phrasing such as “the election of five directors” in their notice of meaning. Consideration should be given to rephrasing the language so that it states “to elect the directors named in the attached proxy statement.”
SEC Guidance on Web Sites
In August 2008, the SEC issued interpretive guidance on public company Web sites that covered a number of issues. One key issue addressed by the SEC was liability that may attach to older historical information on a Web site because it may be considered to be republished when accessed at a later date. The SEC stated, “We do not believe that companies maintaining previously posted materials or statements on their web sites are reissuing or republishing such materials or information for purposes of the antifraud provisions of the federal securities laws just because the materials or statements remain accessible to the public.”
The SEC went on to note that in certain circumstances it may not be apparent to a reasonable person that posted materials or statements speak as of an earlier date. The SEC suggested that in such circumstances the following steps be taken to ensure that an investor understands that the posted information speaks as of an earlier date:
The materials should be separately identified as historical or previously posted materials or statements, including, for example, by dating the posted materials or statements; and The materials should be located in a separate section of the company’s Web site containing previously posted materials or statements. We encourage public companies to review their Web sites for compliance with the foregoing guidance to help reduce liability under the antifraud provisions of the securities laws.
Revised Audit Committee Report
The SEC has made a conforming amendment to Item 407 of Regulation S K as a result of a new rule adopted by the Public Company Accounting Oversight Board regarding communications with audit committees regarding independence. As a result, the audit committee report typically included in the proxy statement must be revised.
The following reference in Item 407 was amended:
“Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees), as adopted by the Public Company Accounting Oversight Board in Rule 3600T.”
As a result, the audit committee report is now required to read:
“…applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence.”
The SEC stated that the rule change was a “non-substantive, technical amendment.”
Section 16 Implications Related to Issuer Discretion Regarding Net Exercise or Tax Withholding Payments
Employee equity plans often provide that with the issuer’s consent, upon exercise of an option or vesting of restricted stock, the insider may elect to have the issuer withhold a portion of shares to pay the exercise price or tax withholding obligation. Rule 16b 3(e) generally provides an exemption for Section 16 purposes for dispositions of stock pursuant to net exercise or tax withholding provisions if approved in advance by the board of directors or a committee of non-employee directors. However, the SEC staff took the position in Compliance and Disclosure Interpretation 123.16 that a net exercise or tax withholding transaction that is subject to issuer discretion would require specific approval of each individual transaction that is not automatic in order for Rule 16b 3 to apply. Some commentators have doubted the validity of this interpretation. However, issuers who wish a high degree of certainty for the availability of the exemption for net exercises and tax withholding should consider advance approval for each transaction or amending the plans to eliminate issuer discretion.