Sure enough, not long after I blogged yesterday about how the US Court of Appeals for the District of Columbia Circuit had not yet finalized its decision, I got word that the court had indeed done so in this brief ruling on Wednesday. But trust me, no one knew about it – so I have my excuse. So yesterday, the SEC posted this release and order lifting the stay – and thus the Rule 14-a(8) stay will be lifted once the new rules are published in the Federal Register. That might be today or next week sometime…
MSCI Slides Over Chief Administrative Officer to Head ISS
As I get ready for an early flight cross-country, I’m bashing out this blog. I thought this press release was notable yesterday – that MSCI has moved over its Chief Administrative Officer Gary Retelny to head ISS. It has long been rumored that MSCI would unload ISS after it bought RiskMetrics, but I guess the right buyer hasn’t yet emerged. By the by, Gary will remain as the corporate secretary of MSCI…
Poll: How Many Shareholder Proposals on Access Do You Expect in ’12?
Now that the SEC’s stay is being lifted, it’s a good time to gauge how many shareholder proposals dealing with proxy access do you think will be submitted to companies next proxy season:
Although this “Staff Observation” – maybe that will be the shorthand reference to these? – is merely informal guidance and not blessed by the Commission, it likely is somewhat of a higher level of guidance than CDIs because of the format (eg. one tip is the “Supplementary Information” section). It appears that this will be an ongoing form of guidance since the Staff bothered to label this as “No. 1.”
You may recall Dave wrote two great pieces in The Corporate Counsel back in ’08 (March-April and May-June issues) explaining all the various flavors of informal guidance that Corp Fin offers. At one point, there was a Staff movement afoot to begin consolidating these forms of guidance – but Corp Fin recently issued this WKSI Waiver Statement and now we have this new form of guidance…
Proxy Access: Is the Court’s Decision “Final” and the SEC’s Shareholder Proposal Stay Lifted?
When the SEC decided last week to not appeal the adverse proxy access decision by the US Court of Appeals for the District of Columbia Circuit, the SEC’s statement noted that the court’s decision was likely to be finalized on September 13th. That finalization is significant because – as noted in the SEC’s statement: “Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.” In other words, the stay on shareholder proposals regarding access would be lifted. As I flew across the country yesterday, I fielded numerous member queries asking if this indeed has happened – and to my knowledge, it has not yet. I’ll let you know when I hear differently…
New California Law: Time to Consider Charter Provisions to Exempt Preferred Stock Preferences
Recent amendments to California Corporations Code Section 500 et seq. look like they will have broad application to companies doing business in California as a result of Section 2115 for pseudo-California corporations. John Tishler of Sheppard Mullin notes “there is a “sleeper” in here allowing California corporations – and presumably foreign corporation subject to Section 2115 – to include language in the articles of incorporation permitting distributions (that is, dividends in cash or property, repurchases and redemptions of shares) without regard to preferences of senior series of preferred stock. Presumably, such language could also be included in the certificate of designation for a newly authorized series of preferred stock.
We speculate it will become market standard to include that waiver language, since preferred stock protective provisions will generally do a better job protecting preferred holders than Section 500. Although AB 571 is not effective until January 1st, we are recommending that companies now adopt or amend their charters or authorize new series of preferred stock consider including language permitting distributions without regard to preferred stock preferences.”
Here’s an excerpt from this Sheppard Mullin memo:
Recently, California Governor Jerry Brown signed Assembly Bill No. 571, which simplifies restrictions on dividends, repurchases and redemptions of shares. The restrictions are set forth in Sections 500 to 509 of the California Corporations Code, and are commonly referred to collectively as “Section 500.” These provisions are designed to protect the interests of creditors and senior equity holders against transactions that might undermine their seniority in the capital structure. Section 500 applies to companies incorporated in California and to companies incorporated elsewhere but deemed subject to the same restrictions by virtue of satisfying the requirements of Section 2115 of the California Corporations Code for “pseudo-California corporations.” Section 500 uses the term “distributions” to encompass dividends of cash or property (other than shares of the corporation) and repurchases and redemptions of shares.
Section 500 has served as a trap for the unwary, a significant impediment to the ability to effect many transactions that do not intuitively threaten the interests of creditors or senior equity holders, a substantial risk for directors who face personal and potential criminal liability for distributions made in violation of Section 500, and a source of frustration to lawyers and clients who struggled to explain, apply and perform the financial gymnastics required under Section 500. In extreme cases, companies incorporated in California have had to reincorporate in other jurisdictions prior to effecting a transaction because the transaction would otherwise be prohibited under Section 500.
