Category: Corporate Compliance

8th Annual FCPA & Anti-Corruption Compliance Conference

The National Law Review is pleased to bring you information about the upcoming 8th FCPA & Anti-Corruption Compliance Conference:

 

8th FCPA and Anti-Corruption Compliance Conference
Identifying Changes to the Global Anti-Corruption Compliance Landscape to Maintain and Upgrade Your Existing Compliance Program

Event Date: 12-14 Jun 2012
Location: Washington, DC, USA

 

Beyond dealing with the FCPA and UK Bribery Act, there are upcoming changes to global Anti-Compliance initiatives being enacted by other major countries. It is imperative that organizations are made aware of these new rules and regulations to be able to meld them all into their organization’s anti-corruption compliance program. Maintaining a robust global compliance program along with performing proper and detailed 3rd party due diligence is of the upmost importance.

Marcus Evans invites you to attend our 8th Annual Anti-Corruption & FCPA Conference. Hear from leading executives within various industries on how to identify new areas of concern when dealing with bribery or working within a company to update an anti-corruption compliance program.

Attending this event will allow you to learn how to mitigate the effects of any possible instances of corruption and bribery both at home and abroad. Discuss solutions and best practices that companies have found when dealing with their anti-corruption compliance programs. This conference will not only review the newest enforcement cases, but also highlight practical solutions to problems dealing with FCPA and global anti-corruption measures.

Attending this conference will allow you to:

-Overcome the issues in dealing and conducting an internal investigation with Dell
-Identify anti-corruption liability concerns for US companies when engaging in Joint Ventures and Mergers and Acquisitions with Crane Co.
-Perform anti-corruption audits to better identify gaps in the compliance program with SojitzCorporation of America
-Promote a culture of ethics within an organization to combat non-compliance with Morgan Stanley
-Assess the continued challenges in conducting a 3rd party due diligence program with Parker Drilling

The marcus evans 8th Annual Anti-Corruption & FCPA Conference is a highly intensive, content-driven event that includes, workshops, presentations and panel discussions, over three days. This conference aims to bring together heads, VP’s, directors, chief compliance officers, and in-house counsel in order to provide an intimate atmosphere for both delegates and speakers.

This is not a trade show; our 8th Annual Anti-Corruption & FCPA Conference is targeted at a focused group of senior level executives to maintain an intimate atmosphere for the delegates and speakers. Since we are not a vendor driven conference, the higher level focus allows delegates to network with their industry peers.

 

Liability for inside bridge rounds?

The National Law Review recently published an article by Michael D. DiSanto of Dinsmore & Shohl LLP regarding Inside Bridge rounds and their liability:

Imagine for a moment that you are the CEO of a venture-backed technology or services startup. The company is in the midst of a round of funding, and it is taking longer than anticipated for whatever reason. The cash coffers are unnervingly low, with payroll or other normal monthly expenses right around the corner.

Or maybe the situation is something different. Maybe the company isn’t a technology or services company at all. Maybe it is a manufacturing company and the first big order has just arrived. The company needs to lay out a pile of cash to scale up its team or otherwise secure the necessary raw materials to fulfill the order.

Whatever the case may be, who is the first person the CEO typically calls to alleviate the temporary cash crisis? That is an easy one. The CEO almost always reaches out to the member of the board of directors that represents the private equity fund that typically demonstrates the most support for the company. The conversation typically lasts a few minutes, as the pair hammer out standard (or maybe not so standard) terms for a bridge loan, and the cash coffers are reloaded a few short days later.

Problem solved, right? Not necessarily.

The company’s short-term cash flow problem is solved. Yet, in at least one part of the country, the venture capital funds funding the bridge loans and the director designees approving the transaction could face liability for a breach of the duty of loyalty, if the transaction does not pass the “entire fairness” test.

Did that grab your attention? It certainly grabbed mine.

The Seventh Circuit issued an opinion that, if adopted by California and Delaware, could turn the common practice of inside bridge loans on its head.

The facts of the case probably sound all too familiar to anyone involved with technology startups during the so-called “bubble burst” in 2000 and the global economic crisis that kicked into high gear in late 2008. Cadant was a technology startup incorporated under the laws of Delaware and backed by an investor syndicate lead by two well known venture funds —Venrock and J.P. Morgan. Cadant was facing dire straits in the fall of 2000. Unable to complete a round of preferred stock financing, Cadant sought a bridge loan from an outside investor group, as well as an inside proposal from Venrock and J.P. Morgan.

In late January 2001, the VCs funded an $11 million bridge loan at 10 percent interest and 90-day maturity. Cadant burned through those funds in no time, so the company went back to the deep pockets of its investor syndicate and raised another $9 million bridge from the VCs. This time, however, the bridge included a two-times liquidation preference and the published court opinion makes no mention about seeking a competing proposal.

The Cadant board at the time of both transactions consisted of seven directors. Four were designees of the VCs. The other three were “engineers without financial acumen” who were basically “at the mercy of the financial advice” they received from the four VC designees. The board reportedly relied on Eric Copeland, one of its directors and a Venrock principal, to negotiate the terms of the two bridge loans, despite the fact that Copeland had a clear conflict of interest.

The rest of the story isn’t difficult to predict. Cadant ultimately defaulted on both bridge loans and agreed to sell all of its assets for stock then valued at approximately $55 million. That amount was completely consumed by the liquidation preference of the preferred stockholders and the company’s outstanding debt. The common holders received nothing. Bankruptcy ensued and a liquidating trust brought suit against the VC funds and their director designees.

The Seventh Circuit held that a decision by VC representatives on a board to approve a loan was essentially self-dealing that could not be cured by a vote of majority of the disinterested directors where the interested directors set the terms of the deal. The deal, therefore, had to be evaluated under the entire fairness doctrine, which could raise liability questions when distressed companies do not go out and shop the offer to get a market check as to the fairness of the terms. Note also that the VC funds, while not owing a fiduciary to shareholders directly, faced liability under an aiding and abetting theory.

This opinion seems to be at odds with Delaware law that appears on its face to allow a majority of disinterested directors to approve the deal so long as it was fully and fairly disclosed. Note that the court applied Delaware law due to the internal affairs doctrine, since the company was incorporated in Delaware.

Courts outside of the Seventh Circuit are obviously not bound by this decision. But Judge Posner, the man who authored the opinion, is one of the most well respected and widely cited members of any judiciary. If the Delaware Chancery Court adopts a similar position on the issue, it could result in a dramatically change in the appetite for VCs to fund quick inside bridge rounds for distressed portfolio companies hoping to create some breathing room ahead of an equity round or exit.

What’s the BIG deal?

Judge Posner’s opinion won’t likely have a chilling effect on inside bridge rounds for Delaware corporations, nor should it. Instead, it should serve as a bit of a wakeup call companies and investors shooting from the hip when it comes to inside bridge rounds.

Two practice points jump off the pages of the opinion. First, directors should think twice before sitting on both sides of the negotiation table when a CEO comes asking for a bridge loan. Had one of the non-VC designees negotiated the terms with the VCs in this case, the case might not have survived a motion to dismiss.

Second, boards should be prepared to defend inside bridges under the “entire fairness” test. Performing some semblance of a market check, if possible, is one way to help avoid liability. You know what they say – the more the merrier when it comes to competing proposals.

