Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

The SEC has released the language of amendments to the proxy rules that will require issuers and other soliciting persons to post proxy materials online. As posted earlier here, under the new rules, issuers have two options for making proxy materials available to shareholders:

(1) Post proxy materials on an Internet Web site and send a notice to shareholders that materials are online at least 40 days before the shareholders’ meeting. Shareholders can still request hard copies, including a permanent request for paper or e-mail copies for all meetings.

(2) Post proxy materials on an Internet Web site, send a notice to shareholders that materials are online, and still deliver a hard copy of materials to each shareholder.

Neither option is exclusive. After posting the materials online, the issuer may submit just the notice to some shareholders and the notice plus the hard copy to other shareholders.

Finally, the issuer must provide shareholders with a method to execute proxies as of the time the notice is first sent to shareholders. Some had worried this would mean issuers have to establish an Internet voting platform. The SEC has assured issuers that this requirement can be satisfied through a variety of methods, including an Internet voting platform, a toll-free telephone number for voting, or a printable or downloadable proxy card on the Web site. Interestingly, a toll-free telephone number for voting may appear on the Web site, but not the notice, because it would allow a shareholder to vote a proxy without having access to the proxy statement.

The new rules are effective for Large Accelerated Filers on January 1, 2008, and other filers and persons soliciting proxy materials on January 1, 2009.

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Yesterday, the Securities and Exchange Commission approved PCAOB Auditing Standard No. 5, which, together with the SEC’s new guidance on internal control over financial reporting, will allow Section 404 audits to be scaled appropriately in light of a particular company’s size and complexity.

Auditing Standard No. 5 replaces Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. 

In addition to its scalability, Auditing Standard No. 5 includes various improvements, including the following:

• There exists fewer mandatory requirements, which will allow auditors to use their best judgment to determine when certain tests should be performed;
• It narrows auditors’ focus on high-risk areas, and thus, allows auditors to closely examine deficiencies that my constitute a “material weakness”; and
• It emphasizes a principles-based approach, which will allow auditors to use their best judgment in determining the extent to which they can rely on another person’s work.

Audits conducted for fiscal year ending on or after November 15, 2007 will be required to utilize Auditing Standard No. 5.

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The IRS has issued a directive identifying backdated stock options as a Tier 1 Compliance Issue. The directive explains the tax implications of backdated options, including the fact that options backdated to produce a “build-in” profit do not qualify as incentive stock options (ISOs). Corporations that intended backdated options to qualify as ISOs may be required to withhold and pay income and employment taxes when the option is exercised, and the individual may owe additional taxes at the time of exercise. As the directive explains, there are also 162(m) and 409A issues.  

The designation of option backdating as a Tier 1 Compliance Issue means it is a mandatory examination item for taxpayers with backdated stock option grant and/or exercise prices.

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Ohio Governor Ted Strickland signed a bill into law yesterday that allows Ohio corporations to permit directors to be elected by means other than a plurality of votes. Previously, Ohio law stated that director candidates who receive the greatest number of votes are elected. The law has been amended to allow shareholders to provide for different methods of election in the articles of incorporation, such as election by a majority vote.

The Ohio State Bar Association supported the amendment because some Ohio corporations have received shareholder proposals to reincorporate in states where a majority voting provision could be adopted, namely Delaware. The OSBA expects the new law to keep businesses in Ohio. 

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As reported here, Whole Foods founder and CEO John Mackey admitted yesterday to anonymously posting messages about Whole Foods and its rival, Wild Oats, on Yahoo’s stock forum. This revelation comes following a Federal Trade Commission suit to stop a pending merger between Whole Foods and Wild Oats over antitrust concerns.

Several reports have indicated the SEC is conducting its own investigation into whether Mackey violated securities laws with the postings. The mere use of a pseudonym on a website by a company’s CEO is not a violation of securities laws; however, the securities laws are implicated if the postings are used to selectively disclose material non-public information in violation of Regulation FD or to commit fraud. Professor J. Robert Brown of the University of Denver Sturm College of Law offers further explanation here regarding potential violations by Mackey.

Brown concludes that any Reg. FD violation will depend on (a) whether the information disclosed was material, (b) whether Whole Foods knew about it and failed to disclose the information to the entire market, and (c) whether posting on a forum accessible by the entire market is selective disclosure. It will be difficult to prove a Reg. FD violation on these facts.

And, Brown asserts any allegation of fraud will depend on showing Mackey made materially false or incomplete statements. This will be difficult to show because statements made by an unidentified contributor to a message board are likely not considered material by a reasonable investor.

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Several news outlets have recently reported that the SEC is circulating a plan to allow 5% shareholders to propose bylaw amendments aimed at nominating directors on the company’s proxy ballot. The goal is direct proxy-ballot access by shareholders. How such a proposal would work is unclear. Presumably, a 5% holder would propose a bylaw amendment that would allow shareholders of an unknown percentage to nominate candidates on the company’s proxy ballot. If the bylaw amendment were approved by a majority of shareholders, direct shareholder access to the company’s ballot would be achieved.

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Issuers that are not required to file periodic reports under the Exchange Act may soon be able to exempt compensatory employee stock options from registration. The SEC has proposed amendments to Exchange Act Rule 12h-1 that would allow private, non-reporting issuers to take advantage of an exemption for compensatory employee stock options issued under employee stock option plans.

Private, non-reporting issuers use compensatory employee stock options to attract and reward employees of all levels. But, if an issuer has more than 500 holders of record of a class of equity securities, such as stock options, and assets in excess of $10 million, it must register the class or qualify for an exemption. The new rules provide an exemption for compensatory employee stock options. 

Comments to the proposed amendments must be received by the SEC by September 10, 2007.

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Today is the first day that companies are permitted to send a Notice of Internet Availability of Proxy Materials to its shareholders. Earlier this year, the SEC amended the proxy rules to provide for a “notice and access” model, which permits publicly traded companies to send a notice to shareholders indicating the Internet website where the companies’ proxy materials are available in lieu of sending hard copies of the proxy materials to every shareholder. 

As we reported on June 23, 2007, the SEC has adopted mandatory e-proxy rules, which will soon require companies to make their proxy materials available to shareholders on an Internet website. Large accelerated filers (excluding registered investment companies) must comply with the amendments starting January 1, 2008 and registered investment companies, soliciting persons other than issuers, and issuers that are not large accelerated filers must comply with the amendments starting January 1, 2009.

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