The changes to Section 500 create an opportunity for issuers of preferred stock (e.g., companies receiving venture capital in its most common form) to exempt the preferences of classes or series of preferred stock from the application of Section 500. This would have the potential to improve companies’ flexibility to undertake various actions that would otherwise require unanimous consent of holders of a class or series of preferred stock.
When I blogged last week about the SEC deciding to not appeal the proxy access court decision, I noted that one importance of the SEC’s announcement was that the stay on Rule 14a-8 access proposals was being lifted. And I used the phrase “opening floodgates” in my title to intimate that a lot of shareholder proposals touting access might be forthcoming in ’12.
I’m now doubting myself for using that phrase as it remains to be seen just how many access proposals will be submitted next year. On the one hand, CII issued a press release that stated: “Council member funds and the broader investor community are ready and willing to seek access to the proxy to nominate directors judiciously, at companies where boards have been asleep at the switch or chronically unresponsive to shareowner concerns.”
On the other hand, ISS’s Ted Allen’s blog on the topic notes:
Amy Borrus, CII’s deputy director, said she expects to see “probably not more than a handful” of access proposals in 2012. “I expect that shareowners will file proxy access proposals selectively at companies where boards have a history of not being responsive to shareowners or have been asleep at the switch,” she said.
This view is supported by this statement in Ted’s blog:
There is concern among some activists that corporate advocates will argue that federal access standards are not needed if investors file a large number of access resolutions next year.
But you never know what will really happen until it happens – so it’s too early to tell, although not too early to poll (I’ll post a poll soon). But one thing is sure, as noted in Ted’s blog:
Even with the revised Rule 14a-8(i)(8) in place, it appears likely that shareholder access resolutions will face no-action challenges from companies on proof-of-ownership or other procedural grounds. Some companies may try to argue that an access proposal conflicts with state law or is impermissibly vague and misleading.
Second Circuit Clarifies Materiality Requirement in Securities Fraud Cases
The Second Circuit held that defendants’ alleged failures to write down goodwill in a timely manner and to increase loan loss reserves sufficiently during the financial crisis were not actionable, because defendants’ challenged statements were matters of opinion rather than fact. Thus, plaintiffs had to allege that defendants did not believe the statements were true at the time they were made, something the complaint failed to do. Fait promises to be a useful tool in defending claims under the Securities Act, as well as claims that a defendant otherwise misstated financial figures, when those figures depend on the judgment of management rather than strictly objective criteria. The decision may be particularly important with respect to claims against accounting firms, whose conclusions based on their audits of financial statements and internal control regularly take the form of an expression of opinion.
The SEC’s New “MAP”: Organization Reform is Coming!
On Monday, the SEC posted this 25-page report entitled “Implementation of SEC Organizational Reform Recommendations” as required by Section 967 of Dodd-Frank and in response to a 267-page Boston Consulting Group study provided to Congress earlier this year (I’ve blogged about that twice – here and here).
At 25-pages, I was more willing to spend more time with this report than the formidable Boston Group Study – but it still wasn’t my type of “quiet read.” Here are a few notes based on a skim of this new report:
– Implementation of the recommendations will be expensive – $42-55 million over two years, per pg. 6 – and the SEC is budget-constrained right now.
– Program formally named the “Mission Advancement Program” aka “MAP” (pg. 10)
– Corp Fin seems to have escaped any further reshaping since it recently did some realignment (pg. 13)
– SEC will seek flexibility from Congress when creating four new Offices as required by Dodd-Frank (and since stalled due to budget limits)(pg. 17)
– SEC is following up on its momentum towards technological sophistication by devoting more attention to developing a technology strategy including eventually forming a “Technology Center for Excellence” (pgs. 19-20)
– SEC focused on addressing high priority hiring needs – those “hard to recruit or hire” (pg. 23)
A great compilation of highlights for those that want to relive Michigan’s epic win over Notre Dame on Saturday…
Last week, the 9th company that failed to garner majority support for their say-on-pay was sued – Dex One Corp in a federal district court in North Carolina (here’s the complaint). We continue to post pleadings from these cases in CompensationStandards.com’s “Say-on-Pay” Practice Area.