It will be interesting to see if Delaware and other jurisdictions ultimately decide to adopt Judge Posner’s approach to dealing with inside bridge rounds.

© 2012 Dinsmore & Shohl LLP.

Finally the Final … 408(b)(2) Regulation

Recently The National Law Review published an article by Fred Reish and Bruce L. Ashton of Drinker Biddle & Reath LLP regarding The DOL Service Provider Fee Disclosure Regulations:

The Department of Labor (DOL) has issued the long-anticipated final service provider fee disclosure regulation (the “408(b)(2) regulation”). (A complete copy of the final regulation and its preamble is at http://www.drinkerbiddle.com/files/ftpupload/pdf/408b2reg. pdf) In this Alert, we describe what the amendment says; in a subsequent piece, we will explain the impact on various service providers.

>   The extension of the compliance date from April 1, 2012 to July 1, 2012

>   The fact that service providers are not required to provide a summary of the disclosures, though the DOL provided a sample “guide” that is not mandatory

>   The addition of the requirement to describe the arrangement between the service provider and the payer of indirect compensation

>   Limited relief for disclosures for brokerage accounts and similar arrangements

>   Clarification that electronic disclosure of the disclosures is permitted

>   Relief from the disclosure requirements for “frozen” 403(b) contracts

>   The requirement that plan sponsors terminate the relationship with a service provider who fails or refuses to provide information on request

Background

The 408(b)(2) regulation requires most service providers to retirement plans – including pension, profit sharing, 401(k) and 403(b) plans subject to ERISA – to make written disclosure of their services, fiduciary and/or RIA status and total compensation. The regulation was first proposed in 2007, was issued as an “interim final” regulation in July 2010 and has now been finalized with today’s release.

In light of its “interim final” status, it had been widely anticipated that amendments to the regulation would be issued; and the DOL invited comments on several issues in the 2010 release. In August of this year, the DOL publicly announced that it was working on an amendment and as a result extended the compliance date. Now, in issuing the final rule, the compliance date has once again been extended, though for only three months (i.e., July 1, 2012). Given the scope of some of the changes, this may not be sufficient time for covered service providers to develop and disseminate the required information on an orderly basis…which could result in errors.

Because of the delayed compliance date, some service providers have deferred starting the process of preparing the forms and creating the systems needed to comply with the disclosure requirements. Some did so to avoid having to make changes and others may have hoped for a more extended delay. That is not going to happen, and service providers should circle July 1, 2012 (barely five months away) on their calendars to make sure they are in full compliance by that date for existing clients and that they are prepared to comply with advance disclosures for any new clients.

The Final Regulation

The most important changes in the newly released amendment are:

  • Covered Plan – The definition of covered plan now excludes annuity contracts and custodial accounts in 403(b) plans that were issued to employees before January 1, 2009, where no additional contributions have been made and the contract is fully vested and enforceable by the employee.
  • Indirect Compensation – The final regulation has made a fairly significant change in the disclosure of indirect compensation (that is, compensation received from a source other than the plan or plan sponsor). The disclosure must now include both identification of the payer and a description of the arrangement between the payer and the covered service provider, affiliate or subcontractor pursuant to which the indirect compensation is paid. There is limited relief for disclosures related to brokerage accounts and similar arrangements.
  • Investment Information – The regulation modifies the information that must be provided by recordkeepers and others to better track the disclosures required in the participant disclosure regulation. It also adds a requirement to disclose information that is within the control of (or reasonably available to) the covered service provider and that is required for the plan administrator to comply with the participant disclosure regulation.
  • Form of Disclosure – There was speculation that the DOL would require service providers to include a summary of the disclosures and a “roadmap” for finding the disclosures in the documents provided. It did not do so and has indicated that it will be issuing a proposed rule regarding a summary or roadmap (now referred to as a “guide”) requirement in the future. In the meantime, the DOL did provide a sample guide that may, but is not required, to be used. That said, in the preamble, the DOL states, “Similarly, to the extent a responsible plan fiduciary experiences difficulty finding and reviewing the required disclosures in lengthy, technical, or multiple disclosure documents received from a covered service provider pursuant to the requirements of the final rule, the fiduciary should consider requesting assistance from the covered service provider, for example, discussing with the covered service provider the feasibility and cost of using the attached sample guide.”
  • Manner of Delivery – The final regulation clarifies that nothing in the regulation limits the ability to use electronic media.
  • Change Notice – The interim final regulation required that changes in the information previously provided had to be given to the responsible plan fiduciary not later than 60 days after the service provider becomes aware of it. This “update requirement” applied to all disclosures, including investment-related information. The final rule changes this requirement to say that the deadline for disclosure of investment-related information is “at least annually.” In other words, for this type of information, the updating requirement is now annual.
  • Reporting and Disclosure Response – The interim final rule required a service provider to give information necessary for a plan administrator to comply with the plan’s reporting and disclosure requirements under ERISA within 60 days after a written request. This has been changed to say that the information must be provided (in response to a written request) reasonably in advance of when the plan administrator must comply with its reporting obligation.
  • Compensation Definition – The final regulation amends the definition of compensation to permit a service provider to provide a “reasonable and good faith” estimate of compensation if it is not otherwise readily able to describe its compensation, though the covered service provider in this case is also required to explain the methods and assumptions used for the estimate.
  • Plan Fiduciary Relief – The regulation provides an exemption for plan fiduciaries if the service provider fails to provide required disclosures so long as various requirements are met. The exemption originally stated that if the service provider failed to provide the information upon request, the plan fiduciary was required to consider whether to continue the relationship with the service provider. The final rule now requires the plan fiduciary to terminate the relationship if the service provider fails to provide requested information relating to future services.

Finally, the compliance effective date for the participant disclosures has also been pushed back. For calendar year plans, the initial disclosures of plan and investment information must be provided by August 30, 2012, and the first quarterly expense statement is required by November 14, 2012 (covering the third quarter).

We will be discussing the impact of the changes and the compliance issues in a month or so in another, more detailed bulletin. However, we wanted to get this information to you as quickly as possible.

©2012 Drinker Biddle & Reath LLP

White Collar Crime

The National Law Review would like to advise you of the upcoming White Collar Crime conference sponsored by the ABA Center for CLE and Criminal Justice Section, General Practice,  &   Solo and Small Firm Division:

Event Information

When

February 29 – March 02, 2012

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL, 33140-3226
  • United States of America
Primary Sponsors

  • Highlight

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.

  • Program Description

Each year the National Institute brings together judges, federal, state, and local prosecutors, law enforcement officials, defense attorneys, corporate in-house counsel, and members of the academic community.  The attendees include experienced litigators, as well as attorneys new to the white collar area.  Attendees have consistently given the Institute high ratings for the exceptional quality of the Institute’s publication, its valuable updates on new developments and strategies, as well as the rare opportunity it provides to meet colleagues in this field, renew acquaintances and exchange ideas.

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.  Once again, we expect excellent representation from the corporate sector.

  • CLE Information

ABA programs ordinarily receive Continuing Legal Education (CLE) credit in AK, AL, AR, AZ, CA, CO, DE, FL, GA, GU, HI, IA, ID, IL, IN, KS, KY, LA, ME, MN, MS, MO, MT, NH, NM, NV, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VT, VA, VI, WA, WI, WV, and WY. These states sometimes do not approve a program for credit before the program occurs. This course is expected to qualify for 11.0 CLE credit hours (including TBD ethics hours) in 60-minute-hour states, and 13.2 credit hours (including TBD ethics hours) in 50-minute-hour states. This transitional program is approved for both newly admitted and experienced attorneys in NY. Click here for more details on CLE credit for this program.

