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Corporate GovernanceOur Corporate Governance Group guides clients through the ever changing maze of rules and regulations that complicate the day-to-day management, structure and direction of their companies. We help clients to meet the challenges of state and federal rules, the Sarbanes-Oxley Act and stock exchange listing standards. We provide counsel to boards of directors and their committees on fiduciary duties, executive compensation, company policies and procedures, insurance, whistleblower complaints, auditor independence, internal control over financial reporting and other compliance issues. With experienced lawyers from multiple departments within the firm, we represent management, boards, audit and other committees, as well as individual executives, employees and directors. We also provide corporate governance counseling for mutual funds and their directors through our Investment Management Group. Representative Client Work
News and UpdatesBelow are the most recent updates from our Corporate Governance Group. For a complete list, see our archive. 5/08/08: Cross border tender offer proposalsThe SEC has proposed rule changes to expand and enhance the utility of cross-border exemptions for business combination transactions. Many of the rule changes proposed would codify existing interpretive positions and exemptive orders in the cross-border area. In several instances, the SEC requests comment about whether the rule changes being proposed also should apply to tender offers for U.S. companies. In this release, the SEC also addresses certain interpretive issues of concern for U.S. and other offerors engaged in cross-border business combinations. Comments on these proposals are due at the end of June. 4/03/08: New 8-K FAQsThe SEC has updated and consolidated its 8-K FAQs. These are a great resource for any tricky 8-K questions. 2/15/08: SEC release "Financial Explorer"The SEC launched today "Financial Explorer" on its web site to help investors quickly and easily analyze the financial results of public companies. Financial Explorer "paints the picture of corporate financial performance" with diagrams and charts, using financial information provided to the SEC as "interactive data" in eXtensible Business Reporting Language (XBRL). At the click of a mouse, Financial Explorer lets investors automatically generate financial ratios, graphs, and charts depicting important information from financial statements. Information including earnings, expenses, cash flows, assets, and liabilities can be analyzed and compared across competing public companies. This product adds to the SEC's other XBRL offerings, the Executive Compensation viewer and the Interactive Financial Report viewer, also available at www.sec.gov/xbrl. 2/12/08: Revisions to Form DSEC amendments to Form D (requiring among other things electronic filing) have now been published (they were approved several weeks ago). The new form and related rules are effective in part starting September 15, 2008, with everything becoming mandatory by March 16, 2009: http://www.sec.gov/rules/final/2008/33-8891.pdf 1/29/08: Changes for fee proceduresEffective Feb. 4, the SEC is making some changes to its fee payment system. Notably, they have switched from Mellon Bank to US Bank, so if you are making any filing that involves payment of registration or other fees, make sure to update past procedures (presumably the financial printers will have the new information). A description of all of the changes can be found at: http://www.sec.gov/rules/final/2008/33-8885.pdf 12/21/07: New SEC tool to compare executive compensationThe SEC website has launched new internet tool with instant comparisons of executive pay for 500 of the largest American companies. The "Executive Compensation Reader" is available at http://www.sec.gov/xbrl. This is part of the SEC's initiative to develop interactive data, also called XBRL. By tagging the executive compensation figures in XBRL, the SEC has created a new online tool to help investors more efficiently view Summary Compensation Tables and certain other data in the proxy statements of large companies. The tool allows the user to quickly glimpse the total annual pay as well as dollar amounts for salary, bonus, stock, options and company perks. Users can instantly compare those executive compensation figures with other companies by sorting according to industry or size. It includes direct links to companies' proxy statements, including footnotes and the companies' explanation of their compensation decisions. It is widely expected that over the next year or two, interactive compensation and financial data will become more widely utilized by the SEC and companies will likely be required to tag the data in their filings. 12/12/07: Private offering reformThe SEC has approved some more of the changes that will give smaller companies faster and easier access to capital when they need it or market conditions are favorable. (Earlier this month, the SEC approved reforms to Rules 144 and 145 and made small business scaled disclosure more widely available for companies.)..read more 11/28/07: Shareholder access proposalsThe SEC today adopted the amendment referred to below preserving the current SEC policy of allowing companies to omit shareholder proposals relating to bylaw amendments with respect to how directors are nominated. Though this decision is controversial, given the current makeup of the Commission, it was not a surprising short term outcome and the amendment provides greater certainty for the coming proxy season. Chairman Cox has indicated that he intends to keep exploring this issue and we should expect to see it revisited in the future. In a related matter, the SEC also adopted rules designed to facilitate the use of "electronic shareholder forums". The rules are intended to open up communications among shareholders (until 60 days prior to a meeting or less is certain circumstances) without fear that their opinions in the forums will be considered unlawful proxy solicitations. More details can be found in the SEC's press releases from today: http://www.sec.gov/news/press/2007/2007-247.htm 11/15/07: Major changes to Rule 144 approvedThe SEC today voted to adopt three measures designed to modernize and improve its capital-raising, reporting and disclosure requirements for smaller companies. These changes are summarized below - the full text of the rule releases will take several days to be posted on the SEC website. A few other related proposals relating to Regulation D and expand use of Form S-3 are still under consideration