Transcript Slide 1

2008 R&T/CFP SEMINAR ON INDUSTRY TOPICS
Hyatt Regency Jersey City on the Hudson
Jersey City, New Jersey
June 2-3, 2008
Understanding the Changes to Rule 144
and Corporate Governance Best Practices
By
Craig M. Scheer, P.C.
Silver, Freedman & Taff, L.L.P.
3299 K Street, N.W., Suite 100
Washington, D.C. 20007
(202) 295-4500 (main)
(202) 295-4525 (direct dial)
[email protected]
©Silver, Freedman & Taff, L.L.P. 2008
Understanding the Changes to Rule 144
and Corporate Governance Best Practices
Topics:
 Changes to Rule 144
 Insider Trading Policies and Procedures
 Rule 10b5-1 Trading Plans
 Compensation Committee Best Practices
 Equity Grant Procedures
 Advance Notice and Other Bylaw
Provisions
 Board and Board Committee Minutes
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Changes to Rule 144
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Changes to Rule 144
Background
 Safe harbor exemption from 1933 Act registration
requirements for resales of securities.
 Two categories of securities covered:
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Restricted securities: securities acquired in a transaction or
series of transactions not registered under 1933 Act.
Control securities: securities held by affiliates (generally
directors, executive officers and greater than 10% stockholders),
regardless of how acquired. Control securities may or may not
also be restricted securities.
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Changes to Rule 144
Conditions of Rule 144 Before Amendments
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One-year holding period on resales of restricted securities.
Additional conditions on resales of control securities
(restricted or unrestricted) and resales of restricted
securities by non-affiliates held for at least one year but
less than two years:
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Issuer subject to 1934 Act at least 90 days and current in 10-K
and 10-Q filings.
Amount of securities sold during preceding three months by seller
and those aggregated with seller cannot exceed greater of 1% of
shares outstanding or average trading volume during preceding
four calendar weeks.
Must be sold in “brokers’ transactions” or directly with a market
maker.
Notice on Form 144 must be filed with SEC and applicable
securities exchange concurrent with sell order if amount to be sold
in any three month period exceeds 500 shares or aggregate sale
price exceeds $10,000.
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Changes to Rule 144
Conditions of Rule 144 After Amendments
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Holding period for restricted securities issued by SEC
reporting company shortened from one year to six months.
After six months but before one year non-affiliates can sell
if issuer current in 10-K and 10-Q filings. Affiliates must
comply with additional requirements for control securities.
Holding period for restricted securities issued by non-SEC
reporting company remains one year.
Conditions on resales of control securities same as before
amendment, except:
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Alternative volume calculation for debt and debt-like securities.
Manner of sale requirement eliminated for debt securities and
liberalized for equity securities.
Form 144 filing threshold raised to 5,000 shares or aggregate sale
price of $50,000 (up from 500 and $10,000, respectively).
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Changes to Rule 144
Rule 145
 “Presumptive underwriter” doctrine – previously
subjected affiliates of target companies in stock
merger transactions to Rule 144 control
securities resale restrictions for one year after
merger and to Rule 144 current public
information requirement during second year
after merger.
 No longer applies, except to transactions
involving shell companies (other than business
combination-related shell companies).
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Changes to Rule 144
Practical Implications
 Should increase liquidity of privately sold,
restricted securities.
 Should decrease cost of raising capital, as
issuers can negotiate smaller illiquidity discount
to market price.
 Shortening of holding period for restricted
securities may obviate or lessen investors’
needs for registration rights.
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Insider Trading Policies
and Procedures
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Insider Trading Policies and Procedures
Overview
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Recent focus on insider trading enforcement by SEC.
Focus is not just on individuals trading, but also
companies themselves.
Retirement Systems of Alabama and Chanin Capital LLC.
Potential liability for company to SEC and private
plaintiffs for failing to take steps to prevent insider
trading by “controlled perons” (directors, officers and
employees).
If don’t have a written insider trading policy, get one. If
do have a policy, periodically review it and consistently
enforce it.
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Insider Trading Policies and Procedures
Key Points to Consider When Establishing/
Reviewing Insider Trading Policy
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Keep it simple.
All directors and employees should be subject to it.
Window periods.
Require preclearance for insiders.
10b5-1 plans.