The Inside Job: Can Employees Walk Out The Door With Your Company's IP?

Recently in The National Law Review was an article by Katie L. Clark, Rohan Massey, and Hiroshi Sheraton of McDermott Will & Emery regarding IP Security:

With the economic downturn forcing redundancies, most employers are aware that the Q1 period brings an increase in employee movement. But have employers considered how much value could be walking out the door when an employee leaves? In today’s “knowledge economy”, businesses increasingly understand the value of intangible assets in the form of information.  Yet few businesses give thought to how and where those assets reside, or consider how much can be lost or passed to a competitor when employees move on.

The ease with which knowledge can be taken by employees has increased exponentially in recent times.  USB drives are now large enough to store literally millions of documents and cloud computing can provide limitless secure storage.  The increase in remote working also allows employees to download your documents and information in the privacy of their own homes.

There is also a growing international market for transferable knowledge, making the temptation even greater for employees to maximise their value to their new employer.  Emerging economies, with different laws, regulations, and cultural values, provide a ready market into which intellectual capital can be dispersed.

This issue affects every industry.  A number of high profile cases in the United States and China have seen former employees jailed for theft of trade secrets relating to consumer electronics and financial trading software, but every business has a wealth of internal knowledge that is used to give it a competitive advantage over its rivals.  Business plans, presentations, strategies, customer lists, market positioning, and protocols and procedures are all valuable assets that can find their way to new employers.

Most worryingly, this movement of information is not confined to “rogue” employees.  Many salespeople will claim that their address books of contacts belong to them, not to their employer.  Each type and level of employee and each type of business is likely to have a different understanding of what belongs to the company.  In addition, international cultural differences play an enormous role in determining where employees perceive the boundary to be between legitimate and illicit use of information.

So, how do you distinguish between what an employee is free to take away and what should remain with the business before it’s too late?  What procedures should be in place to maximise the intangible value retained by the business when employees move?  To what extent do data protection and privacy laws permit monitoring of employees’ activities?  What procedures are available when employees are suspected of taking valuable information and/or passing it to competitors?

In 2012, McDermott will be running a number of IP- and employment-focused seminars to provide an overview of how intellectual property and employment laws can help your company to protect it, and the policies and procedures that can be used to mitigate value walking out the door.

© 2012 McDermott Will & Emery

White Collar Crime

The National Law Review would like to advise you of the upcoming White Collar Crime conference sponsored by the ABA Center for CLE and Criminal Justice Section, General Practice,  &   Solo and Small Firm Division:

Event Information

When

February 29 – March 02, 2012

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL, 33140-3226
  • United States of America
Primary Sponsors

  • Highlight

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.

  • Program Description

Each year the National Institute brings together judges, federal, state, and local prosecutors, law enforcement officials, defense attorneys, corporate in-house counsel, and members of the academic community.  The attendees include experienced litigators, as well as attorneys new to the white collar area.  Attendees have consistently given the Institute high ratings for the exceptional quality of the Institute’s publication, its valuable updates on new developments and strategies, as well as the rare opportunity it provides to meet colleagues in this field, renew acquaintances and exchange ideas.

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.  Once again, we expect excellent representation from the corporate sector.

  • CLE Information

ABA programs ordinarily receive Continuing Legal Education (CLE) credit in AK, AL, AR, AZ, CA, CO, DE, FL, GA, GU, HI, IA, ID, IL, IN, KS, KY, LA, ME, MN, MS, MO, MT, NH, NM, NV, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VT, VA, VI, WA, WI, WV, and WY. These states sometimes do not approve a program for credit before the program occurs. This course is expected to qualify for 11.0 CLE credit hours (including TBD ethics hours) in 60-minute-hour states, and 13.2 credit hours (including TBD ethics hours) in 50-minute-hour states. This transitional program is approved for both newly admitted and experienced attorneys in NY. Click here for more details on CLE credit for this program.

Electronically Stored Information, Social Media and the Rules of Professional Conduct: Are you compliant with your duties of competence and diligence?

Recently published in The National Law Review was an article about Compliance and Diligence and Electronic Media by  Charles H. Gardner of  Much Shelist, P.C.:

Electronically Stored Information and its increasingly complex progeny, social media evidence (collectively, “ESI”) are quickly being woven into the fabric of discovery and the practice of law.  As the cases and rules of professional conduct discussed below demonstrate, lawyers who fail to thoughtfully investigate and use social media evidence (both that of their own client and that of the opposing party(ies)) are not engaged in best practices.

The American Bar Association (“ABA”) Model Rule of Professional Conduct 1.1 (Competence) states that “[a] lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” (The Model Rules have been adopted in all of the fifty states, except California, and in the District of Columbia and the U.S. Virgin Islands). Comment 5 to Rule 1.1 provides, in part, that “[c]ompetent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem, and use of methods and procedures meeting the standards of competent practitioners. It also includes adequate preparation (emphasis added).” Further, the ABA Standing Committee on Ethics and Professional Responsibility Formal Opinion No. 98-411(1998) states, “[w]e believe the ethical issues are the same whether [involving] substantial legal or procedural aspects of a client’s matter or [a lawyer’s] ethical duties in furtherance of the client’s matter.”

Much has changed since the ABA adopted the Model Rules of Professional Conduct and its predecessor guidelines. Electronic data and communication and social media communities such as Facebook, MySpace, and Twitter have become linchpins of society and discourse. As of December 2011, Facebook alone reported that it had 845 million monthly users and more than 483 million average daily users (http://newsroom.fb.com/content/default.aspx?NewsAreaId=22, last visited Feb. 12, 2012).

In the recent case of Griffin v. Maryland, 192 Md. App. 518, 535 (2010), the court opined, “[i]t should now be a matter of professional competence for attorneys to take the time to investigate social networking sites (emphasis added).” In addition, a 2010 study by the American Association of Matrimonial Attorneys found that an overwhelming eighty-one percent of the nation’s top divorce attorneys said that they have seen an increase in the number of cases in which social media evidence plays a role. Sixty-six percent of those attorneys cite Facebook as the primary source of such evidence. Accepting as an imminent practical reality that an attorney has or will soon have an affirmative duty to investigate social media evidence, what might the cost be to the attorney, the client, or both for failing to do so or, worse, failing to preserve such evidence?

Consider hypothetically the evidentiary value of photographs posted on a disability claimant’s social media page showing her rock climbing, for example. One can see just how persuasive ESI can be.  However, ESI can also be a minefield of professional liability. Consider the case of Lester v. Allied Concrete Company, Nos. CL08-150, CL09-223 (Va. Cir. Ct. Oct. 21, 2011) in which a Virginia attorney was found to have instructed his assistant to tell his client to remove a photograph from a social media website. Finding that the lawyer had violated Virginia’s equivalent of Model Rules 3.3 (Candor toward the tribunal), 3.4 (Fairness to opposing parties and counsel), 5.3 (Responsibilities regarding non-lawyer assistants), 8.4 (Misconduct) and rules of court regarding conduct that tends to defeat the administration of justice or to bring the courts or the legal profession into disrepute, the court sanctioned the attorney with a fine of $540,000. In addition, the court fined the client $180,000 for spoliation of evidence. For the twenty-first century practitioner, a well thought-out ESI discovery plan could mean not only the difference between success and failure in the matter at hand, but may also mean the difference between a grateful client and a client that brings a malpractice claim, a disciplinary complaint or both for ineffectiveness in investigation and preparation. However, case investigation and preparation are not the only source of risk for attorneys and judicial officers.

