Yesterday, Corp Fin Director Keith Higgins delivered this testimony before the House Financial Services Committee’s Capital Markets Subcommittee – talking about the state of the Division, with an emphasis on the status of Dodd-Frank and JOBS Act rulemaking. No earth-shattering revelations – but here are notables:
1. Pay Ratio – “Division staff is carefully considering those comments and is preparing recommendations for the Commission for a final rule”
2. Three Other Horsemen – “Division continues to work to implement provisions of the Dodd-Frank Act relating to executive compensation matters”
3. Accredited Investor Definition – “Division and other Commission staff currently are conducting a review of the accredited investor definition”
4. Crowdfunding – “Commission has received over 300 comment letters and the Division is preparing recommendations for the Commission on final rules”
5. Regulation A+ – “Commission has received over 100 comment letters and the Division is preparing recommendations for the Commission on final rules”
There were other rulemakings addressed – but you get the idea: “We are working on it.” There were also questions asked about the Ackman/Allergan situation. As noted in this Reuters article, Keith also addressed questions about WKSI waivers, a hot topic among the SEC Commissioners lately.
Keith did talk about the disclosure effectiveness project, noting that the initial set of recommendations would hone in on the business and financial disclosures in the ’34 Act area (with coordination with FASB). And noting that subsequent phases “will include compensation and governance information included in proxy statements.”
As for operational stats, 4500 companies had their filings reviewed last year – with the Division on the same pace for ’14. Over 400 no-action letter requests are processed annually – of which over 300 relate to shareholder proposals.
Time to Benchmark? Our Horde of Corporate Governance Surveys
We are constantly adding new “Practice Areas” to this site – with now over 500 of them! One of the latest is this one about “Corporate Governance Surveys,” which contains over 70 recent surveys on governance topics…
Connecting Middle-Market Bankers
In this DealLawyers.com podcast, Andy Jones, President of PEI Services, discusses his company – an online information services company providing up-to-date & accurate information about financial buyers to the middle market investment banking community and associated M&A service providers, including:
- What is PEI Services generally & who are the intended users?
- Can you describe your research database?
- How do you source your data and ensure data quality?
- Do you license your data for use within internal CRM systems, or as a plug-in to other corporate data systems?
As the result of a collaborative effort between Ginsberg Jacobs’ Anthony Zeoli, Crowdcheck and Seyfarth Shaw’s Georgia Quinn, here is a comparative summary chart where you can go to compare all of the enacted instrastate crowdfunding exemptions side-by-side – and here’s a chart with the proposed intrastate crowdfunding exemptions…
More on “New Intrastate Offering Exemptions: Not Useful”
Back in April when Corp Fin issued 3 CDIs about the intrastate offerings exemption, I ran a blog noting that they weren’t useful. Now Joe Wallin explains more about why that’s the case in his blog – and also see this piece by Sam Guzik…
I’ve been posting a slew of new checklists recently. This checklist is about whether it’s worth the hassle of converting old board minutes from paper to digital – and if so, how to best do it…
I know the title of this particular blog sounds sensational – but the opening of this DealBook column by Andrew Ross Sorkin about shareholder engagement is “What if lawmakers never spoke to their constituents?” So let me deal with the top 10 points that I see in this column since it created a stir yesterday:
1. “Within the clubby world of directors, communicating with shareholders, big or small, is overtly frowned upon”
My take: I agree that it’s quite strange that the notion of shareholder engagement is something that only recently is in vogue. Then again, the term “corporate governance” was barely used – or understood – until about a dozen years ago. I make fun of this sudden fascination with engagement in this 90-second video entitled “10 Silly Ways Towards Better Shareholder Engagement.” I should note that The Conference Board issued a statement yesterday clarifying its position about directors engaging (i.e. they support directors speaking directly with investors, particularly in special circumstances such as when investors have lost confidence in a board or management)- Sorkin didn’t characterize their position quite right.
2. “At least 1,000 large United States public companies to receive a letter this month from a group of shareholders representing more than $10 trillion in assets with a demand: Talk to us.”
