2008 R&T/CFP SEMINAR ON INDUSTRY TOPICS Hyatt Regency Jersey City on the Hudson Jersey City, New Jersey June 2-3, 2008 Understanding the Changes to Rule 144 and Corporate Governance Best Practices By Craig M. Scheer, P.C. Silver, Freedman & Taff, L.L.P K Street, N.W., Suite 100 Washington, D.C (202) (main) (202) (direct dial) © Silver, Freedman & Taff, L.L.P. 2008

Understanding the Changes to Rule 144 and Corporate Governance Best Practices Topics: Changes to Rule 144 Insider Trading Policies and Procedures Rule 10b5-1 Trading Plans Compensation Committee Best Practices Equity Grant Procedures Advance Notice and Other Bylaw Provisions Board and Board Committee Minutes 2

Changes to Rule 144 3

Background Safe harbor exemption from 1933 Act registration requirements for resales of securities. Safe harbor exemption from 1933 Act registration requirements for resales of securities. Two categories of securities covered: Two categories of securities covered: Restricted securities: securities acquired in a transaction or series of transactions not registered under 1933 Act. Restricted securities: securities acquired in a transaction or series of transactions not registered under 1933 Act. Control securities: securities held by affiliates (generally directors, executive officers and greater than 10% stockholders), regardless of how acquired. Control securities may or may not also be restricted securities. Control securities: securities held by affiliates (generally directors, executive officers and greater than 10% stockholders), regardless of how acquired. Control securities may or may not also be restricted securities. Changes to Rule 144 4

Conditions of Rule 144 Before Amendments One-year holding period on resales of restricted securities. One-year holding period on resales of restricted securities. Additional conditions on resales of control securities (restricted or unrestricted) and resales of restricted securities by non-affiliates held for at least one year but less than two years: Additional conditions on resales of control securities (restricted or unrestricted) and resales of restricted securities by non-affiliates held for at least one year but less than two years: Issuer subject to 1934 Act at least 90 days and current in 10-K and 10-Q filings. Issuer subject to 1934 Act at least 90 days and current in 10-K and 10-Q filings. Amount of securities sold during preceding three months by seller and those aggregated with seller cannot exceed greater of 1% of shares outstanding or average trading volume during preceding four calendar weeks. Amount of securities sold during preceding three months by seller and those aggregated with seller cannot exceed greater of 1% of shares outstanding or average trading volume during preceding four calendar weeks. Must be sold in “brokers’ transactions” or directly with a market maker. Must be sold in “brokers’ transactions” or directly with a market maker. Notice on Form 144 must be filed with SEC and applicable securities exchange concurrent with sell order if amount to be sold in any three month period exceeds 500 shares or aggregate sale price exceeds $10,000. Notice on Form 144 must be filed with SEC and applicable securities exchange concurrent with sell order if amount to be sold in any three month period exceeds 500 shares or aggregate sale price exceeds $10,000. Changes to Rule 144 5

Conditions of Rule 144 After Amendments Holding period for restricted securities issued by SEC reporting company shortened from one year to six months. After six months but before one year non-affiliates can sell if issuer current in 10-K and 10-Q filings. Affiliates must comply with additional requirements for control securities. Holding period for restricted securities issued by SEC reporting company shortened from one year to six months. After six months but before one year non-affiliates can sell if issuer current in 10-K and 10-Q filings. Affiliates must comply with additional requirements for control securities. Holding period for restricted securities issued by non-SEC reporting company remains one year. Holding period for restricted securities issued by non-SEC reporting company remains one year. Conditions on resales of control securities same as before amendment, except: Conditions on resales of control securities same as before amendment, except: Alternative volume calculation for debt and debt-like securities. Alternative volume calculation for debt and debt-like securities. Manner of sale requirement eliminated for debt securities and liberalized for equity securities. Manner of sale requirement eliminated for debt securities and liberalized for equity securities. Form 144 filing threshold raised to 5,000 shares or aggregate sale price of $50,000 (up from 500 and $10,000, respectively). Form 144 filing threshold raised to 5,000 shares or aggregate sale price of $50,000 (up from 500 and $10,000, respectively). Changes to Rule 144 6