and expected to be approved later in the year. (read more...) 10/15/07: Executive compensation guidanceThe SEC has issued a brief report summarizing its review under its new rules of executive compensation disclosures in 350 public companies' proxy statements. The SEC reviewed companies, mostly large, in a variety of industries, not targeting disclosures it necessarily perceived as good or bad. The report summarizes some of the recurring comments it made, with the major themes being that companies need to (1) do a better job of analysis in CD&A and (2) improve their presentation and formatting. To quote the SEC, "First, companies should provide more focused disclosure of how and why they made specific executive compensation decisions. Second, the manner of presentation is important, and companies can use it to provide more direct, specific, clear and understandable executive compensation disclosure." These themes are echoed in a speech given by the director of the Division of Corporation Finance the day the report was released. Although interestingly the report was released before the comment process was completed for most of the companies reviewed, it is nonetheless vital reading for companies and their advisors as they prepare for the 2008 proxy season. 09/27/07: Correcting EDGAR FilingsThe SEC has posted a helpful guide describing the procedures to be undertaken to request an EDGAR filing date adjustment or correction. 07/30/07: Shareholder access proposalsLast week, in an unusual move, the SEC put out two directly opposite proposals relating to shareholders' ability to impact nominations of directors - essentially one would preserve the current system (which was challenged last year by a 2nd Circuit decision) and not give shareholders any new rights and the other would allow 5% or greater stockholders to make proposals to change company bylaws with respect to how directors are nominated. The proposals were both approved 3-2 by the 5 commissioners (the 2 Republicans voted for the status quo; the 2 Democrats voted for increased shareholder rights - Chairman Cox supported both). Essentially that means the issue is still very much up in the air and likely to provoke continued debate. The SEC has expressed a goal of having a new rule by year end, but it's not clear if they can get there with such differing stances among the commissioners (not to mention investor rights advocates and the business community). 07/27/07: NYSE and NASD to combine regulatory oversight of broker/dealersThe SEC gave approval yesterday to the consolidation of NASD and NYSE member firm regulatory functions into a new entity called the "Financial Industry Regulatory Authority" (FINRA). For more details, see the SEC's press release. 06/22/07: E-proxy rulesEarlier this week, the SEC approved rules to mandate its "notice and access" procedures for proxy materials, rather than making them voluntary. Starting January 1, 2008 for large accelerated filers and January 1, 2009 for all other filers, public companies will need to make their proxy materials available online and send a notice of their availability (for more information see our client advisory on the approval of the voluntary compliance with these rules. However, a company can still opt to deliver hard copies of the materials as under the old rules, but must nonetheless now post the materials on its website and send certain additional notice materials. Full details are not yet available, but a brief summary can be found at: http://www.sec.gov/news/speech/2007/spch062007rab.htm 06/19/07: Nasdaq rule change - notifications of material newsNasdaq has also changed its rule for the submission of material news to Nasdaq to require that (except in emergencies) all notifications now must be submitted through Nasdaq's electronic disclosure system and no longer through fax or phone call. For more information, see: http://www.sec.gov/rules/sro/nasdaq/2007/34-55856.pdf. 06/05/07: Nasdaq rule changeNasdaq has modified its listing requirement regarding related party transactions to now only require review and oversight by the audit committee or independent directors rather than requiring approval of such committee or directors. See: http://www.sec.gov/rules/sro/nasdaq/2007/34-55822.pdf. This is not to suggest that it still isn't a good corporate governance practice to have a committee or independent directors approve or ratify such transactions, but it would no longer be a listing standard violation if it was not done. Fyi, other Nasdaq changes in the works include requiring annual reports to be posted on websites and announced by press release rather than necessarily having to be mailed to shareholders, revising shareholder approval rules for private placements to clarify how warrant valuations are to be considered in the approval thresholds and revising the listing of additional shares process to give issuers up to 5 days after an offering to notify Nasdaq of the listing of shares. Nasdaq is also in the process of creating a more user-friendly Nasdaq Marketplace Rulebook and revising its procedures for announcement of material developments to require that Nasdaq be notified in advance electronically (rather than by fax or other methods previously permitted). Stay tuned... 05/24/07: New Section 16 interpretationsThe SEC’s Division of Corporation Finance has posted a new set of interpretations regarding Section 16 of the 1934 Act. These interpretations supersede those found in the Telephone Interpretations Manual and FAQs that related to Section 16. Now everything is in one place. Unfortunately, each interpretation is dated 3/23/07, whether or not there was a change, which will make it difficult to tell what's new. Going forward, only new interpretations will get a new date. 05/17/07: Private offering reformThe SEC has scheduled a meeting for next week to (1) adopt revised guidance on SOX 404 management evaluations and to combine the current requirement for 2 audit opinions on internal controls into 1 and (2) to propose a series of private offering and small company reforms, including making short-form registration statements on Form S-3 more widely available, providing a new exemption from 34 Act registration for private company option grants, revising Reg D by updating the definition of accredited investor and making Form Ds electronic and shortening the Rule 144 holding period and making other changes to Rules 144 and 145. The full agenda for the meeting is below. Anyone who is interested can listen to a live webcast at www.sec.gov. OPEN MEETING - WEDNESDAY, MAY 23, 2007 - 9:00 A.M.The subject matter of the open meeting scheduled for Wednesday, May 23, will be: 1. The Commission will consider whether to adopt interpretive guidance for management regarding its evaluation and assessment of internal control over financial reporting. The Commission will also consider whether to adopt amendments to Exchange Act Rules 13a-15(c) and 15d- 15(c) that would make it clear that an evaluation that complies with the Commission's interpretive guidance would satisfy the annual management evaluation required by those rules. In addition, the Commission will consider whether to adopt amendments to Rules 1- 02(a)(2) and 2-02(f) of Regulation S-X to require the expression of a single opinion directly on the effectiveness of internal control over financial reporting by the auditor in its attestation report. Finally, the Commission will consider whether to adopt amendments to Exchange Act Rule 12b-2 and Rule 1-02 of Regulation S-X to define certain terms. 