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Client Alert

February 1, 2006

Cost and Pricing Issues – West Government Contracts Year in Review Conference

Gibson Dunn partner Karen Manos is the author of "Cost and Pricing Issues" [PDF], a brief from the 2005 West Government Contracts Year in Review Conference.  
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January 26, 2006

Illinois Law Restricts Business Connections to Sudan – Many Companies Will Be Asked for Certification

On January 27, the Act to End Atrocities and Terrorism in the Sudan, Public Act 094-0079 ("the Act"), will become effective in Illinois. This legislation amends the Illinois Deposit of State Moneys Act to prohibit the investment of state funds in Sudanese entities and in domestic companies who do business with Sudan. Due to its broad scope, the new law will likely affect a large number of companies.The Act provides that the State Treasurer may not invest Illinois funds in debt instruments issued by "forbidden entities," which are defined as:the government of Sudan;companies managed or controlled, in whole or in part, by the government of Sudan;companies who are incorporated in Sudan or have their principal place of business in that country;companies who were identified by the Office of Foreign Assets Control (OFAC) as sponsors of terrorism;companies who violate United States sanctions against Sudan after January 27, 2006 and become subject to OFAC penalties; andcompanies who fail to certify under oath that they do not have assets or employees in Sudan and that they do not engage in business with Sudanese entities.Media organizations, non-governmental organizations certified by the United Nations, and other entities who provide humanitarian relief or educational services are specifically excluded from the definition of forbidden entities.The Act further provides that Illinois funds can only be deposited at financial institutions who require loan applicants to certify that they are not forbidden entities. Finally, the Act prohibits the investment of pension funds with intermediaries who fail to fully divest such funds from any forbidden entities within eighteen months after the effective date of the Act.  For further information, please contact Judith A. Lee at (202) 887-3591 or Radu Costinescu at (202) 955-8259 in the Washington, D.C. office of  Gibson, Dunn & Crutcher LLP.© 2006 Gibson, Dunn & Crutcher LLPThe enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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January 17, 2006

SEC Proposes Amendments to Executive Compensation, Related Party and Independence Rules

