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Monthly Archives: February 2010

February 26, 2010

SEC Reaffirms Path Towards IFRS Decision by 2011

Highlighting the high profile of the issue, the SEC voted unanimously to issue a Statement at an open Commission meeting on Wednesday regarding its current plans regarding IFRS. It’s interesting that the open meeting format was used to approve a statement. Here’s Chair Schapiro’s opening remarks.

As noted in this press release, the Statement:

- Reaffirms the SEC’s support for a single, globally accepted set of accounting standards (although the SEC still hasn’t made a final decision to move to IFRS yet)
- Describes six categories of issues that need to be analyzed in an upcoming SEC Staff Workplan (there will be progress reports given on the Workplan, starting no later than this October)
- Describes milestones that need to occur before 2011 (including the SEC’s study of certain issues and completion of convergence projects under the FASB-IASB Memorandum of Understanding) if the SEC is to move to IFRS
- Notes the first time that US companies would report under such a IFRS system (if one was adopted) would be no earlier than 2015 (the Work Plan will further evaluate this timeline)

PCAOB Staff Posts FAQs on Engagement Quality Review

Last week, the PCAOB published a “Staff Question and Answer” on the documentation requirements of Auditing Standard No. 7, the engagement quality review standard that provides a framework for the engagement quality reviewer to objectively evaluate the significant judgments made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement. This set of FAQs was encouraged to be created by the SEC when it approved AS #7 last month.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- Canadian OSC Staff Urges Better IFRS Disclosure
- Social Media Policies: No Paranoia Necessary
- Analysis: Ability to Backdate Board Resolutions
- An Auditor’s Claim of Privilege: The Latest
- An Effete Corps of Governance Snobs

- Broc Romanek

February 25, 2010

SEC Issues Proxy Solicitation Rule Corrections: Impact on Your Form 10-K

Yesterday, the SEC issued this technical corrections release related to its proxy disclosure enhancement rules adopted in December (actually the release was posted Tuesday – taken down for a while – and then reappeared Wednesday morning). The release corrects Forms 10-Q and 10-K to retain the current numbering of the items appearing in each form to avoid confusion that might otherwise arise from references to the numbering from other rules, etc.

So what does this mean for your Form 10-K? For Form 10-Ks filed on or after this Monday – March 1st (actually, it’s filings until 5:30 pm EST on Friday – even though filings are accepted until 10 pm, they are considered filed the next business day) – the title and substance of Part I – Item 4 should be deleted, the word “Reserved” should be inserted in the place thereof and the remaining items of Form 10-K should not be renumbered.

In addition, the SEC made three changes to Form 8-K, including adding an instruction that corresponds to an instruction contained in Forms 10-Q and 10-K that allows certain wholly-owned subsidiaries to omit the disclosure of shareholder voting results and to amend the regulatory text to make it consistent with the discussion of the amendments to that form contained in the adopting release.

NYSE: Annual Corporate Governance Letters Now Available

Last week, the NYSE issued its annual corporate governance letters – one for domestic companies and one for foreign private issuers.

RR Donnelley Buys Bowne: You May Lose Your Free Lunch

As a former employee of RR Donnelley (I launched RealCorporateLawyer.com for them when it was a different type of site), I closely follow the financial printer industry. Thus, I wasn’t surprised to see Donnelley’s announcement that it had bought Bowne yesterday.

As the printers have been struggling for quite some time, I had expected industry consolidation long ago. It will be interesting to see whether this will have an impact on the “freebies” for lawyers and bankers. I would imagine that narrowed margins for the industry and less competition in the space will combine to make that so. No more fifty-yard line…

SEC Adopts An Alternative Uptick Rule

At an open Commission meeting yesterday, the SEC voted 3-2 to adopt a new uptick rule, one that has a circuit breaker restriction on short sales in stocks that experience a price decline of 10% or more from the prior day’s close. The uptick rule had been eliminated in July 2007 amid some controversy. Commissioners Casey and Paredes strongly opposed the new rule. The new rule will be effective 60 days after the publication of the release in the Federal Register – but it will then have a six-month implementation period (so essentially it will be 8 months until the rule takes effect).

