Securities & Financial News to Note

Transcription

1 Securities & Financial News to Note A Bi-Weekly Bulletin SEC/Corporate SEC Votes to Propose New Rules Providing Shareholders Access to Proxy Statements On May 20, 2009, the SEC voted to propose rule amendments that would facilitate the rights of shareholders to nominate directors to corporate boards. The proposed rule amendments would create new Exchange Act Rule 14a-11, which would allow shareholders to include nominees in the company s proxy materials unless otherwise prohibited by state law or a company s charter/bylaws. Under the proposed rule, shareholders would be eligible to have their nominees included in the proxy materials if they own at least: 1% of the voting securities of a large accelerated filer 3% of the voting securities of an accelerated filer 5% of the voting securities of a non-accelerated filer To achieve these thresholds, shareholders would be able to aggregate holdings, but would be required to have held the shares for at least one year. Shareholders would also be required to certify that they are not holding their stock for the purpose of changing control of the company or to gain more than a minority representation on the board of directors. Shareholders would be required to sign a statement with their intent to continue to own the shares through the annual meeting at which directors are elected. In addition, a shareholder would only be permitted to include the greater of one shareholder nominee, or a number of nominees that represents up to 25% of the company s board of directors, in the company s proxy materials. The proposed rule amendments also contemplate a new Schedule 14N which a nominating shareholder would be required to file with the SEC and submit to the company. The nominating shareholder would have to disclose on Schedule 14N the amount and percentage of securities owned by the nominating shareholder and the length of time of ownership as well as the shareholder certification and statement referenced above. The proposed rule amendments would provide that a company is not liable for information provided by a nominating shareholder, unless the company knows or has reason to know that the information provided was false. The proposals also amend Exchange Act Rule 14a-8(i)(8). Rule 14a-8(i)(8) currently permits companies to exclude shareholder proposals that relate to an election. Under the proposal, this exclusion would be narrowed to require companies to include in their proxy materials shareholder proposals, submitted by eligible shareholders, that would address a company s nomination procedures or other director nomination disclosure provisions (as long as it does not conflict with proposed Rule 14a-11). The current eligibility provisions of Rule 14a-8 would govern which shareholders could submit a proposal. These provisions provide that a shareholder proponent must have continuously held at least $2,000 in market value (or 1%, whichever is less) of the company s securities for a period of one year prior to submitting the proposal. The actual text of the proposed rules has not yet been released by the SEC. However, public comments on the proposed rule amendments must be received by the commission within 60 days after their publication in the Federal Register. SEC to Hold Public Seminar on New Interactive Data Reporting Requirements The SEC will hold a public seminar on June 10, 2009, to help preparers and companies comply with the new rules that require financial reports to be filed using interactive data (XBRL). The SEC staff will provide an overview of the tools and information provided by the SEC to assist with compliance, present information about the technology requirements for complying with the rules, and cover frequently asked questions about the new rules and the technology requirements. The seminar will be held in the auditorium at the SEC s headquarters at 100 F Street, N.E., in Washington, D.C., and will be open to the public with seating on a first-come, first-served basis. The seminar will also be webcast via the SEC website. The SEC staff is seeking suggested questions and topics to be discussed at

