Category: Corporate law

Sequestration: Responding to Government Contract Delays and Changes

The National Law Review recently published an article regarding Sequestration written by Jonathan T. Cain of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.:

MintzLogo2010_Black

 

Recent hardening of the rhetoric between Congressional Republicans and the White House is leading to growing acknowledgment that across-the-board reductions in federal agency budgets are likely to be imposed, at least temporarily, beginning March 1st. Government contractors serving nearly every federal agency can expect to be affected by delays, stop-work orders, and/or contract changes to postpone or reduce the government’s cost of contract performance.

Federal contracts give the government the right to impose schedule delays in contractor performance, direct work stoppages, and order changes in the delivery schedule, but the government does not have the right to impose the costs of those actions on contractors – provided the contractors take timely action to preserve their rights to compensation for those increased costs.

The clause most likely to be employed is the stop-work order. This clause is included in federal contracts for supplies, services, and R&D, and in both fixed-price and cost-reimbursement contracts. It permits the contracting officer to issue a written order to the contractor to stop all or any part of the contract work for up to 90 days. Within that 90-day period, or any additional extension of the 90-day period to which the contractor has agreed, the contracting officer must either revoke the stop-work order or terminate the contract for the government’s convenience. If the stop-work order is lifted, the contractor has 30 days after the end of the work stoppage to submit a written claim for increased costs. The contracting officer must allow all timely submitted, reasonable costs incurred by the contractor for the stoppage. If the agency terminates the contract for convenience, the contractor is entitled to recovery of all reasonable costs of termination plus profit on all work completed.

Fixed-price supply and service contracts for non-commercial items also will include a Government delay of work clause. Under this clause, the contractor is entitled to recover for increased costs resulting from delays or interruptions in the performance of the work caused by any overt act of the contracting officer or the failure of the contracting officer to take a contractually required action in a timely manner. Recovery of costs for government delay of work do not require a written order by the contracting officer. A delay caused, for example, by a decision of the customer agency to send government employees home on furlough may cause a contractor serving that agency to incur a costly delay. Such costs are recoverable under the delay of work clause. In the case of a delay of work, the contractor may only recover costs incurred within the 20 days before the contractor gives written notice of the cause of the delay to the contracting officer. If a contractor suffers a government-caused delay, it should immediately calendar its notice deadlines and file written notices to preserve its right to recover delay costs.

Contracts that are not for commercial items and services also will contain a changes clause that gives the government the unilateral right to change certain terms of the contract, including in the case of services, the time of performance. The contractor is entitled to an equitable adjustment to the contract price, schedule, or both to compensate for the change. Changes may occur as a result of an express contract modification or constructively as a result of other government actions. In either case, the contractor is entitled to an equitable adjustment to the contract for all changes, provided that it has given written notice to the contracting officer within 30 days after the change is imposed. If a contractor does experience an express or constructive change to the contract, it also must immediately begin to separately account for all its incurred, segregable costs that are allocable to the change. Failure to do so will make recovery of those costs more difficult, if not impossible.

Commercial item contracts for goods and services are not required to contain a delay or stop-work clause, though many do. The standard changes clause in a commercial item contract requires mutual agreement of the government and the contractor to any modification, though it is not uncommon for that clause to be replaced with a non-commercial changes clause. Each contract should be reviewed to determine the steps required of the contractor to preserve its right to recover for government delays and changes resulting from even a short period of sequestration.

©1994-2013 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

Key Financial Industry Regulatory Authority (FINRA) Regulatory Focus of 2013: Retail Sales of Complex Products, According to Annual Letter [VIDEO]

The National Law Review recently published an article, Key Financial Industry Regulatory Authority (FINRA) Regulatory Focus of 2013: Retail Sales of Complex Products, According to Annual Letter [VIDEO], written by Mark T. Carberry with Neal, Gerber & Eisenberg LLP:

Neal Gerber

In January, the Financial Industry Regulatory Authority (FINRA) published its annual letter identifying its regulatory and examination priorities for 2013, a document intended to “represent [FINRA’s] current assessment of the key investor protection and market integrity issues on which [FINRA] will focus in the coming year.”