The case of In re: B. Carlton Terry, Jr., No. 08234 (N.C. Judicial Standards Commission, April 1, 2009) demonstrates how critical it is for attorneys to be savvy in social media and ESI discovery in general. In that family law case, the judge, plaintiff’s counsel and defense counsel were discussing Facebook in a meeting in chambers. Plaintiff’s attorney commented that she did not know what Facebook was and did not have time for it. Following the meeting in chambers, Judge Terry and defense counsel became friends on Facebook and discussed the case in some detail. Judge Terry also conducted independent investigation into plaintiff’s social media pages and quoted from them at the hearing. The judge did not inform plaintiff’s counsel of his actions until after he had entered an oral order. Plaintiff’s counsel immediately sought to and did have the judge’s order vacated. Judge Terry voluntarily disqualified himself and the case was remanded for a new hearing, costing the taxpayers a considerable amount. Ultimately Judge Terry was publicly reprimanded by consent in formal proceedings before the Judicial Standards Committee.

Had plaintiff’s counsel conducted a thorough, or even a rudimentary, ESI investigation, the wrongdoing on the part of defense counsel and the bench could have been addressed promptly which would have spared both Plaintiff and the taxpayers significant costs in having to try the same matter twice.

Furthermore, it is worth noting that the rules of professional conduct apply equally to in-house counsel and transactional attorneys as to litigators. In the more casual in-house and transactional business environments, the line between clients and business colleagues can become easily blurred. These attorneys should be especially mindful of their professional responsibilities and the implications that their actions may have on their organization in the event that litigation ensues.

Following are six simple and practical suggested steps towards developing a strong ESI discovery plan and investigation process:

  1. Educate yourself about social media and ESI in general. If you do not know where to look, you could be lost in a search engine “black hole”. Not only can you place yourself ahead of the pack in the legal community, you will also be able to communicate with your children and grandchildren!
  2. Draft a written ESI discovery plan that includes an immediate request for a discovery hold on ESI.  Be systematic and judicious in your requests. And be mindful of Model Rule 1.3 (diligence).
  3. Draft and circulate acknowledgement forms to all personnel in your organization and obtain their signatures.  These documents should educate your personnel about sound social media practices and emphasize ethical concerns as well as the legal liability to the organization, to you and to the employee, who could also face appropriate discipline for violating company policy.  Be mindful of Model Rule 5.3 (responsibilities regarding non-lawyer assistants). And, with respect to employees, be mindful of the limitations imposed by the National Labor Relations Act when drafting your policies and acknowledgement forms.
  4. Instruct your client that ESI is evidence and that the client should not tamper with or destroy such evidence until the case is completely resolved, including during the time allowed for appeals and in appellate proceedings, if any.
  5. Check your client’s social media pages.  Know what you are up against.
  6. Conduct a thorough review of any and all available ESI of the other party.  Be careful to abide by the “no contact” rules.  For example, do not send a surreptitious friend request to gain access to another party’s ESI, but rather, look only at what is publicly available to you and obtain proper warrants for any additional information.  And be prepared to argue to the court why the evidence is relevant and why it should be produced and admitted.

If you are not making diligent and competent use of ESI, you place yourself and your client at a severe disadvantage and you are arguably breaching your ethical obligations. The immediate future is a rare opportunity to be on the cutting edge of developing law.  With a little knowledge and a reasonable amount of follow-through, you can set yourself apart in the new media frontier by making sound use of the bountiful resources that new media technologies have brought to the practice of law.

Charles H. Gardner is Special Counsel to the Intellectual Property & Technology group at Much Shelist, P.C. and head of its social media practice.  Mr. Gardner is a frequent writer and lecturer on the topic of social media and new media technologies. He has been featured in Crain’s Chicago Business and The Chicago Daily Law Bulletin and will be leading a CLE seminar on the “Laws of Social Media” (tailored for house counsel and business executives) on February 21, 2012.* Before joining Much Shelist, Mr. Gardner served as Director of Legal and Business Affairs for Harpo Studios, Inc. Mr. Gardner has a juris doctorate from Loyola Law School, Los Angeles (Entertainment Law Review) and a bachelor’s degree from the University of California, Berkeley.  He is admitted to practice law in California, New York, Illinois, the District of Columbia and before the United States Supreme Court.

*For more information and/or for complimentary registration, please call or e-mail Mr. Rodney Abstone at CLS Executive Search at (312) 251-2564 or email rabstone@clsexecutivesearch.com. 

© 2012 Much Shelist, P.C.

White Collar Crime

The National Law Review would like to advise you of the upcoming White Collar Crime conference sponsored by the ABA Center for CLE and Criminal Justice Section, General Practice,  &   Solo and Small Firm Division:

Event Information

When

February 29 – March 02, 2012

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL, 33140-3226
  • United States of America
Primary Sponsors

  • Highlight

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.

  • Program Description

Each year the National Institute brings together judges, federal, state, and local prosecutors, law enforcement officials, defense attorneys, corporate in-house counsel, and members of the academic community.  The attendees include experienced litigators, as well as attorneys new to the white collar area.  Attendees have consistently given the Institute high ratings for the exceptional quality of the Institute’s publication, its valuable updates on new developments and strategies, as well as the rare opportunity it provides to meet colleagues in this field, renew acquaintances and exchange ideas.

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.  Once again, we expect excellent representation from the corporate sector.

  • CLE Information

ABA programs ordinarily receive Continuing Legal Education (CLE) credit in AK, AL, AR, AZ, CA, CO, DE, FL, GA, GU, HI, IA, ID, IL, IN, KS, KY, LA, ME, MN, MS, MO, MT, NH, NM, NV, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VT, VA, VI, WA, WI, WV, and WY. These states sometimes do not approve a program for credit before the program occurs. This course is expected to qualify for 11.0 CLE credit hours (including TBD ethics hours) in 60-minute-hour states, and 13.2 credit hours (including TBD ethics hours) in 50-minute-hour states. This transitional program is approved for both newly admitted and experienced attorneys in NY. Click here for more details on CLE credit for this program.

White Collar Crime

The National Law Review would like to advise you of the upcoming White Collar Crime conference sponsored by the ABA Center for CLE and Criminal Justice Section, General Practice,  &   Solo and Small Firm Division:

Event Information

When

February 29 – March 02, 2012

Where

  • Eden Roc Renaissance Miami Beach
  • 4525 Collins Ave
  • Miami Beach, FL, 33140-3226
  • United States of America
Primary Sponsors

  • Highlight

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.

  • Program Description

Each year the National Institute brings together judges, federal, state, and local prosecutors, law enforcement officials, defense attorneys, corporate in-house counsel, and members of the academic community.  The attendees include experienced litigators, as well as attorneys new to the white collar area.  Attendees have consistently given the Institute high ratings for the exceptional quality of the Institute’s publication, its valuable updates on new developments and strategies, as well as the rare opportunity it provides to meet colleagues in this field, renew acquaintances and exchange ideas.

