Association of Corporate Counsel

Transcription

1 Hot SOX: Executive Compensation and Other Sarbanes-Oxley Developments March 14, 2006 Association of Corporate Counsel

2 Page 2 Panel Holland & Knight LLP Jane K. P. Tam, Partner Mark J. Tarallo, Partner Jonathan F. Wolcott, Partner Moderator Jonathan Spencer, General Counsel and Secretary, Shenandoah Telecommunications Company

3 Page 3 Compensation Discussion and Analysis The proposed disclosure would: replace the compensation committee report and stock performance graph address the objectives and implementation of executive compensation programs including discussions of: the elements of executive compensation; the specific items of corporate performance taken into account in setting compensation policies and making compensation decisions; and how each compensation element fits within the company s overall objectives.

4 Page 4 Compensation Discussion and Analysis address material differences in compensation policies and decisions for individual named executive officers be considered filed with the SEC, rather than furnished, making it subject to liability and the Section 302 CEO and CFO certifications

5 Page 5 Summary Compensation Table C B A PFO PEO (i) (h) (g) (f) (e) (d) (c) (b) (a) All Other Compensation ($) Non-Stock Incentive Plan Compensation ($) Option Awards ($) Stock Awards ($) Bonus ($) Salary ($) Total ($) Year Name and Principle Position

6 Page 6 Summary Compensation Table Noteworthy changes: total annual compensation (sum of other columns) Principal Financial Officer now automatically included options and other share-based awards valued in accordance with 123(R) narrative disclosure required

7 Page 7 Director Compensation tabular and related narrative disclosure of all elements of director compensation for the most recent fiscal year similar to the Summary Compensation Table narrative disclosure required

8 Page 8 Proposed Revisions to Item 8-K SEC thinks too much non-material compensation information filed under Form 8-K Item 1.01 (Material Agreements) employment compensation arrangements would be covered under a modified broader Item 5.02 of Form 8-K Item 5.02(e) would require disclosure of material employment compensation arrangements involving named executive officers upon triggering events late filing of 8-Ks for employment compensation arrangements would not jeopardize S-3 eligibility unclear as to how the proposal really changes what companies currently do

9 Page 9 Small Business Issuers would not be required to provide a Compensation Discussion and Analysis would only provide information in the Summary Compensation Table for the last two fiscal years (rather than three years) would be required to provide information for the principal executive officer and the two other most highly compensated officers

10 Page 10 Related Party Transactions principles-based approach Elements: any completed transaction since the company s last fiscal year or currently proposed transaction; company was or is to be a participant; amount exceeds $120,000; and a related party has a direct or indirect interest. related party definition would be expanded to include stepchildren, stepparents and any person (other than a tenant or employee) sharing the household of a related person

11 Page 11 Perquisite or Other Personal Benefit Confers a direct or indirect benefit Personal aspect with no regard for whether it may be provided for some business reason Not available on non-discriminatory basis to all employees Not integrally and directly related to job performance Threshold: $10,000

12 Page 12 Perquisite or Other Benefit Perquisite or other Personal Benefit use of company-provided aircraft, yachts or other watercraft commuter transportation services additional clerical or secretarial services devoted to personal matters or investment management services Non-Perquisite reserved parking space that is closer to business facilities but not otherwise preferential additional clerical or secretarial services devoted to company matters personal travel using vehicles owned or leased by the company discounts on the company s products or services not generally available to employees on a non-discriminatory basis travel to and from business meetings

13 Page 13 Recommendations Brief Compensation Committee, CEO and CFO Now Compensation decisions made this year (even prior to adoption) likely to show up in next year s proxy statement conduct a compensation disclosure audit to see what will change in your company s disclosure CD&A will be covered under CEO/CFO certifications Named Executive Officers Top 5 will now include CFO, regardless of compensation 3 other executive officers will be determined on total compensation (formerly salary plus bonus)