Although numerous such issues were identified by FINRA in its letter, including issues relating to the sale of private placement securities, anti-money laundering compliance, insider trading, margin lending practices, and algorithmic trading, a substantial focus for 2013 relates to suitability concerns and the sale of complex products to retail investors.

Economic Environment Sharpens FINRA’s Concern

FINRA specified in its letter a number of current general economic factors giving rise to concerns about retail investors purchasing complex products:

  • FINRA believes the “slow growth, low-interest rate environment…” has challenged retail customers to seek returns outside their stated risk tolerance;
  • “[A]n unprecedented compression of credit risk premiums and yields…;”
  • The fact that retail investors are, therefore, increasingly transferring funds from equity to debt markets;
  • Retail investor “appetite for yield…” has increased prices on investment-grade and high-yield debt issues, limiting substantially upside growth while exacerbating risk of loss.

In light of the above factors, FINRA expressed its particular concern “about sales practice abuses, yield-chasing behaviors and the potential impact of any market correction, external stress event or market dislocation on market prices.”

3 Complex Products Earn Particular FINRA Scrutiny

While FINRA’s assessment again identifies numerous complex products in previous annual reviews, including non-traded REITs and leveraged and inverse ETFs, FINRA singled-out the following three “recently surfaced…” products as potentially unsuitable for retail investors in the current economic environment, given their underlying market, credit and liquidity risk factors:

  • Business Development Companies (BDCs): BDCs, typically closed-end investment companies, are highlighted due to, among other things, their investment in the corporate debt and equity of private companies;
  • Leveraged Loan Products: These adjustable-rate loans are extended by financial institutions to companies with low credit quality;
  • Commercial Mortgage-Backed Securities: FINRA is concerned retail investors are not being advised by their registered representatives of the “considerable risks given today’s low-interest-rate, low-yield environment.”

FINRA’s Recommended Supervisory Points of Emphasis

Supervisory policies and procedures regarding the sale of complex products to retail investors will be subject to particular scrutiny in 2013. FINRA’s Regulatory Notice 12-03 (“Complex Products-Heightened Supervision of Complex Products”), offers substantial guidance regarding heightened supervisory procedures that may be appropriate. In brief, some of these supervisory procedures may include:

  • Suitability: Is there a process to ensure the mandatory suitability analyses have been undertaken, particularly in light of FINRA’s revised suitability rule (FINRA Rule 2111)?
  • Post-Approval Review: Is there a supervisory process in place to reassess – post-sale – the performance and risk profile of existing complex products? Does this process also capture any complaints received from customers relating to a particular complex product?
  • Training: Registered representatives who recommend complex products must have a thorough understanding of all features and risks of a given product to enable them to articulate such features and risks to retail clients. Have sufficient resources been allocated to such training, and is there a process in place to ensure this training was utilized and effective?
  • Financial Sophistication of Clients: FINRA recommends that firms adopt the approach mandated for options trading accounts – that financial advisors must have a reasonable basis to believe that a retail client is sufficiently knowledgeable in financial matters, that he or she is capable of evaluating the risks of a recommended transaction and that the client can bear the associated financial risks.
  • Discussions with the Client: In recommending a complex product, a registered representative should thoroughly discuss all features of the product, how the product is expected to perform under different market conditions, the risks of the product and potential returns and the costs of the product. Fundamentally this should be undertaken in a manner most likely to facilitate the client’s understanding of the product.

In sum, as advised in its letter, FINRA is “particularly concerned about firms’ and registered representatives’ full understanding of complex or high-yield products, potential failures to adequately explain the risk-versus-return profile of certain products, as well as a disconnect between customer expectations and risk tolerances.”

For these reasons, supervisory procedures regarding sales of complex products to retail investors in large part must be designed – and enforced – with the intent to give financial advisors the ability to provide credible, substantive responses to the regulatory inquiry, “How did you educate yourself regarding the particular features and risk factors of this product?” and “How did you effectively communicate that information to your (suitable) client?”