The faculty includes some of the leading white collar lawyers in the United States.  The keynote panels for the 2012 program will continue to focus on the role of ethics and corporate compliance in today’s business environment.  Once again, we expect excellent representation from the corporate sector.

  • CLE Information

ABA programs ordinarily receive Continuing Legal Education (CLE) credit in AK, AL, AR, AZ, CA, CO, DE, FL, GA, GU, HI, IA, ID, IL, IN, KS, KY, LA, ME, MN, MS, MO, MT, NH, NM, NV, NY, NC, ND, OH, OK, OR, PA, RI, SC, TN, TX, UT, VT, VA, VI, WA, WI, WV, and WY. These states sometimes do not approve a program for credit before the program occurs. This course is expected to qualify for 11.0 CLE credit hours (including TBD ethics hours) in 60-minute-hour states, and 13.2 credit hours (including TBD ethics hours) in 50-minute-hour states. This transitional program is approved for both newly admitted and experienced attorneys in NY. Click here for more details on CLE credit for this program.

Preparation for 2011 Fiscal Year SEC Filings and 2012 Annual Shareholder Meetings

Published recently in The National Law Review an article by Megan N. Gates and Pamela B. Greene of  Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding Year End SEC Filings and Shareholder meetings for 2012:

As our clients and friends know, each year Mintz Levin provides an analysis of the regulatory developments that impact public companies as they prepare for their fiscal year-end filings with the Securities and Exchange Commission (SEC) and their annual shareholder meetings. This memorandum discusses key considerations to keep in mind as you embark upon the year-end reporting process in 2012.1

Year 2 of Say-on-Pay. 

As required by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related SEC rulemaking, public companies other than smaller reporting companies were required to include two new, non-binding resolutions in their proxy statements for their first shareholder meetings taking place on or after January 21, 2011. The first resolution, the “say-on-pay” vote, allows shareholders to vote whether to approve executive compensation as disclosed in the proxy statement pursuant to Item 402 of Regulation S-K. The second vote, referred to as the “say-on-frequency” vote, asks shareholders how often they want to conduct future say-on-pay votes: once a year, once every two years, or once every three years. For the 2011 proxy season, shareholders overwhelmingly voted in favor of annual votes on say-on-pay, as opposed to either of the other possible choices, making say-on-pay a yearly event for most companies. However, now that the first year is behind us, companies are not required and not expected to propose another say-on-frequency vote until their shareholder meetings taking place in 2017. Companies that qualify as “smaller reporting companies” will not be required to conduct the say-on-pay or say-on-frequency votes until the first annual or other meeting of shareholders at which directors are to be elected that occurs on or after January 21, 2013.2

For further detail on the final say-on-pay rules that were adopted last year, please review our client alert.

The advent of say-on-pay has caused companies to revisit how they write their compensation-related disclosure in their proxy statements, in particular the Compensation Discussion and Analysis (CD&A) section, with both advocacy and disclosure in mind. For the year ended December 31, 2011, 46 companies failed to receive a majority vote in favor of their executive compensation payments and practices, suggesting that executive compensation is more vulnerable than initially thought at some companies. While this percentage of failed votes is small compared to the number of companies conducting say-on-pay votes last year, it is still higher than most experts expected. In addition, say-on-pay has resulted in shareholder litigation against many of these companies and such suits name the board, compensation committee members, and executives in their suits.3 The allegations of several of the complaints filed generally claim that the directors breached their fiduciary duties in three different ways. The first alleged breach arises from allegations that the directors diverted corporate assets to the executives in a manner that put the executives’ interests ahead of those of the shareholders. The second alleged breach arises from allegations that the companies that have adopted “pay-for-performance” compensation policies failed to disclose in their proxy statements that the compensation awards were made notwithstanding or in contravention to the policies. Finally, the complaints also bring claims for corporate waste against the directors based on the alleged excessive size of the executive compensation awards. Given these claims, it is critical for companies to review their CD&A disclosure, especially with regard to a company’s pay-for-performance philosophy. Many companies have boilerplate compensation policy language that is vulnerable to being exploited by derivative plaintiffs and which is not necessary to provide an accurate and reasonable basis for a company’s compensation decisions. Companies should review the CD&A section of their proxy statements to ensure that it reflects the company’s actual executive compensation philosophy and accurately describes the rationale for payment of executive compensation.

The Dodd-Frank Act added a new requirement in the CD&A beginning this year relating to the say-on-pay vote taken last year. Item 402(b)(1) of Regulation S-K was amended to add section vii to the CD&A disclosure requirements to require a discussion as to whether and, if so, how the company has considered the results of the shareholder say-on-pay vote in determining compensation policies and decisions and, if so, how that consideration has affected the company’s executive compensation decisions and policies. In preparing for compensation committee meetings, companies should make sure the compensation committee is in a position to discuss and make recommendations on this new disclosure requirement, as the disclosure must specifically address what actions the company has taken to date. Companies should make sure their compensation committees have been provided with the following information well in advance of approving this year’s executive compensation:

  • the results of the shareholder vote on say-on-pay from the 2011 annual meeting and any information that the company has as to the specific shareholders that voted against say-on-pay; and
  • the 2011 Institutional Shareholder Services (ISS) Proxy Advisory Services report discussing its analysis of the company’s say-on-pay proposal.

In preparing for this year’s say-on-pay vote the compensation committee should consider:

  • how it defines “pay-for-performance” and whether the company has a good pay-for-performance story for 2011 backing up its executive compensation decisions;
  •  whether the company should reach out to shareholders who voted against the company’s say-on-pay proposal last year (and who are still shareholders) to determine what issues they had with the company’s compensation as many institutional shareholders have expressed their desire to engage with companies regarding their executive compensation policies as long as the discussion is not at the eve of the voting decision and preferably before the proxy season begins in earnest;
  • whether the company has had any significant changes to its shareholder base that could change the say-on-pay results for this year; and
  • whether ISS changes in how it will be determining whether a company has a pay for performance disconnect this year will have any effect on its recommendations for the 2012 proxy season.

Lastly, as companies enter this proxy season they need to be aware of how ISS will evaluate their say-on-pay proposals this year. ISS expects companies which received the support of less than 70% of the votes cast last year on say-on-pay to take specific action to address the concerns expressed by shareholders and expects to see substantive disclosure regarding the company’s response to shareholders’ opposition. If ISS is not satisfied with the changes made by the company, they will recommend a vote against compensation committee members as well as a vote against this year’s say-on-pay proposal. As it did last year, ISS will continue to review say-on-pay proposals by making a quantitative assessment of the CEO’s pay as compared to the company’s financial performance to initially identify underperforming companies. However, ISS has revised its approach and will measure the degree of alignment between the company’s total shareholder return rank and the CEO’s rank within the peer group4 as measured over a one-year (40% weight) and three-year (60% weight) period as well as the multiple of the CEO’s total pay relative to the peer group median. It will also measure the absolute alignment between the trend in CEO pay and a company’s total shareholder return (TSR) over the prior five fiscal years. These quantitative measures are to identify outlier companies that have demonstrated significant misalignment between CEO pay and company performance over time. In cases where alignment appears to be weak, further in-depth analysis will determine causal or mitigating factors, such as the mix of performance- and non-performance-based pay, grant practices, the impact of a newly hired CEO, and the rigor of performance programs.5

SEC Rules on Mandatory Proxy Access Have Been Vacated by the Courts but “Private Ordering” Lives On.

