CD&A Disclosure and Companies with Public Debt

The SEC recently made significant changes to its executive compensation and related party disclosure rules. An item of particular concern to companies that do not have public equity but that are required to make Exchange Act filings as a result of a registered offering of debt securities is that they will be required to include in their Form 10-K an extensive and detailed description of the company’s compensation philosophy for its named executive officers, known as the Compensation Discussion and Analysis (or “CD&A”).

The CEO and CFO certification required under Sarbanes-Oxley will cover the CD&A, which requires detailed and company-specific (i.e., non-boilerplate) disclosure, including:

• What are the objectives of the company’s compensation program?
  
  
• What is the compensation program designed to reward?
  
  
• What is each element of compensation?
  
  
• Why does the company choose to pay each element of compensation?
  
  
• How does the company determine the amount and, where applicable, the formula for each element of compensation?
  
  
• How does each element of compensation and the company’s decisions regarding that element fit into the company’s overall compensation objectives and affect decisions regarding other elements?

In answering these questions, the CD&A discussion will need to detail, among other things, the nature of performance targets, factors considered in increasing or decreasing an individual’s compensation, the existence of change of control benefits and the rationale in awarding such a benefit, the impact of the accounting and tax treatments of a particular form of compensation, and the role of executive officers in determining executive compensation.

Going forward, careful consideration will need to be given to the elements of compensation offered to executives of companies that are or will be privately held but have or will have registered debt, as well as how those elements will need to be disclosed. We strongly encourage companies to begin examining their compensation philosophy immediately and to consult with outside counsel about drafting the CD&A well before the end of the current fiscal year.

Our partner, Arthur Kohn, will be speaking on this subject on November 1, 2006 in New York at a panel sponsored by the Practising Law Institute entitled “Writing the CD&A: Getting Past the Technicalities to the Focus of the SEC’s New Regime.” The program is also available as a webcast. Additional information on the PLI presentation can be obtained through the following link:

http://www.pli.edu/product/program_detail.asp?ptid=511&stid=3&id=EN00000000035041

Please call any of your regular contacts at the firm or any of our partners and counsel listed under Employee Benefits in the Our Practice section of our web site if you have any questions.