My take: Here’s the July 2nd letter if you haven’t seen it. The letter doesn’t demand direct shareholder-director engagement. Rather, it asks boards to “consider adopting and clearly articulating a policy for shareholder-director engagement, whether through adoption of the SDX Protocol or otherwise.” The letter notes that JPMorgan’s proxy statement explicitly endorsed the SDX protocol – and that its board met with shareholders representing 40% of its base. The letter notes that less than 25% of the S&P 500 disclosed their engagement efforts in their proxy (I note that even the ones that disclosed their engagement efforts likely didn’t mention shareholder-director engagement).
3. “Some directors avoid meetings, worried about speaking with one voice”
My take: This seems like a valid concern on its face – but smart shareholders know that each director has their own views. Those shareholders seeking to meet a particular director typically just want to ascertain whether they are truly independent and capable of doing their job. They are not looking to meet a politician.
4. “Most don’t consider it their responsibility”
My take: Directors are supposed to represent shareholders. Although I agree it’s not a primary responsibility – and most directors don’t have the time to do a bunch of meetings – they shouldn’t shun shareholders.
5. “Some are anxious about accidentally disclosing sensitive information”
My take: If a director isn’t capable of meeting with someone and not giving away material nonpublic information, they shouldn’t serve in that role. Note that Corp Fin has issued Reg FD CDI Question 101.11 which clarifies that directors are not prohibited from speaking privately with shareholders. This CDI should give directors comfort that private meetings are not intrinsically problematic so that they can participate in governance engagement efforts.
6. “Some chief executives are insecure and don’t want shareholders to get too close to their boards for fear they will have undue influence”
My take: This is an interesting one. On its face, the CEO shouldn’t be insecure as these typically are short and simple meetings (and normally a company officer accompanies the director). But look how lobbying has destroyed Congress. So long as the engagement process is kept in check, this concern isn’t a valid one.
7. “Many top executives seem to think that board members cannot be trusted with such interactions”
My take: It’s true that most boards will have some directors that are not “camera ready.” But smart shareholders will know that and not expect (nor want) a board full of politicians.
8. “If a board becomes too enamored with a particular view from a set of shareholders, it could lead to short-term thinking that undermines long-term performance”
My take: True dat.
9. “Large investors might have the opportunity to meet with directors while small retail investors almost certainly never will”
My take: This is reality. But as I blogged yesterday, companies can post video interviews with directors so that anyone can get a feel for a director.
10. “The shareholders despite saying they want a dialogue, actually aren’t interested”
My take: This is a real problem: boards going on governance roadshows with few attendees. At our executive pay conference, the comments made during my “investors speaks” panels illustrate that there are a variety of views towards whether directors need to meet with shareholders. Shareholders have limited time availability, just like directors. By the way, I just posted this sample Powerpoint that can be used for a governance roadshow…
Our “Shareholder Engagement Checklists”
For me, the upshot is that boards should consider adopting shareholder engagement policies – and this is a topic ripe for proxy disclosure (many of the proxies I highlighted in my video series this year included this disclosure). Remember that we have a lot of good practical stuff in our “Shareholder Engagement Checklists”:
It’s Done: 2015 Edition of Romanek’s “Proxy Season Disclosure Treatise”
Just ahead of my vacation, I have wrapped up the 2015 Edition of the definitive guidance on the proxy season – Romanek’s “Proxy Season Disclosure Treatise & Reporting Guide” – and it’s gone to the printer. You will want to order now so that you can get your copy as soon as it’s done being printed. With over 1450 pages – spanning 32 chapters – you will need this practical guidance for the challenges ahead…
In this podcast, John Seethoff of Microsoft explains how the company has showcased its directors through video interviews, including:
- Why did Microsoft decide to tape videos of the directors?
- How do I find the videos?
- What typically is discussed in these videos?
- How much production is involved? Is it costly?
- Was it difficult to convince the directors to do them?
- What has feedback been from investors? From employees?
As noted in this MoFo blog, SEC Chair White & Corp Fin Director Higgins will testify on Thursday before the House Financial Services Committee about the status of Dodd-Frank’s rulemakings, as well as the disclosure effectiveness project…
Unclaimed Property: Delaware’s Voluntary Program Extended
As noted in this memo, the deadline to enter Delaware’s SOS VDA Program has been extended until September 30, 2014 (bumped up from June 30th) – and the deadline to resolve all unclaimed property liability under that program has been extended until June 30, 2016.