2 the seminar which interested parties should to and include the reference Public Education Seminar in the subject line. Accounting/Tax FASB Moves Forward on New Off-Balance- Sheet Reporting Standards On May 18, 2009, the Financial Accounting Standards Board (FASB) concluded its deliberations on two proposals and is now working on finalizing the new standards relating to off-balance-sheet reporting that appear to be in furtherance of the Board s stated goal of eliminating the appearance of joint control of off-balance-sheet assets when, in reality, the original owner retains the risk. The two proposals had originally been issued in September 2008 for comment. The first proposal, an amendment to FIN 46(R), Consolidation of Variable Interest Entities, modifies the existing guidance on how a company should report its interests in variable-interest entities (VIEs). VIEs are generally thinly capitalized business structures that enable investors to hold controlling interests without having voting majorities, and include many off-balance-sheet vehicles called special-purpose entities. The principal objective of the FIN 46(R) amendment relates to how a company determines whether or not a VIE should be consolidated. Under the current version of FIN 46(R), a company must consolidate any entity in which it has a controlling interest, a test which is principally a quantitative analysis. If the company has a controlling interest over the VIE s most significant activities (and the right to some of its benefits or the responsibility to absorb its losses), the company must consolidate the VIE with the company s own financials. Under the amendment, a company will be required to perform a new qualitative analysis to determine if a VIE must be consolidated. The amendment also mandates that companies make ongoing reassessments regarding the need to consolidate a VIE, rather than only upon the occurrence of certain events, which is the standard under existing guidance. Finally, the revisions to FIN 46(R) require that a company provide additional disclosure on (1) the company s utilization of VIEs, (2) significant changes in risk exposure arising from the use of VIEs and (3) how the involvement with a VIE affects the company s financial statements. The second proposal amends FAS 140, Transfers of Assets, to provide greater transparency about transfers of financial assets and a company s continuing involvement in transferred financial assets. The amendment erases the concept of a Qualified Special Purpose Entity (QSPE) from U.S. GAAP. Currently, FAS 140 enables companies to report many transfers of portions or components of financial assets as sales. Under the new standard, a transfer of a portion of a financial asset may be reported as a sale only when that transferred portion is a pro-rata portion of an entire financial asset, no portion is subordinate to another and other restrictive criteria are met. The new standard will also drop an exception that currently allows companies to derecognize certain transferred mortgage loans when the company has not surrendered control over those loans, according to the board. Supporters of the amended FAS 140 assert that the elimination of QSPEs will require many U.S. banks to recognize losses relating to securitized assets that have previously been hidden off-balance sheet. FASB expects to issue the final standards in June The amended FASB standards will be effective by the start of 2010 and will mostly apply to existing entities. But the amendments on how to account for transfers of financial assets will apply to transfers occurring on or after the effective date. FASB Codifies Guidance on Subsequent Event Disclosure On May 28, 2009, FASB issued FASB Statement No. 165, Subsequent Events (FAS 165). FAS 165 establishes the principles and requirements for the disclosure of subsequent events. In particular, the Statement sets forth: the period after the balance sheet date during which management of a reporting entity will evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements the circumstances under which an entity will recognize events or transactions occurring after the balance sheet date in its financial statements the disclosures that an entity will make about events or transactions that occurred after the balance sheet date FAS 165 states that an entity that has a current expectation of widely distributing its financial statements to its shareholders and other financial statement users, including a public entity (as defined in FAS 165), will evaluate subsequent events through the date that the financial statements are issued. All other entities will evaluate subsequent events through the date that the financial statements are available 2