2. The Commission will consider a number of rule proposals addressing the registration and disclosure requirements for smaller companies, as well as private offerings of securities, including whether:
3. The Commission will consider whether to adopt rules to implement provisions of the Credit Rating Agency Reform Act of 2006. 05/09/07: Executive compensation speechJohn White, Director of the SEC's Division of Corporation Finance gave his analysis of the disclosures he has seen so far in response to the new executive compensation rules. Of particular interest are his observations below on disclosure of (or lack thereof) performance targets and his criticism of the alternative disclosure if such targets are kept confidential. Performance targets. Our rules are quite clear on this one, and at least at first blush, it seems like they are also quite unpopular among some. Companies do not seem eager to disclose their performance targets as we have set up in our rules. Early reports suggest that less than half of reporting companies are disclosing specific performance targets used in awarding annual bonuses or long-term incentive pay. Of course, some companies may not use performance targets; others may rightly be relying on the confidential treatment exclusion provided under our rules. Others, though, may be failing to make the required disclosures. The staff has heard an almost unanimous chorus from investors-confirmed privately by many in-house and law firm counsel-that companies are not providing required disclosure about performance targets in some cases. That too many companies are invalidly claiming the confidential information exclusion. In other words, some companies may be incorrectly asserting that they would suffer competitive harm if they provided the required material disclosure about performance targets used for executive compensation purposes. This is obviously something that the staff in Corporation Finance will be taking a very hard look at. Investors have made it very clear that they want this information and that it is quite material to them. I am not interested in suggesting any loosening of the confidential treatment standards. We have great respect for those standards in the Division of Corporation Finance. At the same time, though, public companies need to employ the same respect for the rules as we do, and not try to claim cover from them if the company's facts do not in fact fit within the rules. And as part of our review process in Corporation Finance, the staff will be prepared, as appropriate, to ask companies to justify their use of the exclusion. Companies that are using the exclusion and therefore not disclosing their specific performance targets should be prepared to provide the staff with an open and full explanation of those decisions and those targets. Alternative disclosure when performance targets may be excluded. I am also hearing what sound like valid concerns about the disclosures that are being provided by companies that are claiming the exclusion for confidential information. If the targets are in fact protected by this exclusion and thus do not need to be disclosed, then the company still must provide investors with a sense of how hard the targets are to achieve or how likely it is they will be met. This is again key information for investors. They want to know whether or not the targets are real targets or are more akin to shadows and are going to result in essentially guaranteed awards. I am not impressed by disclosure that targets "are difficult but possible to achieve" without more. Another complaint I have heard relates to identification of targets simply as "intended to encourage superior performance". Is there any target for which that is not true? Without more, identifying a target simply as "challenging but achievable" or as "designed to promote excellence and motivate management" seems an empty disclosure that I would not think is useful to investors. And again, this is a specific area at which the Corporation Finance staff will take a close look in reviewing this year's proxy disclosures. And I think it's possible we could consider whether it would be appropriate to recommend rulemaking on this one to recalibrate the rules. 04/25/07: ADP ChangeADP has spun out its brokerage services group into a new public company called Broadridge Financial Solutions. Broadridge will now be the entity handling all proxy mailings and related shareholder communications that were formerly done by ADP. 01/30/07: Executive compensation FAQsThe SEC has published some FAQs regarding the new executive compensation rules. The format is a supplement to the Telephone Interpretations Manual that replaces the previous section of that Manual covering Regulation S-K, Item 402. Useful ResourcesBelow are some third party resources that you may find useful. Sullivan & Worcester did not prepare the items linked to below and is not responsible for their content.
The updates, publications and resources above primarily relate to public companies and mature private companies. These materials generally relate to U.S. federal securities laws and rules and regulations of U.S. agencies, such as the SEC and the Public Company Accounting Oversight Board, and self-regulatory organizations, such as the New York Stock Exchange, American Stock Exchange and Nasdaq. Sullivan & Worcester also advises smaller private companies on all matters relating to corporate governance. In addition, our Corporate Governance Group assists clients in complying with corporate governance requirements and other rules and regulations under state law, including in Delaware, Massachusetts and New York, among others.
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