Rule 145 “Presumptive underwriter” doctrine – previously subjected affiliates of target companies in stock merger transactions to Rule 144 control securities resale restrictions for one year after merger and to Rule 144 current public information requirement during second year after merger. “Presumptive underwriter” doctrine – previously subjected affiliates of target companies in stock merger transactions to Rule 144 control securities resale restrictions for one year after merger and to Rule 144 current public information requirement during second year after merger. No longer applies, except to transactions involving shell companies (other than business combination-related shell companies). No longer applies, except to transactions involving shell companies (other than business combination-related shell companies). 7 Changes to Rule 144

Practical Implications Should increase liquidity of privately sold, restricted securities. Should increase liquidity of privately sold, restricted securities. Should decrease cost of raising capital, as issuers can negotiate smaller illiquidity discount to market price. Should decrease cost of raising capital, as issuers can negotiate smaller illiquidity discount to market price. Shortening of holding period for restricted securities may obviate or lessen investors’ needs for registration rights. Shortening of holding period for restricted securities may obviate or lessen investors’ needs for registration rights. 8 Changes to Rule 144

Insider Trading Policies and Procedures 9

Overview Recent focus on insider trading enforcement by SEC. Recent focus on insider trading enforcement by SEC. Focus is not just on individuals trading, but also companies themselves. Focus is not just on individuals trading, but also companies themselves. Retirement Systems of Alabama and Chanin Capital LLC. Retirement Systems of Alabama and Chanin Capital LLC. Potential liability for company to SEC and private plaintiffs for failing to take steps to prevent insider trading by “controlled perons” (directors, officers and employees). Potential liability for company to SEC and private plaintiffs for failing to take steps to prevent insider trading by “controlled perons” (directors, officers and employees). If don’t have a written insider trading policy, get one. If do have a policy, periodically review it and consistently enforce it. If don’t have a written insider trading policy, get one. If do have a policy, periodically review it and consistently enforce it. Insider Trading Policies and Procedures 10

Key Points to Consider When Establishing/ Reviewing Insider Trading Policy Keep it simple. Keep it simple. All directors and employees should be subject to it. All directors and employees should be subject to it. Window periods. Window periods. Require preclearance for insiders. Require preclearance for insiders. 10b5-1 plans. 10b5-1 plans. Gifts. Gifts. Other restrictions: Other restrictions: Short sales Short sales Standing orders Standing orders Margin accounts and pledges Margin accounts and pledges Publicly traded options Publicly traded options Hedging transactions Hedging transactions Post-termination transactions Post-termination transactions 11 Insider Trading Policies and Procedures

What to do now Adopt written policy if don’t have one already. Adopt written policy if don’t have one already. If do have policy, review key components and ensure consistently enforced. If do have policy, review key components and ensure consistently enforced. Periodically remind directors, officers and employees in writing of the rules. Periodically remind directors, officers and employees in writing of the rules. Insider Trading Policies and Procedures 12

Rule 10b5-1 Trading Plans 13

Overview What is a 10b5-1 trading plan? What is a 10b5-1 trading plan? SEC Rule 10b5-1 allows a person (typically a director or officer) to purchase or sell a company’s securities, even while in possession of material non-public information, provided that the transaction is made pursuant to a plan that (1) specifies the amount, price and date on which securities are to be purchased or sold and (2) is established at a time when the trading person was not aware of material non-public information. SEC Rule 10b5-1 allows a person (typically a director or officer) to purchase or sell a company’s securities, even while in possession of material non-public information, provided that the transaction is made pursuant to a plan that (1) specifies the amount, price and date on which securities are to be purchased or sold and (2) is established at a time when the trading person was not aware of material non-public information. Heightened scrutiny of late by SEC and others. Heightened scrutiny of late by SEC and others. Company responses to recent scrutiny: Company responses to recent scrutiny: Prohibit use of plans by insiders? Prohibit use of plans by insiders? Require use of plans by insiders when trading? Require use of plans by insiders when trading? Rule 10b5-1 Trading Plans 14

