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Pillsbury Winthrop Shaw Pittman LLP

The Stock Option Backdating Scandal: Lessons for Privately-Held Companies
The publicity surrounding backdating of stock option grants has focused on publicly traded companies. Pillsbury Winthrop Shaw Pittman and its Stock Option Task Force are actively engaged in the representation of companies and boards of directors in connection with these issues. However, even privately-held companies should learn from the questionable practices that have come to light and adopt procedures that avoid these concerns. In this alert, we identify some of the practices that have created problems, explain why these matter to even privately-held companies and suggest best practices to avoid issues.

08-17-2006

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Pepper Hamilton, L.L.P.

Affirmative State Election Will Be Required for Federal S Corporations Seeking Pennsylvania C Corporation Treatment
Pennsylvania Governor Edward Rendell recently signed two bills – SB 300 and HB 859 – affecting the taxation of Pennsylvania businesses. Included in the legislation is a significant change in the procedure for electing S corporation status for Pennsylvania tax purposes.

Change in Pennsylvania S Corporation Election Methodology
Pennsylvania has made a change in the manner by which S corporations make such an election for Pennsylvania tax purposes. Historically, S corporations doing business in Pennsylvania had to make a separate election in order to be considered an S corporation for Pennsylvania tax purposes, since the Pennsylvania election did not piggyback on the federal election. Effective for tax years starting after December 31, 2005, however, federal S corporations doing business in Pennsylvania (regardless of whether they have a historic Pennsylvania S election in place) will automatically be considered S corporations for Pennsylvania tax purposes. In other words, the Pennsylvania S corporation election now generally follows the federal treatment, and no separate election is necessary.

S corporations that wish to remain C corporations for Pennsylvania tax purposes (because they have unutilized Pennsylvania net operating loss carryforwards, for example) are permitted to “opt out” of the federal piggyback treatment by filing an affirmative election to remain a Pennsylvania C corporation. This election is due no later than the extended due date of the corporation’s income tax return.

Thus, if an S corporation is a calendar year taxpayer, and its 2006 federal income tax return (assuming an extension) was due on September 15, the S corporation would have until 30 days after the federal return was due (October 15) to file its extended 2006 Pennsylvania S corporation tax return. It would likewise have until October 15 to elect out of the default S corporation treatment to be treated as a C corporation for Pennsylvania tax purposes. Absent this affirmative election by the October 15 deadline, the corporation will automatically revert to S corporation status in Pennsylvania.

The new legislation makes a number of other changes intended to reduce Pennsylvania business taxes. The following are highlights:

Increased Sales Factor. Effective for tax years beginning on or after January 1, 2007, the sales factor weighting increases to 70 percent, with 15 percent weighting each for the property and payroll factors. Currently, the sales factor weighting is 60 percent. This change in apportionment only applies to the corporate net income tax and does not apply to the capital stock tax three-factor apportionment, which remains an evenly-weighted combination of property, payroll and sales.

Increased Net Losses. Effective for tax years beginning on or after January 1, 2007, the cap on net operating losses that may be deducted in any year is increased from the current $2 million to the greater of $3 million or 12.5 percent of taxable income.
Capital Stock/Franchise Tax Reductions. For taxable years beginning on or after January 1, 2006, the capital stock and franchise tax rate decreases to 4.89 mills from 4.99 mills. As under prior law, for 2007 and thereafter the tax will continue to be phased out by the rate of 1 mill per year, until it is completely eliminated by 2011. The new legislation also increases the dollar exclusion from “capital stock value” by $25,000 to $150,000.

R&D Credit Increases. The research and development tax credit for small businesses increases from 10 percent to 20 percent of research and development tax credits in excess of the Pennsylvania base amount. In addition, the aggregate amount of credits available in any year increases to $40 million from $30 million, with $8 million allocated exclusively to small businesses.

Although these amendments may be regarded as business-friendly, they are not as significant as many Pennsylvania corporate taxpayers had wanted or expected. In recent years, businesses have sought to eliminate the cap on net losses entirely. They had also pressed for a single-factor sales apportionment methodology, which generally would be advantageous to businesses headquartered in the state. In addition, certain proposals sought by the Department of Revenue, such as granting the Department the authority to require the filing of combined returns or to make IRC § 482-type adjustments, continue to meet opposition from the General Assembly.