July-August Issue: Deal Lawyers Print Newsletter
This July-August Issue of the Deal Lawyers print newsletter includes:
- Materiality Scrapes Trending Upward in Private Deals
- Hushmail: Are Activist Hedge Funds Breaking Bad?
- Recent Trends: Antitrust & Regulatory Risk-Shifting in M&A Agreements
- Respecting Boilerplate: Preamble
For many years, ISS has posted a host of resources to help investors conduct due diligence, including a set of “questions you should ask” and a “due diligence checklist” in this 11-page due diligence compliance package. In addition, here’s a letter from Sullivan & Cromwell about a conflict policy review it conducted in ’07. So these materials were not posted in response to the SEC’s recent Staff Legal Bulletin that deals with the responsibilities of investment advisers to vote and hire proxy advisors, but they are definitely helpful now…
ISS Seeks Input: Annual Policy Survey
As noted in this Gibson Dunn blog, ISS has opened its annual survey ahead of updating its policies. The survey closes on August 29th – and then the results are released a few weeks later. Then there’s an open 30-day comment period in October – with the final policy updates arriving sometime in November typically. The entire policy process is described on ISS’ website..
Webcast: “Career Advice: The In-House Perspective”
Tune in tomorrow for the webcast – “Career Advice: The In-House Perspective” – during which Oracle’s Chris Ing, Governance Solutions Group’s Denise Kuprionis, Northeast Utilities’ Rich Morrison, former Northrup Grumman Kathie Salmas and Tennant’s Heidi Wilson will impact career advice from decades of in-house experience. The panel will cover:
- Determining Whether Going In-House is Right for You
- How to Evaluate a Potential Employer
- How to Market Yourself – Internally & Externally
- Salary Negotiations
- How to Best Work With Your Law Firm Lawyer
- Challenges in Setting Yourself Up as a Consultant After You “Retire”
James Garner was one of my favorites. From the “Rockford Files,” Jimmy Joe Meeker was his best alter ego…
A while back, I was surprised to discover that SEC Commissioner Dan Gallagher has his own Twitter account. Not that there’s anything wrong with it. In fact, I am all for it. I was just surprised because too many in the business world – and the government – are a tad bit paranoid about social media. He’s been on Twitter since last October and has tweeted 99 times. The Commissioner follows no one and has just under 1000 followers. Here’s a recent tweet as a sample:
I'm shocked, SHOCKED, that heavy-handed gov’t intervention into the economy is creating systemic risk. http://t.co/GPzSUVanrT
— Dan Gallagher SEC (@DanGallagherSEC) July 7, 2014
Social Media: Seeking Alpha Wins Court Case to Keep Contributors Anonymous
This note posted on Seeking Alpha’s site brings us the news that the NY Supreme Court dismissed a case seeking to compel Seeking Alpha to reveal the identity of a pseudonymous contributor who criticized a company and its management. Afterwards, Q4 ran this blog, providing full details about the case and post-case remarks from Seeking Alpha’s CEO.
For those that don’t know Seeking Alpha, it is an important site for you to familiarize yourself with as many independent analysts, professional investors and retail investors share insights & opinions there about investing in specific companies. Folks that post – known as a “contributor” – can do so anonymously or they can choose to identify themselves (and they get paid for their contributions if they reach a certain number of views). And companies can even participate themselves in the forums, although I’m not sure if any actually do like they do on StockTwits. The primary difference between Seeking Alpha & StockTwits is that Seeking Alpha has long-form content, whereas StockTwits has very short pieces (limit of 140 characters like a tweet). Each platform has millions of users as noted in this recent academic study…
This Akin Gump blog from last year describes how traders on Wall Street are obsessed with Snapchat. This led me to the idea of conducting this poll about how many readers of this blog use that app:
According to the ISS US preliminary postseason update, the win rate for dissidents, measured by whether they won at least one board seat through negotiations or a vote, was 59% at 22 contested elections in the first half of 2014, compared to 24 contests with a 68% success rate by June 2013. The size of the target continues to increase, as seven of the companies had market capitalizations greater than $1 billion. Notable for 2014 were what ISS dubbed “hydra-headed activist challenges,” where multiple dissidents targeted the same company but with competing visions, including at Darden and Sotheby’s.