How to Structure 10b5-1 Plans in Light of Recent Scrutiny Put it in writing – technically doesn’t have to be, but always should be. Put it in writing – technically doesn’t have to be, but always should be. Keep it simple. Keep it simple. No subsequent influence over trades. No subsequent influence over trades. Waiting period before first trade. Waiting period before first trade. Amending and terminating plans. Amending and terminating plans. Allow for necessary suspensions. Allow for necessary suspensions. Avoid trading outside of adopted plans. Avoid trading outside of adopted plans. Ensure compliance with Form 4 and Form 144 (for sales) filing obligations. Ensure compliance with Form 4 and Form 144 (for sales) filing obligations. Rule 10b5-1 Trading Plans 15

Other Considerations Can be useful for benefit plan transactions. Can be useful for benefit plan transactions. Option exercises and sales. Option exercises and sales. Sale of restricted stock upon vesting to cover taxes. Sale of restricted stock upon vesting to cover taxes. Issuer repurchases. Issuer repurchases. Allows company to be in market at times when otherwise prohibited, but relinquish control over when repurchases made. Allows company to be in market at times when otherwise prohibited, but relinquish control over when repurchases made. Should company publicly announce adoption of plans by insiders or company? Should company publicly announce adoption of plans by insiders or company? Not required, but can bolster case that plan was established at time claimed to be established. Not required, but can bolster case that plan was established at time claimed to be established. Not clear how much detail to provide, but SEC is very interested in these disclosures, especially those that are “asymmetrical” (e.g., disclosure of plan adoption but no disclosure of plan amendment or termination). Not clear how much detail to provide, but SEC is very interested in these disclosures, especially those that are “asymmetrical” (e.g., disclosure of plan adoption but no disclosure of plan amendment or termination). Rule 10b5-1 Trading Plans 16

Compensation Committee Best Practices 17

What is a tally sheet? Centerpiece of best compensation committee practices. Centerpiece of best compensation committee practices. Identification and quantification of all elements of the executive’s pay, including compensation that would be owed to him or her upon retirement or other termination of employment. Identification and quantification of all elements of the executive’s pay, including compensation that would be owed to him or her upon retirement or other termination of employment. Shouldn’t just be an annual exercise – tally sheet should be reviewed and discussed before making any decision on the executive’s pay. Shouldn’t just be an annual exercise – tally sheet should be reviewed and discussed before making any decision on the executive’s pay. Compensation Committee Best Practices 18

What should go into the tally sheet? Tailored to fit each executive’s compensation package. Tailored to fit each executive’s compensation package. Should capture all elements. Should capture all elements. Can generally track SEC compensation disclosure rules, but not a perfect fit. Can generally track SEC compensation disclosure rules, but not a perfect fit. Numerical components of tally sheet will be reflected in various areas of compensation disclosures. Numerical components of tally sheet will be reflected in various areas of compensation disclosures. Disclosure of compensation committee practices should include discussion of tally sheet exercise. Disclosure of compensation committee practices should include discussion of tally sheet exercise. Compensation Committee Best Practices 19

Other Things Compensation Committees Should Be Doing Reevaluate compensation philosophies and components of existing program. Reevaluate compensation philosophies and components of existing program. Accumulated wealth analysis. Accumulated wealth analysis. Survey use – don’t cherry pick, and must disclose peers. Survey use – don’t cherry pick, and must disclose peers. Internal pay equity – material differences in pay among officers may require explanation in CD&A. Internal pay equity – material differences in pay among officers may require explanation in CD&A. Employment agreement provisions: Employment agreement provisions: Evergreen provisions Evergreen provisions Definition of “termination for cause” Definition of “termination for cause” Change in control payouts Change in control payouts Gross-ups Gross-ups Compensation Committee Best Practices 20

Other Things Compensation Committees Should Be Doing (continued) Compensation consultants should be engaged by and report directly to the compensation committee. Compensation consultants should be engaged by and report directly to the compensation committee. Compensation committee charter – should have one even if not required (only required for NYSE-listed companies). Compensation committee charter – should have one even if not required (only required for NYSE-listed companies). Director compensation: Director compensation: Trend away from meeting fees in favor of annual retainers Trend away from meeting fees in favor of annual retainers Increased proportion of pay in equity Increased proportion of pay in equity General disdain for director “retirement” plans General disdain for director “retirement” plans Reduction or discontinuation of perquisites Reduction or discontinuation of perquisites “Say on pay” initiatives. “Say on pay” initiatives. Compensation Committee Best Practices 21