Under the new rules, once the circuit breaker is triggered for a stock, short selling in that stock will only be allowed at prices above the current national best bid for the rest of the trading day as well as the following trading day, subject to certain exemptions. However, the SEC did not adopt an exemption for bona fide market making activity.

- Broc Romanek

February 24, 2010

Bringing in the Vote: The Need to Get Creative

During our recent snow-in here, I spent some time pondering how to get more people to vote in corporate elections. As I blogged yesterday, I believe one necessary first step is enhancing the usability of communications to shareholders. But as we all know, even that will only improve shareholder participation on the margins.

As I struggled with this diIemma – so desperate I was perusing old Dale Carnegie books about how to win friends and influence people for inspiration – I just happened to hear from Peggy Foran about a novel program that Prudential is trying this proxy season. I think what they are trying is pure genius. By tying the act of voting to the environment & sustainability movement, the company is trying to make people feel good about themselves when they vote. It will be interesting to see how it pans out in practice.

In this podcast, Peggy and Ed Ballo of Prudential explain their company’s novel initiative that ties its environmental & sustainability program to bringing in the vote for its annual shareholders meeting (here are two items that will be used in Pru’s mailings: program notice postcard and proxy materials insert), including:

- How does Pru intend to engage registered holders this season?
- What exactly will be sent to registered holders?
- Is there an online component to this initiative?
- What are the benefits to the company of this initiative?

Speaking of getting creative, this is one of the more unusual promotions I’ve come across in a while, courtesy of Smith & Wollensky…

The Latest on Fairness Opinions

We have posted the transcript for the DealLawyers.com webcast: “The Latest on Fairness Opinions.”

Judge Reluctantly Approves SEC-Bank of America Settlement

A few weeks after the SEC announced it had settled (again) with Bank of America over its two actions against the company regarding alleged disclosure deficiencies in connection with BofA’s acquisition of Merrill Lynch (one action regarding bonus amounts; the other over operating losses), Judge Rakoff from the Southern District of New York ended his game of “will he or won’t he” and approved the settlement on Monday. As noted in this NY Times article, the Judge still expressed displeasure with the settlement – he called it “half-baked justice at best” – even as he issued this order.

Below is an excerpt from yesterday’s “Proxy Disclosure Blog” from Mark Borges that explains the changes to the SEC’s announced settlement:

As part of the Court’s order, he modified several of the remedial corporate governance and disclosure measures that BofA must follow for the next three years. Specifically, with respect to the requirements to engage an independent auditor to assess whether BofA’s accounting controls and procedures were adequate to assure proper public disclosures and to engage independent disclosure counsel to report solely to the audit committee on the adequacy of the bank’s public disclosures, the Bank’s choices must be fully acceptable to the SEC (not simply selected in consultation with the SEC), with the Court making the final selection if the parties cannot agree.

Interestingly, the Court also proposed that the selection of an independent compensation consultant to advise BofA’s compensation committee be made jointly by the compensation committee, the SEC, and the Court (rather than solely by the compensation committee) The Court gave the following reason for this suggestion:

The reason for this suggestion was the Court’s perception that too many compensation consultants have a skewed focus when it comes to executive compensation, concentrating on what they perceive is necessary to attract and keep “talent” (however defined), and more generally favoring ever larger compensation packages, while rarely taking account of limits that a reasonable shareholder might place on such expenditures.

However, in the face of BofA’s objection, the Court conceded the point, explaining that the matter should not be a “deal breaker,” especially in light of the “Say-on-Pay” vote that the Bank must conduct for the next three years.

While it’s possible that some of these remedial measures may be superseded by the legislative initiatives that are currently pending before Congress, the fate of these legislative proposals is still very much up in the air. Consequently, BofA’s disclosure practices may prove to be a very interesting “laboratory” over the next three years on the merits of these enhanced disclosure techniques.

Below is an excerpt from the NY Times’ article, noting that BofA still faces a battle with the New York Attorney General:

“The bank still faces a complaint filed last month by Andrew Cuomo, the attorney general of New York. The judge, after studying some of the evidence in Mr. Cuomo’s case, left room for that case to reach a different conclusion than the SEC’s.