© 2013 Neal, Gerber & Eisenberg LLP

Securities and Exchange Commission’s (SEC) Rule 10b5-1 Trading Plans Under Scrutiny

The National Law Review recently published an article, Securities and Exchange Commission’s (SEC) Rule 10b5-1 Trading Plans Under Scrutiny, written by the Financial, Corporate Governance and M&A Litigation Group of Barnes & Thornburg LLP:

Barnes & Thornburg

 

For more than a decade, corporate officers and directors of publicly traded companies have relied on trading plans, known as Rule 10b5-1 trading plans, in order to trade stock in their companies without running afoul of laws prohibiting corporate “insiders” from trading on material information not known to the general public. Historically, effective 10b5-1 plans have provided corporate insiders with an affirmative defense to allegations of unlawful insider trading.

Such plans typically involve a prior agreement between a corporate executive or board member and his or her broker. Under such agreements, the insider would provide standing trading instructions to the broker, requiring the broker to trade at a set stock price or a set time, for example. The broker would then effect the trade at the required price or time, regardless of the information held by the insider.

Recently, notwithstanding the Securities and Exchange Commission’s (SEC) longtime knowledge of potential abuses, such 10b5-1 plans have been under fire. In a Nov. 27, 2012, article in the Wall Street Journal titled “Executives’ Good Luck in Trading Own Stock,” the authors aired several complaints about such plans, including that “[c]ompanies and executives don’t have to file these trading plans with any federal agency. That means the plans aren’t readily available for regulators, investors or anyone else to examine. Moreover, once executives file such trading plans, they remain free to cancel or change them—and don’t have to disclose that they have done so. Finally, even when executives have such a preset plan, they are free to trade their companies’ stock at other times, outside of it.” The article went on to chronicle several purported abuses by officers and directors of such plans.

The current regulatory environment has simultaneously raised suspicions about plans and trades that are innocent, and potentially provided shelter for others that may be less so. In fact, in a Feb. 5, 2013, article in the Wall Street Journal entitled “SEC Expands Probe on Executive Trades,” the author noted that “[t]he Securities and Exchange Commission, expanding a high-profile investigation, is gathering data on a broad number of trades by corporate executives in shares of their own companies, according to people familiar with the probe.”

It would appear, from news like this, that the SEC is concerned that corporate insiders are adopting or amending 10b5-1 plans when in possession of non-public information that might affect market participants’ decision to trade in the company’s stock. Such changes could nullify the use of a 10b5-1 plan as a defense.

Seemingly in reaction to the perceived manipulation of 10b5-1 plans, the Council of Institutional Investors (CII) submitted a letter to the SEC on Dec. 28, 2012, requesting that the SEC implement rulemaking to impose new requirements with respect to Rule 10b5-1 trading plans. The CII letter calls for company boards of directors to become explicitly responsible for monitoring 10b5-1 plans, which undoubtedly will subject boards to increased scrutiny by the SEC. In addition, the CII letter proposes stricter regulatory rules including:

  • Adoption of 10b5-1 plans may occur only during a company open trading window
  • Prohibition of an insider having multiple, overlapping 10b5-1 plans
  • Mandatory delay of at least three months between 10b5-1 plan adoption and the first trade under the plan
  • Prohibition on frequent modifications/cancellations of 10b5-1 plan

The CII also advocates pre-announced disclosure of 10b5-1 plans and immediate disclosure of plan amendments and plan transactions. Under the CII’s suggested new rules, a corporate board also would be required to adopt policies covering 10b5-1 plan practices, monitor plan transactions, and ensure that such corporate policies discuss plan use in a variety of contexts. A similar set of suggestions can be found in Wayne State University professor Peter J. Henning’s Dec. 10, 2012, article, “The Fine Line Between Legal, and Illegal, Insider Trading,” found online at:  http://dealbook.nytimes.com/2012/12/10/the-fine-line-between-legal-and-illegal-insider-trading/.

Given the uncertainty in the market concerning the current use of Rule 10b5-1 plans and the future of such plans, companies or individuals who may be subject to Rule 10b5-1 plans and/or future regulations in this area should consult with counsel before adopting or amending such plans.

© 2013 BARNES & THORNBURG LLP

Trade Secret Misappropriation: When An Insider Takes Your Trade Secrets With Them

Raymond Law Group LLC‘s Stephen G. Troiano recently had an article, Trade Secret Misappropriation: When An Insider Takes Your Trade Secrets With Them, featured in The National Law Review:

RaymondBannerMED

While companies are often focused on outsider risks such as breach of their systems through a stolen laptop or hacking, often the biggest risk is from insiders themselves. Such problems of access management with existing employees, independent contractors and other persons are as much a threat to proprietary information as threats from outside sources.

