scott m. stanton morrison & foerster kristopher l. hanson saic january 26, 2007

© 2006 Morrison & Foerster LLP All Rights Reserved

Keeping Up With a Changing Compliance Environment for Public Companies

ACC-A General Counsel Roundtable___________________________________________

Scott M. StantonMorrison & Foerster

Kristopher L. HansonSAIC

January 26, 2007

Introduction

• Introductions

• Materials

• Topics to be Discussed– Executive Compensation Disclosure Reform– E-Proxy Notice and Delivery Rules– The Return of the Tender Offer– Accelerated Filer Rules– Nasdaq/NYSE Developments


Executive Compensation Disclosure Reform

Compensation Discussion & Analysis

• CD&A Requirement: New “general overview” of executive compensation in the form of a Compensation Discussion & Analysis (“CD&A”)

– Report regarding the Company’s executive compensation policies and practices

– Should be principles-based and address the objectives, elements and implementation of executive compensation programs

– Much like MD&A in form and approach– Report is reviewed and approved by Compensation Committee– CD&A is deemed “filed” not “furnished” – more liability for CEO and CFO

• Required Discussion: The CD&A must answer the following questions specific to compensation programs:

– What are the objectives of the program?– What is the program designed to reward?– What are the elements of compensation?– Why does the company choose to pay each element?– How does the company determine the amount/formula for each element?– How does each element and the company’s decision regarding that

element fit into the company’s overall compensation objectives and affect decisions regarding other elements?

Compensation Discussion & Analysis(Continued)

• Additional Discussion: The Final Rules identify 15 additional examples of matters that may be relevant to discuss in the CD&A

• Option Granting Practices:– Discuss reasons for selecting particular grant dates– Methodology for selecting exercise prices and other terms of options (e.g.,

vesting periods, accelerations, forfeitures, etc.)– If exercise price is not the fair market value as of the grant date, then the method

for determining the price must be disclosed– Disclose any policies or practices regarding the timing of option grants relative to

the release of material information, including management’s role Spring Loading Bullet Dodging

• New Compensation Committee Report: – Considerably more brief than previously-delivered report– Report is “furnished” – not “filed”– Will indicate that Committee has reviewed CD&A, discussed its contents with

management and has recommended its inclusion in proxy statement and 10-K

Compensation Discussion & Analysis(Continued)

• Practical Considerations:– Significant amount of time will be needed to think through and

formulate CD&A– Drafting and reviewing CD&A will involve numerous parties,

including legal, human resources and financial reporting, compensation consultants, management and Compensation Committee

– Because CEO and CFO must certify as to sufficiency of CD&A, draft of CD&A should be fairly developed at time of filing of 10-K

Old Summary Compensation Table

Revised Summary Compensation Table

• Total Compensation: Reflects dollar value of all compensation earned by an executive during the fiscal year

– Amount of total compensation used to determine NEO status

– Plan-based awards now reflected with reference to FAS 123R “dollar” value (e.g., Black-Scholes, etc.) – not in shares

• Narrative Disclosure: Narrative disclosure to follow tables

• Prior Fiscal Years: No need to recalculate years prior to new rules

Name and Principal Position Year

Salary($)

Bonus($)

Stock Awards

($)

Option Awards

($)

Non-Equity

Incentive Plan

Comp.($)

Change in Pension Value

and Nonqualified

Deferred Compensation

Earnings($)

All Other Compensation

($) Total ($)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Principal Executive Officer

Principal Financial Officer

Officer 3

Officer 4

Officer 5

Who are the NEO’s?• Any person who served as CEO or CFO at any time during the past fiscal year• Next three highest paid officers (based upon total compensation)• Any former executive officer who would have made the list but for the fact that he/she was not serving as

an officer at 12/31• Additional narrative disclosure proposed for up to three highly-paid employees if the employee makes more

than any of the “top five” and is in policy-making position (originally referred to as “Katie Couric” rule)

Practical Consideration:• Harder to track (or engineer) list of NEO’s since total compensation now includes all elements of

compensation – not just salary and bonus

Revised Summary Compensation Table (Continued)


Salary($)

Bonus($)

Stock Awards

($)

Option Awards

($)

Non-Equity

Incentive Plan

Comp.($)


and Nonqualified


Earnings($)


($) Total ($)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)



Officer 3

Officer 4

Officer 5

Revised Summary Compensation Table(Continued)

Plan-Based Awards:• Requires disclosure of FAS 123R dollar value of stock awards, options or other non-stock

awards that are settled in cash but where performance is tied to company’s stock– SEC issued interim final rules in December 2006 stating that disclosure should reflect

portion of awards’ fair value recognized in fiscal year – not full grant date fair market value– SEC approach remedied disparity between proxy statement and financial statement

treatment of equity awards under original rules• Non-equity incentive compensation will reflect cash bonuses earned on account of pre-

determined bonus goals – instead of under “Bonus” column (which will include only discretionary awards)