It should also be noted that there were few amendments in the sales and use tax area. Perhaps most surprising is what the General Assembly failed to amend. Specifically, in 2005 the Commonwealth Court stated in Graham Packaging Co. v. Commonwealth, Pa. Commw. (2005) 882 A2d 1076, that license renewals for canned software were taxable regardless of whether the software was delivered in physical form or downloaded electronically. Because of a procedural issue, the Graham Packaging decision was not appealed by the taxpayer. It was anticipated that the General Assembly would implement a legislative fix to Graham Packaging, preventing the Department of Revenue from taxing software delivered online. However, as the recent tax legislation made no such change, it appears that the decision in Graham Packaging will stand for now.

The Department of Revenue has taken an expansive view of the language from Graham Packaging, concluding that all canned software, regardless of the format in which it is delivered, is tangible personal property subject to taxation. The Department even appears to be taking the position that accessing web-hosted software, regardless of the location of the customer, will be taxable if the vendor houses the software in Pennsylvania. In contrast, the Department appears to be taking the position that digital transfers of information other than software are not tangible personal property subject to taxation. For example, it is the Department’s apparent position that music downloads delivered to Pennsylvania customers are not subject Pennsylvania sales and use taxation.

08-17-2006

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Pepper Hamilton, L.L.P.

NJ Supreme Court Condemns Class Action Waiver in Consumer Loan Contract Dispute Involving Low Value Claim
On August 9, 2006, the New Jersey Supreme Court issued an important decision with wide-ranging implications for the consumer financial services industry and other industries. In Muhammad v. County Bank of Rehoboth Beach, Delaware, the Court invalidated a provision in a consumer loan contract waiving any right to class arbitration as unconscionable under New Jersey law because the plaintiff would have been effectively prevented from enforcing her statutory rights in the absence of a class action due to the low value of her claim. Further, the Court severed the offending provision and enforced the arbitration clause without it, which means that the parties can be forced into class arbitration even though they clearly agreed that there would be no class arbitration.

The enforceability of class action and class arbitration waivers is one of the most important issues facing companies that use arbitration clauses in consumer contracts. This decision follows a California Supreme Court decision in Discover Bank v. Superior Court of Los Angeles, 36 Cal. 4th 148 (2005), which struck down as unconscionable a class action waiver clause in an arbitration contract and sanctioned class arbitration under California law. Other courts have upheld class action and class arbitration waivers.

In Muhammad, the plaintiff college student obtained a short term, single advance, unsecured loan in the amount of $200 from the defendant, County Bank of Rehoboth Beach, Delaware (County Bank). Under the terms of the loan, the plaintiff agreed to repay the principal plus a $60 finance charge within three weeks of the date of the loan. The Loan Note and Disclosure form that the plaintiff signed listed the annual rate of interest at 608.33 percent.

In standard form documents that accompanied the loan, the plaintiff agreed to two types of class-action waiver prohibitions. The first prohibition, referred to by the Court as the “class-arbitration waiver,” barred the plaintiff from bringing any class claims in arbitration. The second prohibition, referred to by the Court as the “broad class-action waiver,” barred the plaintiff from “bring[ing], join[ing] or participat[ing]” in any class-action suit in court or arbitration.

Despite agreeing to these arbitration prohibitions, the plaintiff filed a putative class action in New Jersey state court against County Bank and its loan servicer, alleging that they had violated the New Jersey Consumer Fraud Act, New Jersey’s civil usury statute and New Jersey’s RICO statute by charging and conspiring to charge illegal rates of interest.

The trial court granted the defendants’ motion to compel arbitration and stayed the case pending arbitration; the Appellate Division affirmed. The Supreme Court reversed and held the class-arbitration waiver unconscionable and thus unenforceable as a matter of New Jersey state law. (The Court did not address the broad-class action waiver.) The Court found that the consumer contract at issue constituted a contract of adhesion under New Jersey law because the lender presented it on a take-it-or-leave-it basis. Further, the Court found that the contract effectively prevented the plaintiff from enforcing her statutory rights and the rights of her fellow consumers and thus violated New Jersey’s public policy because of the low value of the amount in dispute and the complexity of the claims involved. The Court also found that the public interest in protecting consumer rights outweighed the defendants’ right to seek to enforce the class action-arbitration waiver.

As a remedy, the Court severed the class-arbitration waiver and enforced the remainder of the arbitration agreement, inferring that the parties intended for the arbitration agreement to be enforced whether and to what extent class-wide arbitration might be enforced because the broad class-action waiver in two places used the language “to the extent permitted by law.”