But that’s not all in the area of lawsuits over pay practices. Last week, Chesapeake Energy’s board was sued for allegedly bailing the company’s CEO out of financial trouble by awarding him bonuses – as well as buying his personal art collection for $12.1 million and relying only on the CEO’s art dealer for determining the value of the art – in a federal district court in Oklahoma. Not sure why, but it doesn’t seem like the mass media has caught up with this one. Thanks to Paul Hastings’ Mark Poerio for pointing it out!
And then as I blogged last week on CompensationStandards.com’s “The Advisors’ Blog,” arguments where just made in a lawsuit in the Delaware Chancery Court over Goldman Sach’s pay practices. If the case survives, it should be interesting – as will the Citigroup case where discovery ended last week and now we’re just waiting for a trial date to be set before VC Glasscock…
Our Conference Hotel is Nearly Sold Out!
Our pair of popular executive pay conferences – “6th Annual Proxy Disclosure Conference” & “The Say-on-Pay Workshop Conference” – is quickly approaching and the Conference hotel is nearly sold out; register for the Conference today and make your hotel reservations online or by calling them at 800.445.8667 or 415.771.1400. Be sure to mention the Conferences to get the best rate. The Conferences will be held on November 1-2 in San Francisco and by video webcast. If you have difficulty securing a room, contact us at 925.685.5111.
With Conference registrations going strong – on track to reach nearly 2000 attendees – you don’t want to be caught unprepared as we head into next year. The last time we held our Conferences in San Francisco – two years ago at the height of the recession – we sold out a month in advance: the Conference itself, not just the hotel! And that was without the reality of Dodd-Frank and mandatory say-on-pay hanging over our heads. Register today to ensure you don’t miss out.
Webcast: “Current Developments in Capital Raising”
Tune in tomorrow for the webcast – “Current Developments in Capital Raising” – to hear John Jenkins of Calfee Halter, Michael Kaplan of Davis Polk, Louis Lehot of Sheppard Mullin, and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster explore the latest developments in the capital markets, including alternatives such as PIPEs, registered direct offerings, “at-the-market” offerings, equity line financing and rights offers.
A few weeks ago, two senior members of the House Committee on Financial Services – Randy Neugebauer (R-TX) and Scott Garrett (R-NJ) – sent this letter to SEC Chair Shapiro requesting that the SEC “refrain from undertaking any important or controversial initiatives, including significant rulemakings” until Dan Gallager is confirmed by the Senate to fill the seat recently vacated by Commissioner Casey.
While on its face, this request appears noncontroversial and logical. But I don’t recall ever seeing a similar request to any federal agency in this town – and the reality is that it’s pretty common for a federal agency’s Commission to be operating at less than “full strength.” The appointment process is time-consuming and often not at the top of a Presidential agenda. In fact, I recall during an extended period of time during my last tour of duty at the SEC that the Commission only had two Commissioners – Chair Arthur Levitt and Commissioner Steve Wallman – from July ’95 til February ’96. President Bill Clinton left many agencies with unfilled slots during his initial years in office, a common occurrence when there is turnover in the Oval Office. [Here’s a chart if someone wants to conduct the analysis and tell us how often the SEC has had less than 5 Commissioners.]
So if this request was to become the norm, at least one agency or another – if not many more – would be at a standstill for extended periods of time. And this also could lead to shady dealings such as a Commissioner threatening to quit – and thus stall a rulemaking – in order to pressure changes to a rulemaking that the other four Commissioners don’t want. The SEC is supposed to be an independent agency but constant Congressional interference has made it challenging for it to do its job properly. Please make it stop…
The Battle of the New Corporate Entities: Flexible Purpose Corp vs. B Corp
As noted in the “Triple Pundit Blog,” the Benefit Corporation (B Corp) – a new type of corporate entity that purports to use business to address environmental and social problems – passed the California State Assembly. California joins a few other states – Maryland, Vermont, New Jersey, Virginia and Hawaii – in passing Benefit Corp legislation.
I haven’t been following the B Corp saga but quickly learned that the B Corp has been getting most of the publicity even though another new entity – the Flexible Purpose Corp – was introduced first before the California legislature by more than a year. Last week, the California bill creating FPCs (SB201) passed the California Senate unanimously and the Assembly by a vote of 52-21. Now, both the FPC and B Corp bills are sitting on the California Governor’s desk for signature.
FPCs appear preferable over B Corps by those that know better. According to those that I talked to, there is nothing that the B Corp sponsors want to do under their bill that they can’t do under the FPC bill – but the FPC is a broader entity that allows for greater shareholder rights (eg. the shareholders and not the legislature determines the social and environmental goals of the company). To learn more why the B Corp is a bit of a disaster, read this letter from the California Corporations Committee of the Business Law Section of the California State Bar. Given these flaws, the California Corporations Committee has stated that it prefers the Flexible Purpose Corp.