3 to be issued. Financial statements are considered available to be issued when they are complete in a form and format that complies with GAAP and all approvals necessary for issuance have been obtained, for example, from management, the board of directors, and/or significant shareholders. The Board stated that it did not believe that FAS 165 would result in significant changes in the subsequent events that an entity reports either through recognition or disclosure in its financial statements. In its release, the Board asserted that it believes FAS 165 reflects the principles underpinning current subsequent events guidance in existing accounting literature and in AU Section 560, Subsequent Events. Furthermore, the Board confirmed that if an event or transaction is within the scope of another applicable GAAP, that addresses the accounting treatment of events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued, companies will follow the guidance in that applicable GAAP, rather than the guidance in FAS 165. FAS 165 will be effective for interim and annual periods ending after June 15, Litigation Approval of Dissident Directors Solely for Purposes of Avoiding a Fundamental Change Enforceable On May 12, 2009, the Delaware Court of Chancery addressed the enforceability of director poison puts. Director poison puts are contractual provisions, typically found in indentures and other debt documents, which state that a fundamental change has occurred if the borrower s board of directors ceases to have a certain percentage of directors that are continuing directors. Continuing directors are generally defined as those who were on the board on the date the notes were issued, or new directors whose election to the board or whose nomination for election by stockholders was approved by a majority of the directors then still in office. Typically, an indenture or other debt document provides that the occurrence of a fundamental change will give noteholders or the other lenders additional rights, including the right to have their debt immediately repaid either at face value or at a premium. In the Delaware case, two dissident shareholders of a company engaged in a proxy contest whereby each nominated five people for election to the company s 12-person board of directors. The company had convertible notes outstanding under an indenture which had a typical director poison put provision defining a fundamental change to include a change in the makeup of the board of directors of the company such that the continuing directors would not constitute a majority of the board. The plaintiff, a third shareholder of the company, filed a lawsuit against, among others, the company and its individual directors and sought, in part, a mandatory injunction requiring the directors to approve the dissident shareholders nominees. The company cross-claimed against the Indenture trustee seeking declaratory relief that the board has the power to approve any or all shareholder nominees. The plaintiff and the company reached a partial settlement whereby the board would approve the dissident shareholders nominees solely for the purpose of complying with the continuing directors provision. However, the company s board would continue to oppose the shareholders nominees and recommend its own nominees. The Indenture trustee argued against the proposed settlement and asserted that the board s determination not to recommend for election the shareholders nominees was inconsistent with the plain meaning of the term approval and that, consequently, they believed that a fundamental change would occur if the company board approved the directors, but did not recommend them for election. The Court agreed with the company s interpretation of approval and held that the board may approve nominees for purposes of the Indenture without endorsing them and may simultaneously recommend its own nominees instead, provided that the board determines in good faith that the election of one or more of the dissident nominees would not be materially adverse to the interests of the corporation or its stockholders. The Court stated that the Indenture trustee s reading of the continuing directors provision would render it a possible entrenchment mechanism and that a provision in an Indenture with such an eviscerating effect on the stockholder franchise would raise grave concerns. Specifically, the Court questioned whether and to what extent a board s fiduciary duties would be implicated if they were to agree to such a provision. The Court stated that boards of directors, when negotiating with rights that belong first and foremost to the stockholders (i.e., the stockholder franchise), must be especially solicitous to its duties both to the corporation and to its stockholders. Specifically, terms which may affect the stockholders range of discretion in exercising the franchise should, even if considered customary, be highlighted to the board. In this way, the board will be able to exercise its fully informed business judgment. Furthermore, the Court cautioned that even if approved after exercise of a fully-informed business judgment, the Court would have to consider the degree to which such a provision might be unenforceable against public policy. San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc. 3

4 U.S. Supreme Court Grants Writ of Certiorari in Securities Fraud Case Regarding Inquiry Notice On May 26, 2009, the U.S. Supreme Court granted a writ of certiorari in a securities fraud class action that raised issues regarding the sufficiency of information to place investors on inquiry notice of fraud in connection with statements about the safety of a drug product and as a result trigger the statute of limitations. The limitations period for a Section 10(b) fraud class action is triggered upon actual or inquiry notice of the claim. Courts analogize inquiry notice to storm warnings that are sufficient to put a reasonable investor on notice of the possibility of fraud. Although most courts do not require notice of all the details of the fraud, the Third Circuit held that storm warnings of culpable activity were required, effectively requiring more information about the alleged fraud before investors are placed on inquiry notice. The Third Circuit analyzed the facts in the case, including the existence of several disclosures in research studies, publications, news articles, websites and the filing of lawsuits which identified problems with the drug product, and found that investors were not on inquiry notice of fraud in connection with statements about the safety of the drug product. The Third Circuit found that none of these disclosures showed that the company believed that its explanation for the higher incidence of certain adverse health affects was not plausible. The Third Circuit s standard departs from other inquiry notice standards in that it plainly requires notice of evidence of scienter to trigger the statute of limitations. About This Bulletin Securities & Financial News to Note Co-Editors: Kara L. MacCullough Fort Lauderdale kara.maccullough@hklaw.com Esther L. Moreno Miami esther.moreno@hklaw.com Holland & Knight LLP Information contained in this newsletter is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different, and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel. To ensure compliance with Treasury Regulations (31 CFR Part 10, 10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code. Holland & Knight lawyers are available to make presentations on a wide variety of securities and financial law issues. 4

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