In Delta Funding Corporation v. Alberta Harris, also decided on August 9, 2006, the New Jersey Supreme Court provided members of the consumer finance industry with some guidance on the impact of the Muhammad decision. In Delta Funding, the Court made clear that under New Jersey law a class-arbitration waiver is not unconscionable per se and that the unconscionability determination is a fact sensitive determination to be made on a case-by-case basis. In fact, the Court noted in dicta that a class-arbitration waiver was valid where - unlike the situation in Muhammad - the plaintiff’s individual claims involved substantial damages (in excess of $100,000), provided for the recovery of attorney’s fees and costs, and there were other incentives for the plaintiff to seek an attorney and bring individual claims (in that case, a home foreclosure proceeding had been commenced against the plaintiff).

08-17-2006

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Pepper Hamilton, L.L.P.

National Flood Insurance Program: The Basics
The stark images of New Orleans underwater in the aftermath of Hurricane Katrina served as a reminder that flood risks are a required consideration in most decisions to build or to rebuild.

Evolution of Federal Program

Federal flood control activities have evolved as the government continues to seek ways to mitigate the consequences of flooding. Until the mid-1960s, federal involvement was limited to flood control projects, such as dams or levees. However, private insurance companies were not able to provide flood insurance at affordable rates, and flood losses and the cost of disaster relief continued to rise. As a result, legislation passed by Congress in 1965 to provide relief to victims of Hurricane Betsy also authorized a study of the feasibility of national flood insurance, which eventually led to the National Flood Insurance Act of 1968.

The 1968 Act, which created the National Flood Insurance Program (NFIP), sought to provide relief to individuals for losses through flood insurance, to reduce additional losses through State and community floodplain management, and consequently to reduce federal costs for flood control and disaster relief. (The program was extended to cover mudslides in 1969 and flood-related erosion in 1973.) The NFIP tasks included identifying and mapping floodplains – resulting in Flood Insurance Rate Maps (FIRM) – to help educate people about potential risks and provide information required for floodplain management and the flood insurance program.

Under the 1968 Act, if a community adopted and enforced a floodplain management ordinance to protect new construction from flood hazards, subsidized insurance rates were available for buildings in flood hazard areas before a FIRM was developed for the community. Initially, the federal government relied on the incentive of subsidized flood insurance to achieve the desired goal of shifting development from flood prone areas. However, experience demonstrated that this was not sufficient. In 1972, Tropical Storm Agnes caused extensive river flooding in the northeastern United States. Most of the affected property was uninsured, and the cost of disaster relief was as high as for any prior flood disasters.

In response the Flood Disaster Protection Act of 1973 moved beyond strictly voluntary measures. Under the 1973 Act, federal agencies are prohibited from providing financial assistance for acquisition and construction of buildings in communities that failed to participate in the NFIP by designated deadlines. Additionally, federally regulated or insured lenders and federal agencies were obliged to require flood insurance for loans or grants for acquisition or construction of buildings in Special Flood Hazard Areas (SFHAs). (An SFHA has been defined as land in a floodplain that has at least a one percent chance of flooding in any year, commonly referred to as a 100-year flood.) Today, regulated lenders are still obligated to require flood insurance for property located in SFHAs in participating communities, although the 1973 Act was amended in 1977 to permit lenders to make conventional loans for property located in SFHAs in non-participating communities, if the lenders notify the owner or lessee about whether federal disaster assistance will be available.

In 1994, the 1968 Act and the 1973 Act were amended by the National Flood Insurance Reform Act, which among other things imposed new requirements on mortgage originators and servicers (including mandatory escrows for flood insurance and mandatory provisions for forced placement of insurance); codified the Community Rating System of the NFIP, which provides flood insurance premium discounts for communities that establish programs that go beyond NFIP minimum requirements; and provided added emphasis on activities designed to further mitigation of future flood damage.

Flood Hazard Identification and Assessment

By statute, the Federal Emergency Management Agency (FEMA) must identify and evaluate flood risks. From the beginning, the NFIP has used the 100-year flood as the standard (referred to as the Base Flood). Since information necessary to define flood risks necessarily requires time to develop, the insurance program began on an emergency basis with Flood Hazard Boundary Maps that identified only the boundaries of 100-year flood floodplains on an approximate basis. For most communities, a more detailed study was subsequently conducted, typically using engineering methods based on computer models and/or statistical techniques.