Gifts.
Other restrictions:
 Short sales
 Standing orders
 Margin accounts and pledges
 Publicly traded options
 Hedging transactions
 Post-termination transactions
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Insider Trading Policies and Procedures
What to do now
 Adopt written policy if don’t have one already.
 If do have policy, review key components and
ensure consistently enforced.
 Periodically remind directors, officers and
employees in writing of the rules.
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Rule 10b5-1 Trading Plans
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Rule 10b5-1 Trading Plans
Overview
 What is a 10b5-1 trading plan?
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SEC Rule 10b5-1 allows a person (typically a director or officer)
to purchase or sell a company’s securities, even while in
possession of material non-public information, provided that the
transaction is made pursuant to a plan that (1) specifies the
amount, price and date on which securities are to be purchased
or sold and (2) is established at a time when the trading person
was not aware of material non-public information.
Heightened scrutiny of late by SEC and others.
Company responses to recent scrutiny:
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Prohibit use of plans by insiders?
Require use of plans by insiders when trading?
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Rule 10b5-1 Trading Plans
How to Structure 10b5-1 Plans in Light of
Recent Scrutiny
 Put it in writing – technically doesn’t have to be,
but always should be.
 Keep it simple.
 No subsequent influence over trades.
 Waiting period before first trade.
 Amending and terminating plans.
 Allow for necessary suspensions.
 Avoid trading outside of adopted plans.
 Ensure compliance with Form 4 and Form 144
(for sales) filing obligations.
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Rule 10b5-1 Trading Plans
Other Considerations
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Can be useful for benefit plan transactions.
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Issuer repurchases.
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Option exercises and sales.
Sale of restricted stock upon vesting to cover taxes.
Allows company to be in market at times when otherwise
prohibited, but relinquish control over when repurchases made.
Should company publicly announce adoption of plans by
insiders or company?
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Not required, but can bolster case that plan was established at
time claimed to be established.
Not clear how much detail to provide, but SEC is very interested
in these disclosures, especially those that are “asymmetrical”
(e.g., disclosure of plan adoption but no disclosure of plan
amendment or termination).
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Compensation Committee
Best Practices
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Compensation Committee Best
Practices
What is a tally sheet?
 Centerpiece of best compensation committee
practices.
 Identification and quantification of all elements
of the executive’s pay, including compensation
that would be owed to him or her upon
retirement or other termination of employment.
 Shouldn’t just be an annual exercise – tally
sheet should be reviewed and discussed before
making any decision on the executive’s pay.
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Compensation Committee Best
Practices
What should go into the tally sheet?
 Tailored to fit each executive’s compensation
package.
 Should capture all elements.
 Can generally track SEC compensation disclosure
rules, but not a perfect fit.
 Numerical components of tally sheet will be
reflected in various areas of compensation
disclosures.
 Disclosure of compensation committee practices
should include discussion of tally sheet exercise.
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Compensation Committee Best
Practices
Other Things Compensation Committees
Should Be Doing
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Reevaluate compensation philosophies and components of
existing program.
Accumulated wealth analysis.
Survey use – don’t cherry pick, and must disclose peers.
Internal pay equity – material differences in pay among officers
may require explanation in CD&A.
Employment agreement provisions:
 Evergreen provisions
 Definition of “termination for cause”
 Change in control payouts
 Gross-ups
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Compensation Committee Best
Practices
Other Things Compensation Committees
Should Be Doing (continued)
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Compensation consultants should be engaged by and report
directly to the compensation committee.
Compensation committee charter – should have one even if not
required (only required for NYSE-listed companies).
Director compensation:
 Trend away from meeting fees in favor of annual retainers
 Increased proportion of pay in equity
 General disdain for director “retirement” plans
 Reduction or discontinuation of perquisites
“Say on pay” initiatives.
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Equity Grant Procedures
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Equity Grant Procedures
General
 Still a white hot area – numerous SEC
investigations ongoing and guilty pleas
continuing to roll-in for backdating. Recent
Broadcom enforcement action shows SEC’s
interest has not waned.
 Restatements.
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Equity Grant Procedures
Practices Being Scrutinized
 Backdating - choosing a grant date with the benefit of
hindsight so that the date selected is earlier than the
date on which the grant was actually approved, with the
selected grant date usually being a date on which the
market price is lower than the date on which the grant is
actually approved.