In particular, the judge said the SEC had substantial evidence to support the bank’s claim that the dismissal of its general counsel, Timothy Mayopoulos, “was unrelated to the nondisclosures or to his increasing knowledge of Merrill’s losses.” That is the position the bank and its executives have argued since last spring, but Mr. Cuomo’s office asserts that the firing was related to advice from Mr. Mayopoulos.

Judge Rakoff said he had not determined which was right, but he said he was comfortable that the SEC’s conclusion was reasonable. “It is important to emphasize, with respect not just to the Mayopoulos termination but with respect to all the events that the attorney general interprets so very differently from the SEC, that the court is not here making any determination as to which of the two competing versions of the events is the correct one,” the judge wrote.

Mr. Cuomo’s complaint differs from the SEC’s in that it charges the bank as well as its former chief financial officer, Joe Price, and the chief executive, Kenneth Lewis, who retired early in part because of the mounting investigations into the merger.”

- Broc Romanek

February 23, 2010

SEC Finally Adopts E-Proxy Rules: Early Adoption Permitted?

As noted in this press release, the SEC issued an adopting release yesterday to tweak the e-proxy rules it proposed last October (it was adopted via the SEC’s seriatim process like the proposal was made). The new rules become effective 30 days after being published in the Federal Register.

As calendar year-end companies are in the midst of the proxy season, it’s hard to tell if they will take advantage of the new rules this time around – particularly because there is no discussion in the adopting release regarding transition issues (ie. whether companies can adopt early on a voluntary basis). Many members have already asked me whether they can rely on the new rules early – I don’t know the answer.

Here is my math if companies aren’t permitted to rely on the rule changes early: the SEC gets the adopting release published in the Federal Register within a week and the new rules become effective in late March or early April – then with notice and access requiring 42-45 days (as the SEC didn’t reduce the number of advance notice days to 30 from 40 as proposed and Broadridge needs a few days to process a mailing) in advance of the meeting, companies with annual meetings in mid-May or later would be able to use the new rules. I will follow-up on this blog soon once we know more specifics…

Learn the latest practice pointers on e-proxy – and the factors to consider about how and whether to use it – in the transcript of our recent webcast: “How to Implement E-Proxy in Year Three.”

The SEC’s New “Plain English” Spotlight on Proxy Matters: My Ten Cents

Yesterday, the SEC also made a big splash about a new “Spotlight” page for investors about how they can vote – as well as issued this investor alert on the topic. This is a fine small step – but it’s really small potatoes as I doubt many investors will get motivated by the SEC’s educational content to cast their votes (as few investors are ever likely to come across the content).

I think the SEC should be taking steps that will have a much greater impact on voter participation. Starting with improving the usability of proxy cards, voting instructions – and the communications that go along with them. Most communications are laden with legalese and use 200 words when 20 will suffice – a critical mistake when using e-mail to get someone to act. Check out my DealLawyers.com blog entry today for more on my beef here. And I know many corporates are unhappy that they still aren’t permitted to send a proxy card or voting phone number in their e-proxy notice mailings…

All the Rage: Tender Offers

Tune in tomorrow for the DealLawyers.com webcast – “All the Rage: Tenders Offers” – to hear Alex Gendzier of Jones Day, Josh Korff and Christian Nagler of Kirkland & Ellis and Jim Moloney of Gibson Dunn discuss the latest dynamics – and processes – of conducting tender offers, particularly debt ones…

- Broc Romanek

February 22, 2010

The IRS’ Broad Proposal to Require Tax Uncertainties Disclosure

A few weeks ago, the IRS issued a proposed policy (in the form of IRS Announcement 2010-9) that would require corporate taxpayers to make broad disclosures on a schedule regarding their tax uncertainties, pulling information derived from FIN 48. The schedule would require a concise description of each “uncertain tax position” and information about its magnitude, but would not require disclosure of the taxpayer’s risk assessments or tax reserve amounts.

If this controversial proposal is adopted, it could impact those of us who have to evaluate these positions to draft disclosures to be flied with the SEC. Notable is IRS Commissioner Doug Shulman’s recent speech that discusses this proposal. We have been posting memos regarding this development in our “Tax Uncertainties” Practice Area.