A detailed Flood Insurance Study (FIS) typically includes identification of the following:

100-year flood elevations (Base Flood Elevations, or BFEs) in terms of either water-surface elevations or depth of water flow above ground
water-surface elevations for the 10-year, 50-year, 100-year and 500-year floods
boundary of the regulatory floodway (for non-coastal SFHAs), which is a stream channel and adjacent floodplain areas that must be kept free of encroachment so that discharge of the Base Flood (100-year flood) does not increase the Base Flood Elevation by more than one foot
boundaries of the 100-year floodplain (the Special Flood Hazard Area, or SFHA) and the 500-year floodplain – with the results included in a Flood Insurance Rate Map (FIRM).
Flood elevations for rivers, streams and lakes are determined by taking into account precipitation and runoff, with SFHAs identified as A Zones on the applicable FIRM. For coastal areas, factors include storm surge, wind direction and speed, and wave heights, with SFHAs identified as either A Zones or V Zones – where V Zones are the more hazardous areas with conditions that support damaging waves of at least three feet in height.

FEMA has issued guidelines that provide technical requirements and specifications for Flood Hazard Maps and related matters. A draft FIS is developed under procedures found in 44 CFR Part 65 and Part 66. Before the FIS becomes final, it is subject to a statutory public comment and appeals period, where property owners and tenants have an opportunity to challenge elevation determinations based on scientific or technical objections.

FEMA has developed several procedures for amending current FIRMs, including a Letter of Map Amendment (LOMA) to correct a map when a specific property has been inadvertently included in an SFHA, a Letter of Map Revision (LOMR), a Letter of Map Revision based on Fill (LOMR-F) and a Physical Revision and Republication (PMR) to document changes, generally based on manmade changes to the floodplain.

Properties may be removed from the 100-year floodplain based on protection from a levee or floodwall system that meets criteria set forth in 44 CFR §65.10. As Katrina demonstrated, relying on a protective system can be catastrophic if the system fails to provide the expected protection – whether because the system fails or the flood event exceeds the 100-year flood design basis.

A significant percentage of the flood maps are now more than ten years old. FEMA recognizes that these outdated maps require modernization. As development occurs, flood hazards generally increase, and outdated maps tend to understate flood risks. In addition, current techniques promise more accurate, useable products. Unfortunately, FEMA lacks the funding required to implement its proposed map modernization plan.

Floodplain Management

A community must adopt and enforce a floodplain management program that meets NFIP criteria before FEMA can provide flood insurance for property in the community. The program requirements are designed to minimize future flood damage.

As a general rule, a new or substantially modified building in an A Zone must have the lowest floor elevated to at least the Base Flood Elevation, and a new or substantially modified building in a Z Zone must be elevated so that the bottom of the lowest horizontal structural member of the lowest floor is at or above the Base Flood Elevation. As indicated, these requirements apply to both new buildings and those that are substantially improved or substantially damaged – meaning the cost of the improvement or restoration is 50 percent or more of the market value of the building. Also, for non-coastal A Zones, a community must designate a regulatory floodway that can carry away water from a 100-year flood without increasing surface water elevation more than one foot at any point.

National Flood Insurance

Flood insurance covers damage and loss to real and personal property caused by floods. Under the NFIP, policies are issued both by state licensed property and casualty insurance brokers and agents who deal with FEMA, and by private insurance companies who issue policies and adjust claims under the “Write Your Own” program. Generally there is a 30-day waiting period before a policy becomes effective, which is designed to prevent the opportunistic purchase of flood insurance in connection with progressive river flooding.

There are three policy forms: (1) Dwelling Form for 1-4 family buildings and individual condominium owners, (2) General Property Form for more than four-family residential and non-residential buildings, and (3) Residential Condominium Building Association Policy Form for condominium associations. Residential buildings under the first two forms are eligible for up to $250,000 building coverage and $100,000 contents coverage. Non-residential buildings are eligible for up to $500,000 building coverage and $500,000 contents coverage. Under the third form, a condominium association can purchase building coverage that includes all of the units and improvements in the units for up to $250,000 building coverage per unit and $100,000 contents per building. Certain other types of coverage are also available, depending on the form.

The Problem of Repetitive Losses

Recent efforts by Congress to refine and extend the flood legislation have included a focus on the problem of repetitive losses. For example, the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 established a pilot program for mitigation of repetitive loss properties (i.e. currently insured properties that have experienced two or more flood losses of more than $1,000 each within a 10-year period).