Today, the Securities and Exchange Commission (the “SEC”) voted to propose rules that would amend disclosure requirements for:executive and director compensation; related party transactions;director independence and other corporate governance matters;security ownership of officers and directors; and Form 8-K reports regarding compensation arrangements.The final rules are not expected to be enacted in time for the 2006 proxy season, but likely will apply to disclosures of 2006 compensation that are made in companies’ 2007 proxy statements. As discussed below, in addition to filling gaps in required tabular presentations of compensation, the proposals would require additional narrative disclosure to elaborate on the compensation tables. The narrative disclosure must satisfy “plain English” standards. A summary of the rule proposal is set forth below. This summary is based on information provided at the SEC’s open meeting, and therefore may not reflect nuances that appear in the SEC’s proposing release, which is expected to be issued shortly. We expect to issue additional materials on the rule proposals once the actual rule text has been published and can be fully assessed. Based on the limited information currently available, the rule proposals appear to reflect a thorough, thoughtful and well-informed effort to provide comprehensive, balanced and informative disclosure on executive compensation and related issues. We expect that many shareholders and companies will welcome greater clarity in the disclosure requirements and a more level playing field for disclosure of differing types of compensation, so that disclosure considerations do not unnecessarily handicap particular types of compensation programs. At the end of this Update, we discuss actions that companies, executives and compensation committees should consider in anticipation of the new rules. Executive Compensation DisclosureThe proposals would eliminate the Board Compensation Committee Report on Executive Compensation and the five-year stock price performance graph. In their place would appear a Compensation Discussion and Analysis report containing details on the objectives and implementation of executive compensation programs (similar in concept to existing requirements for Management’s Discussion and Analysis covering a company’s financial condition and results of operations). The Compensation Discussion and Analysis would expand disclosure beyond existing standards for Compensation Committee Reports by requiring a discussion of compensation policies and decisions, including details on each element of compensation - its objectives, why it is provided, how amounts are determined and how the compensation fits into the company’s overall compensation program. This report would be styled as a company disclosure; it would not appear “over the names” of a company’s compensation committee. Existing tabular disclosure of executive compensation would be reformatted and enhanced, and would be accompanied by more narrative disclosure than is currently provided. The tables would be grouped into three broad categories: compensation over the last three years; holdings of outstanding equity-related compensation; and retirement plans and other post-employment payments and benefits.Compensation would be presented for the Chief Executive Officer, Chief Financial Officer and three other most highly paid executive officers. The additional three executives would be determined based on their total annual compensation, whereas the current rules base that determination on the amount of salary and annual bonus paid to executives. Tabular disclosure over the past three years would be provided through a reorganized Summary Compensation Table, a Performance-Based Award Grant Table and an All Other Equity Award Grant Table.The Summary Compensation Table:would have a column reporting “total” annual compensation;would contain a single column for reporting grant-date fair value of all equity awards for the year (restricted stock/stock unit grants as well as option/stock appreciation right grants), computed under Statement of Financial Accounting Standards No. 123(R); and would combine the “Other Annual Compensation” and “All Other Compensation” columns, and at the same time expand the disclosure requirements so that the column includes all compensation not elsewhere reported in the table (including, for example, dividends on restricted stock, the aggregate annual increase in the actuarial value of pension benefits and accruals under deferred compensation arrangements that are not tax-qualified plans).The SEC’s release will contain interpretive guidance on what constitutes a “perquisite” that is subject to disclosure and will request public comment on that guidance. It is unclear whether this guidance will be prospective only, or will apply under the existing disclosure rules, as the Division of Corporation Finance has in the past not provided interpretive guidance in this area. It also is unclear whether the rule proposals will contain new valuation standards for perquisites, but the proposals would lower the disclosure threshold to $10,000 from the current $50,000 threshold. During the SEC’s open meeting, the Commissioners and Staff discussed a number of aspects of the proposed disclosures for option grants. In particular, it appears that the proposal would require disclosure of the full SFAS No. 123(R) valuation of an option whenever the option is materially modified (such as when the term of an option is extended in connection with termination of employment). This disclosure proposal would differ from the standard applicable for financial statement reporting, where only the incremental value arising from an option modification is expensed. Holdings of and amounts realized under all forms of equity compensation (including options, restricted stock and stock units) would be reported in two tables, similar to existing disclosure requirements for option holdings and amounts realized from option exercises. The third category of executive compensation disclosures would entail greatly expanded reporting of retirement, change-in-control and post-employment benefits. The proposed disclosure requirements include: a table showing the actual annual benefits payable to each named executive officer under defined benefit pension plans; a table showing annual executive contributions, company contributions, earnings, withdrawals and year-end balance under deferred compensation plans that are not tax-qualified (that is, excluding for example 401(k) plan amounts); anda description and quantification of payments and benefits payable to each of the five covered executive officers on termination of employment or change in control. We expect that this last element of disclosure will be a source of extensive public comment. While many compensation committees review calculations of these potential benefits, they involve extensive use of assumptions (which would be disclosed under the rule proposals). Moreover, in our experience these potential benefits often are calculated in a manner that is sufficient to inform compensation committees of the magnitude of change-in-control or severance payments, but that does not obtain the level of precision necessary for an SEC filing. Directors’ Compensation DisclosureCompensation provided to each director in the last fiscal year would be itemized in a compensation table similar to the Summary Compensation Table provided for executives, with a narrative discussion of the elements of directors’ compensation. Disclosure of Other Employees’ Compensation An unanticipated aspect of the proposed rules would require disclosure of the compensation paid to up to three employees who are not executive officers, if that compensation exceeds the compensation paid to executive officers covered in the Summary Compensation Table. Although the proposals would not require the employees to be named, their job responsibilities would be disclosed. We expect that this proposal will raise concerns regarding the competitive impact on the market for non-managerial sales staff and creative or technical talent, and that comments will address whether the proposed disclosures provide meaningful information for investors. Related Party TransactionsItem 404(a) of Regulation S-K currently requires disclosure of transactions in which executives, directors and large shareholders, or their family members, have a direct or indirect material interest, if the value of the transaction exceeds $60,000. While details were vague, it appears that the proposals will raise the transaction threshold to $120,000, but otherwise would expand the scope of transactions required to be disclosed. During and after the SEC’s open meeting, the Commissioners and Staff described the proposed changes as leading to a more “principles-based” disclosure requirement, and involving the repeal of existing rules that allow certain types of relationships to not be disclosed. Companies will be required to disclose their policies for approving related party transactions. Director Independence and Other Corporate Governance MattersThe proposals would expand the disclosure requirements for a company’s business relationships with other businesses where a director is employed or is a significant owner, so that the disclosure thresholds more closely conform to the stricter standards applied under New York Stock Exchange and NASDAQ Stock Market independence standards. While details were not clear, the proposals also would require disclosure of other material relationships that were considered when evaluating a director’s independence. Other proposed rule changes would consolidate existing corporate governance disclosure requirements into a single set of rules, while easing disclosure burdens by allowing enhanced reliance upon internet availability of committee charters and other information. Security Ownership of Officers and DirectorsThe proposals would require that the table reporting the number of shares of company stock that executives and directors beneficially own disclose the number of shares, if any, that are subject to pledges. Form 8-KThe proposals would revise the scope of executive compensation disclosure requirements on Form 8-K, so that only executive officers’ employment arrangements and material amendments to such arrangements are covered. It appears that this rule amendment may eliminate the need for Form 8-K reports on directors compensation. It is unclear whether the proposals also will provide greater clarity on when a Form 8-K may be required to report compensation decisions under bonus and employee benefit plans, although we expect this to be an area that companies will wish to cover in comments submitted to the SEC. Planning for the New RulesOver the last several years, many companies have provided enhanced compensation disclosures that address many of the areas covered by the proposed rules, and we expect the rule proposals to expand that practice. Because the scope of required disclosures will clearly expand for the 2007 proxy season, companies and compensation committees should consider now whether to provide those additional disclosures in 2006. While it will be appropriate to provide additional disclosures on elements of compensation that are not clearly required under the existing rules, it is unclear whether 2006 proxy disclosures will be permitted to deviate from the current required tabular presentations in favor of the reformatted compensation tables set forth in the rule proposals, as consistency in presentation remains an SEC priority for compensation disclosures. Compensation committees should not view elimination of the Board Compensation Committee Report as easing their disclosure responsibilities. The proposed new Compensation Discussion and Analysis will require more detail on the operation of compensation programs and on the basis for compensation decisions, and that disclosure will flow from the decisions made by compensation committees. It is clear that the SEC is not only seeking additional numerical information; the narrative disclosures will cover both the “big picture” and the details of compensation programs. There will continue to be an opportunity to discuss compensation “best practices,” such as evaluations of internal pay equity and accumulated wealth. Compensation committees that are not already using tally sheets to evaluate “total” compensation should do so in 2006, since current compensation decisions will be reflected under the new rules in 2007. Likewise, because of the expense and effort that will be required to precisely quantify the value of change-in-control and severance benefits, compensation committees should plan on undertaking that effort in 2006. Any renegotiations or adjustments to severance programs should be in place by fiscal year-end, since that could be the point in time when those benefits are valued for disclosure purposes. Some compensation committees likely will evaluate whether to cap the value of post-employment benefits, so as to avoid disclosing, for example, that airplane use benefits are potentially of unlimited value. Companies should assess how the proposed “total” compensation standard may alter which executives are covered by the compensation disclosure rules. Companies that do not have restrictions on their executives’ pledging or hedging company stock should evaluate whether to implement policies addressing those practices, as the final disclosure standards may cover arrangements that are in place during 2006, and executives may wish to close-out existing arrangements over the coming year. Finally, investors, companies and directors, particularly compensation committee members, should carefully review the proposed rules once they are made available, and should consider submitting pragmatic comments to the SEC. If aspects of the proposals could unduly bias or burden compensation decisions, those elements should be pointed out and alternative means to enhance disclosure suggested. The comment period for the rule proposals is scheduled to end 60 days after the proposals are published in the Federal Register.Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or John F. Olson (202-955-8522, jolson@gibsondunn.com), Ronald O. Mueller (202-955-8671, rmueller@gibsondunn.com), Brian J. Lane (202-887-3646, blane@gibsondunn.com) or Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com) in the firm's Washington, D.C. office.© 2006 Gibson, Dunn & Crutcher LLP 
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December 20, 2005