 Spring-Loading - the granting of equity awards in
anticipation of the issuer’s disclosure of material
information that is likely to have a positive effect on the
issuer’s stock price.
 Bullet-Dodging - purposefully waiting until material
negative information is publicly disclosed before granting
an equity award.
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Equity Grant Procedures
Why problematic?
 Effectively results in discounted options; most
shareholder-approved plans require options to be
granted “at the market” or at a premium.
 Potentially a breach of directors’ fiduciary duties.
 Potential financial statement restatements.
 Big potential tax problems if options purporting to be
granted “at the market” are later determined to be
below market:
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Lose ISO treatment, if intended.
Won’t qualify as “performance-based compensation” under
Internal Revenue Code Section 162(m).
Constitutes deferred compensation under Internal Revenue Code
Section 409A, potentially resulting in excise tax on executive.
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Equity Grant Procedures
What should be done to minimize risk of
problems?
 Review existing equity grant practices.
 Tighten internal controls.
 Adopt formal written grant policy.
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Equity Grant Procedures
Adopting an Equity Grant Policy
 No “one size fits all” approach.
 Determine role played by equity grants in overall
compensation programs.
 Key components:
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Frequency and timing of grants – consider limiting to fixed dates
or during open trading windows.
Designate equity grants compliance person(s).
Delegation of grant authority to officers – critical to ensure
permissibility under state law and plan document. Delegation
should not cover grants to Section 16 reporting persons (i.e.,
Form 4 filers).
Limit grants to in-person or telephonic meetings and avoid
written consents if possible. If written consents must be utilized,
do not use “as of” dating.
Forms of equity award agreements. Should be approved by
compensation committee before grants are made and executed
as soon as possible after grants are made. If multiple forms of
agreements are used depending on level of employee, critical to
have controls in place to ensure right form of agreement used.
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Advance Notice and
Other Bylaw Provisions
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Advance Notice and Other Bylaw
Provisions
Advance Notice Provisions
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What are they? Require advance notice of shareholder
proposals and director nominations to ensure orderly
annual meeting process and to give company adequate
time to strategize and prepare proxy materials.
In two recent cases (Jana Master Fund Ltd. v. CNet
Networks and Levitt Corp. v. Office Depot, Inc.),
Delaware Chancery Court narrowly construed these
provisions and resolved ambiguities in favor of dissident
shareholders. End result was that in one case, the
dissident was allowed to propose business at an annual
meeting without complying with the company’s advance
notice bylaw and the other case, the dissident was
allowed to nominate its own directors without complying
with the company’s advance notice bylaw.
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Advance Notice and Other Bylaw
Provisions
Advance Notice Provisions (continued)
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Key lessons of recent cases:
 Make clear that the requirement to provide advance
notice of a shareholder proposal applies not only to a
proposal submitted for inclusion in the company’s
proxy materials under SEC Rule 14a-8, but also to
proposals submitted outside that rule (why the
dissident prevailed in CNet).
 Clearly distinguish between providing advance notice
of a shareholder proposal and providing advance
notice of director nominations (why the dissident
prevailed in Office Depot).
 Any ambiguities will likely be resolved in favor of
dissident shareholders.
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Advance Notice and Other Bylaw
Provisions
What to do now?
 If don’t have advance notice bylaw provisions, and next annual
meeting is not soon, adopt now.
 If do have advance notice bylaw provisions, eliminate any
ambiguities.
 If deadline for next annual meeting has passed and bylaws have
Office Depot-type ambiguity (no clear distinction between proposals
for business and director nominations), provide in notice of meeting
that agenda item on director elections applies only to election and
not nominations.
 Require dissident to provide details of any hedging/derivative
activities.
 What if advance notice provisions are in articles or certificate of
incorporation rather than bylaws?
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Advance Notice and Other Bylaw
Provisions
Other Areas For Review
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SEC e-proxy
State law changes
Consider lowering quorum requirement
Director retirement provision
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Board and Board
Committee Minutes
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Board and Board Committee Minutes
Overview
 Less may not be more.
 Circulate draft minutes promptly.
 Safeguard final minutes.
 Limit or prohibit note taking.
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THANK YOU!!