The devastation caused by the 2005 hurricane season has led to further examination of the difficult questions surrounding decisions to rebuild in flood-prone areas. Is it appropriate to continue to rely on New Orleans levees to protect against future flood? If the answer is yes, but only if sufficient funding is available to properly maintain the levees, what happens when promised funding is not made available? What are the consequences of writing off an entire city? Can we afford to rebuild New Orleans? Can we afford not to? The answers to questions such as these will inevitably have a profound effect on future development of our national policy on flood hazards

08-17-2006

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Pepper Hamilton, L.L.P.

New Rules Likely to Spur CDBG Use in Brownfields
The U.S. Department of Housing and Urban Development (HUD) recently published its Final Rule for Community Development Block Grant (CDBG) funding of brownfields cleanup and remediation of other environmental contamination. Although the final rule leaves the previously published proposed rule substantially intact, it does make noteworthy changes in response to industry comments. CDBG regulations now provide greater direction to grantees and industry participants who use CDBG funds for redevelopment of abandoned, idled or under-used properties where expansion or redevelopment is complicated by the presence or potential presence of environmental contamination.

The regulations now unambiguously expand the “slum or blight” national objective criteria to include “known and suspected environmental contamination” as blighting influences. The final rule also permits CDBG grantees to adopt definitions for blighting influences based on state or local law provided grantees retain site specific applications and records to support blighting definitions. In addition, an area’s slum or blighted designation must be re-evaluated every 10 years for continued qualification.

HUD’s Proposed Rules

In 1998, Congress made clear its intent to open the CDBG program for use as an environmental clean-up tool, including a specific statement in its 1999 HUD Appropriations (P.L. 105-276) to make CDBG available for environmental remediation and related brownfields projects. While this opened the door for expanded brownfield activity, some regulatory impediments remained. To use the block grants for environmental remediation, a “loose interpretation” of national objectives as stated in existing rules was required.

On July 9, 2004, HUD published proposed rules to conform existing regulations for CDBG use in brownfields cleanup, development or redevelopment, within existing CDBG eligibility categories. The proposed rules also changed CDBG’s national objectives as they relate to brownfields and attempted to clarify other confusing regulatory language.

Final regulations and a response to public comment were published in the Federal Register on May 24, 2006, and became effective on June 23, 2006.

Final Rule Changes

Since HUD’s 2004 regulatory revision was considered adequate with respect to its clarification of CDBG availability for Brownfield and other environmental cleanup efforts (and inclusion under slum or blight criteria), the final rule made few specific changes. The proposed regulations, however, were over-restrictive in the modification of slum and blight requirements. HUD’s initial effort mandated that at least 33 percent of all properties in a slum or blight eligible area meet one or more specifically listed conditions. In addition, the slum or blight designation for any given area was subject to re-determination every five years. Both of these conditions were significantly revised.

Percentage of Property in Blighted Area.

HUD’s proposed rule required properties in a slum or blight area meet one or more specifically listed conditions for designation, including:

deteriorating or deteriorated buildings or improvements
abandonment
chronic high turnover or vacancy
significant property value decline or abnormally low property values
environmental contamination.
Although grantees were offered limited ability to define these conditions, an area that had already reached the 33 percent threshold for deterioration also may have entered a downward spiral that could not be reversed without extraordinary financial assistance. Many who commented on the proposed regulations argued that areas ripe for improvement with CDBG funds would be lost due to the unnecessarily high threshold, which had not previously existed for the slum or blight designation.

The final rule states that only 25 percent of properties throughout the area must meet one or more of the conditions, and that an open parcel might be considered vacant for these purposes.

Need for Re-Determination of Blighted Designation.

HUD’s proposed rule required that any area designated as slum or blight be subject to review and re-designation every five years. Commentators pointed out that this would trouble long-range planning and overburden administrators. Some commentators even argued for a 40-year designation cycle. While HUD was unwilling to stretch that far, it did make an adjustment.

Final regulations now require CDBG recipients to maintain documentation on the boundaries of the slum or blighted area and the conditions and standards under which it initially qualified. Re-designation review, however, is required only once every 10 years.

CDBG use in brownfields and environmental remediation has increased steadily over the past two years. With final regulations now in place, and taking into account matters discussed above as well as technical revisions for displacement, relocation, lead paint and asbestos remediation, CDBG funding is likely to continue to grow as a tool for meeting environmental challenges to community redevelopment projects.