Despite the mandate provided by Section 971 of the Dodd-Frank Act and subsequent rulemaking by the SEC, shareholders’ ability to require companies to include shareholder nominees in companies’ own proxy statements was vacated by the United States Court of Appeals for the District of Columbia Circuit in July 2011.6 However, the amendments to Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the Exchange Act), the rule addressing when a company must include a shareholder’s proposal in its proxy statement, were not affected by the court decision and became effective on September 20, 2011. As a result of amendments to Rule 14a-8, shareholders will now be able to propose nominees for director in a company proxy statement provided that a company’s by-laws allow for such action. This is known as “private ordering.” As a result, proxy access may become a reality if shareholders are successful in requiring companies to add by-law amendments allowing for shareholders to nominate directors in a company’s proxy statement. If a company’s by-laws allow shareholder proxy access for director nominations, then the same procedures must be followed as those that would have been followed had mandatory SEC proxy access survived under the Exchange Act. These procedures include Rule 14a-18, providing for disclosure regarding nominating shareholders and nominees submitted for inclusion in a company’s proxy material pursuant to applicable law or a company’s governing documents; Regulation 14N, which requires filings by certain nominating shareholders on a Schedule 14N; and amendments to Rule 14a-2(b) to facilitate shareholder director nominations. As of December 21, 2011, ISS had reported a total of 16 proxy access proposals submitted to companies with varying procedural provisions. It remains to be seen whether any of these proposals for by-law amendments to require proxy access will be adopted by companies or whether any company may instead choose to adopt its own preemptive proxy access by-law amendment to provide procedures more stringent than would be set forth in a shareholder by-law amendment proposal. We expect that like majority voting for directors, the momentum for proxy access will begin with larger companies and will continue to gain traction over the next few years.

SEC Issues Additional Guidance with Respect to Proposals Brought by Shareholders. 

The SEC staff issued Legal Bulletin No. 14F on October 18, 2011 providing new guidance on topics relating to shareholder proposals under Rule 14a-8 of the Exchange Act that to date had been unclear. The new guidance addresses issues on proof of share ownership for beneficial owners, submission of revised proposals, procedures for withdrawal of a no-action request for a proposal submitted by multiple proponents, and the use of e-mail to transmit information. This SEC Legal Bulletin, together with SEC Legal Bulletins 14-14E, contains important information for any company that receives a shareholder proposal.

Other Sections of the Dodd-Frank Act Are Still Subject to Rulemaking.

The Dodd-Frank Act contains several other sections that will impact companies’ proxy statements in coming years, including the requirements to provide disclosure on measuring pay for performance, the ratio between CEO compensation and other employees’ compensation, hedging of shares by employees and directors, clawback of “erroneously awarded compensation” and rules regarding compensation consultants and compensation committee independence.

However, these sections of the Dodd-Frank Act require that the SEC undertake rulemaking to implement them, and only the rules with respect to exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence and disclosure rules regarding compensation consultant conflicts have been proposed to date. The SEC does expect to finalize these proposed rules in the first half of the calendar year but it is unclear whether it will be in time for the 2012 proxy season. The SEC’s rulemaking calendar was recently revised to state that it expects to propose the rest of these corporate governance and disclosure rules required by the Dodd-Frank Act in the first half of the 2012 calendar year and adopt them in the July through December 2012 time frame, not within the time to take effect for the 2012 proxy season. We will update our clients and friends separately as these rules are proposed and issued.

Whistleblower Bounty System in Effect. 

The SEC’s rules under Section 922 of the Dodd-Frank Act, relating to bounties to be paid to whistleblowers who report information to the SEC about violations of the securities laws, took effect on August 12, 2011. These rules, which were the subject of hundreds of comment letters, put in place a system under which whistleblowers may benefit financially from contacting the SEC directly with allegations of federal securities fraud and other violations.

A new Office of the Whistleblower has been set up within the SEC, which is charged with receiving and reviewing reports directly from individuals of violations or potential violations of the federal securities laws. These reports can be submitted through a form on the SEC’s website, by e-mail, or by telephone.

These regulations have the potential to impact any issuer that has issued a security, regardless of whether that issuer is public, private, foreign, or domestic, or whether the security is equity or debt. As long as the situation about which a whistleblower makes a report constitutes a violation or potential violation of the federal securities laws, a whistleblower may bring a claim to the SEC in an effort to obtain a reward. Companies have expressed serious concerns about these rules, primarily because they are worried that the rules create a financial incentive for employees to circumvent a company’s internal compliance procedures and reporting mechanisms and contact the SEC directly with respect to a potential violation.

In order to be entitled to a whistleblower bounty, an individual must provide information that leads to the successful enforcement by the SEC of a matter resulting in sanctions that exceed $1 million. The bounty, by statute, is required to be paid in an amount between 10% and 30% of the funds that are recovered by the SEC in the matter. As a result, a whistleblower complaint needs to involve a reasonably significant claim in order to have the potential to result in a recoverable bounty. Also, the bounty is only available to an individual, and not to an issuer or other entity. Further, some individuals are ineligible to obtain a whistleblower bounty, including those who have client relationships with an issuer, such as an independent public accountant or a lawyer. Interestingly, the SEC does not exclude individuals who are involved in the wrongdoing itself from receiving a bounty, although any participation in the wrongdoing would factor into the determination of the size of the bounty awarded.

Whistleblower information, in order to qualify for the payment of a bounty, has to be submitted on a voluntary basis. Consequently, a person is not eligible for a bounty if he or she produced information as the result of a subpoena or request for information by the SEC. The individual must come forward with the information of their own volition, and the information has to be “original,” meaning it (1) must be derived from the independent knowledge or analysis of the whistleblower, (2) is not known to the SEC from any other source, and (3) is not exclusively derived from another public source such as an administrative hearing or news report. Hearsay and other forms of indirect evidence are not acceptable forms of evidence and cannot be used to support a whistleblower’s claim.

Other factors besides the culpability of the whistleblower can increase or decrease a whistleblower award pursuant to these rules. First, the information must be significant and not just incremental to information that the SEC already possesses. In addition, the size of an award may be larger if the whistleblower reports the wrongdoing internally through an issuer’s own compliance procedures and mechanisms before going to the SEC. There is no requirement, however, for a whistleblower to report internally before reporting to the SEC. A whistleblower may also make an initial report anonymously, but if the SEC investigation does result in the payment of an award, the person who made the report must reveal his or her identity to the SEC in order to receive the payment.

To protect whistleblowers against retaliation, the regulations contain an express anti-retaliation provision which mandates that an issuer may not retaliate against an employee for coming forward with a whistleblower report. To date, purported whistleblowers have brought a number of anti-retaliation claims as a result of the whistleblower rules, and the number of those claims is likely to increase as whistleblowers become more aware of the existence of these regulations.

Companies should take steps now to ensure that their employees are aware of internal reporting systems and compliance procedures for addressing potential violations of the federal securities laws. Employees should not learn about the concept of whistleblowing for the first time when they hear about the potential to claim a bounty for making a report to the SEC. Rather, they should have their employer’s own internal reporting system at the top of their minds, and think of using that system to report a problem if they see one. As part of preparations for fiscal year-end reporting in 2012, companies should remind employees that management is committed to full compliance with the federal securities regulations, and educate them as to the systems in place at the company to report any issues with compliance.

