This Securities Briefing discusses:
This Securities Briefing is intended only as a summary of the SEC rules discussed and you are encouraged to review the full text of the rules.
In January 2006, the SEC proposed extensive amendments to the executive compensation and related disclosures for proxy and information statements, periodic reports and registration statements. This is the first material change to these rules since 1992. The proposed rules are intended to:
The proposed rules organize executive compensation disclosures into three categories:
In addition, in June 2006, SEC Chairman Christopher Cox reportedly told members of the media that its executive compensation rules will contain some specific provisions dealing with option back-dating.
The SEC is expected to adopt final rules on these matters in its open meeting to be held on July 26, 2006 that are expected to apply to the 2007 proxy season. For these reasons, companies are urged to become familiar with the requirements of the expected new rules so that appropriate disclosure controls and procedures can be implemented on a timely basis to capture all of the information required by the new rules. Once the SEC’s final rules have been adopted and studied, we plan to issue a Securities Briefing summarizing the new rules.
The SEC’s proposed rules encourage more complete information on executive compensation matters through, among other things, the use of broader-based tabular presentations and require narrative disclosure to supplement those tables. The proposed rules, among other things,:
The proposed SEC rules require the disclosure of certain provisions of any written or unwritten arrangement that provides for payments at, following or in connection with a resignation, severance, retirement or other termination, including constructive termination of a NEO, a change in a NEO’s responsibilities or a change-in-control of the company. The following information is required:
The proposed SEC rules expand the disclosures for director compensation to more closely resemble disclosures required for executive compensation. The proposed rules include a director compensation table to disclose compensation earned or paid during the last fiscal year similar to that proposed for NEOs in the new Summary Compensation Table. Directors may be grouped in a single row if all elements and amounts of compensation are identical. The same information required by the Outstanding Equity Awards at Fiscal Year-End Table for NEOs must be disclosed in footnotes to the table. In addition, narrative disclosure of any material factors necessary to an understanding of the information in the table must follow the table.
The proposed SEC rules provide that small business issuers would be required to provide, along with related narrative disclosure only the:
The proposed SEC rules narrows the definition of NEOs for small business issuers so that it only covers the principal executive officer and the two most highly compensated officers other than the principal executive officer. In addition, small business issuers would not be required to provide a compensation discussion and analysis.
The SEC commented that past disclosures under existing Item 1.01 (Entry into a Material Definitive Agreement) of Form 8-K have consisted of executive compensation disclosure on matters that do not appear always to be “unquestionably or presumptively material.” As a result, the proposed SEC rules amend Item 1.01 of Form 8-K to eliminate disclosure of employment compensation arrangements and to require the discussion of such arrangements, with a broader disclosure requirement, under Item 5.02 (relating to changes in directors and executive officers). The proposed changes to Item 5.02 of Form 8-K capture all of the information required by existing Item 5.02 and also require additional information regarding material employment compensation arrangements involving NEOs such as requiring a brief description of not only employment agreements but any material plan, contract or arrangement to which a NEO or director is a party.
The proposed SEC rules revise Item 404 to make information on related party transactions clearer and easier to follow. The changes include, among others,:
Small business issuers will not have to disclose its policies and procedures for reviewing related party transactions and the disclosure threshold for related party transactions will be the lessor of $120,000 or 1% of the average of the company’s total assets for the last three fiscal years.
The proposed SEC rules contain a new Item 407 of Regulation S-K that consolidates existing disclosure requirements on director independence and corporate governance. New Item 407 requires, among other things, disclosure of:
A copy of the proposed SEC rules regarding executive compensation and related disclosures is available on the SEC’s website at www.sec.gov by selecting Proposed Rule: Executive Compensation and Related Party Disclosure.
Effective July 1, 2006, NASDAQ converted from an interdealer quotation system to a national securities exchange. As a result of the change, the NASDAQ announced that the current NASDAQ Stock Market, Inc. would become a holding company for a newly formed subsidiary, The NASDAQ Stock Market, LLC, which will operate as the exchange.
As a result of the conversion, the NASDAQ National Market has been renamed The NASDAQ Global Market and the NASDAQ SmallCap Market has been renamed The NASDAQ Capital Market. In addition, NASDAQ has introduced a new tier called The NASDAQ Global Select Market. NASDAQ unilaterally transferred any company whose securities meets the initial listing standards for the new market to The NASDAQ Global Select Market. Visit www.nasdaq.com to find a list of companies in each tier.
Beginning in October 2007, NASDAQ will review annually the qualifications of all companies listed on The NASDAQ Global Market and automatically transfer any company that then satisfies initial and continued listing standards for The NASDAQ Global Select Market to that market. Apart from this annual review process, a company may, at any time, transfer within The NASDAQ Global Market to The NASDAQ Global Select Market if it satisfies the initial listing standards and pays the applicable entry fees.
Prior to NASDAQ’s conversion to a national securities exchange, securities of most companies quoted on NASDAQ were registered under Section 12(g) of the Securities Exchange Act of 1934 or exempt from registration. As part of the conversion process, NASDAQ filed an application, on behalf of all companies with securities quoted on NASDAQ, to register such securities under Section 12(b) without the need for further action by the companies. Companies that did not wish to switch to registration under Section 12(b) had to opt-out of the process on or before May 30, 2006.
Each company that had its securities registration automatically switched to Section 12(b) must remember to indicate in its future reports filed with the SEC that its NASDAQ-listed securities are registered under Section 12(b) rather than Section 12(g). Despite the change in registration, the SEC has advised NASDAQ that companies should continue to file their reports under the Securities Exchange Act of 1934 using the same SEC file number that they previously received from the SEC. In addition, there will be no change in CIK number.
J.C. Anderson (612) 632-3002
Lindley S. Branson
Christopher A. Carlisle (612) 632-3033
Inchan Hwang (612) 632-3310
Douglas M. Ramler (612) 632-3324
Michael P. Sullivan (612) 632-3350
Daniel R. Tenenbaum (612) 632-3050
Mark D. Williamson (612) 632-3379
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This newsletter is a periodic publication of Gray, Plant, Mooty, Mooty & Bennett that should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult legal counsel concerning your situation and any specific legal questions you may have.
Copyright. 2006. All rights reserved.
Gray, Plant, Mooty, Mooty & Bennett, P.A.
This article is provided for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have.
Gray Plant Mooty is recognized as one of the leading corporate law firms in Minnesota and one of the top franchise firms in the world. Our roots go back to 1866. Today, we are a 180-plus attorney, full-service firm with offices in Minneapolis and St. Cloud, Minnesota; Washington, D.C.; and Fargo, North Dakota.