In any industry dominated by two main players there will be intense competition for an advantage. Advanced Micro Devices and Nvida dominate the graphics card market. They put out competing models of graphics cards at similar price points. When played by the rules, such competition is beneficial for both the industry and consumers.

AMD has sued four former employees for allegedly taking “sensitive” documents when they left to work for Nvidia. In its complaint, filed in the 1st Circuit District Court of Massachusetts, AMD claims this is “an extraordinary case of trade secret transfer/misappropriation and strategic employee solicitation.” Allegedly, forensically recovered data show that when the AMD employees left in July of 2012 they transferred thousands of files to external hard drives that they then took with them. Advanced Micro Devices, Inc. v. Feldstein et al, No. 4:2013cv40007 (1st Cir. 2013).

On January 14, 2013 the District Court of Massachusetts granted AMD’s ex-parte temporary restraining order finding AMD would suffer immediate and irreparable injury if the Court did not issue the TRO. The TRO required the AMD employees to immediately provide their computers and storage devices for forensic evaluation and to refrain from using or disclosing any AMD confidential information.

The employees did not have a non-compete contract. Instead the complaint is centered on an allegation of misappropriation of trade secrets. While both AMD and Nvidia are extremely competitive in the consumer discrete gpu market involving PC gaming enthusiasts, there are rumors that AMD managed to secure their hardware to be placed in both forthcoming next-generation consoles, Sony PlayStation 4 and Microsoft Xbox 720. AMD’s TRO and ultimate goal of the suit may therefore be to preclude any of their proprietary technology from being used by its former employees to assist Nvidia in the future.

The law does protect companies and individuals such as AMD from having their trade secrets misappropriated. The AMD case has only recently been filed and therefore it is unclear what the response from the employees will be. What is clear is how fast AMD was able to move to deal with such a potential insider threat. Companies need to be aware of who has access to what data and for how long. Therefore, in the event of a breach, whether internal or external, companies can move quickly to isolate and identify the breach and take steps such as litigation to ensure their proprietary information is protected.

© 2013 by Raymond Law Group LLC

The Debate Rages On Regarding Whether Default Fiduciary Duties Apply to LLC Managers Under Delaware Law

Bracewell & Giuliani Logo

Earlier this year, we reported on the Delaware Court of Chancery’s decision in Auriga Capital Corp. v. Gatz Properties, LLC, wherein Chancellor Strine held that traditional fiduciary principles apply to LLC managers or members by default. See Delaware Chancery Court Clarifies that Default Fiduciary Duties Apply to LLC Managers, March 15, 2012 available here (discussing Auriga Capital Corp. v. Gatz Properties, LLC, No. C.A. 4390-CS, 2012 WL 361677 (Del. Ch. Jan. 27, 2012)). We emphasized that “until the Delaware Supreme Court or General Assembly state otherwise, Chancellor Strine has definitively established that LLC managers are governed by the same well-established fiduciary duties applicable to corporate fiduciaries, unless explicitly stated otherwise in the LLC Agreement.”

On November 7, 2012, the Delaware Supreme Court issued its decision on appeal. In an en banc opinion, the Supreme Court affirmed the Court of Chancery decision, but declined to reach the issue whether default fiduciary duties exist for LLC managers. See Gatz Properties, LLC v. Auriga Capital Corp., No. 148, 2012 (Nov. 7, 2012). The Supreme Court instead affirmed on the ground that the defendants breached their fiduciary duties arising from an express contractual provision in the operating agreement of the LLC. The Supreme Court’s analysis focused on Section 15 of the LLC Agreement. Section 15 provided, in pertinent part, that no member or manager was permitted to cause the company to “enter into any additional agreements with affiliates on terms and conditions which [were] less favorable to the Company than the terms and conditions of similar agreements which could then be entered into with arms-length third parties . . . .”  Emphasizing that “there is no requirement in Delaware that an LLC agreement use magic words, such as ‘entire fairness’ or ‘fiduciary duties[,]'” the Supreme Court construed Section 15 as an explicit contractual assumption by the contracting parties of a fiduciary duty to obtain a fair price for the LLC in transactions between the LLC and affiliated persons. Viewing Section 15 functionally, the Supreme Court treated it as the contractual equivalent of the entire fairness standard of conduct and judicial review.  Thus, because there was no approving vote by the majority of the Company’s minority members, the Supreme Court held that the defendant – the LLC’s manager – had the burden of establishing the entire fairness of the transaction. Referencing the defendant’s trial testimony and the evidentiary record, the Supreme Court held that he failed to meet this burden, and thus affirmed the Court of Chancery’s holding that he had breached his contractually adopted fiduciary duties.1