“Proxy Plumbing”. 

In July 2010, the SEC issued a concept release on the US proxy system.7 This release, which has come to be known as the “proxy plumbing” release, addresses three principal questions regarding the current proxy system in the United States: whether the SEC should take steps to enhance the accuracy, transparency, and efficiency of the voting process; whether the SEC’s rules should be revised to improve shareholder communications and encourage greater shareholder participation in the shareholder meeting process; and whether the voting power held by shareholders is aligned with the economic interest of such shares. No rulemaking has yet been issued by the SEC in response to this concept release, but we understand that the SEC is continuing to evaluate the issues it raised in that document. In addition the SEC is also looking at proxy advisory firms and the role they play in shaping shareholder votes. Although the SEC has no ability to regulate these firms, the SEC is concerned about the lack of competition and the sway they seem to have over the voting decisions made by many institutional investors.

SEC Cybersecurity Guidance.

On October 13, 2011, the staff of the SEC issued Corporation Finance (CF) Disclosure Guidance on Cybersecurity, a guidance document regarding disclosures of cybersecurity risks that may impact the issuers of securities.8 There has been an increase in cybersecurity attacks on issuers in many industries in recent years — attacks on an issuer’s networks, systems, computers, programs and data that can result in seizure or misappropriation of sensitive information about business partners, customers, and other parties. The Guidance provides direction to companies with regard to when the risks or consequences of those attacks must be disclosed to the public.

An issuer is generally required to disclose any material information related to its business that may impact an investor, including with regard to cybersecurity or cyber attacks. Information is considered to be material if there is a substantial likelihood that a reasonable investor would consider it important when contemplating an investment in a company. With respect to cybersecurity issues, there are certain scenarios in which disclosures may be material to an issuer and its investors. The Guidance notes that public companies are required to evaluate their cybersecurity risks and “consider the probability of cyber incidents occurring and the quantitative and qualitative magnitude of those risks, including the potential costs and other consequences resulting from misappropriation of assets or sensitive information, corruption of data or operational disruption.” Therefore, issuers who work with or have access to sensitive customer data or whose businesses would be seriously impacted by a computer security breach should consider disclosing the risk of cyber attacks and similar events in their disclosure documents.

The SEC also provided direction in the Guidance regarding disclosures which reference how an issuer should address potential cyber security risks, and the need to explain why the cost and consequences associated with doing so represents a material event. The SEC also addressed the need for disclosures if a cyber attack could materially affect the issuer’s products or services, customer relationships, and competitive conditions, as well as disclosure in the event of a pending legal proceeding regarding a cyber attack.

Where an issuer is required to incur substantial costs in order to protect against potential cybersecurity risks, the issuer may need to include references to those costs in the Management’s Discussion and Analysis (MD&A) section of its filings, as well as in footnotes to financial statements. Likewise, when a cyber attack occurs, litigation involving suppliers and customers could be costly; companies may need to disclose and explain these risks in addition to the consequences of the cyber attack itself. Finally, issuers are required to disclose the effectiveness of their disclosure controls and procedures in SEC filings; to the extent those controls and procedures are impacted by cyber attacks, an analysis of the consequences of those attacks for the controls and procedures may be required.

The Guidance does not impose any new disclosure requirements or make any changes to existing disclosure rules. The Guidance does, however, make it very clear that the SEC is strongly concerned about cybersecurity as a general concept. The purpose of the Guidance is to remind companies that they should be keeping this specific topic in mind when crafting disclosure within the existing framework of the SEC’s rules, especially when preparing disclosure in their Forms 10-K regarding risk factors, MD&A, the business description, financial statements, and legal proceedings.

Conflict Minerals Disclosure. 

Conflict minerals-related disclosure is another highly controversial topic for which the SEC was required to issue rules under the Dodd-Frank Act. Section 1502 of the Dodd-Frank Act provides that the SEC shall require companies to disclose whether or not their products contain so-called “conflict minerals” — i.e., tin, gold, tantalum, or tungsten, from the Democratic Republic of Congo and neighboring countries. This provision was included in the Dodd-Frank Act at the request of legislators who believe that the process of mining for and producing these particular minerals in certain countries is contributing to a grave, ongoing humanitarian crisis in that region of Africa.

The SEC proposed rules on this topic in December 2010, and the Dodd-Frank Act had required the rules to be finalized by April 15, 2011. However, due to the strong resistance to the rules from a broad cross section of the business community, the rulemaking has been delayed and, as of January 2012, is still not yet final. The implementing rules as proposed provide that:

  • If “conflict minerals” are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by an issuer, the issuer would be required to disclose in its annual report whether the conflict minerals originated in the Democratic Republic of the Congo or an adjoining country.
  • If the answer is that they do originate in such countries, the issuer must furnish an exhibit to its annual report that includes, among other matters, a description of the measures taken by the issuer to exercise due diligence on the source and chain of custody of its conflict minerals.
  • These due diligence measures would include, but would not be limited to, an independent private sector audit of the issuer’s report conducted in accordance with standards established by the Comptroller General of the United States. Any issuer furnishing such a report would be required to certify that it obtained an independent private sector audit of its report, provide the audit report, and make its reports available to the public on its Internet website.

Of particular concern to the business community is the fact that there is no de minimis threshold for the disclosure, meaning that the presence of even trace amounts of the conflict minerals would need to be analyzed and reviewed for the purpose of this requirement. Further, from a practical standpoint, commenters have argued that companies with dozens or even hundreds of suppliers may find it unmanageably expensive and burdensome to gather this information from several steps back in the supply or production chain. The SEC convened a roundtable discussion on October 18, 2011 in order to obtain information from companies regarding this issue that could help the agency put some parameters around the rule to make it realistically manageable. However, as the final rules have not yet been released, we are still waiting to see what the SEC ultimately produces. In the meantime, companies engaged in manufacturing products in the electronics, medical device, aerospace, and computer industries, among others, should give some consideration to how they would address this requirement by reviewing supply contracts to determine the number and locations of suppliers they would need to contact for information in the event that the rules are passed essentially as written.

Internal Control over Financial Reporting. 

One positive development for smaller reporting companies contained in the Dodd-Frank Act was the permanent elimination of the requirement for such companies to provide an attestation report of their auditors with respect to their internal control over financial reporting in their annual reports on Form 10-K. All other companies have been and are still required to include those reports, pursuant to Section 404 of the Sarbanes-Oxley Act. In addition, all issuers, including smaller reporting companies, are required to include reports of their management as to the effectiveness of internal control over financial reporting.

2012 Periodic Report Filing Deadlines

For companies that qualify as large accelerated filers and have fiscal years ending on December 31, annual reports on Form 10-K are due 60 days after fiscal year-end (Wednesday, February 29, 2012).9Form 10-K reports continue to be due 75 days following fiscal year-end for accelerated filers10(Wednesday, March 15, 2012 for December 31 year-end companies) and 90 days after fiscal year-end for non-accelerated filers (Friday, March 30, 2011 for December 31 year-end companies).

In addition, Form 10-Q reports filed by accelerated filers and large accelerated filers continue to be due 40 days after the close of the fiscal quarter. The deadline for Form 10-Q reports for non-accelerated filers continues to be 45 days after the close of the fiscal quarter

These changes do not affect the existing proxy statement filing deadline of 120 days after fiscal year-end for companies that choose to incorporate by reference from their definitive proxy statements the disclosure required by Part III of the Form 10-K.

