CORPORATE SECURITIES/M & A PRACTICE E-NEWS — MAY 4, 2005
Important Lessons from the SEC Enforcement Action
Against Tyson Foods Regarding Disclosure of
Perquisites
The Securities and Exchange Commission's ("SEC") well publicized enforcement action against Tyson
Foods Inc. ("Tyson Foods") and its former chairman, Donald Tyson, which was settled on April 28,
2005, provides a number of lessons for public companies and their officers and directors relating to the
adequacy of proxy disclosures regarding perquisites. The enforcement action involved underreporting
and misreporting in Tyson Foods' proxy statements from 1997 through 2003 of $3 million in perquisites,
including $689,016 in personal expenses for Mr. Tyson and two of his friends (such as a $20,000
purchase for oriental rugs, an $18,000 purchase for antiques, and an $8,000 horse), $203,675 in
housekeeping costs, and $84,000 in lawn maintenance provided at five different homes where Mr.
Tyson and his family and friends lived and/or vacationed. While the alleged facts are not in the
mainstream of situations facing public companies generally, the case does provide needed reminders
and guidance relating to disclosure in proxy statements of management perquisites that are universal in
application. The important lessons are the following:
The SEC is really serious about compensation disclosure. For the first time, the SEC appears
willing to use enforcement actions to get at "technical" issues in compensation disclosure. The
Tyson enforcement action involves disclosure issues that, despite the extreme nature of the perquisites
provided to Mr. Tyson, many might view as "technical." The violations cited in the complaint included
the following:
•
Mischaracterizing Perquisites. The SEC alleged that certain perquisites provided to Mr. Tyson
were mischaracterized and reported in the Tyson proxy statements as "performance-based"
bonuses. According to the SEC, the effect of such mischaracterization was that the perquisites
were "improperly disclosed . . . by moving amounts from the 'other compensation' column (used
to disclose perquisites) to the 'bonus' column of the summary compensation table." While the
mischaracterization did not affect the total amount of the compensation reported, it did create the
misleading impression that the amounts were earned as a result of Mr. Tyson's performance. To
our knowledge, this is the first case brought by the SEC charging that perquisites were
misreported as opposed to being unreported.
•
Failure to Identify Significant Perquisites. The Tyson Foods proxy statements failed to specify
and identify by type and amount Mr. Tyson's perquisites that exceeded 25% of his total
perquisites, as required by Item 402 of S-K. According to the SEC, certain of Mr. Tyson's
personal expenses and his use of homes owned by Tyson Foods should have been specifically
reported in the footnotes to the compensation disclosures, but were not. Again, to our
knowledge, this is the first case brought by the SEC charging a failure to specifically report in a
footnote perquisites that constitute more than 25% of an individual's total perquisites.
•
Improper Method of Valuing Airplane Usage. According to the SEC, the Tyson Foods proxy
statements incorrectly valued Mr. Tyson's personal usage of company aircraft, using the tax or
Standard Industry Fare Level ("SIFL") method for calculating value, instead of using the
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aggregate incremental cost method required by Instruction 2 to Item 402(b)(2)(iii)(C) of S-K.
When an individual tags along on a flight being taken by others for business purposes, the
incremental cost for the individual is essentially nothing other than the cost of food and drinks.
But when the sole purpose of the flight is for the individual's personal use, the incremental cost
will exceed the SIFL valuation by many times. In this case, the SEC alleged that the SIFL
valuation was only a small fraction of the incremental cost and the value of this perquisite was
greatly understated in the Tyson Foods proxy statements.
In the past, the SEC staff has warned issuers against using SIFL valuations. In particular, Alan
Beller, the Director of the Division of Corporation Finance, has indicated that the SIFL valuation
was not appropriate in proxy statements.1 This appears to be the first case in which the SEC has
actually challenged the use of the SIFL method of valuation. Still, it is somewhat surprising that
the SEC brought an enforcement action for the use of SIFL because there is still a good deal of
confusion as to whether the use of SIFL is appropriate. Last week, when the SEC settled the
Tyson Foods enforcement action, two companies filed proxy statements using the SIFL method
of valuation and another filed a proxy statement using a valuation of two times SIFL.
Signing an incorrect D&O questionnaire may be considered aiding and abetting if it leads to an
incorrect proxy statement. An officer or director whose directors and officers questionnaire for a
proxy statement does not fully and accurately disclose and properly characterize his perquisites (or any
other facts, including transactions with the issuer) may be deemed to aid and abet the issuer's
disclosure violations of the proxy rules if the proxy statement reflects the incorrect or incomplete
information in the questionnaire. The complaint against Mr. Tyson indicates that part of the basis for Mr.
Tyson's violations is that he signed questionnaires with incorrect responses.
The Tyson case is only the second time that the SEC has used an incorrect questionnaire as a basis
for an enforcement action against an individual. In 1987, the SEC brought enforcement actions against
three employees of Alleghany International in part on the basis of incorrect D&O questionnaires.2
The issuer's internal controls system must identify perquisites and report them to the
compensation committee. The Tyson complaint reflects the SEC's position that a system of internal
controls must capture information about all perquisites and must provide such information to the
issuer's compensation committee. A failure to do so may constitute a violation of Section 13(b)(2)(B),
which requires issuers to maintain a system of internal controls that assures, among other things,
transactions are executed, and access to assets is permitted only, in accordance with management's
general or specific authorization. As evidence of the failure of the internal controls and violation of
Section 13(b), the complaint alleged that the "approximately $1.5 million in personal benefits and
perquisites . . . had not been raised with or authorized by the compensation committee or the board of
directors." The violations of the internal control provisions of Section 13(b)(2)(B) were not tied to
Tyson's financial statements.
Note that the Tyson case is not the first case that has tied the failure to report perquisites to a violation
of the internal control provisions. For example, in In the Matter of Playboy Enterprises, Inc, the SEC
specifically found that the failure to identify and report the perquisites involved a violation of the internal
control provisions.3
ADDITIONAL INFORMATION
You can find the full text of the SEC's litigation release, the SEC complaint in the injunction proceeding
and the order instituting cease and desist proceedings at
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http://www.sec.gov/litigation/litreleases/lr19208.htm. If you have questions regarding any of the issues
discussed in this e-alert, please contact the Preston Gates attorney with whom you work or:
•
William Gleeson (williamg@prestongates.com) at (206) 370-5933,
•
Eric Simonson (esimonson@prestongates.com) at (206) 370-7679, or
•
Scott Greenburg (sgreenburg@prestongates.com) at (206) 370-6797.
Please visit the SEC website for more information.
FOOTNOTES
1Alan Beller speech before NASPP on October 20,2004.
2See, for example, In the Matter of Hilton, 1987 SEC LEXIS 3762; 49 S.E.C. 702.
31980 SEC LEXIS 911, 49 S.E.C. 66.
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