Blue Ribbon Commission Issues Recommended Best Practices for Directors

On December 7, 2005, a blue ribbon commission of the National Association of Corporate Directors issued a report that discusses the current legal liability environment for directors and recommends best practices for directors to safeguard against personal liability. John F. Olson, a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP, served on the commission.The NACD report is particularly timely, in light of recent press reports that outside directors are being targeted by the SEC in several pending investigations, including the SEC's investigation of Hollinger International. According to press reports, "Wells notices" have been sent to current and former members of the audit committee of Hollinger, indicating that the Enforcement Division intends to recommend that enforcement actions be brought against those directors. It is believed that the investigation focuses on, inter alia, the directors' approval of over $200 million in management fees paid to a company allegedly controlled by former chairman Conrad Black. In related news, a Deputy Director of the Enforcement Division recently was quoted as saying that the SEC will pursue cases against outside directors when the directors have "taken no care in ensuring the accuracy" of statements made in SEC filings that they sign. "When they sign something, it has to have some basis," the SEC official said.The threat of enforcement actions against outside directors underscores that boards of directors should take appropriate steps to strengthen their board decision-making processes. The recommendations in the NACD report include that directors:Obtain a broad understanding of the company's business, including the management's strategy, the assumptions and risks associated with management's strategy, the company's system of controls and the compliance culture promoted by senior management.Pay special attention to the board agenda and the flow of information to the board, including whether the board receives sufficient information, both positive and negative, to make informed decisions.Attend meetings with an attitude of healthy skepticism and review minutes carefully and promptly to see that they accurately reflect the matters considered. Insist that management circle back to issues decided or discussed for updates and progress reports.Hold regular executive sessions without management to discuss the quality of management.Understand matters put before the board for approval. Take special care in reviewing SEC filings, including registration statements, prospectuses and the periodic reports that they incorporate. Discuss within the board and with management, outside auditors and counsel whether there are any additional steps that the directors should take to assure themselves of the accuracy of documents filed with the SEC and whether aspects of a particular disclosure are unusual or problematic.Rely in good faith on well-chosen experts, but consider expert advice carefully based on a director's own knowledge and information.Strictly observe procedures for addressing unavoidable conflicts of interest and avoid self-dealing. Take special care as to any issue or transaction that involves a potential conflict for a member of management, a director or a controlling stockholder.The appendices to the NACD report include an excerpt from a chapter on indemnification and insurance authored by Gibson Dunn attorneys that has been published as part of a larger work on corporate governance co-edited by Amy L. Goodman, a partner in the Washington, D.C. office of Gibson Dunn. The excerpt discusses the role of insurance in protecting directors and officers in circumstances where indemnification may be unavailable and reviews the structure of a typical D&O insurance policy.The NACD report, entitled "Report of the NACD Blue Ribbon Commission on Director Liability: Myths, Realities and Prevention," is available from the NACD at http://www.nacdonline.org.Gibson, Dunn & Crutcher's lawyers are available to address questions regarding these issues.  For further information, please contact the attorney with whom you work or:Jonathan C. Dickey - Bay Area Offices (650/849-5324; jdickey@gibsondunn.com)Robert F. Serio - New York (212/351-3917; rserio@gibsondunn.com)Wayne W. Smith - Orange County (949/451-4108; wsmith@gibsondunn.com)John F. Olson - Washington DC (202/955-8522; jolson@gibsondunn.com)Amy L. Goodman - Washington DC (202/955-8653; agoodman@gibsondunn.com)© 2005 Gibson, Dunn & Crutcher LLP
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December 19, 2005

Be Careful What You Ask For: Unintended Consequences and Unfinished Business Under the Class Action Fairness Act

Partner Jarrett Arp is the author of "Be Careful What You Ask For: Unintended Consequences and Unfinished Business Under the Class Action Fairness Act," published in the Fall 2005 issue of Antitrust magazine, a publication of the ABA Section of Antitrust Law. Reprinted with permission, Antitrust magazine, © 2005 American Bar Association.
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December 16, 2005

SEC Revises Periodic Report Filing Deadlines and Proposes Amendments to the Tender Offer “Best-Price” Rule