Equity Grant Procedures 22

General Still a white hot area – numerous SEC investigations ongoing and guilty pleas continuing to roll-in for backdating. Recent Broadcom enforcement action shows SEC’s interest has not waned. Still a white hot area – numerous SEC investigations ongoing and guilty pleas continuing to roll-in for backdating. Recent Broadcom enforcement action shows SEC’s interest has not waned. Restatements. Restatements. Equity Grant Procedures 23

Practices Being Scrutinized Backdating - choosing a grant date with the benefit of hindsight so that the date selected is earlier than the date on which the grant was actually approved, with the selected grant date usually being a date on which the market price is lower than the date on which the grant is actually approved. Backdating - choosing a grant date with the benefit of hindsight so that the date selected is earlier than the date on which the grant was actually approved, with the selected grant date usually being a date on which the market price is lower than the date on which the grant is actually approved. Spring-Loading - the granting of equity awards in anticipation of the issuer’s disclosure of material information that is likely to have a positive effect on the issuer’s stock price. Spring-Loading - the granting of equity awards in anticipation of the issuer’s disclosure of material information that is likely to have a positive effect on the issuer’s stock price. Bullet-Dodging - purposefully waiting until material negative information is publicly disclosed before granting an equity award. Bullet-Dodging - purposefully waiting until material negative information is publicly disclosed before granting an equity award. Equity Grant Procedures 24

Why problematic? Effectively results in discounted options; most shareholder-approved plans require options to be granted “at the market” or at a premium. Effectively results in discounted options; most shareholder-approved plans require options to be granted “at the market” or at a premium. Potentially a breach of directors’ fiduciary duties. Potentially a breach of directors’ fiduciary duties. Potential financial statement restatements. Potential financial statement restatements. Big potential tax problems if options purporting to be granted “at the market” are later determined to be below market: Big potential tax problems if options purporting to be granted “at the market” are later determined to be below market: Lose ISO treatment, if intended. Lose ISO treatment, if intended. Won’t qualify as “performance-based compensation” under Internal Revenue Code Section 162(m). Won’t qualify as “performance-based compensation” under Internal Revenue Code Section 162(m). Constitutes deferred compensation under Internal Revenue Code Section 409A, potentially resulting in excise tax on executive. Constitutes deferred compensation under Internal Revenue Code Section 409A, potentially resulting in excise tax on executive. Equity Grant Procedures 25

What should be done to minimize risk of problems? Review existing equity grant practices. Review existing equity grant practices. Tighten internal controls. Tighten internal controls. Adopt formal written grant policy. Adopt formal written grant policy. Equity Grant Procedures 26

Adopting an Equity Grant Policy No “one size fits all” approach. No “one size fits all” approach. Determine role played by equity grants in overall compensation programs. Determine role played by equity grants in overall compensation programs. Key components: Key components: Frequency and timing of grants – consider limiting to fixed dates or during open trading windows. Frequency and timing of grants – consider limiting to fixed dates or during open trading windows. Designate equity grants compliance person(s). Designate equity grants compliance person(s). Delegation of grant authority to officers – critical to ensure permissibility under state law and plan document. Delegation should not cover grants to Section 16 reporting persons (i.e., Form 4 filers). Delegation of grant authority to officers – critical to ensure permissibility under state law and plan document. Delegation should not cover grants to Section 16 reporting persons (i.e., Form 4 filers). Limit grants to in-person or telephonic meetings and avoid written consents if possible. If written consents must be utilized, do not use “as of” dating. Limit grants to in-person or telephonic meetings and avoid written consents if possible. If written consents must be utilized, do not use “as of” dating. Forms of equity award agreements. Should be approved by compensation committee before grants are made and executed as soon as possible after grants are made. If multiple forms of agreements are used depending on level of employee, critical to have controls in place to ensure right form of agreement used. Forms of equity award agreements. Should be approved by compensation committee before grants are made and executed as soon as possible after grants are made. If multiple forms of agreements are used depending on level of employee, critical to have controls in place to ensure right form of agreement used. Equity Grant Procedures 27

