The U.S. District Court for the Southern District of New York
recently denied a request by a co-founder and director of Enzo
Biochem, Inc. for a preliminary injunction to delay the
company's shareholder meeting by 45 days. In support of its
motion, the plaintiff alleged that Enzo and certain of its
directors violated Section 14(a) of the Securities Exchange Act and
several rules promulgated thereunder by: (1) filing a proxy
statement containing material misstatements of fact; (2) failing to
file a preliminary proxy statement; and (3) soliciting shareholder
votes prior to the filing of the proxy statement. Plaintiff's
claims were primarily based on Enzo's failure to include a
reference in its proxy statement to a letter plaintiff had written
in which he informed Enzo's board that he would be nominating
several candidates for election to the board and on several related
allegations concerning his efforts to nominate an alternate slate
of directors. The district court held that even if the proxy statement was
required to disclose that the plaintiff was proposing an
alternative slate of directors based solely on his letter to the
board, because Enzo filed a supplement to the proxy statement 16
days prior to the shareholder meeting (after plaintiff filed his
own proxy statement), any omission was cured. The court also found
that Enzo was not required to file a preliminary proxy statement
because the limited matters to be addressed at the shareholder
meeting triggered an exception to the filing requirement and that
plaintiff's letter to the board did not constitute a
"solicitation" of shareholders that would have rendered
the exception inapplicable. Finally, the district court found that
while certain directors of Enzo met with two major shareholders
prior to the filing of the proxy statement, there was insufficient
evidence that any solicitation of the shareholders' votes
occurred during the meetings. (Rabbani v. Enzo Biochem,
Inc., No. 10 Civ. 170, 2010 WL 343511 (S.D.N.Y. Feb. 1,
2010)) The U.S. District Court for the Western District of Washington
has dismissed on summary judgment whistleblower claims brought by
two former compliance auditors of the Boeing Company, Inc. The
district court found that Boeing did not violate Section 806 of the
Sarbanes-Oxley Act, which prohibits publicly traded companies from
discriminating against their employees for disclosing information
regarding certain alleged illegal conduct undertaken by the
employer to their supervisors, federal regulatory or law
enforcement agencies or Congress. The district court found that the
act that served as the basis for the auditors'
termination—the leaking of confidential information to
the media—was not a protected act under the
Sarbanes-Oxley Act. The Boeing employees in question were auditors who performed
testing on information technology controls at the company. The
tests being performed by the auditors were undertaken in compliance
with the Sarbanes-Oxley Act's mandate that publicly traded
companies review their controls over financial reporting. After
making several complaints to supervisors about perceived auditing
deficiencies, the auditors provided information and documentation
regarding the alleged deficiencies to a reporter at the Seattle
Post-Intelligencer. The auditors were fired soon thereafter. In arguing in favor of whistleblower protection, the auditors
claimed that they were fired not because of the media leak as
Boeing asserted, but rather in response to their frequent
complaints to their supervisors regarding Boeing's
Sarbanes-Oxley Act non-compliance—complaints that fall
within the Sarbanes-Oxley Act's protections for whistleblowers.
The district court rejected the auditors' argument on the
ground that even if they did engage in protected activity, it was
clear that leaking information to the media is not protected
activity under the Sarbanes-Oxley Act, and Boeing was within its
rights to terminate the auditors on this ground. (Tides v. The
Boeing Co., C08-1601-JCC (W.D. Wa. Feb. 2, 2010)) The NASDAQ Stock Market submitted a rule filing to amend its
rules governing order routing processes. The amendments to NASDAQ
Rule 4758, among other things, include changes that provide
additional detail in the rules regarding existing routing options,
modify certain aspects of current routing functionality and add one
new routing option. Among the changes are new definitions that make
clear that NASDAQ reserves the right to modify routing tables at
any time without notice. In the filing, NASDAQ certifies that all
routing processes comply with the requirements of Rule 611 of
Regulation NMS. Read more
(www.sec.gov/rules/sro/nasdaq/2010/34-61460.pdf). The Financial Industry Regulatory Authority has issued a
Regulatory Notice to remind members that are subject to FINRA Rule
4521(d) to file certain customer margin account information
beginning March 1. Under new FINRA Rule 4521(d), members carrying
margin accounts for customers must file a report electronically
using FINRA's new Customer Margin Balance Form, on a settlement
date basis. The information in the monthly report must be as of the
last business day of each month, and the reports are due at such
time, but in no event later than the sixth business day of the
following month. The Form is not yet available. For this March, a
report covering the February 2010 reporting period would need to be
filed by March 8. Rule 4521(d) replaced old Incorporated NYSE Rules
421(2) and 421.40, became effective on February 8, and applies to
all FINRA members that carry customer margin accounts. Click here (http://tinyurl.com/yasezr3) to read
FINRA Regulatory Notice 10-08. The Financial Industry Regulatory Authority is extending to May
3 the effective date of rule amendments that require firms to
identify the "Related Market Center" in non-tape reports
submitted to a FINRA trade reporting facility. Click here (http://tinyurl.com/ybpk93x) to read the
FINRA Trade Reporting Notice. See also the September 18, 2009, edition of
