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The worksheet developed by the Financial Times for the analysis referenced in the article below can be downloaded from the following link:


Financial Times, April 30, 2007 article


'Legal vicious circle' emerges

By Francesco Guerrera, Brooke Masters and Daniel Pimlott in New,York
Published: April 30 2007 03:00 | Last updated: April 30 2007 03:00


As a maker of anti-virus software, McAfee's main job is to protect computer users from unexpected dangers lurking on the internet.

But a complex combination of state laws and financial regulation could soon force the California-based company to protect itself from the unwanted attentions of corporate raiders.

McAfee is one of more than 40 US companies that stood out in a Financial Times analysis of companies that could fall prey to a new, and perverse, side effect of long-standing rules.

The new threat highlights the risks posed by a period of corporate activity during which activist hedge funds have gained prominence and resources while companies have been beset by scandals.

The feared chain of events - dubbed a "legal vicious circle" by an expert - begins with the 140-plus companies that have been engulfed in the stock options backdating scandal.

For many of them, the discovery of backdated options has created the need for financial restatements. That, in turn, has delayed the publication of financial results and annual reports.

Under a Securities and Exchange Commission rule, companies are not allowed to call annual meetings unless they file completed accounts and annual reports.

But according to laws in Delaware, the location of choice for most US companies, shareholders can ask a court to convene a meeting if a company has not had one in 13 months. In the state of New York, shareholders can just call a meeting, provided that they own 10 per cent of the shares.

At that meeting, the company is not allowed to communicate with shareholders - a rule that allows dissident investors to present proposals that would go unchallenged.

The fear of many companies is that this will enable activist hedge funds eager to gain control of a company to call meetings and propose the removal of its board of directors.

Comverse Technology, which is under attack from the activist investor Oliver Press Partners, is so worried that it has asked the SEC to intervene and waive the communication ban.

The SEC declined to comment, but securities law experts note the commission has not granted such a waiver recently, largely because regulators have little sympathy for companies whose managements cannot meet a requirement for access to the public markets such as providing financial information.

"The companies have put themselves in this position if they want someone to blame they should look in the mirror," said Jeffrey Haas, a New York Law School professor.

The issue of companies failing to file financial reports is not new - many firms involved in financial scandals are often unable to complete their financial documents in a timely matter. But those companies are often in terrible shape and not attractive targets for activist investors.

The companies involved in stock options backdating are somewhat different.

Some are in quite good financial shape; for example, McAfee's first-quarter results topped Wall Street forecasts. In addition, the money involved in the potential restatements is generally not large enough to deter potential raiders.

Such a situation could put regulators in a dilemma. After all, the 13-month rule was designed to penalise companies that withheld information from investors.

"The idea was that companies have to talk to shareholders and if they don't call a meeting, someone else will," said Charles Elson, director of the corporate governance centre at the University of Delaware.

Some companies, such as the software maker Novell, say they are aware of the threat.

Others, such as the $15bn power utility AES, whose 13-month period expires in six weeks, have told the FT that they plan to call a meeting before the deadline.

But if the activists decide to employ the Trojan horse offered to them by a kink in the regulations, companies will need more than confidence and hope to survive.




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