My sources tell me that Bar Associations of the other states that have adopted B Corp legislation now object to B Corps due to many of the same issues identified by the California Committee. So my money is on the Flexible Purpose Corp as the entity that could have staying power. Read more in “Flexible Spending Corp” Practice Area, including this B Corp opposition letter from Steve Hazen, FAQS on the California bill, etc.
Webcast: “Preparing for the SEC’s New Whistleblower Rules: What Companies Are Doing Now”
Tune in tomorrow for the webcast – “Preparing for the SEC’s New Whistleblower Rules: What Companies are Doing Now” – to hear Sean McKessy, Chief of the SEC’s Whistleblower Office, David Becker of Cleary Gottlieb, Allegra Lawrence-Hardy of Sutherland Asbill, Steve Pearlman of Seyfarth Shaw, and George Terwilliger of White & Case explore the latest developments in what companies are doing, and the issues that companies should consider, when adopting changes to their whistleblower policies and procedures.
According to this WSJ article, the SEC has revised its controversial policy regarding deleting old MUIs (here’s my blog with commentary on the original story; here’s Bruce Carton’s debunking). This announcement comes ahead of the release of several damaging reports from the SEC’s Inspector General on a variety of matters, as reported in this WSJ article.
Here’s an excerpt from the article about the new MUI policy:
Late in the day, SEC General Counsel Mark Cahn issued a memo to Division of Enforcement staff telling them to stop existing record-destruction procedures for closed cases, until further notice. That’s according to people familiar with correspondence issued by Mr. Cahn.
An SEC spokesman confirmed the rules shift Wednesday night, saying: “We have been working with [the National Archives and Records Administration] on a new policy for records retention, and have determined to suspend the current policy out of an abundance of caution until a new policy is in place.”
As Jean Eaglesham and Jessica Holzer are reporting, the SEC’s internal watchdog is exploring the longstanding document-destruction policies–among a number of other matters–and plans to issue several widely awaited reports this month, including one on this.
The SEC’s directive from Mr. Cahn on Wednesday came after months of wrangling inside the agency, some of it personally involving document-destruction whistleblower Darcy Flynn, over various categories of investigative records, from initial to preliminary to formal. The differences in language are key, because categories–and what’s included in those categories–guide disclosure to the national archives agency, and rules about what can be tossed and what must be kept.
Mr. Flynn, whose job involves interpreting SEC policies and guiding enforcement lawyers on what to save or destroy, raised his hand, through his lawyer, on Tuesday to tell the SEC that improper document-destruction was continuing. Mr. Flynn’s lawyer, Gary J. Aguirre, himself a former SEC staff attorney and whistleblower, told Mr. Cahn at the SEC in a letter Tuesday that “we may need to seek injunctive relief” in federal court if the SEC doesn’t freeze its document-destruction policy, according to a copy of that correspondence reviewed by The Wall Street Journal.
TechCrunch as “Journalist”? Can There Be Insider Trading on Pre-IPO Exchanges?
Last week was a whirlwind of changes for TechCrunch – the popular Silicon Valley blog that got sold to AOL for $30 million last year – as it first announced that founder Michael Arrington would be investing in start-ups (with parent AOL also investing) under an exception to AOL’s “conflict of interest” journalism policies. As noted in this article (coming on heels of this David Carr column and TechCrunch rebuttal), this move was controversial and TechCrunch quickly announced some changes to what Arrington’s future role with the blog would be – and then a few days later, it’s been rumored that he was fired altogether.
As I tweeted, Arrington sounds both arrogant and naive at the same time, particularly when he was quoted as saying he didn’t consider himself a journalist. I even consider myself one and I’m not breaking much in the way of news – plus clearly not to as wide an audience as TechCrunch has.
For me, this debate should not only focus on potential conflicts of interest, it should also raise the specter of insider trading. Remember the R. Foster Winans case from the ’80s? He was a well-known WSJ columnist who wrote the influential “Heard on the Street Column” from ’82 to ’84 and was convicted of insider trading for leaking advance word of the contents of his columns to a broker. It’s possible that the same type of risk could be present in the TechCrunch type of scenario now that shares of pre-IPO companies can be traded via SecondMarket, Sharepost, etc.