Salary($)

Bonus($)

Stock Awards

($)

Option Awards

($)

Non-Equity

Incentive Plan

Comp.($)


and Nonqualified


Earnings($)


($) Total ($)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)



Officer 3

Officer 4

Officer 5

Revised Summary Compensation Table(Continued)

All Other Compensation:• Retains old definition of “perk” – not integrally related to performance of duties and

not generally available to large groups of employees• Threshold for reporting perks lowered to $10,000• Could include payments for: (i) termination on change in control, (ii) company

contributions to deferred compensation plans, (iii) tax “gross-ups” and (iv) life insurance premiums

Practical Consideration:• Extraordinary severance payment to a departing officer could impact NEO list for

past year


Salary($)

Bonus($)

Stock Awards

($)

Option Awards

($)

Non-Equity

Incentive Plan

Comp.($)


and Nonqualified


Earnings($)


($) Total ($)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)



Officer 3

Officer 4

Officer 5

New Grants of Plan-Based Awards Table

• Intended to complement the Summary Compensation Table (columns (e), (f) and (g))• Separate line item disclosure for each grant or award – no grouping allowed• Disclosure required for (i) non-equity and equity awards subject to performance conditions (e.g., stock

price, return on equity, etc.) and (ii) other equity-based awards granted in the last year that are not performance-based

• Full grant date value under FAS 123R for each grant (per Interim Final Rules)

* Extra Approval Date column required if different from Grant Date

** Extra Market Price on Grant Date column if option exercise price different than closing price on grant date

NameGrant Date

Approval Date

Estimated Future PayoutsUnder Non-Equity Incentive

Plan Awards

Estimated Future Payouts Under Equity Incentive

Plan Awards

All Other Stock

Awards: Number of Shares of Stock or

Units(#)

All Other Option

Awards: Number of Securities Underlying

Options (#)

Exercise or Base Price of Option Awards ($/Sh)

Market Price on

Grant Date

Grant Date Fair

Value of Stock and

Option Awards

Thresh-old($)

Target($)

Maxi-mum

($)

Thresh-old(#)

Target(#)

Maxi-mum(#)

(a) (b) * (c) (d) (e) (f) (g) (h) (i) (j) (k) ** (l)



Officer 3

Officer 4

Officer 5

Termination/Change in Control Payments

• Presentation: No prescribed tabular format required – can be only narrative disclosure

• Required Discussion: Disclosure must include:– List of each triggering event (these are likely to be multiple types of

termination triggering severance benefits)– For each triggering event, description and quantification of estimated

benefits; assume event occurred at end of last completed fiscal year at year-end stock price

– Description of post-employment conditions on payment– Non-discriminatory benefits need not be disclosed (e.g., generally

provided death benefits)

• Practical Consideration: New disclosure and quantification of benefits likely to be among most high-profile (and potentially embarrassing) disclosure

New Director Compensation Table

New Requirements:• Similar disclosure requirements as the revised Summary Compensation Table – total compensation

for past year• Disclosure required for any person who served as a director during the past year (except NEO’s)• “All Other Compensation” includes any perks ($10,000 threshold for identifying the perk by name)• Footnote disclosing the aggregate amount of options outstanding at year end and full grant date

value of equity awards (per the Interim Final Rules)

Name

(a)

Fees Earned or

Paid in Cash

($)

(b)

Stock Awards

($)

(c)

Option Awards

($)

(d)

Non-Equity Incentive

Plan Comp.($)

(e)


and Nonqualified Deferred Comp.

Earnings($)

(f)

All Other Comp.

($)

(g)

Total ($)

(h)

Disclosure RequirementsOther Items

• New Rules Expand Disclosure for Security Ownership of Officers and Directors:

– Officers: Requires disclosure of the number of shares actually owned and/or pledged by management

Currently, vested options show as “shares owned”

– Directors: Requires disclosure of the number of shares actually owned and number of qualifying shares, if any, held by individual board members

Shares that are an eligibility requirement to be a board member

• Form 8-K Modifications:

– New Item 5.02 for agreements or material amendments to agreements involving “named executive officers” and other listed officers

– Requires disclosure of retirement, resignation or termination of NEOs and PEOs

– Removes executive compensation agreements from purview of Items 1.01 and 1.02 (Entry Into/Termination of a Material Definitive Agreement)

– Intended to capture only events that are “unquestionably or presumptively material” to investors


E-Proxy Notice and Delivery Rules

E-Proxy Rules

• Background:

– In December 2006, SEC approved amendments to the proxy rules to permit “notice and access” model for furnishing proxy materials (other than those involving business combinations) through the Internet

• Rule Requirements:

– Notice must be sent 40 days or more before the date of the shareholders meeting