Corporate and Financial Weekly Digest
(http://tinyurl.com/y9dl44h) for a discussion of the
amendments. The Internal Revenue Service announced in November of 2009 that
in February 2010, it would begin its first Employment Tax National
Research Project since the 1980s. This Tax Project will include
audits of 6,000 companies over the next three years, and is
expected to focus review on (among other issues) executive
compensation, including deferred compensation arrangements subject
to Section 409A of the Internal Revenue Code of 1986, as
amended. In addition, employers are now reporting that the IRS has begun
to audit deferred compensation plans for compliance under Section
409A. These audits are being conducted by the IRS as a separate
audit project quite apart from the Tax Project. The IRS has been
issuing "Information Document Requests" (IDRs) requiring
disclosure of specific information on deferred compensation
arrangements subject to Section 409A. These IDRs will be used to
determine whether these arrangements are in compliance with Section
409A. Section 409A contains complex rules relating to the timing and
form of payment of deferred compensation. Arrangements providing
deferred compensation must be in a writing that conforms to 409A
requirements (i.e., documentary compliance) and operated in
compliance with the plan document and Section 409A. An operational
and/or documentary violation of Section 409A can subject the
recipient of the compensation to immediate income inclusion of
deferred amounts (even before the amounts are paid to the
recipient) as well as an additional 20% tax and interest (409A
Penalties). Documentary compliance with Section 409A was required as of
January 1, 2009. Failure to meet this deadline would normally
result in the imposition of 409A Penalties. However, compliance
with Section 409A continues to be a "work in progress" as
companies and their advisors continue even now to struggle to
understand the complexities of some of these new rules. In recognition of this fact and as an incentive for employers to
revisit their earlier good faith efforts to comply, the IRS issued
recently Notice 2010-6 (Correction Notice) which sets forth methods
for correcting certain documentary failures. Normally, even where
the Correction Notice is followed, the payment of a partial 409A
Penalty is required. However, the special "transition
relief" offered under the Correction Notice provides that
certain corrections to non-conforming plan documents may be made by
the end of 2010 (and in some cases by the end of 2011) without the
imposition of any 409A Penalty. Sponsors of deferred compensation plans should review their
plans now to determine whether documentary corrections are
indicated. This is true even for plans that have already been
amended under 409A by the January 1, 2009, deadline. Much has
happened in the world of 409A since that time, and new
understandings of the rules may require additional changes to plan
documents. The Correction Notice offers for a brief period the
possibility of making corrections without the imposition of 409A
Penalties. But it is important to act before a plan comes under
audit. Transition relief without penalties is generally not
available with respect to identified 409A failures under
examination by the IRS. Read more
(www.irs.gov/pub/irs-drop/n-10-06.pdf). On February 9, the Committee of European Securities Regulators
(CESR) published its proposals for extending the disclosure of
major shareholdings regime under the European Transparency
Directive. The current regime requires investors to make disclosures of
holdings of voting rights attached to shares and voting rights an
investor is entitled to acquire when certain thresholds are
crossed. There is no current disclosure requirement for instruments
with a similar economic effect, such as cash settled contracts for
difference. The UK and some other countries address this in
national legislation. CESR has recognized that instruments of this kind could be used
to acquire or exercise influence in a company, and in its proposals
it cites a number of examples of where this has happened. To ensure
greater transparency in situations such as these, CESR is proposing
that the regime for notification of major shareholding should be
extended to include all instruments that give a similar economic
effect to holding shares and entitlements to acquire shares in the
broadest sense. In CESR's opinion this approach balances the
need for legal certainty with the potential for avoidance. CESR notes that, where appropriate, its proposals are consistent
with its approach to the European short selling regime. However, it
makes it clear that CESR considers these are two separate regimes
and serve different purposes. In its proposals, CESR also makes it clear that these
instruments are an important source of liquidity to the market and
that it is not seeking to discourage their use but only to make
their resulting economic exposure transparent. To read the proposals in full, click here (www.cesr.eu/popup2.php?id=6481). The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
LITIGATION
Court Denies Request for Preliminary Injunction to Delay
Shareholder Meeting
District Court Limits the Sarbanes-Oxley Act's
Whistleblower Protections
BROKER DEALER
NASDAQ Amends Order Routing Rules
Filing of FINRA's New Customer Margin Balance Form Required
Next Month
FINRA Extends Effective Date to Identify Related Market Center
in Non-Tape Reports
EXECUTIVE COMPENSATION AND ERISA
IRS 409A Audits Have Begun; Corrections Made Now May Prevent
Penalties
EU DEVELOPMENTS
CESR Publishes Proposals to Extend Disclosure of Major
Shareholding Regime
ARTICLE
15 February 2010
Corporate And Financial Weekly Digest - February 12, 2010
The U.S. District Court for the Southern District of New York recently denied a request by a co-founder and director of Enzo Biochem, Inc. for a preliminary injunction to delay the company’s shareholder meeting by 45 days.