While the Supreme Court’s contractual analysis is instructive, the decision has garnered far more attention based on the Supreme Court’s analysis of Chancellor Strine’s holding that default fiduciary duties apply to LLC managers, which it characterized as “dictum without any precedential value.” The Supreme Court reasoned that “[w]here, as here, the dispute over whether fiduciary standards apply could be decided solely by reference to the LLC Agreement, it was improvident and unnecessary for the trial court to reach out and decide, sua sponte, the default fiduciary duty issue as a matter of statutory construction.” The Supreme Court thus intentionally left unresolved the question whether default fiduciary duties apply to managers of an LLC.

However, the debate regarding default fiduciary duties did not end there. Just a few weeks later, Vice Chancellor Laster revisited the issue in Feeley v. NJAOCG, C.A. No. 7304-VCL (Del. Ch. Nov. 28, 2012), a case that, unlike Auriga, put the question of default fiduciary duties squarely before the court. Though he acknowledged that the Auriga decision could not be relied upon as precedent, Vice Chancellor Laster nonetheless adopted Chancellor Strine’s analysis, “afford[ing] his views the same weight as a law review article, a form of authority the Delaware Supreme Court often cites.” Based on Chancellor Strine’s reasoning and “the long line of Chancery precedents holding that default fiduciary duties apply to the managers of an LLC[,]” the Court held that default fiduciary duties apply to LLC managers. Vice Chancellor Laster recognized, however, that “[t]he Delaware Supreme Court is of course the final arbiter on matters of Delaware law.”

Thus, in many ways these two decisions bring things full circle. Until the Delaware Supreme Court or General Assembly address the question whether default fiduciary duties exist for managers of Delaware LLCs, Delaware Chancery precedent provides that they do.  However, while this may suggest extra caution be used when drafting an LLC agreement, the Supreme Court’s contractual analysis in the Auriga decision suggests that the question of default fiduciary duties may often be beside the point. Even in the absence of magic language regarding “fiduciary duties” or “entire fairness,” imprecise language in an LLC agreement may be construed as a contractual assumption by the LLC manager to abide by traditional fiduciary duties. Thus, while we do not expect that Chancellor Strine’s Feeley decision represents the last word in the default fiduciary duty debate, the lesson is the same: LLC agreements should be drafted to expressly address the nature and scope of the LLC managers’ fiduciary duties, or to specifically eliminate fiduciary duties altogether.

1 The Supreme Court also affirmed the Court of Chancery’s determination that the LLC Agreement did not exculpate or indemnify the LLC’s manager due to his bad faith and willful misrepresentations, as well as its awards of damages and attorneys’ fees.

© 2013 Bracewell & Giuliani LLP

Foreign Corrupt Practices Act Conference – October 18-19, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Foreign Corrupt Practices Act Conference:

When

October 18 – 19, 2012

Where

  • The Westin Grand Hotel
  • 2350 M St NW
  • Washington, DC, 20037-1417
  • United States of America

Program Description

As enforcement of anti-corruption laws in the United States and abroad continues to be a top priority for law enforcement, the Institute will provide a timely and substantive briefing on developments to companies, their officers, and employees. This year’s program will continue to examine trends stemming from recent proceedings brought by the U.S. Department of Justice and the Securities and Exchange Commission (SEC) as well as address recent challenges to the FCPA both in Congress and the courts.