On December 14, 2005, the Securities and Exchange Commission held an open meeting during which the Commission adopted revisions to the deadlines for filing periodic reports and the definition of an "accelerated filer".  The Commission also proposed revisions to the "best-price" rule applicable to registered tender offers intended to resolve a split among federal circuits on the interpretation of the existing rule.  At the same meeting, the Commission proposed amendments to liberalize the deregistration process for foreign companies; these amendments are summarized in a separate Gibson Dunn memo, dated December 14, 2005.Adoption of Revisions to the Periodic Report Filing Deadlines for "Accelerated Filers"The Commission adopted revisions to the periodic reporting deadlines for certain large public companies.  The newly adopted rules modify the final phase-in of the accelerated reporting scheme previously adopted by the Commission in 2002.  The new rules retain the accelerated filing status of companies with a public float of $75 million or more, but create a new category of accelerated filers called "large accelerated filers" which are companies with a public float of $700 million or more.The newly adopted rules effect changes to the periodic filing deadlines of both accelerated filers and large accelerated filers as follows:Beginning with fiscal years ending on or after December 15, 2006, the deadline for large accelerated filers to timely file annual reports on Form 10-K will be cut from 75 days to 60 days.The deadline for accelerated filers (not large accelerated filers) to timely file annual reports on Form 10-K will remain at 75 days.The deadline for accelerated filers and large accelerated filers alike to file quarterly reports on Form 10-Q will remain at 40 days.The new rules also permit an accelerated filer whose public float drops below $50 million to file an annual report on a non-accelerated basis for the same fiscal year that the float drops below the $50 million threshold.  Similarly, a large accelerated filer will be permitted to exit large accelerated filer status if its public float should drop below $500 million.It should be noted that the periodic report filing deadlines for all other reporting companies remain unchanged.  Non-accelerated filers must file annual reports on Form 10-K or 10-KSB within 90 days and quarterly reports on Form 10-Q or 10-QSB within 45 days in order to be current in their reporting.  The newly adopted amendments do not impact filing deadlines for Form 20-F or Form 40-F applicable to foreign private issuers.Proposed Amendments to the Tender Offer Best-Price RuleIn addition, the Commission voted to approve proposed amendments to the best-price rule set forth in Exchange Act Rules 14d-10(a)(2) and 13e-4(f)(8)(ii), applicable to third-party tender offers and issuer tender offers, respectively.  The best-price rule provides that the consideration offered and paid to any security holder in a tender offer must be equal to the highest consideration paid to any other security holder in the offer.  Using this rule, plaintiffs have challenged retention agreements, golden parachutes and similar arrangements with target company executives by characterizing such compensation as separate tender offer consideration that violates the best-price rule.  The proposed revisions should address a split among federal courts as to whether the best-price rule in fact applies to such employment and compensation arrangements.  This uncertainty regarding the application of the best price rule has led many acquirors to shy away from conducting a tender offer when engaging in a business combination transaction.Specifically, the proposed revisions are expected to address this issue by:Exempting from the third-party tender offer rule the "negotiation, execution or amendment of an employment compensation, severance or other benefit arrangement," so long as the consideration paid under the agreement relates solely to past or future services, severance, or a non-competition agreement, and not the number of shares owned or tendered by an employee or director of the target company. Clarifying that the best-price rule applicable to both issuer and third-party tender offers is limited to the payment for securities tendered in a tender offer, and not consideration paid for other compensatory purposes.Providing a general safe harbor covering arrangements approved by an independent compensation committee or a committee of the board of either the target or the bidder depending on the entity entering into the arrangement.Clarifying that the best-price rule is not limited solely to the period when a tender offer is pending.The Commission will be soliciting comments on the proposed amendments to the tender offer best-price rule for 60 days following publication in the Federal Register.  When the SEC publishes the proposed amendments, which is expected some time next week, we will circulate a more detailed memo summarizing the specific proposals.Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or John F. Olson (202-955-8522, jolson@gibsondunn.com), Ronald Mueller (202-955-8671, rmueller@gibsondunn.com), Brian J. Lane (202-887-3646, blane@gibsondunn.com) or Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com) in the firm's Washington, D.C. office, or James J. Moloney (949-451-4343, jmoloney@gibsondunn.com) in the firm's Orange County office.© 2005 Gibson, Dunn & Crutcher LLP
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