Boards were also the focus through 13 “vote no” campaigns. CtW urged investors to vote against nine companies, including several fast food restaurants and retail chains, by invoking the ongoing debate over minimum wage and income inequality, leading to a failed say-on-pay vote at Chipotle. New York City funds and CalPERS blamed board members on Duke Energy’s regulatory policy committee for a coal ash spill earlier in the year.
Board elections remained staid affairs generally, however, as directors received 96% average support. Only 34 nominees at 21 companies in the Russell 3000 did not obtain more votes in favor than withheld or against, primarily for failing to respond to majority-supported shareholder proposals or majority opposition to a director in prior years. ISS notes that only one of these director has since stepped down, after poor attendance triggered a resignation due to the company’s majority voting policy. Not attending at least 75% of meetings led to eight directors not receiving majority votes, while six directors were criticized for adopting a poison pill without shareholder approval. As say-on-pay continues to take the pressure off compensation committee members, only one such director did not receive majority support after facing several years of compensation issues.
Environmental and social shareholder proponents dominated the filed resolutions for inclusion in proxy statements, with a 15% increase this year for a total of 460 proposals, surpassing governance topics for the first time since the 1980s. 30% were withdrawn through settlements and the SEC no-action letter process excluded about 13%. Corporate political activity resolutions, usually seeking more disclosure, dominated.
Requests for independent chairs comprised the bulk of governance proposals, but passed at only 4 companies. The lack of support obscures the fact that the practice is gaining increased acceptance, as 26% of S&P 500 companies are now led by independent chairs, compared to 20% two years ago. Predictions for widespread proxy access proposals continued to prove false for 2014, as only 13 were voted on. Six of the nine proposals that allowed shareholders owning 3% or more to submit nominations passed.
Should Companies Scrap Earnings Calls?
Here’s an interesting blog by Ezra Marbach – based on the findings of this study – about whether companies should just go ahead and do away with their earnings calls if they don’t bother to do a Q&A at the end of the calls…
July-August Issue of “The Corporate Executive”
We have mailed the July-August Issue of The Corporate Executive, and it includes pieces on:
- Parsing the House Ways and Means Proposal for Tax Reform
- Regulation FD & Dealing with the Press
- Tax Treatment of Stock Awards Upon Death
- Maximizing Flexible Share Pool Efficiency
- Modernizing Rule 701
In this podcast, Lawrence Heim of Elm Consulting describes how the first batch of Form SDs look and explains how he uses a set of 20 criteria to assess them, including:
- How many Form SDs have you reviewed so far?
- What type of analysis do you conduct when you review them?
- What have you found during your review?
- Any surprising trends?
Conflict Minerals: Does Corp Fin Have a Position on Non-Metallic Forms of Tin?
Does Corp Fin believe that non-metallic forms of tin are not conflict minerals because they are “chemically distinct from the metal derivatives themselves”? I’ve read about Corp Fin’s informal position on non-metallic forms of tin (answering this question “yes”) – and been asked about it many times. Since I haven’t seen anything in writing from Corp Fin nor heard about a SEC Staffer publicly addressing it, I’ve been hesitant to consider it a Corp Fin position.
As noted in Jill Radloff’s blog (and as told by Elm Consulting), Keller and Heckman has posted this letter – in the “comments” section on the SEC’s conflict minerals rulemaking page – documenting discussion with the Staff. How authoritative is that? That’s unclear – and that’s why Keller and Heckman posted the letter. They ask the SEC to come out with something in writing…
Corporate Inversions: The Basics
Are you scared to go to a cocktail party because you will get hammered with questions about inversions once they find out you are a corporate lawyer? People are going crazy over companies avoiding paying taxes (and rightfully so). This Allan Sloan column from the Washington Post blasts them, this WSJ blog explains them – and this blog embeds a short WSJ video that summarizes them. I really like this NY Times article entitled “Motivating Corporations to Do Good” that came out today..
Spanking brand new. This comprehensive “SEC Filing Fees Handbook” covers a topic that few are expert at – but yet those that do deals have to consider regularly. This one is a real gem – 51 pages of guidance.