The Institute will also provide a more in-depth focus on certain recurring issues faced by practitioners and companies alike. Whether examining liability presented by other federal and non-U.S. laws in the event of a potential FCPA violation or minimizing liability in connection with complex international business transactions, the program will provide practical tips from experienced government, corporate, and private practitioners. In addition, the Institute will feature both an in-house perspectives panel and, for the first time, a panel dedicated to SEC enforcement and how it has evolved since the SEC’s establishment of its FCPA unit.

SEC Adopts Compensation Committee and Adviser Independence Rules

Morgan, Lewis & Bockius LLP‘s David A. Sirignano, Amy I. Pandit, and Albert Lung recently had an article regarding The SEC’s New Rules featured in The National Law Review:

 

 

New rules address compensation committee member and adviser independence and disclosure requirements for compensation consultant conflicts of interest.

On June 20, the Securities and Exchange Commission (SEC) adopted final rules directing national securities exchanges and national securities associations (collectively, the exchanges) to establish listing standards addressing the independence of compensation committee members; the committee’s authority to retain Compensation Advisers (as defined below); and the committee’s responsibility for the appointment, compensation, and oversight of its advisers. The final rules implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which added Section 10C of the Securities Exchange Act of 1934, as amended (the Exchange Act), and which requires the SEC to adopt rules directing the exchanges to prohibit the listing of any equity security of an issuer that is not in compliance with Section 10C’s compensation committee and Compensation Adviser requirements. The final rules also amend Item 407 of Regulation S-K to require companies to provide additional disclosures in their proxy statements on conflicts of interest of compensation consultants.

Under the final rules, the exchanges are required to propose new listing standards by September 25, 2012, and must have final rules or amendments that comply with Rule 10C-1 of the Exchange Act by June 27, 2013. Companies must provide new disclosures on conflicts of interest of compensation consultants in any proxy or information statement for an annual or special meeting of stockholders at which directors will be elected occurring on or after January 1, 2013.

Compensation Committee Independence Requirements

New Rule 10C-1 of the Exchange Act directs the exchanges to adopt new listing standards requiring a compensation committee to be composed solely of independent members of the board of directors, and requires the exchanges to establish new independence criteria for these members. While the final rules do not require a company to have a compensation committee, the new independence criteria, as well as the requirements relating to the consideration of a Compensation Adviser’s independence and requirements relating to the responsibility for the appointment, compensation, and oversight of Compensation Advisers, are equally applicable to any board committee performing the functions typically performed by a compensation committee. In formulating the new independence standards, the exchanges are instructed to consider relevant factors, which must include the following:

  • The sources of compensation, including consulting, advisory, or other fees paid by the issuer to such member of the board of directors.
  • Whether the board member is affiliated with the company, any subsidiary of the company, or an affiliate of a subsidiary of the issuer.

The exchanges may consider additional relevant criteria, such as share ownership or business relationships with the issuer. The SEC emphasizes that the exchanges are provided with the flexibility to develop their own independence standards consistent with the nature and types of listed companies. In this regard, the SEC notes that it may not be appropriate to prohibit directors affiliated with large stockholders, such as private equity funds and venture capital firms, from serving on a compensation committee. The SEC recognizes that directors elected by certain funds may have a strong institutional belief in the importance of appropriately structured and reasonable compensation arrangements and that their significant equity ownership may align the directors’ interests with public stockholders on matters of executive compensation.

The final rules also reiterate an important distinction between the compensation committee independence requirements under Section 952 of the Dodd-Frank Act and the existing independence requirements for audit committee members under Rule 10A-3 of the Exchange Act. While the audit committee independence rules prohibit a director from serving on the audit committee if such director accepts consulting or advisory fees or is otherwise affiliated with the listed company or any of its subsidiaries, the Dodd-Frank Act does not require any mandatory exclusion of compensation committee membership due to these factors. Instead, the final rules only require that these two factors be considered in determining the independence of compensation committee members.

Exemptions from Independence Standards

The following categories of listed issuers are not subject to the independence standards described above:

  • Limited partnerships
  • Companies in bankruptcy proceedings
  • Open-end management investment companies registered under the Investment Company Act of 1940
  • Any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee

The exchanges may exempt from the independence requirements a particular relationship with respect to members of the compensation committee as each exchange may determine, taking into consideration the size of an issuer and any other relevant factors.