– Notice must be written in plain English and include:

the date, time and location of the meeting;

the address of the Internet website where the proxy materials are available;

a toll-free number and e-mail address for shareholders to request copies of the materials (at no cost to the shareholders); and

a description of the matters to be considered at the meeting and the issuer’s recommendation on the matters

– Issuer must give the shareholders some means of voting (voting over the Internet or telephonic voting or some combination thereof), but a proxy card may not be sent along with the initial notice

– Issuers relying on the new rules must provide shareholders with copies of proxy materials upon request in paper or by e-mail (as requested) within three business days

E-Proxy RulesContinued

• Impact of New Rules on Intermediaries:

– The current proxy rules require that issuers send their proxy materials to the intermediaries who forward the materials, along with a request for voting instructions, to the beneficial owners

– At the request of an issuer or other soliciting person, intermediaries will be required to prepare and send their own notices regarding Internet availability of the proxy materials that would be designed specifically for beneficial owners

• Timing and Effectiveness of New Rules:– Issuers may begin to comply with the new rules beginning July 1, 2007 – but not

before that time– SEC also proposed new rule that would require all issuers and other soliciting

persons to follow the “notice and access” model for all proxy solicitations (other than business combinations) at an unspecified time in the future – possibly as early as 2008 proxy season for large accelerated filers


The Return of the Tender Offer

Return of the Tender Offer

• The Problem: Judicial interpretations of the “Best Price” Rule

• The Solution: SEC Exemption (and Safe Harbor– Best price rule does not apply to employment compensation,

severance or benefit arrangements

– Safe harbor if compensation and severance arrangements are approved by independent board committee

• The Effect: Acquirors of public targets can now avail themselves of tender offer structure rather than conventional merger

– Tender offers are much faster to complete than mergers

– SEC reviews focus on more material issues due to compressed timeline


Accelerated Filer Rules

Accelerated Filer Rules

• Background:– In December 2006, the SEC issued rules to delay the SOX 404 internal control

reporting requirements for newly public companies, non-accelerated filers and certain foreign private issuers

• Delay of Section 404 Compliance Date for Smaller Public Companies:– For companies that are not accelerated filers, SEC split the compliance dates for

(i) the management report on internal control and (ii) the auditor attestation Management Report – Management report not required until the filing of the Form 10-

K for Company’s first fiscal year ending on or after December 15, 2007 (a six-month delay from the current rules)

Auditor Attestation – Auditor attestation report not required until the filing of the Form 10-K for Company’s first fiscal year ending on or after December 15, 2008 (an 18-month delay from the current rules)

• Relief for Newly Public Companies:– Newly public companies may delay compliance with Section 404 internal control

reporting requirements until after they filed one annual report with the Commission

– In second annual report, the company would then be required to comply with the Section 404 internal control reporting requirements in accordance with the bifurcated phase-in schedules discussed above.

Accelerated Filer RulesContinued

Category of Category of Domestic Filer Domestic Filer

Internal Control Internal Control Reporting Deadlines Reporting Deadlines Starting with Annual Starting with Annual

Reports For FYEs Reports For FYEs Ending on or after the Ending on or after the

Date Below.Date Below.

Filing Deadlines Filing Deadlines Starting with 10-K Starting with 10-K

Annual Reports for FYE Annual Reports for FYE on or after December on or after December

15, 200515, 2005

Filing Deadlines Filing Deadlines Starting with Annual Starting with Annual

Reports for FYE on or Reports for FYE on or after December 15, 2006after December 15, 2006

Filing Deadline for 10-Q Filing Deadline for 10-Q Quarterly ReportsQuarterly Reports

10-K Deadline 10-K Deadline 10-Q Deadline

Large Accelerated Filer ($700MM or more)

Management Report and Auditor Attestation:

• Already required for domestic issuers

75 days 60 days 40 days

Accelerated Filer ($75MM and above, but less than $700MM)

Management Report and Auditor Attestation

• Already required for domestic issuers


Non-accelerated Filer Management’s Report:

• December 15, 2007

Auditor Attestation• December 15, 2008



Nasdaq / NYSE Developments

Nasdaq/NYSE Developments

• Nasdaq is now an “exchange” with three tiers – Global Select, Global and Capital

• NYSE treasury share exception to shareholder approval requirement eliminated

• Modification of Nasdaq definition of “independent” director

• NYSE proposal to eliminate broker discretionary voting in director elections (implications for companies with majority voting provisions)

• Nasdaq adds the “letter of reprimand” to its arsenal

Thank You

• Scott StantonPartner, Morrison & [email protected]

• Kris HansonCorporate CounselSAIC

scott m. stanton morrison & foerster kristopher l. hanson saic january 26, 2007

Documents

elements of compensation

compensation consultants

compensation committeecda

cforequired discussion

sufficiency of cda

draft of cda

sharesnarrative disclosure

r dollar value