Legal proceeding disclosure under Regulation S-K Item 103

See the following handbook and Q & A on thecorporatecounsel.net

http://www.thecorporatecounsel.net/GreatGovernance/member/handbook/Legal.pdf

Disclosure “As of End of Period” or “Filing Date”

Question: Any thoughts or insight on whether the legal proceedings disclosure in a Form 10-K/

Form 10-Q must reflect developments that occurred in the proceeding after the end of the period

covered by the report?

Answer: While it is common practice to include post-period material developments to previously

disclosed proceedings, it is rare to disclose newly initiated proceedings in a Form 10-Q/K after the

period end. In other words, if a new proceeding arises between the period end for a report and the

time it is filed, it is not included.

topic # 1001
Legal Proceedings Disclosure As of End of Period or Filing Date
Last Post: 6/10/2005 5:15:33 PM
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Any thoughts or insight on whether the legal proceedings disclosure in a Form 10-K/Form 10-Q must reflect developments that occurred in the proceeding after the end of the period covered by the report?

Reply
   6/10/2005 11:57:00 AM

RE: Legal Proceedings Disclosure As of End of Period or Filing Date
Most practitioners consider Item 103 to speak as of the date of filing, not end of period covered by the report.

If you read Item 103, it is not limited in its scope to the end of the period - and of course, it is always safer to include all material information in the 10-K/10-Q available to the company at the time of filing - particularly in the area of legal proceedings - to ensure that there was no material omission as to make the disclosure misleading or incomplete. This practice probably is even more important in this "real-time" disclosure environment.

Reply

Broc Romanek, Editor, TheCorporateCounsel.net    6/10/2005 5:15:33 PM

Nasdaq listing rules regarding minimum committee members

Rule 5605(c)(2)(A) requires that each company must have, and certify that it has and will continue to have, an audit committee of at least three members.

Rule 5605(d)(2)(A) requires that each company must have, and certify that it has and will continue to have, a compensation committee of at least two members. Rule 5605(d)(5) also provides that a Smaller Reporting Company, as defined in Rule 12b-2, is not subject to the requirements of Rule 5605(d), except that a Smaller Reporting Company must have, and certify that it has and will continue to have, a compensation committee of at least two members.

Rule 5605(e)(1) simply requires that director nominees must either be selected, or recommended for the Board's selection, either by:

(A) Independent Directors constituting a majority of the Board's Independent Directors in a vote in which only Independent Directors participate, or

(B) a nominations committee comprised solely of Independent Directors.