Compensation Adviser Requirements

Authority and Oversight

The final rules require the exchanges to adopt listing standards providing the compensation committee with full discretion and authority to retain and obtain the advice of compensation consultants, independent legal counsel, and other advisers (collectively, Compensation Advisers). The compensation committee will be directly responsible for the appointment, compensation, and oversight of Compensation Advisers, and listed companies must provide appropriate funding to the compensation committee to retain these advisers. The final rules also make clear that the compensation committee is not required to obtain the advice or recommendation of any independent Compensation Adviser or to follow its advice.

Assessment of Compensation Adviser Independence

While the compensation committee is not required to retain any independent Compensation Adviser, the compensation committee is required to assess the independence of each Compensation Adviser prior to the Compensation Adviser being retained and to consider the following six factors (as well as any other factors identified by the relevant exchange):

  • Whether the employer of the Compensation Adviser is providing any other services to the issuer
  • The amount of fees received from the issuer by the employer of the Compensation Adviser as a percentage of such employer’s total revenue
  • Policies and procedures that have been adopted by the employer of the Compensation Adviser to prevent conflicts of interest
  • Any business or personal relationship of the Compensation Adviser with a member of the compensation committee
  • Any stock of the issuer owned by the Compensation Adviser
  • Any business or personal relationship of the Compensation Adviser or employer of the Compensation Adviser with an executive officer of the issuer

The final rules clarify that these six factors should be considered as a whole, and no one factor is determinative or controlling. This list is not exhaustive, and the exchanges may consider other relevant factors in determining the independence assessment requirement.

The final rules also state that a listed issuer’s compensation committee is required to conduct the independence assessment outlined above with respect to any Compensation Adviser that provides advice to the compensation committee, other than in-house legal counsel.

General Exemptions

The requirements relating to both the independence of compensation committees and the independence of Compensation Advisers shall not apply to the following categories of issuers:

  • Controlled companies (companies where more than 50% of the voting power for the election of directors is held by an individual, a group, or another entity)
  • Smaller reporting companies

The exchanges may also choose to exempt from the above-described requirements any further categories of issuers the exchanges determine appropriate.

In addition, the rules adopted by the exchanges must provide for appropriate procedures for a listed issuer to have a reasonable opportunity to cure any defects that would be a prohibition for listing. Such rules may provide that if a member of a compensation committee ceases to be independent in accordance with the requirements of Rule 10C-1 of the Exchange Act for reasons outside the member’s reasonable control, that person, with notice by the issuer to the applicable exchange, may remain a compensation committee member of the listed issuer until the earlier of (i) the date of the next annual stockholder meeting of the listed issuer or (ii) one year from the occurrence of the event that caused the member to be no longer independent.

Conflicts of Interest Disclosures

The final rules amend Item 407(e) of Regulation S-K to expand the current proxy disclosure requirements regarding compensation consultants identified by listed issuers in their SEC disclosures, pursuant to Item 407(e)(3)(iii) of Regulation S-K, as having played a role in determining or recommending the amount or form of executive or director compensation. The final rules will require additional disclosures on (i) whether the work of a compensation consultant raised any conflict or interest, and (ii) if so, the nature of such conflict and how the conflict is being addressed. The new disclosure requirement applies only to conflicts of interest with respect to a compensation consultant, not to outside legal counsel or other advisers.

The final rules do not provide any definition of “conflicts of interest,” and companies should consider their specific facts and circumstances in making such a determination. However, the final rules instruct companies to consider the same six factors described above relating to the independence of Compensation Advisers in analyzing whether conflicts of interest exist.

The new disclosure requirements will be applicable to all reporting companies subject to the proxy rules, regardless of whether the company is listed on an exchange. Accordingly, smaller reporting companies and controlled companies will also be required to provide the additional disclosures, although foreign private issuers will be exempt from such requirements.

Practical Considerations

Assessment of compensation committee composition: While the new compensation committee independence requirements may not become effective until after the 2013 proxy season, companies should begin analyzing the composition of the compensation committee to determine whether the independence of any director may be affected by the new listing standards.

Review of the compensation committee charter and director and officer questionnaire: The new listing standards are likely to require companies to review and update compensation committee charters and director and officer questionnaires to reflect the new independence criteria for directors.