The Last Samples: Companies Complying with the SEC’s New Rules

In our “Proxy Season Blog” on Friday, I posted another batch of proxy statements filed under the SEC’s new rules, courtesy of Kevin O’Neil of Vorys and Jackie Lasaracina of Perkins Coie.

Here’s my last word on the subject – a preliminary proxy statement filed by Umpqua Holdings that uses a grid for director qualifications. I wonder how many others will follow this format compared to those that insert the information directly into the director biography section…

Note that the SEC has announced an open Commission meeting for this Wednesday to consider publishing an IFRS statement.

More on “One Hot Potato: Climate Change Disclosure”

Recently, I blogged about how the SEC’s climate change interpretive guidance was a political hot potato. To bolster that statement, House Republican Spencer Bauchus (R-Ala), ranking member of the Committee on Financial Services (the committee that oversees the SEC), wrote this letter to the SEC recently, asking if the White House pushed the climate guidance. I’m sure there will be more to come…

Check out Kevin LaCroix’s analysis in his blog about whether the new climate change disclosure requirements could lead to more climate-related lawsuits.

- Broc Romanek

February 19, 2010

FINRA: Implementing a Same-Day Clearance Option for Shelf Filings

Here is news from Suzanne Rothwell of Skadden Arps:

FINRA’s Corporate Financing Department is responsible for the pre-offering review of public offerings of securities for compliance with FINRA’s regulations governing underwriting terms and arrangements. In most cases, in order for a shelf takedown to be completed in compliance with FINRA Rule 5110, participating broker/dealers must rely on FINRA’s prior issuance of a “conditional no objections” opinion with respect to the base shelf prospectus and also obtain FINRA’s opinion of “no objections” with respect to the takedown prospectus.

In an effort to address the timing issues related to shelf offerings, FINRA has announced that on March 1st, it will implement a new “Same-Day Clearance Option” for the issuer’s base shelf prospectus and the takedown prospectus for those offerings where counsel can make a number of representations. The FINRA “conditional no objections” opinion on the base shelf prospectus and the “no objections” opinion on the takedown prospectus will be issued automatically once a filing that relies on the Same-Day Clearance Option is accepted by the FINRA’s electronic COBRADesk filing system. The base shelf prospectus and the takedown prospectus can be filed separately or simultaneously under the new procedure.

FINRA has not yet issued explanatory materials related to the new procedure. These materials should be available some time next week and will be distributed. However, based on information made available at a FINRA Roundtable on Shelf Offering Review, it is my understanding that, in order to qualify for Same-Day Clearance Option in the case of a shelf takedown, counsel will be required to represent on behalf of participating members that underwriting compensation will not exceed 8% of the gross offering proceeds, the offering does not include any arrangements specifically prohibited by FINRA Rule 5110(f), all items of underwriting compensation are disclosed in the prospectus supplement, and participating broker/dealers have not received securities that are treated as underwriting compensation (except for fair priced derivatives).

More limited representations are required from issuer’s counsel with respect to FINRA filing of the base prospectus. This process will be available for shelf offerings subject to FINRA’s conflict of interest rule (NASD Rule 2720) in most circumstances. In such case, an additional representation regarding compliance with Rule 2720 will be required. FINRA staff initially discussed that they will conduct a post-clearance review as to the accuracy of the representations submitted. FINRA materials may further clarify the scope of this review.

More on “New York Law: ‘Abstentions’ as ‘Votes Cast’”

Some members were confused by the member statement that I included in this blog regarding the NYSE’s view of “abstentions.” Here is my attempt to clarify the NYSE’s position:

Rule 312.07 contains two requirements with respect to the shareholder approval of transactions or compensation plans under Sections 312.03 and 303A.08 of the NYSE Listed Company Manual: (a) a majority of votes cast must approve the proposal and (b) total votes cast must represent over 50% in interest of all securities entitled to vote.