Although caselaw hasn’t yet dealt with insider trading in the pre-IPO context, I believe it’s just a matter of time before this issue will reach a court. Note how Facebook has already adopted an insider trading policy as mentioned during our recent webcast, “Understanding the Private Company Trading Markets.”
EU Market Participants Oppose Mandates
Here’s news from Rob Yates of ISS’s Governance Institute and Martin Wennerstrom of Nordic Research:
In response to the Green Paper on the EU Corporate Governance Framework, the European Union has received a variety of comments from institutional investors, investor associations, accounting firms, national and European industry associations, professional associations, stock exchanges, proxy advisers, and national regulatory associations. Of the small subset of responses that have been publicly released so far, most said the EU should maintain its comply-or-explain approach to governance and avoid Europe-wide regulation.
The green paper was published in May in an effort to “assess the effectiveness of the current corporate governance framework for European companies.” The paper focuses on three areas: directors, shareholders, and the effectiveness of the comply-or-explain framework, and then outlines potential next steps. According to the paper, governance “is one means to curb harmful short-termism and excessive risk-taking.”
Among the responses that have been published thus far, several general themes have emerged. Most respondents agreed that companies function more effectively with a separate chair and CEO, although they did not believe this is something that needed to be regulated on an EU-wide level.
The Association of Private Client Investment Managers and Stockbrokers, in its response, said: “This model should broadly be followed but it is critically an area where there cannot be a single answer or one-size-fits-all solution and where there may be a division between the approach to SMEs [small and medium enterprises] on the one hand (especially when they are very small) and to larger companies on the other. We believe the question may be wrongly phrased because it does not appear to recognise this.”
Similarly, many respondents viewed board diversity, gender balance, and the size of the board as important issues, but not issues that, at this point, warrant wholesale, large-scale regulation. In particular, some respondents said the definition of board diversity should be expanded to include experience, background, and qualifications.
The respondents agreed that “say on pay” votes are an important topic, although many were reluctant to support mandatory votes, or argued that the votes should be advisory only. The European Association of Cooperative Banks, focused its response on the impact of the questions on cooperative banks and said, “In our opinion, it [mandatory votes on remuneration policy and the remuneration report] would be contrary to the principle of division of tasks and powers to strengthen the role of shareholders or members in our case in setting compensation policies for corporate officers.” Other respondents pointed to the need for a consistent policy on remuneration votes across Europe.
The role of regulation and the degree to which it should be implemented in Europe generated a wide array of responses. Many said that regulation, at this point, is not the answer to current issues, and that comply-or-explain is sufficient. For example, the U.K. Financial Regulating Council said in its response: “The comply-or-explain principle is recognised at the European level as an important tool for delivering good corporate governance but the Green Paper raises questions about its effectiveness. We believe that the flexibility that it offers is positive for economic activity . . . Indeed, a comply-or-explain approach depends on regulation to make it effective. There must be a formal requirement for transparency . . . ”
Also, most respondents said regulators should not be responsible for enforcing comply-or-explain adherence, but that shareholders should take an active role in ensuring the quality of corporate explanations. Those respondents argued that regulatory monitoring would lead to a set of boilerplate responses to fit in within the regulators’ guidelines.
The Institute of Chartered Secretaries and Administrators, in its response, stated: “We believe that codes can be more effective at raising standards than legislative solutions.” Those respondents who do support comply-or-explain regulation said it should be enforced on a national level. In its response, the London Stock Exchange Group said regarding EU-wide regulation, “Member states should be free to determine the best approach to applying corporate governance standards.
Only a small subset of the responses have been made public thus far. The European Commission plans to post the green paper comments on its Web site this fall. Here is the ISS response to the green paper.
What if the influence of ISS on how institutional investors vote has been overstated? That’s the upshot of this groundbreaking new study from Professors Stephen Choi, Jill Fisch and Marcel Kahan, the first to gauge the relationship between ISS and mutual fund voting on director elections. Bear in mind that mutual funds constitute the largest group of institutional investors, holding 27% of US equities and that they are relatively free of conflicts of interests compared to other types of institutions.
I’m not a big fan of academic studies, but this one weighs in at a mere 46 pages (before appendixes) and is easy to read. In fact, it’s a “must read” as it could have profound implications for the SEC’s proxy plumbing project, shareholder engagement and proxy solicitation practices – and perhaps change the views of those that harbor ill will towards ISS these days. And it should be helpful framing some of the discussions that will take place soon enough during the multiple panels during our pair of executive pay conferences that deal with proxy advisors, shareholder engagement, etc.
