CORPORATE QUICK HIT
DECEMBER 2006
THE HERRICK ADVANTAGE
“Middle market” doesn't mean “simple,” and you can count on Herrick to help you get the most out of your
transaction, whatever its size. Herrick recently advised a company in its sale of $57 million of convertible
stock in a Rule 144A transaction. As part of the deal, our client loaned 1.5 million shares of its common stock
to an affiliate of the initial purchaser in order to facilitate transactions by which purchasers of the stock will
hedge their investments through privately negotiated derivatives transactions.
SEC to Ease SOX Requirements for Small Publicly Held Companies
The Securities and Exchange Commission recently made some proposals under Rule 404 of the Sarbanes-Oxley Act intended to
ease auditing standards for thousands of smaller public companies. Rule 404, one of the more contentious provisions of SOX,
requires publicly traded companies to assess the controls they have put in place to ensure that their financial reports are reliable.
Under the proposals, a “materiality standard” will be incorporated into Rule 404. Under this standard, auditors will be advised to
scrutinize only those controls that could have a reasonable risk of having a material impact on the financial statements. These
proposals are expected to encourage auditors to rely on prior years’ work as a basis for testing controls and discourage auditors
from multiple testing of the same controls. The proposals are further expected to encourage the auditors to use a “risk
assessment” to focus the audit on the areas of greatest potential concern.
www.sec.gov/news/press/2006/2006-206
Variation on Use of Options for Compensation Purposes
In a move intended to expand the opportunity for its employees to recognize value from stock options, Google Inc. announced
earlier this month that it would create a system allowing options to be sold as well as exercised. Under the program, Google Inc.
will grant employees a new type of option, called a transferable stock option. Once the options are vested, employees will be able
to hold them, exercise them or sell them. Google Inc. plans to work with its financial advisors to establish a trading platform that
will enable financial institutions and other investors to bid for those options.
SEC Amends Tender Offer Best-Price Rules to Exempt Employment Compensation Arrangements
On November 8, 2006, the SEC amended the best-price rules for tender offers. The best-price rules, set forth in Rules 13e-4(f)(8)
and 14d-10 under the Securities Exchange Act of 1934, as amended, were adopted originally to provide fair and equal treatment
of all security holders of the class of securities that became the subject of a tender offer. Prior to the amendments, the best price
rules provided that no bidder was to make a tender offer unless (1) the offer was open to all holders of the subject class of
securities and (2) the consideration paid to any holder was equal to the highest consideration paid to any other holder during the
offer. Some courts had interpreted this language to prohibit compensatory agreements from being struck with the holders of
subject securities within the context of a tender offer, as such agreements were seen to create inequity in the consideration
received by all holders during the offer, thus violating the “best price” provision of the rules. The new rules are designed to permit
bidders to negotiate and enter into service-based, compensatory arrangements with a subject company’s security holders within
the context of a tender offer. In order to qualify under the amended rules, such arrangements may provide consideration only for
past services performed, future services to be performed, or future services to be refrained from performing by the security holder,
or matters incidental thereto. Amounts payable under such arrangements may not be calculated based upon the number of
securities tendered by the holder. The amendments also provide a safe harbor protecting compensatory arrangements that are
approved by certain independent directors of either the subject company or the bidder, if the bidder is a party to the arrangement.
SEC Release No. 34-54684
SEC To Propose Definition of “Accredited Investor” for Hedge Fund Purposes
Earlier this month, the SEC announced that it proposes to define a new category of accredited investor that would apply to offers
and sales of securities issued by hedge funds and other private investment pools to natural persons. The proposed definition
would include any natural person who (i) meets either the net worth test or income test specified under the current definition and
(ii) owns at least $2.5 million in “investments” (as such term will be defined in the proposing release expected to be issued in
early 2007).
www.sec.gov/news/press/2006/2006-208
SEC Votes to Repropose Rules Allowing Foreign Private Issuer Deregistration Under the Exchange Act
Earlier this month, the SEC proposed amendments to the rules that govern when a foreign private issuer may withdraw their
securities from American public trading markets. Under the current rules, a foreign private issuer may withdraw if the issuer’s
securities have fewer than 300 record holders who are U.S. residents. As a result of the increased globalization of the U.S.
securities markets that has occurred since the withdrawal rules were initially adopted, a foreign private issuer may find it difficult
to withdraw from American public trading markets despite the fact that there is relatively little interest in the issuer’s securities
among U.S. investors.
Under the proposed amendments, a foreign private issuer that meets a quantitative benchmark designed to measure relative U.S.
market interest for the issuer’s securities (rather than a head count of such issuer’s U.S. security holders) will be permitted to
withdraw. The proposed benchmark would require the comparison of the average daily trading volume of the foreign private
issuer in the U.S. with that in its primary trading market.
www.sec.gov/news/press/2006/2006-207
NASD Issues Guidance On Gift-Giving Rules
With the holiday party gift-giving season in full swing, many clients have asked for clarification of the $100 per person per year
limitation on “gifts or gratuities” that the National Association of Securities Dealers has imposed on its members pursuant to Rule
3060. The NASD, in its December 2006 Notice to Members, clarified the gift limitation. NASD member firms should be
mindful of the limitations on gift-giving when receiving gifts and offering gifts, and in any event, should keep accurate records of
all gifts falling within the rule.
Personal Gifts. Rule 3060 does not apply personal gifts, such as wedding gifts, birthday gifts and congratulatory gifts for the
birth of a child, provided that such gift is not “in relation to the business of the employer of the recipient.” If a firm bears the cost
of a gift or reimburses an employee making a gift, the gift will be presumed by the NASD as falling within Rule 3060.
De Minimis and Promotional Items. The $100 limitation will not count toward gifts with a low value (e.g., pens, notepads,
modest desk ornaments) or toward promotional items of nominal value that display the firm’s logo (e.g., umbrellas, tote bags or
shirts). The NASD considers only gifts well below the $100 dollar limit to be of “nominal” value. Expensive items over $100
would not be eligible for the “promotional item” exclusion to Rule 3060 even if the item displays the firm’s logo.
The NASD has made an important clarification to Rule 3060 by stating that Lucite tombstones, plaques or other similar solely
decorative items commemorating a business transaction would not fall within Rule 3060 or the $100 dollar limitation. However,
functional items or electronic equipment would fall within the rule even if they were given as a “deal toy.”
Aggregation of Gifts. The NASD requires that receipts for each individual person receiving gifts from a firm be aggregated to
ensure compliance with the $100 limitation. Firms are well advised to keep a record of the gifts they give to employees of NASD
members.
Valuation of Gifts. Sporting event and entertainment tickets should be valued at the higher of the face value of the ticket or the
cost to procure the ticket on the secondary market (exclusive of tax and delivery charges). If a gift basket is sent to an office, the
value of the gift may be split among individuals in the office.
Gift Incidental to Business Entertainment. There are no exceptions for gifts purchased in the course of client entertainment.
www.nasd.com/web/groups/rules_regs/documents/notice_to_members
For more information on these issues or other corporate matters, please contact:
NY Irwin Kishner at 212.592.1435 or email ikishner@herrick.com
NY Daniel Etna at 212.592.1557 or email detna@herrick.com
Copyright © 2006 Herrick, Feinstein LLP. Corporate Quick Hit is published by Herrick, Feinstein LLP for information purposes only. Nothing
contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.