Analysis of Compensation Adviser independence and conflicts of interest: Given that new factors must be considered in determining the independence of Compensation Advisers, companies and compensation committees should be proactive in establishing or updating procedures for collecting the information necessary to conduct the required independence and conflicts of interest analysis. This may include new screening questionnaires for Compensation Advisers, additional interview sessions, and committee meetings to discuss independence and potential conflicts of interest. The collection of such information should be part of an enhanced disclosure and control procedure designed to ensure that companies can prepare and determine, in a timely manner, whether there are independence questions warranting further discussion regarding Compensation Advisers and if there will be conflicts of interest disclosures relating to compensation consultants in their proxy statements.

Copyright © 2012 by Morgan, Lewis & Bockius LLP

Foreign Corrupt Practices Act Conference – October 18-19, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Foreign Corrupt Practices Act Conference:

When

October 18 – 19, 2012

Where

  • The Westin Grand Hotel
  • 2350 M St NW
  • Washington, DC, 20037-1417
  • United States of America

  • Program Description

As enforcement of anti-corruption laws in the United States and abroad continues to be a top priority for law enforcement, the Institute will provide a timely and substantive briefing on developments to companies, their officers, and employees. This year’s program will continue to examine trends stemming from recent proceedings brought by the U.S. Department of Justice and the Securities and Exchange Commission (SEC) as well as address recent challenges to the FCPA both in Congress and the courts.

The Institute will also provide a more in-depth focus on certain recurring issues faced by practitioners and companies alike. Whether examining liability presented by other federal and non-U.S. laws in the event of a potential FCPA violation or minimizing liability in connection with complex international business transactions, the program will provide practical tips from experienced government, corporate, and private practitioners. In addition, the Institute will feature both an in-house perspectives panel and, for the first time, a panel dedicated to SEC enforcement and how it has evolved since the SEC’s establishment of its FCPA unit.

Foreign Corrupt Practices Act Conference – October 18-19, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Foreign Corrupt Practices Act Conference:

When

October 18 – 19, 2012

Where

  • The Westin Grand Hotel
  • 2350 M St NW
  • Washington, DC, 20037-1417
  • United States of America

  • Program Description

As enforcement of anti-corruption laws in the United States and abroad continues to be a top priority for law enforcement, the Institute will provide a timely and substantive briefing on developments to companies, their officers, and employees. This year’s program will continue to examine trends stemming from recent proceedings brought by the U.S. Department of Justice and the Securities and Exchange Commission (SEC) as well as address recent challenges to the FCPA both in Congress and the courts.

The Institute will also provide a more in-depth focus on certain recurring issues faced by practitioners and companies alike. Whether examining liability presented by other federal and non-U.S. laws in the event of a potential FCPA violation or minimizing liability in connection with complex international business transactions, the program will provide practical tips from experienced government, corporate, and private practitioners. In addition, the Institute will feature both an in-house perspectives panel and, for the first time, a panel dedicated to SEC enforcement and how it has evolved since the SEC’s establishment of its FCPA unit.

Foreign Corrupt Practices Act Conference – October 18-19, 2012

The National Law Review is pleased to bring you information regarding the upcoming ABA Foreign Corrupt Practices Act Conference:

When

October 18 – 19, 2012

Where

  • The Westin Grand Hotel
  • 2350 M St NW
  • Washington, DC, 20037-1417
  • United States of America

  • Program Description

As enforcement of anti-corruption laws in the United States and abroad continues to be a top priority for law enforcement, the Institute will provide a timely and substantive briefing on developments to companies, their officers, and employees. This year’s program will continue to examine trends stemming from recent proceedings brought by the U.S. Department of Justice and the Securities and Exchange Commission (SEC) as well as address recent challenges to the FCPA both in Congress and the courts.

The Institute will also provide a more in-depth focus on certain recurring issues faced by practitioners and companies alike. Whether examining liability presented by other federal and non-U.S. laws in the event of a potential FCPA violation or minimizing liability in connection with complex international business transactions, the program will provide practical tips from experienced government, corporate, and private practitioners. In addition, the Institute will feature both an in-house perspectives panel and, for the first time, a panel dedicated to SEC enforcement and how it has evolved since the SEC’s establishment of its FCPA unit.