By examining the voting trends of mutual funds – who have been required to disclose how they vote annually on Form N-PX since ’03 – the trio of Professors were able to confirm their earlier contention that ISS swings only 6-10% of the vote in uncontested director elections. That is far less than what others have concluded – they claim that ISS influences 20-30% in a typical election. That alone is significant, but the study has other interesting findings, including:
– More Lockstep Voting with Management than Blindly Following ISS – 25% of funds (as measured by asset size) blindly vote lockstep with management, compared to less than 10% that blindly follow ISS
– Funds Tend to Consider ISS Recommendations Rather Than Blindly Follow – Overall, ISS’s influence is due more to investors evaluating and considering ISS recommendations rather than blindly following them
– Smaller Funds Tend to Blindly Side with Management – Smaller funds are more likely to blindly vote in lockstep compared to larger funds (with either ISS or management)
– Lack of Conflicts for Affiliated Funds – No evidence exists that funds affiliated with banks, etc. are more likely than independent funds to vote with management in an effort to maintain good business relations
– The Big Three Have Wide Influence – The largest fund families – Vanguard, Fidelity and American Funds, each of whom individually accounts for 11% of total fund assets – vote substantially differently both from each other and from what ISS recommends
High Number of Director “Withhold” Votes? How That Happens
One of the most interesting sections of the study starts on page 40. This section gets into what type of factors are present when a director receives a high level of withhold votes, an issue of great importance to directors concerned about their own reputation. Here is an excerpt from the study’s abstract that highlights the findings here:
Finally, we examine the factors associated with high (in excess of 30%) withhold votes in director elections. An ISS withhold recommendation, in conjunction with at least one of four factors – a withhold vote by Fidelity, the director missing 25% of board meetings, the company having ignored a shareholder resolution that received majority support, and a Vanguard withhold vote on outside directors with business ties to the company – is associated with a 49% probability of receiving a high withhold vote. Directors in these groups account for 48% of all directors who received high withhold votes.
By contrast, an ISS withhold recommendation that is not combined with one of these factors is associated with only a 21% probability of a high withhold vote, and the general probability of a high withhold vote is a mere 2%. These findings suggest steps that companies and directors should take to try to avoid high withhold votes. They are also evidence that not all ISS recommendations have the same impact on voting outcomes.
ISS’s Biggest Shortcoming? Be Careful What You Wish For…
For me, the largest mindblower of the study is on page 24. This is where the professors explain “perhaps the biggest shortcoming of ISS” – which is identified as ISS not providing sufficient details about why it is recommending a vote “for” a particular director. Without that explanation, it is more challenging for an investor to decide whether to not follow ISS’s “for” recommendation – and thus decide to vote “against/withhold” instead.
For those on the “bash ISS at all costs” bandwagon, think about that for a minute. Imagine if ISS fixes this shortcoming and directors stop receiving so many “for” votes just because ISS recommended as such. Read my prior blog entitled “The Debate Over ISS’s Role: Imagine a World Without” – and be careful what you wish for…
“The Twittersphere is alive with the sound of #proxyaccess!” Sung to the tune of “The Sound of Music.” Late yesterday, SEC Chair Mary Schapiro issued a statement that the SEC would neither seek a rehearing of the US Court of Appeals for the District of Columbia Circuit decision nor appeal the decision to the US Supreme Court. So the SEC chose “Door #4” of the options available that I laid out in a blog yesterday.
In her statement, Chair Schapiro reaffirmed her support for the proxy access concept – but she also pledged not to rewrite a proxy access rule anytime in the near future. While this means that “mandatory” proxy access is dead for now, the real story is that the SEC did allow the Rule 14a-8 amendments to go into effect (when the current stay expires next week), which means that the agency will allow access shareholder proposals (“absent further Commission action”) for this proxy season. Private ordering, here we come – a nice boon for corporate lawyers. Here’s the SEC’s statement:
The Securities and Exchange Commission today confirmed that it is not seeking rehearing of the decision by the U.S. Court of Appeals in Washington, D.C. vacating a Commission rule, Rule 14a-11, which would have required companies to include shareholders’ director nominees in company proxy materials in certain circumstances. Nor will the SEC seek Supreme Court review.
Chairman Mary L. Schapiro issued the following statement:
“I firmly believe that providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and our markets. It is a process that helps make boards more accountable for the risks undertaken by the companies they manage. I remain committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.