08-17-2006

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Pepper Hamilton, L.L.P.

Pennsylvania Counties Are Prepared for Disaster -- Are You?
After Hurricane Katrina ravaged New Orleans and the Gulf Coast, every listserv connected with the real estate legal community circulated e-mails with questions about the condition of courthouse records and recorded documents such as deeds, easements and mortgages. These documents – a vital part of the real estate economic engine of a community – were in buildings that in many cases were under water. Without access to such documents, properties could not be bought and sold, title could not be established and rights of parties to the use of properties could not be determined. Over and over people asked, “What happens now?”

The question resonates beyond the Gulf Coast and other hurricane-prone areas. Pennsylvania has 67 counties, each storing invaluable real estate records, and each with a different level of preparedness for disaster. Some counties have set up sophisticated computer tracking systems for recorded documents, others have only just begun to develop such systems. If a massive hurricane or other catastrophe struck any part of Pennsylvania, would important real estate documents be safe? Anyone old enough to recall the devastation that followed Hurricane Agnes in the Wilkes-Barre-Scranton area in 1972 knows this is not an abstract question. And not all potential damage is weather-related – fires and other disasters could easily cause widespread damage to real estate documents.

To help measure the level of risk, Pepper surveyed several county Recorder of Deeds offices in Pennsylvania to find out how prepared each county is to protect recorded documents in the event of a natural disaster or other casualty. Our survey included Allegheny, Washington, Westmoreland, Chester, Delaware, Montgomery, Bucks and Philadelphia counties. We found good news.

Every county in Pennsylvania is statutorily required to maintain recorded documents records digitally or on microfilm (65 P.S. §63.1 (1998)). All of the counties surveyed met this requirement, and some went beyond this requirement with more than one back up system in place. However, no county surveyed had a written policy for document retention and protection, and only one, Montgomery County, had begun work on such a policy.

Allegheny County has several back-up systems. As required by statute, Allegheny County places all documents on 35 mm archival film, and stores these films in a separate location. In addition, the county scans new documents into a server as they are recorded and the data is transferred daily to a CD. Allegheny also has its documents available on the Internet, with scanned document images available back to September 2001, and subdivision plans available back to 1889. The county is continuing to scan its documents, moving backwards from 2001.

Washington County places all documents on 35 mm archival film, which is stored off site. It also keeps hard copies on site.

Westmoreland County scans all recorded documents into a computer database. It keeps a copy on site and sends an additional electronic copy to the county courthouse. Also, the recorder’s office keeps electronic copies off-site at a secure location in Ohio. In addition, the courthouse sends all electronic copies to an off-site location, which includes copies of documents that the recorder’s office has provided to them.

Chester County scans in all recorded documents. At an off-site location, Chester County keeps a replicated server that replicates the main production server on site and backs up material every four minutes. The county also has a contract with an archival company that gathers copies of images of recorded documents and makes them available to the recorder’s office and via the internet. Records also are maintained on microfilm and burned on CD. Chester County sends copies of its microfilm to Boyertown, Pennsylvania to be stored in underground facilities known as the “caves.” The county has microfilmed documents dating back to 1688. Additionally, Chester County maintains a contract with a flood preservation vendor who is on standby to freeze-dry any documents that become wet and restore them at an off-site facility.

Delaware County microfilms all recorded documents. Master copies of the microfilm are maintained at the recorder’s office and copies are sent to the caves in Boyertown for preservation and storage. The county also maintains a contract with a vendor in South Carolina which electronically gathers images of the recorded documents on a daily basis. This vendor has images dating back to 1982 available. The vendor is continuing to gather data going backward in time and will eventually gather all documents dating back to the 1700s, which will then become available via the Internet.

Montgomery County scans its recorded documents into a computer database with a mainframe backup maintained at the county courthouse. The county also burns images of the documents onto CDs and ships these CDs to an off-site vendor that creates a microfilm copy. The master copy of the microfilm is maintained at the recorder’s office with copies sent to Boyertown for preservation and maintenance. The county also maintains a contract with a vendor in South Carolina that electronically gathers images of the recorded documents on a daily basis and makes them available via the Internet.

Bucks County microfilms all documents. Copies of the microfilm are sent to the caves in Boyertown for preservation and maintenance. The county also maintains a contract with a vendor in South Carolina that electronically gathers images of the recorded documents on a daily basis.