Advance Notice and Other Bylaw Provisions 28

Advance Notice Provisions What are they? Require advance notice of shareholder proposals and director nominations to ensure orderly annual meeting process and to give company adequate time to strategize and prepare proxy materials. What are they? Require advance notice of shareholder proposals and director nominations to ensure orderly annual meeting process and to give company adequate time to strategize and prepare proxy materials. In two recent cases (Jana Master Fund Ltd. v. CNet Networks and Levitt Corp. v. Office Depot, Inc.), Delaware Chancery Court narrowly construed these provisions and resolved ambiguities in favor of dissident shareholders. End result was that in one case, the dissident was allowed to propose business at an annual meeting without complying with the company’s advance notice bylaw and the other case, the dissident was allowed to nominate its own directors without complying with the company’s advance notice bylaw. In two recent cases (Jana Master Fund Ltd. v. CNet Networks and Levitt Corp. v. Office Depot, Inc.), Delaware Chancery Court narrowly construed these provisions and resolved ambiguities in favor of dissident shareholders. End result was that in one case, the dissident was allowed to propose business at an annual meeting without complying with the company’s advance notice bylaw and the other case, the dissident was allowed to nominate its own directors without complying with the company’s advance notice bylaw. 29 Advance Notice and Other Bylaw Provisions

Advance Notice Provisions (continued) Key lessons of recent cases: Key lessons of recent cases: Make clear that the requirement to provide advance notice of a shareholder proposal applies not only to a proposal submitted for inclusion in the company’s proxy materials under SEC Rule 14a-8, but also to proposals submitted outside that rule (why the dissident prevailed in CNet). Make clear that the requirement to provide advance notice of a shareholder proposal applies not only to a proposal submitted for inclusion in the company’s proxy materials under SEC Rule 14a-8, but also to proposals submitted outside that rule (why the dissident prevailed in CNet). Clearly distinguish between providing advance notice of a shareholder proposal and providing advance notice of director nominations (why the dissident prevailed in Office Depot). Clearly distinguish between providing advance notice of a shareholder proposal and providing advance notice of director nominations (why the dissident prevailed in Office Depot). Any ambiguities will likely be resolved in favor of dissident shareholders. Any ambiguities will likely be resolved in favor of dissident shareholders. 30 Advance Notice and Other Bylaw Provisions

What to do now? If don’t have advance notice bylaw provisions, and next annual meeting is not soon, adopt now. If don’t have advance notice bylaw provisions, and next annual meeting is not soon, adopt now. If do have advance notice bylaw provisions, eliminate any ambiguities. If do have advance notice bylaw provisions, eliminate any ambiguities. If deadline for next annual meeting has passed and bylaws have Office Depot-type ambiguity (no clear distinction between proposals for business and director nominations), provide in notice of meeting that agenda item on director elections applies only to election and not nominations. If deadline for next annual meeting has passed and bylaws have Office Depot-type ambiguity (no clear distinction between proposals for business and director nominations), provide in notice of meeting that agenda item on director elections applies only to election and not nominations. Require dissident to provide details of any hedging/derivative activities. Require dissident to provide details of any hedging/derivative activities. What if advance notice provisions are in articles or certificate of incorporation rather than bylaws? What if advance notice provisions are in articles or certificate of incorporation rather than bylaws? Advance Notice and Other Bylaw Provisions 31

Other Areas For Review SEC e-proxy SEC e-proxy State law changes State law changes Consider lowering quorum requirement Consider lowering quorum requirement Director retirement provision Director retirement provision Advance Notice and Other Bylaw Provisions 32

Board and Board Committee Minutes 33

Overview Less may not be more. Less may not be more. Circulate draft minutes promptly. Circulate draft minutes promptly. Safeguard final minutes. Safeguard final minutes. Limit or prohibit note taking. Limit or prohibit note taking. Board and Board Committee Minutes 34

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