Things you need to know about certain aspects of contested proxy solicitation

1. Broker non-votes: A “broker non-vote” is a proxy returned by a broker on behalf of its beneficial owner customer with respect to shares held in a fiduciary capacity (generally referred to as being held in “street name”) that are not voted on a particular matter because voting instructions have not been received by the broker from the customer. 
2. Broker non-votes significant for quorum purposes in Delaware: A broker non-vote is present for quorum purposes if there is at least 1 “routine” matter. Otherwise, the brokers simply with the “non-voted” shares are not considered present at the meeting such that the “non-voted” shares are not tabulated as present for any matter even for the quorum purposes. Think of it as the difference between showing up and voting on one (routine) item and then walking out on the non-routine matters versus not showing up at all. Make sure your annual meeting contains a routine item - i.e., ratification of independent auditor. In sum, brokers hold legal title to the shares, as the owner of record, and therefore they have the legal authority to vote the shares in person or by proxy. If they do not receive instructions from the beneficial or “street” owner for a “non-routine” matter, the proxy is considered to be a “limited” proxy and the broker does not have authority to vote on that particular matter (i.e., considered a “broker non-vote” or “unvoted” shares), but does have authority to vote on discretionary (or “routine”) matters, at its discretion. The “limited” proxies in Berlin were granted by brokers holding shares, but for which no express directions had been given by the beneficial owner. The shares were “represented” at the shareholders meeting for the limited purpose of establishing a quorum and could be voted on discretionary (or “routine”) matters, all in according with the applicable rules of the New York Stock Exchange.' Licht v. Storage Technology Corp.,2005 WL 1252355 (Del.Ch., May 13, 2005).
3. Dodd-Frank Connotation: Section 957 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) adopted new Section 6(b)(10) of the Securities Exchange Act.  This provision requires all national securities exchanges to adopt rules that prohibit their members from voting on the election of a member of the board of directors of an issuer (except for a vote with respect to the uncontested election of a member of the board of directors of any investment company registered under the Investment Company Act of 1940), executive compensation, or “any other significant matter, as determined by the Commission,” unless the member receives voting instructions from the beneficial owner of the shares. 
4. NYSE Rules 452.11 (as amended in September 2010) provides "[i]n the list of meetings of stockholders appearing in the Weekly Bulletin, after proxy material has been reviewed by the Exchange, each meeting will be designated by an appropriate symbol to indicate either (a) that members may vote a proxy without instructions of beneficial owners, (b) that members may not vote specific matters on the proxy, or (c) that members may not vote the entire proxy. Generally speaking, a member organization may not give or authorize a proxy to vote without instructions from beneficial owners when the matter to be voted upon" among other things,...(2) is the subject of a counter-solicitation, or is part of a proposal made by a stockholder which is being opposed by management (i.e., a contest);...(3) relates to a merger or consolidation (except when the company's proposal is to merge with its own wholly owned subsidiary, provided its shareholders dissenting thereto do not have rights of appraisal);...(19) is the election of directors, provided, however, that this prohibition shall not apply in the case of a company registered under the Investment Company Act of 1940; or...(21) relates to executive compensation. Make sure to call NYSE before you finalize your proxy statement.
5. NASDAQ Rule 2251 currently (as of April 2016) governs when NASDAQ members may vote shares held for customers by adopting the FINRA Rules. The FINRA rule, in turn, currently prohibits members from voting any uninstructed shares, but also permits the member to follow the rules of another self regulatory organization (SRO) instead.   In order to assure compliance, in all cases, with the newly adopted Section 6(b)(10), back in 2010, NASDAQ proposed to modify Rule 2251 to provide that in no event could a member vote uninstructed shares on the election of a member of the board of directors of an issuer (except for a vote with respect to the uncontested election of a member of the board of directors of any investment company registered under the Investment Company Act of 1940), executive compensation, or “any other significant matter, as determined by the Commission,” unless instructed by the beneficial owner of the shares. In its final rule adopting the Nasdaq’s amendment to Rule 2251 to become compliant with the Dodd-Frank requirement, the SEC pointed out in foot note 12 thereto (see the final release: https://www.sec.gov/rules/sro/nasdaq/2010/34-62992.pdf): “The Commission has not, to date, adopted rules concerning other significant matters where uninstructed broker votes should be prohibited, although it may do so in the future. Should the Commission adopt such rules, we would expect Nasdaq to adopt coordinating rules promptly to comply with the statute.”
6. Director's Abstention at Board Meeting: There is a Delaware case that supports the argument that a director who is present but does not vote at all is to be counted in the negative, Dillon v. Berg (326 F. Supp. 1214).  It states, “It is established that where a statute requires a vote of a majority of directors present to pass a resolution, a director who is present and does not vote at all on the resolution is counted in the negative for the purpose of determining whether the resolution has been carried by a majority vote.” On the other hand, Section 144 of DGCL sets forth the circumstances in which an (interested) director’s vote can be considered void or voidable, that is, a contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest. 
7. "Solicitation in Opposition": Note 3 to Rule 14a-6 provides that the exclusion from filing a preliminary proxy does not apply for a “solicitation in opposition” in connection to the meeting. A “solicitation in opposition” is an independent solicitation by a shareholder. The SEC Staff believes that a company may not rely on Rule 14a-6 to omit a preliminary proxy filing if it knows—or reasonably should know—of a solicitation in opposition, notwithstanding the fact that the company does not “refer” to such a solicitation in its proxy statement. See Schedule 14A, Question 2 in the July 2001 Supplement to the Staff’s Manual of Publicly Available Telephone Interpretations. Also make sure you call the SEC Office of Mergers and Acquisitions regarding the nature of a potential independent solicitation by a shareholder.
8. Rule 14a-8, including 14a-8(m) which relates to timing of issuer's definitive proxy material delivery if a shareholder proponent asks the SEC Staff to intervene because the shareholder doesn’t like the language in the company’s statement in opposition to the shareholder proposal, does not apply to independent solicitation by a shareholder.
9. Liability. It doesn’t appear that there is any liability for filing a “deficient” preliminary proxy statement even though Note 2 to Rule 14a-6 warns companies that “the official responsible for the preparation of the proxy material should make every effort to verify the accuracy and completeness of the information required by the applicable rules.” However, if the same deficiencies exist when the company files the definitive proxy statement, it may be held liable under Rule 14a-9.