The NYSE counts votes “for”, “against” and “abstain” as votes cast in determining the numerator used in the calculation to determine (b). Broker non-votes are not treated as votes cast, but are included as “securities entitled to vote” for purposes of determining the denominator in the calculation to determine (b), as are all voting securities whether or not they are represented at the meeting. Then, (a) is a majority of the shares counted as present at the meeting for purposes of (b).

Put another way, (b) is “for”+”against”+”abstain” divided by outstanding shares (whether or not represented at the meeting), while (a) is 50% plus one of or”+”against”+”abstain”. Using an example, if there are 100 shares outstanding, at least 51 shares must be cast in total as “for”, “against” or “abstain” votes. This satisfies (b). To satisfy (a), at least 26 shares must be voted “for” the proposal (assuming, for purposes of our example, that exactly 26 shares are represented at the meeting).

So in the NYSE’s view, an “abstain” has the same effect as an “against” vote. It’s a totally different standard from the “majority of votes cast” requirements of state law (at least in Delaware, New York and Pennsylvania as far as I know).

Some Thoughts on Pre-IPO Acquisitions

In this podcast, David Westenberg of WilmerHale discusses pre-IPO acquisitions, including:

- What “business” issues arise for a private company when making an acquisition, especially if the acquisition is concurrent with its IPO?
- Can you provide an overview of the unique legal issues that arise when a private company pursues an acquisition?
- What advice do you have for private companies that are contemplating an acquisition?

- Broc Romanek

February 18, 2010

We Win Top Blog Honors!

As I blogged a few months ago, this blog was placed in the ABA Law Journal’s “Blawg 100” for the second year in a row. The ABA then pitted the top 100 blogs against each other in a voting contest – and I’m proud to say that we easily emerged as #1! Thanks to those that bothered to navigate a difficult voting system – registration was required and only one vote was permitted per person (even though many offered to vote as many times as permitted).

Here is a breakdown of the top 10 blogs as voted upon in the contest (culled from these results; here are the vote counts):

1. TheCorporateCounsel.net Blog – 426 votes
2. TechnoLawyer Blog – 388 votes (has an asterisk because cash prizes were offered for votes!)
3. Above the Law – 355 votes
4. The Legal Satyricon – 266 votes
5. E-Lessons Learned – 233 votes
6. Jonathan Turley – 216 votes
7. Patently-O – 204 votes
8. China Law Blog – 158 votes
9. The Volokh Conspiracy – 149 votes
10. Social Media Law Student – 148 votes

Although I’m not a big believer in “lists,” the honor is humbling and I’m glad we were able to prove the widespread loyalty of those who read this blog. All too often I see this blog surprisingly not on the top of the few lists that compare the relative popularity of legal blogs, when I know that this blog is more widely read than “JohnnyBoy’s Kansas Farmlaw Blog.” I’m not disparaging farm law at all – it’s just that I know many thousands get this blog pushed out to them via email and RSS feeds (as well as Securities Mosaic’s Blogwatch) and there can’t be that many farm lawyers in Kansas (another example – we are below the “Biker Law Blog” in this list; in fact, we are not even on that list!). Those lists use metrics that don’t account for all the pushing out that this blog does – over 20,000 get this blog pushed out to them in one form or another.

In the “small world” category, I grew up in the same Chicago apartment complex as Professor Jonathan Turley – who has the #6 blog and is an international legal giant. Maybe now he’ll buy me a lunch.

Former General Counsels as Directors

In this podcast, Craig Nordlund, former General Counsel of Agilent Technologies, discusses his career path, including:

- What has been your career path?
- What are your plans for your new retirement?
- What attributes would someone with your type of background bring to a boardroom?

How to Implement E-Proxy in Year Three

We have posted the transcript of our popular webcast: “How to Implement E-Proxy in Year Three.”