Philadelphia County, Lancaster County and Lehigh County follow similar retention procedures as those listed above. All have contracted with vendors that electronically gather images of the documents on a daily basis and retain them at off-site facilities.

From our admittedly less than scientific survey, it appears that Pennsylvania’s counties have systems in place to adequately protect real estate recorded documents. While no system is foolproof, most counties have built in redundancies to protect valuable information should the primary system be compromised. However, businesses (and individuals where applicable) can take simple steps to protect themselves:

adopt a written retention policy for important documents and keep specific records of where such documents are located on and off-site
keep building and floor plans at an easily accessible off-site location to help identify key areas in the company’s facilities, such as electrical boxes, master telephone switches; computer server rooms, to enable personnel to quickly identify critical areas for recovery purposes
protect deeds, easements and other recorded documents in a fireproof safe. For individuals, small versions of these safes are available in any office supply store.

keep multiple copies of a property title policy (and copies of the documents referenced in the title report) along with conveyance deeds and any recorded encumbrances occurring after the policy issue date, in more than one place (preferably on and off-site in easily accessible areas) to aid in the recovery of such documents in the case of a casualty keep contact numbers for your mortgage company and title company in a secure place that can be easily accessed after a casualty choose a reputable title company that has the capacity to store information on recorded documents for their property transactions, and a title company that has a valid back-up system for such documents in place. The vital role that title companies have played in producing necessary title information in the aftermath of a natural disaster cannot be downplayed. The storage policies of a title company can mean the difference between reproducing a recorded document in time to protect yourself after a disaster or waiting for months, or even years, until such information can be reconstructed.

Protecting real estate documents is not the first thing that comes to mind when thinking about disaster preparedness, yet it can be a critical issue. While it is impossible to prepare for every potential disaster, having a plan in place before disaster strikes can help give peace of mind and avoid at least one potential problem in the chaotic aftermath.

08-17-2006

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Pepper Hamilton, L.L.P.

SEC Adopts Significant Changes to Compensation Disclosure Rules
On July 26, 2006, the SEC approved new disclosure rules regarding executive and director compensation, and certain corporate governance matters. The new rules represent the first significant changes to the SEC’s executive compensation disclosure regime since the early 1990s. Originally proposed in January 2006, the rules will be effective for the 2007 proxy season, as they generally will apply to proxy statements, information statements and annual reports filed for fiscal years ending on or after December 15, 2006.

In general, the new rules call for increased disclosure regarding key compensation elements. As expected, disclosure of a total compensation dollar figure for each named executive officer will be required, as will increased disclosure regarding equity-based compensation, perquisites and the value of pension benefits and deferred compensation.

The final form of the rules will vary somewhat from the SEC’s original proposal in a number of respects, including a requirement to provide a compensation committee report in addition to the proposed Compensation Discussion and Analysis section, and to disclose the company’s policies and practices regarding option grants, with details concerning how exercise prices and the timing of grants are determined. Although this latter requirement was not addressed in the proposed rules, it should come as no surprise in light of recent developments regarding options backdating, including criminal and civil charges being brought by the Justice Department and SEC against certain Brocade Communications executives.

As of this Update’s publication date, the text of the final rules had not been published. However, based on the SEC’s press release announcing the adoption of the new rules (available on the SEC’s Web site at http://www.sec.gov/news/press/2006/2006-123.htm) and other public statements, we are able to offer this overview of some of the new rules’ key elements. When the final rules are published, we will cover the modified disclosure regime in greater detail.

Compensation Discussion and Analysis

A key element of the new disclosure rules requires companies to describe their overall compensation objectives, policies and practices in a new “Compensation Discussion and Analysis” (CD&A) section. This section is intended to provide shareholders with narrative, principles-based disclosure, including disclosure regarding options grant policies and practices. In particular, the disclosure regarding grant policies and practices will need to address grant timing and option pricing practices. The CD&A will be considered to be “filed” with (rather than “furnished” to) the SEC; consequently, CD&A disclosures will be subject to liability under the proxy rules, and, to the extent the CD&A is incorporated by reference into the company’s Form 10-K along with other compensation-related information, it will be subject to certification by the company’s chief executive officer and chief financial officer.