Companies should also note the extra day in the first quarter as this year is a leap year with February 29th as an added date.

Board of Director and Committee Membership

Each year as part of the year-end reporting process, we recommend that companies carefully examine the membership profiles of their board and board committees. Sarbanes-Oxley, the SEC rules issued under Sarbanes-Oxley, and the listing requirements of Nasdaq, NYSE, and NYSE Amex relating to board and committee membership requirements all impact who may serve.11 Mintz Levin has prepared a director independence and qualification checklist to assist with this analysis, and we encourage you to evaluate each director and director nominee to ensure continued compliance with these requirements.

Shareholder Approval of Equity Compensation Plans

Nasdaq, NYSE, and NYSE Amex all require shareholder approval for the adoption of equity compensation plans and arrangements for employees, directors, and consultants and for any material modification of such plans and arrangements, including the addition of new shares to a plan. Exemptions from the shareholder approval requirement continue to be available for inducement grants to new employees if such grants were approved by a compensation committee or a majority of the company’s independent directors, and if, promptly following each grant, a press release is issued specifying the material terms of the award, including the name of the recipient and the number of shares issued. In certain situations, exceptions to the requirement may also be available for a grant relating to an acquisition or merger. An exemption from the shareholder approval requirement is also available for certain tax-qualified, non-discriminatory employee benefit plans (such as plans that meet the requirements of Section 401(a) of the Internal Revenue Code and Employee Stock Purchase Plans meeting the requirements of Section 423 of the Internal Revenue Code), provided that such plans are approved by the issuer’s compensation committee or a majority of the issuer’s independent directors. Equity plans adopted prior to June 30, 2003 are unaffected under this rule, until a material modification is made to such a plan.

As noted above, companies considering option repricing programs in light of significant declines in their stock prices should note that such programs may require shareholder approval, depending on the terms of the equity compensation plan under which the options were granted. In the event that shareholder approval is required, the company will need to file a preliminary proxy statement with the SEC, which would not be required for approval of a new plan or an amendment to an existing plan.

Companies should review their existing equity compensation plans as part of their year-end reporting preparation in order to determine whether shareholder approval will need to be obtained for new plans or to determine increases in the numbers of shares available under old plans, option repricing programs, or material plan amendments. Since this is another area where ISS continues to weigh in heavily, both with respect to the number of shares to be authorized under the plan and with respect to some of the substantive disclosure within the plan itself, plenty of time should be allotted to drafting proposals on these matters.

Other Year-End Considerations

We also recommend that companies take the opportunity while planning their year-end reporting to consider what amendments may be necessary or desirable to their corporate documents over the coming year that may require shareholder approval. Some items to consider are:

  • Does the company have enough shares authorized under its certificate of incorporation to achieve all of its objectives for the year, including acquisitions for which it may want to use its stock as currency?
  • Does the company have adequate shares available under its equity compensation plans to last throughout the year?
  • Are there other material changes that should be made to the company’s equity compensation plans that would require shareholder approval?
  • Has the company reviewed its charter and by-laws to assess any anti-takeover measures in place?

To the extent that a company expects any proposal in its proxy statement to create controversy among its shareholder base, it may want to consider hiring a proxy solicitor to assist with the process of seeking the requisite shareholder vote.

In addition, in light of the say-on-pay, executive compensation, and governance rules described above, management and directors of public companies should annually consider the following questions, with a view to the disclosure that would flow from each answer.

Compensation Committe

Consider whether the company’s compensation policies and practices for all of the company’s employees, including non-executive officers, create risks that are reasonably likely to have a material adverse effect on the company.

  • Are there business units that carry a significant portion of the company’s risk profile?
  • Are there business units with compensation structured significantly differently from the other units within the company?
  •  Are there business units that are significantly more profitable or risky than others within the company?
  • Are there business units where compensation expenses are a significant percentage of the unit’s overall expenses?
  •  Does the company have compensation policies or practices that vary significantly from the overall risk and reward structure of the company and are not in alignment with the timing of the outcome on which the award was based?

Is the company using a compensation consultant for which disclosure would be required under these rules?

If the company is currently subject to the say-on-pay rules, is the CD&A written in a sufficiently compelling and persuasive manner?

Nominating Committee

»     Consider, for each director and nominee, the particular experience, qualifications, attributes, or skills that led the board to conclude that the person should serve as a director for the company and how the directors’ skills and background enable them to function well together as a board, as of the time that a filing containing this disclosure will be made with the SEC. Review the company’s current requirements regarding minimum qualifications to serve as a director that are currently set forth in the company’s proxy statement to make sure that the disclosure works with the current nominating committee policy.

»      Consider whether, and if so how, the nominating committee considers diversity in assessing director nominees. Consider whether to adopt a policy regarding the consideration of diversity in identifying nominees, how to implement the policy, and how to assess its effectiveness.

»      Consider the current governing structure of the board. Is it still appropriate for the company? Are revisions necessary or appropriate?

»      Revise the nominating committee charter, if necessary, based on the issues discussed above.

Full Board

Consider the board’s role in managing and overseeing the material risks facing a company. Has this role been effectively managed by the board? Should the role be delegated to a committee?

Endnotes

1  We invite you to review our memorandum from last year, which analyzed regulatory changes that were new for fiscal year 2010, and we would be happy to provide you with another copy upon request.

2  Smaller reporting companies are those that have less than $75 million in public float as of the last business day of their most recently completed second fiscal quarter.

3  For a further discussion regarding say-on pay litigation see our Client Advisory, dated July 18, 2011, entitled “Lessons Learned from Initial ‘Say-on-Pay’ Litigation, Plaintiffs’ Attorneys Start Utilizing ‘No’ Votes as a Basis for Claims Against Directors”.

4  The peer group is generally comprised of 14-24 companies that are selected by ISS using market cap, revenue (or assets for financial firms), and GICS industry group, via a process designed to select peers that are most similar to the company, and where the company is close to median in revenue/asset size.

5  The ISS 2012 policy in evaluating say-on-pay is available on the ISS website.

6  Specifically, Exchange Act Rule 14a-11, which sets forth the specific procedures and rules to be used to nominate a director, was vacated.

7  Concept Release on the U.S. Proxy System (Release No. 34-62495, July 14, 2010).

8  Securities and Exchange Commission, CF Disclosure Guidance: Topic No. 2, Cybersecurity (October 13, 2011).

9  Large accelerated filers are domestic companies that meet the following requirements as of their fiscal year-end:

·         have a common equity public float of at least $700 million, measured as of the last business day of their most recently completed second fiscal quarter (i.e., for calendar fiscal year-end companies, this test would be applied as of June 30, 2011);

·         have been subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, for at least 12 months;

·         have previously filed at least one Annual Report on Form 10-K; and

·         do not qualify as smaller reporting companies under SEC rules.

10 Accelerated filers are those that meet all of the above tests but have a common equity public float of at least $75 million, but less than $700 million, measured as of the last business day of their most recently completed second fiscal quarter (i.e., for calendar fiscal year-end companies, this test would be applied as of June 30, 2011).

11 Please see our Client Advisory, dated November 2003, entitled “Changes to Corporate Governance Standards for Nasdaq-Listed Companies,” for a further description of these changes. We would be happy to provide you with a copy upon request.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.