- Broc Romanek

February 17, 2010

CDIs: Corp Fin Issues Six More on the SEC’s New Rules

With the federal government finally open yesterday (albeit two hours late) in DC, Corp Fin issued six more Compliance & Disclosure Interpretations on the SEC’s new rules. They include:

- Item 401 – New Question 116.07
- Item 402(a) – New Question 117.05
- Item 402(c) – New Question 119.21
- Item 402(c) – New Question 119.22
- Item 402(c) – New Question 119.23
- Form 8-K’s Item 5.07 – New Question 121A.01

More Samples: Companies Complying with the SEC’s New Rules

Last Thursday’s blog listing companies that have filed proxy materials under the SEC’s new rules was popular – here are some more samples that either members informed me about or that I dug up myself:

- Weyerhauser Company
- Synovus Financial Corp.
- AGL Resources
- Huntington Bancshares
- Signature Eyewear
- NetSol Technologies
- Champion Industries
- Frederick’s of Hollywood
- Schlumberger Ltd.
- MDU Resources Group
- Covidien Public Limited Company
- Eli Lilly

Thanks to Ken Wagner of Peabody Energy Corp. and Matt Tolland of Wilson Sonsini for pointing some of these new ones out! We should be seeing a lot more proxy statements filed going forward. One member notes that in reading the first batch of filers, it is interesting how companies define “diversity.” Some don’t include gender in that definition, some do. I’m sure we will see surveys on this point at the end of the proxy season.

In his “Proxy Disclosure Blog,” Mark Borges continues to provide detailed analysis of the new proxy statements as they roll in.

Proxy Access: Where Are We?

Last Friday, I blogged about the 50,000-plus comment letters the SEC has received on proxy access over the years. That led a number of members to ask if the SEC was still considering their current access proposal. I believe the answer is “yes,” as all recent statement publicly made by folks from the SEC indicate that they are still “hopeful” that they are on track to consider voting on something this Spring.

Of course, we still don’t have any idea what a final rule may look like. This recent Reuters interview with Commission Aguilar indicates that he is not in favor of watering down the existing proposal by allowing companies to opt out.

Farewell to Loretta Griffin

I’m sad to inform you that Loretta Griffin, beloved secretary in Corp Fin for many years recently passed away. Loretta served in the Office of Chief Counsel and always had a smile on her face. Many of you don’t realize it, but you interacted with Loretta whenever you left a voicemail for OCC as she was one of the folks that assigned your call to one of the attorneys in the group. We will miss you Loretta – our condolences to her family and friends.

- Broc Romanek

February 16, 2010

RiskMetrics’ FAQs on SEC’s New Disclosure Requirements

Last week, RiskMetrics posted three FAQs to address how their voting policies apply to the SEC’s new rules. These FAQs address:

- What will RiskMetrics be looking for in the new disclosure requirement on risks raised by compensation programs? In particular, how will RMG react to non-disclosure?

- How will RMG analyze compensation consultant fee disclosures? Will RMG apply some type of formula where concerns will be raised if fees for other services exceed fees for compensation consulting?

- Regarding the new disclosures on director qualifications, diversity policies, and board leadership and oversight of risk management, what are RMG’s views and the prospects for related voting recommendations?

In his “Proxy Disclosure Blog,” Mark Borges discusses these new FAQs.

Delaware Chancery Court’s Groundbreaking Decision: “Brokers” as Recordholders

Here is some news from John Grossbauer of Potter Anderson:

Last Tuesday, Delaware Vice Chancellor Laster delivered a potentially important opinion in Kurz v. Holbrook. In it, VC Laster finds valid consents delivered without the consenting party having obtained an omnibus proxy from DTC. The Vice Chancellor held this did not invalidate the consents, because the Cede breakdown is part of the stocklist for Section 219 purposes. In other words, brokers are now “record holders” of Delaware corporations for all purposes. This has potentially significant consequences for consent practice and compliance with notice requirements.

He also invalidates a bylaw that purported to reduce the size of the board and to call a special meeting to elect the single remaining common director, finding this would not comport with any of the valid methods for ending the term of an incumbent director. He does say that a bylaw that would reduce the size of the board at an annual meeting could effectively end the term of directors not reelected at that meeting.

We are posting memos analyzing this opinion in our “Stockholder Lists” Practice Area.

Showdown Over Special Meetings

Below is some recent commentary from RiskMetrics’ Ted Allen:

More than a dozen U.S. companies plan to offer management proposals this year to give shareholders the right to call special meetings. While one might expect that investors would welcome these reforms, shareholder activists are crying foul because these management bylaw (or charter amendment) proposals have higher ownership thresholds than those that many investors say they prefer.