The SEC had originally proposed replacing the compensation committee report and the company stock performance graph with the CD&A. The final rules, however, will preserve both the compensation committee report (in a shortened form) and performance graph requirements. The compensation committee report will not need to be as lengthy or detailed as in the past – the primary requirement will be a statement from the committee indicating whether the committee members have discussed the CD&A with the company’s management and have recommended its inclusion in the annual report and proxy statement. The report will be considered to be “furnished” to (rather than “filed” with) the SEC. The performance graph will move from the compensation-related disclosures falling under Item 402 of Regulation S-K to the market price/dividends-related disclosures under Item 201 of Regulation S-K.

Compensation Tables

The new rules continue the SEC’s emphasis on the presentation of important compensation elements in tabular format. The rules continue to require a Summary Compensation Table with compensation information for the past three years, but now also will require additional columns, including a new column disclosing a total dollar amount of compensation for each named executive officer that will aggregate the dollar amounts included in the other seven table columns. In addition, the named executive officers to be covered by this table will be the company’s principal executive officer, the principal accounting officer and the next three most highly compensated executive officers whose compensation exceeds $100,000. This marks a change from the current rules, which require the table to cover the company’s chief executive officer and the next four most highly compensated executive officers.

In addition to the Summary Compensation Table, companies will be required to present a new table addressing grants of plan-based awards (whether or not equity-based) during the most recent fiscal year. Disclosure will be required showing the fair value of option grants as determined under FAS 123R, the closing market price of the stock on the grant date (if higher than the exercise price), and the date that the option was approved for grant by the board or compensation committee (if different than the stated grant date). In the event the exercise price differs from the closing market price on the grant date, the company will be required to describe the method for determining the exercise price. The current requirement to disclose the potential realizable value of options based on assumed 5 percent and 10 percent increases in market value will be eliminated.

Two additional tables will be required to provide information regarding deferred compensation and pension benefits. A new deferred compensation table will include disclosure of all contributions, withdrawals, earnings and year-end balances under nonqualified defined contribution and other deferred compensation arrangements with respect to the named executive officers. In addition, the disclosure rules for the pension benefits table will be expanded to require additional information regarding retirement plan and post-employment compensation, including the actuarial present value of each named executive officer’s accumulated benefits under each pension plan. Calculations of the pension benefits will be required to be based on normal retirement age (as defined in the plan), the executive’s current level of compensation and other assumptions the company uses for financial reporting purposes under GAAP. This approach replaces the proposed rule, which would have required estimates of the annual benefit payable upon retirement.

Finally, three-year compensation information regarding the company’s outside directors will be required to be presented in a new Director Compensation Table, which will be similar in format to the Summary Compensation Table.

Change of Control Payments

The final rules will require disclosure of agreements or arrangements (written or not) to provide payments to named executive officers in connection with changes-of-control, changes in an executive’s responsibilities and termination of an executive’s employment. Required disclosure will include estimates of the dollar amounts that would be required to be paid to executives, and the SEC has indicated that the final rules will provide guidance regarding the assumptions companies should use in calculating those estimates.

Related Party Transactions Disclosure

Additional disclosures concerning the company’s internal policies and procedures for reviewing, approving and ratifying related party transactions will be required under the new rules. In addition, the dollar threshold for disclosure of related-party transactions will be increased from the current $60,000 threshold to $120,000.

Re-proposal – Additional Compensation Disclosure

The SEC also announced its intention to re-propose rules that would require compensation disclosure relating to a company’s top three employees whose compensation is greater than that of the named executive officers. The re-proposal would amend the original proposal so as to apply only to companies that meet the definition of “large accelerated filer” and would be limited to employees who have a significant policy-making function within the company or a significant subsidiary, principal business unit, division or function. In addition, disclosure would be limited to an identification of the employee’s total compensation and job description – the employee would not have to be identified by name. If adopted, the changes should eliminate most concerns expressed about the original proposal, since the exclusion of employees with no policy-making function should result in highly compensated entertainers, athletes, traders, portfolio managers and others not having their compensation disclosed under these rules.

Form 8-K Revisions

In order to address concerns raised about Form 8-K filing requirements with respect to employment contracts and arrangements, the final rules will clarify that certain employment contracts and arrangements (including material amendments) will be required to be disclosed on Form 8-K only if they involve named executive officers. In addition, all compensation-related contracts and arrangements disclosure requirements will be embodied in Item 5.02 of the Form, rather than Item 1.01. The effective date for compliance with the Form 8-K rule changes will be earlier than the effective date for the other compensation-related disclosure rules – the revised Form 8-K requirements will apply for triggering events occurring 60 days or more after publication of the final rules in the Federal Register.

08-17-2006

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