14 Page 14 Recommendations Perquisite or Other Personal Benefit re-evaluate the way you keep track of perquisites perquisites would be required to be disclosed for both named executive officers and directors Related-Party Transactions adopt policies and procedures for the review, approval or ratification of related-party transactions as proposed Item 404(b) would require such disclosure

15 Page 15 Recommendations Pledged Shares Check approval policies on pledged shares - proposed amendments would require beneficial holders table disclosure of any shares pledged as security by named executive officers, directors and director nominees Post-Employment Payments Analyze post-employment, termination and change of control arrangements - now will be quantified

16 Page 16 Advisory Committee on Smaller Public Companies chartered by the SEC on March 23, 2005 published draft report on Feb. 27, 2006 ( ; File No ) comment period closes on April 3, final report to be released end of April 2006

17 Page 17 Areas of Review Internal control over financial reporting Corporate disclosure and reporting requirements and federally imposed corporate governance requirements Accounting standards and financial reporting requirements Process, requirements and exemptions relating to securities offerings

18 Page 18 Objectives Cost-benefit analysis Methods to minimize costs Facilitate capital formation Scaled or proportional regulatory treatment for companies based on size Good governance and transparency

19 Page 19 Scaled Regulation for Microcap and Smallcap Microcap lowest 1% of total U.S. equity market capitalization (i.e. <$128 million in market cap.) Smallcap the next lowest 5% (i.e. between $128 million and $787 million in market cap.) Smaller Public Companies Microcap + Smallcap i.e. lowest 6%, representing close to 80% of all U.S. public companies

20 Page Scaled financial statements accommodations under Reg. S-B be made available to all Small Public Companies Require only 2 years of income statement, instead of 3 Reduce costs and simplify disclosure; Third year data and corresponding analysis generally less relevant; Easier for smaller public companies to change auditors

21 Page Exemption from 404 Microcap companies with <$125 million revenue and smallcap companies with <$10 million revenue exempted; provided that, Adhere to audit committee standards under Rule 10A-3 of Exchange Act; Adopt and enforce a code of ethics applicable to all directors, officers and employees; and Design and maintain effective internal controls over financial reporting

22 Page Exemptive relief from external auditor involvement Smallcap with <$250 million revenue but >$10 million in product revenue; and microcap with $125 - $250 million revenue exempt from Section 404 external audit of internal control; provided that Management report on its assessment of internal controls; CEO and CFO certifications; Maintains internal controls designed to provide reasonable assurances to accuracy of financial statements

23 Page Scaled disclosure accommodations under Reg. S-B be made available to all Small Public Companies Less detailed description of business operations, with 3 years instead of 5 years history; No requirement for selected financial data; 2 years of analysis, instead of 3, under MD&A; No requirement for tabular disclosure of contractual obligations; No requirement for quantitative and qualitative statements of market risks; No requirement for compensation committee report; No requirement for stock performance graphs.

24 Page All exchange- or OTCBB- listed companies that are current in their reporting can use S-3 Have been reporting for at least 1 year Current in Exchange Act reporting at time of filing Eliminate current $75 million public float requirement for primary offerings Eliminate requirement for timely filing for the past 12 months

25 Page 25 Sarbanes Oxley Updates Executive Loans Stelmar Shipping, Ltd., December 1, 2005 First SEC Case Dealing with Section 402 of Sarbanes Oxley Subject Company tried to cast loan as salary advance. CEO and CFO approved loans for each other. CEO and CFO never sought approval from outside counsel or auditors. SEC rejected argument. Imposed a cease and desist order on CEO and CFO. May be a sign of SEC willingness to prosecute these matters.

26 Page 26 Other Updates Section 404 Periodic Filing Requirements

27 Page 27 Panel Contact Information Holland & Knight, LLP partners: Jane K. P. Tam, (202) , Jonathan F. Wolcott, (202) , Mark J. Tarallo, (617) , Moderator: Jonathan Spencer, General Counsel and Secretary, Shenandoah Telecommunications Company, (540) ,