At the same time, I want to be sure that we carefully consider and learn from the Court’s objections as we determine the best path forward. I have asked the staff to continue reviewing the decision as well as the comments that we previously received from interested parties.”
# # #
Last year, when the Commission adopted Rule 14a-11, it also adopted amendments to Rule 14a-8, the shareholder proposal rule. Under those amendments, eligible shareholders are permitted to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials. Through this procedure, shareholders and companies have the opportunity to establish proxy access standards on a company-by-company basis — rather than a specified standard like that contained in Rule 14a-11.
Although the amendments to Rule 14a-8 were not challenged in the litigation, the Commission voluntarily stayed the effective date of those amendments at the time it stayed the effective date of Rule 14a-11. The Commission’s stay order provides that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further Commission action when the court’s decision is finalized, which is expected to be September 13. Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.
The SEC’s Rethink of All Its Rules: The First Step
Yesterday, the SEC issued this press release announcing that it’s seeking public comment on the process it should use to conduct retrospective reviews, such as how often rules should be reviewed, the factors that should be considered, and ways to improve public participation in the rulemaking process. Comments are due by October 6th – and can be submitted via this form.
This forward-looking retrospective is due to President Obama’s memo a few months ago recommending that independent agencies do this rethink (see Vanessa Schoenthaler’s blog for the full background of Obama’s memo). How the SEC will be able to undertake this project given its Dodd-Frank rulemaking burden – not to mention all the resources needed to constantly respond to various Congressional inquiries – is a mystery. But note that this request is just to help the agency develop a plan under which it will then review its rules and regulations – it is not soliciting comment on specific items at this time (although the SEC does have this webpage that solicits comments on specific rules & regs – so there is that opportunity).
To develop this review plan, the timeframe is tight. As noted in this blog, agencies have 120 days to report their findings to the Office of Management and Budget as well as the public – and that clock started ticking about 60 days ago…
Poll: Which Corp Fin Rules Should the SEC Reconsider?
Although it’s early in the process of the SEC rethinking its rules, we can still conduct an anonymous poll about which rules you wish the SEC to review (“XBRL” seems to be popular write-in candidate):
Today is the deadline for the SEC to decide whether to appeal the decision of the US Court of Appeals for the DC Circuit in the Business Roundtable’s and Chamber of Commerce’s lawsuit over proxy access. The SEC can file a petition for rehearing (which seeks review before the panel) or a petition for rehearing en banc (seeking review of all judges of the DC Circuit) or both.
If the SEC doesn’t not file anything today, the court’s mandate (ie. final judgment) will issue seven days later and the case will be sent back to the SEC. Even in this scenario, the SEC could ask the Solicitor General to appeal the decision to the US Supreme Court – but that is fairly unlikely given that there is no split among the circuit courts on this issue and a statutory standard is involved that is fairly unique to the SEC and CFTC. Thus, it is improbable that SCOTUS would grant certiorari.
Although CII has urged the SEC to appeal, it also has urged the agency to continue the stay on Rule 14a-8 – even if the case is not taken up for rehearing. And now the ABA’s Business Law Section has also submitted a letter to the SEC also urging that the stay be continued.
A Facelift! Corp Fin Reformats the “Financial Reporting Manual”
Last Thursday, Corp Fin posted a new and improved formatted “Financial Reporting Manual.” The facelift didn’t change the substance in the Manual…
Last week, the SEC also revised Form ID to allow for new applicant types to file the Form and make Edgar filings. The new Form ID requires the filer to select an entity type. Those that have already filed a Form ID are not required to re-file or otherwise revise what they already have filed.
Our September Eminders is Posted!
We have posted the September issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Yesterday, the SEC issued its second fee advisory for the year (along with this methodology). Right now, the filing fee rate for Securities Act registration statements is $116.10 million (the same rate applies under Sections 13(e) and 14(g)). Under the fee advisory, this rate will slightly decline to $114.60 per million, a 1.2% price drop. Not bad, unless you recall last year’s 63% price hike, the largest one-year rate hike in my experience.
As noted in this SEC order, the new fees will go into effect on October 1st – which is a departure from the past when the new rates didn’t become effective until five days after the date of enactment of the SEC’s appropriation for the new year, which often was delayed well beyond the October 1st start of the government’s fiscal year as Congress and the President battled over the government’s budget.