In virtually all of these cases, the companies are acting in response to a recently filed shareholder proposal that requests a 10 percent (of outstanding shares) threshold, and/or a similar investor resolution that received majority support in 2009. Most of the companies are seeking a 25 percent threshold, although a few issuers have proposed different percentages such as Honeywell International (20 percent), and Medco Health Solutions (40 percent).

Companies have offered various arguments in support of a 25 percent threshold. Some issuers point out that 25 percent is more appropriate for their circumstances because there are several institutions that own more than 5 percent of their shares. They contend that a higher threshold would deter nuisance requests and force a hedge fund to seek broader support before requiring a company to incur the expense of holding a special meeting.

However, most shareholders won’t have an opportunity this year to choose between the competing thresholds because many issuers are obtaining permission from the staff of Securities and Exchange Commission’s Corporation Finance Division to omit the investor resolutions. In their no-action requests, the companies are successfully citing SEC Rule 14a-8 (i)(9), which bars a shareholder proposal that would directly conflict with a management resolution that the company plans to present at the same meeting.

Under that rule, an investor resolution may be excluded if it and the management agenda item present “alternative and conflicting decisions for shareholders.” In a 1998 rulemaking release, the SEC explained that the proposals don’t have to be “identical in scope or focus” for a company to exclude the shareholder resolution.

Among the companies that have successfully used the (i)(9) argument recently to exclude special meeting proposals are: CVS Caremark, Medco, Honeywell, NiSource, Baker Hughes, Becton Dickinson & Co., Eastman Chemical, and Safeway. In addition, Time Warner, Genzyme, Bristol-Myers Squibb, International Paper, Pinnacle West Capital, and Liz Claiborne Inc. have filed similar no-action requests to exclude proposals with a 10 percent threshold, according to investors.

Meanwhile, AT&T is trying to exclude a 10 percent special meeting resolution under a different SEC rule–14a-8(i)(10)–by arguing that it has “substantially implemented” that proposal. The company’s board approved a 15 percent bylaw on Dec. 18.

The special meeting proposals are part of a successful multi-year campaign by Nick Rossi, William Steiner, and other retail investors affiliated with John Chevedden, a long-time shareholder activist based in southern California. Overall, 31 special meeting proposals filed by investors received majority support in 2009, according to RiskMetrics Group data. Of the 14 companies that so far have sought to exclude proposals under Rule 14a-8 (i)(9), 10 had special meeting proposals that earned majority support last year.

Until last year, not many companies had tried to use (i)(9) to knock out shareholder proposals. In the past, companies often have responded to broadly supported shareholder resolutions by adopting governance policies or bylaws (that may be more restrictive on investors) and then arguing under Rule 14a-8 (i)(10) that they had “substantially implemented” those proposals. However, corporate lawyers shifted their strategy last season after the SEC staff rejected (i)(10) arguments by AMN Healthcare, Allegheny Energy, and Becton Dickinson to exclude special meeting proposals. After switching to (i)(9) arguments later in the proposal filing season, lawyers for H.J. Heinz, International Paper, and EMC successfully won no-action relief.

In letters to the SEC opposing the recent wave of no-action requests, Chevedden argues that the management and shareholder proposals do not directly conflict because they would allow investors to choose between two different thresholds. “Management should not be allowed to short-circuit that sort of dialogue between shareholders and the board by letting a defensive maneuver trap an otherwise legitimate shareholder proposal,” he wrote in a Dec. 30 letter in response to Medco’s no-action petition.

He also complains that the SEC staff is allowing companies to mislead investors, who may logically assume that the management proposal will enhance their rights. “When shareholders are given the ‘opportunity’ to vote on a weak management version of this topic in order to prevent them from voting on a stronger shareholder proposal on the same topic, the shareholders who learn of this context may view this as a subtraction from their rights,” he wrote in a Dec. 18 letter on Medco’s no-action request.