Auditor Rotation: Your Audit Partner’s Affair
This Form 8-K filed by Ventas shows how an indiscretion by someone on your independent auditor’s team can be costly for the company. Changing your auditor is an expensive endeavor – and here, the auditor forced the change after an auditor independence analysis indicated that it was necessary due to the affair between someone on the audit team and someone who worked at the client company. Can companies insert a provision into their auditor engagement letter to be reimbursed if this happened to them? Probably not – but I’d like to hear your opinion…
Yesterday, the SEC settled with E&Y for violations of the auditor independence rules due to prohibited lobbying activities…
Webcast: “Executive Pay Basics: The In-House Perspective”
Tune in tomorrow for the CompensationStandards.com webcast – “Executive Pay Basics: The In-House Perspective” – during which Winston & Strawn’s Erik Lundgren, Motorola Solutions’ Kristin Kruska and KAR Auction Services’ Becca Polak provide analysis about how a struggling in-house practitioner might best keep up with executive pay practices & disclosures, including an overview of fundamental securities law issues, stock exchange requirements, proxy advisor policies.
Previously, I’ve blogged about two small companies that have recently adopted fee-shifting bylaws ahead of a stalled Delaware legislature movement to ban them (here’s our memos on the topic). Here’s the latest from this blog by Davis Polk’s Ning Chiu:
The numbers keep changing, but the latest report indicates that six public (or soon-to-be-public) companies have adopted fee-shifting provisions in charters and bylaws since the Delaware court ruling in May that such provisions may be valid, in a case involving a non-stock company.
All are small, and none are in the Russell 3000 index at the moment. Two of the companies have only recently filed IPO registration statements, with the information contained in risk factors or general information disclosure and those incorporation documents are not available yet. One company just went public in June as a limited partnership.
Only Biolase Inc. appears to be rated by ISS QuickScore. Biolase is one of two companies that has adopted these bylaws after facing litigation over board composition this year. Echo Therapeutics settled its suit with a dissident in February, but litigation continues for Biolase. In mid-June, Biolase lost a notable case regarding whether an oral resignation by a director was sufficient notice. The Delaware Supreme Court confirmed in that case that a writing is not mandatory, since the statute indicates that a director “may resign” upon notice given in writing or by electronic transmission, which was also the language used in the company’s bylaws. In the context of numerous discussions, questions and debates about the resignation, the operative words uttered by the director as evidencing his intent to leave, as cited in the court opinion, were “Okay, I agree, I go along with that.” That led to at least one open vacancy filled by a candidate supported by a dissident shareholder and ultimately the CEO’s termination.
The company’s former CEO and chairman initiated a books and records case near the end of June. Around the same time, the company modified its bylaws so that anyone claiming on behalf of a current or former director (a Claiming Director) who does not obtain a judgment on the merits that achieves the purposes of the suit shall be obligated to reimburse the company for “all fees, costs and expenses of every kind and description (including all reasonable attorneys’ fees and other litigation expenses)” incurred by the company.
This chain of events may mean that the appropriateness of the fee-shifting bylaw also gets reviewed soon by the courts in the next round of Biolase litigation. According to a report by Reuters, lawyers for the company’s former CEO and chairman stated that he intends to challenge the validity of the fee-shifting bylaw. It will be interesting to see whether the bylaw adopted by Biolase is upheld for public companies, as it is also slightly different and possibly more limiting than other examples, including as adopted by LGL Group, which defines a “Claiming Party” as any current or prior stockholder.
The Delaware State Bar Association had prepared possible legislation to prohibit such bylaws in May, but in response to concerns from the Chamber of Commerce and other business groups, a resolution asking for continued examination of the measures that would address fee-shifting was approved by the Delaware legislature instead. It is expected that the earliest vote on any legislation will not occur until January 2015.
Webcast: “Divestitures: Nuts & Bolts”
Tune in tomorrow for the DealLawyers.com webcast – “Divestitures: Nuts & Bolts” – during which Doug Campbell, Jim Rice, Doug Brody and Scott Berry of E&Y will teach us all we need to know about diversitures, including financial, operational & tax considerations…
Podcast: The SEC’s 1st Whistleblower Anti-Retaliation Case
In this podcast, Renee Phillips of Orrick addresses the SEC’s resolution of its first whistleblower anti-retaliation case – In Re: Paradigm Capital Management – and the implications for companies, including:
- What is the SEC’s retaliation case about?
- Did you expect the SEC to bring this type of case as its first stand-alone retaliation case?
- What should companies be learning from it and doing now?