Corporate Governance: In the wake of Sarbanes-Oxley, organizations have had to develop strategies to meet the Act’s new, evolving regulations. Because Governance should operate like a system by which companies are directed and controlled in order to protect shareholder value, technology has a key role to play. While the link between IT and shareholder value is increasingly understood and quantifiable, financial pressures prompt companies to adopt a cautious approach to IT. The question for business leaders is to know where, when and how they should invest in technology. Solving this dilemma will have a crucial impact on the performance of business.
Executive Compensation and Backdating Options: Unlawful schemes to backdate executive stock options benefit employees at the expense of shareholders. In a simple stock option, a company grants an employee the right to purchase a specified number of shares of the company’s stock at a specific price (exercise price) after a specified period of time (exercise date). In one scenario, employees backdate exercise dates to correspond with low points of the closing price of a company’s stock. This minimizes the gain at exercise that they report as ordinary income on their tax returns, while maximizing the capital gains treatment of any eventual profits by starting the clock ticking early on the holding period for capital gains treatment. At the same time, the reduced gain at the exercise of an option results in a corresponding reduction in the tax deduction for the company. Criminal and civil charges apply.
Gifts and Entertainment: The SEC published a notice requesting comment on rule filings by the National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) relating to business entertainment of customers by member firms, and their associated persons. In conjunction with the announcement that it had settled proceedings against a broker-dealer regarding gifts, travel and entertainment provided to certain personnel of a registered adviser, the NASD issued:
(a) a report on its examination of over 40 member firms’ gifts and gratuities practices, and,
(b) Notice to Members (NTM), which provides additional guidance on complying with NASD’s gifts and gratuities rule.
In general terms, the rule prohibits any NASD member or its associated persons from giving, or permitting to be given, anything of value in excess of $100 per year to any individual where the gift is in relation to the business of the recipient’s employer. The rule also requires an NASD member to maintain a separate record of all payments or gratuities “in any amount known to the member” and have systems and procedures reasonably designed to achieve compliance with the rule.
Recent Developments in Delaware Corporation Law: The Delaware Supreme Court recently held, in a case of first impression for that court, that creditors of insolvent and nearly-insolvent Delaware corporations may not assert direct claims against directors for breaches of fiduciary duties.
In Gatz v. Ponsoldt, the Delaware Supreme Court recognized expanded scope of direct shareholder claims. The Court, en banc, held that public shareholders could bring direct claims, in addition to derivative claims, to challenge a series of transactions orchestrated by a controlling shareholder that transferred voting power and economic value from the public shareholders to a third party, and ultimately benefited the controlling shareholder.