Chevedden contends that some companies (where the board may adopt bylaws without shareholder consent) are holding unnecessary investor votes on special meeting bylaws just to thwart the 10 percent proposals filed by investors. He also expresses concern that companies will be able to avoid votes on future investor resolutions on special meetings by offering management proposals with different (such as 35 or 50 percent) percentages each year.

Cornish Hitchcock, a Washington-based attorney who represents the Amalgamated Bank and other labor investors in no-action matters, said the volume of exclusion requests under (i)(9) this season has been a “little surprising.” He recalled that the SEC staff has rejected a few no-action petitions based on that provision, such as last year when the staff concluded that a retail investor’s “say on pay” proposal at Bank of America did not directly conflict with the company’s federally mandated advisory vote, because the shareholder resolution sought an advisory vote every year.”Some clarification [from the SEC staff] would be useful about what companies can and cannot do under (i)(9),” Hitchcock said.

So far, the SEC staff has not provided a detailed explanation on how it is interpreting Rule 14a-8(i)(9) this season. In ruling on no-action requests, the agency staff typically issues a one-page memorandum stating whether it concurs with any of the issuer’s arguments. Chevedden and his fellow investors have asked the SEC staff to reconsider its rulings on the CVS, Medco, Honeywell, and Safeway no-action petitions. On Dec. 22, the staff rejected his request to reverse its Becton Dickinson decision.

It remains to be seen how institutional investors will react to the companies that have proposed a 25 percent threshold for special meetings in response to majority-supported 10 percent provisions. Based on responses to a recent policy survey, RiskMetrics’ institutional investor clients were divided over what shareholders should do. Of the approximately 100 institutions that responded, just 33.7 percent of endorsed the management approach by saying they would support the management proposal and not withhold support from directors.

However, a majority of the respondents indicated that there should be some negative consequences for management, but they split over how to express their concern: 34.7 percent said they would oppose the management proposal and the board; 16.3 percent said they would support the management proposal but oppose the board; and 15.3 percent said they would oppose the management proposal but support the board.

- Broc Romanek

February 12, 2010

Doing the Math: How Many Proxy Access Comment Letters This Decade?

In a recent speech, SEC Chair Schapiro said “we are nearing a vote” on proxy access rule, but she did not provide a timetable. Last month, I conducted a poll on this blog regarding how many comment letters have been submitted to the SEC on its various reiterations of proxy access proposals since 2003 (the total does include form letters). The poll results were:

- 5% thought there were between 100-500
- 4% between 500-1000
- 18% between 1000-3000
- 28% between 3000-10,000
- 26% between 10,000- 50,000
- 20% over 50,000

Well, the last category is the winner. There have been over 50,000 comment letters submitted to the SEC on proxy access over the past 7 years. Unbelievable. That’s a lot of hard labor.

Here is the math that leads us to this conclusion:

1. 2003 proposal – The SEC received approximately 500 individually signed comments plus form letters from 12,500 others. The SEC held a roundtable in February 2004, after which it received approximately 200 additional individually-signed comments, plus an additional 2,000 form letters.

2. 2007 proposal (alternative 1) – The SEC received approximately 200 comments on this alternative, plus 9,300 form letters.

3. 2007 proposal (alternative 2) – The SEC received approximately 600 comments on this alternative, plus 26,000 form letters.

4. 2009 proposal – The SEC has received over 500 comments so far, but not much in the way of form letters this time around. The latest extension for this proposal has brought in more than 40 letters.

So the total of these is roughly 51,800 comment letters. And counting…

IR Fundamentals

In this podcast, John Palizza (who writes the “Investor Relations Musings” blog) enlightens us with some investor relations fundamentals, including:

- I always thought that investor relations was like advertising – very difficult to measure in its impact. How have people attempted to gauge what investor relations officers do?
- What does the research say about the impact of investor relations?
- Other than making sure investors understand the company’s financial measures, what can investor relations officers do?

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

- Rule 163 Proposal: Some Have a Beef
- Canadian Companies Show Renewed Interest in US Capital Markets
- Regulation FD: Can You Walk Analysts Down From Too Much Optimism?
- Survey: Corporate Governance and IPOS
- Jail Time: SEC Goes After Scofflaw

- Broc Romanek