You might be asking, “How are the SEC’s fees set?” Or more importantly, “Will the rate hike help the SEC’s push for more resources?” The SEC sets its filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002.” The SEC’s budget is not dependent on its fees as it’s not a self-funded agency. All of the fees go to the US Treasury. In theory, these fees could help convince Congress to allow the SEC to receive their requested budget – but that surely hasn’t worked as of late. Learn more how the filing rate-setting process works in this blog.
Too funny. I had a brief conversation with an AP reporter last night and today I’m quoted in 468 newspapers, all of them in this same short piece. The power of the Associated Press! I wonder how @MrPoorCEO will take it…
Heating Up: Calls for More Political Contribution Disclosures
One topic that has been on the lobbyist agenda – but never quite on the hot seat – is greater disclosure about corporate political contributions. In the wake of the Citizens United decision by the Supreme Court, that is changing. As Ted Allen blogged a few days ago, the International Corporate Governance Network is the latest to weigh in with a letter to the SEC on the topic, commenting upon the rulemaking petition filed several weeks ago by a group of academics (here are other letters sent in about the petition).
Section 13(d) Reporting: CSX Case Highlights Need for SEC Action on Derivatives
A divided panel of the U.S. Court of Appeals for the Second Circuit has finally issued its opinion in the CSX case in which the District Court addressed whether the long party in a cash-settled total-return equity swap should be considered the beneficial owner of the underlying shares for reporting purposes under Section 13(d) of the Williams Act. The majority opinion — issued nearly three years after the appeal was argued — declined to resolve the beneficial ownership issue, noting that there was disagreement within the panel on the subject. Instead, the panel considered only whether a “group” had been formed under Section 13(d) as to the shares held outright by the defendant activist funds.
The majority opinion also addressed whether and under what circumstances a party should be precluded from voting shares acquired during a period when it was in violation of its disclosure obligations under Section 13(d). CSX Corp. v. The Children’s Inv. Fund Mgmt. (UK) LLP, Docket Nos. 08-2899-cv, 08-3016-cv (2d Cir. July 18, 2011).
As to the District Court’s finding of a “group,” the majority opinion, by Judge Newman, found insufficient for appellate review the District Court’s finding that a group was formed by the activities of the two funds (TCI and 3G) that suggested “concerted action” vis-à-vis CSX. The Court therefore remanded the case to the District Court for additional findings on that limited subject, as well as to reconsider the appropriateness and scope of any injunctive relief should a group violation of Section 13(d) be found with respect to the purchase of shares outright. In connection with its consideration of the group issue, the majority ruled that “activities” resulting from group action were insufficient to form a group unless — in the words of the rule — the group “act[s] together for the purpose of acquiring, holding, voting or disposing” of equity securities of the issuer.
As to the availability of injunctive share “sterilization,” the majority opinion adhered to prior precedent holding that an injunction prohibiting the voting of shares acquired while in violation of Section 13(d)’s reporting requirements was not an available remedy if the required disclosure is ultimately made in sufficient time for informed action by shareholders. The opinion rejected the arguments that sterilization may be necessary to provide a “level playing field” and to deter violations of Section 13(d), relying in part on the policy notion that sterilization might injure those stockholders who, after full disclosure, choose to support an insurgent’s program.
Judge Winter filed a separate opinion concurring in the result, and, unlike the majority opinion, directly addressed the issue as to whether the long party in a total-return swap transaction may be deemed to beneficially own the shares purchased as a hedge by the short counterparty. Judge Winter’s opinion rejected the District Court’s view that equity swaps are (in Judge Winter’s words) “an underhanded means of acquiring or facilitating access to [shares] that could be used to gain control through a proxy fight or otherwise.” Judge Winter instead writes that, absent an agreement on acquiring or voting the short party’s hedge position, “such swaps are not a means of indirectly facilitating a control transaction. Rather, they allow parties such as the Funds to profit from efforts to cause firms to institute new business policies increasing the value of a firm.”
Judge Winter rejected the position that the shares acquired by the swap dealer to hedge the swap should be deemed beneficially owned by the long party based on a review of the statutory language; other legislation that has addressed swaps — including Dodd-Frank, which granted new authority to the SEC to promulgate rules providing that “a person [] be deemed to acquire beneficial ownership of an equity security based on the purchase or sale of a security-based swap”; and the SEC’s ongoing and, as yet, inconclusive consideration of derivatives and beneficial ownership under Section 13(d), including its recent repromulgation of Rule 13d-3.
The CSX majority’s determination not to address whether the long party to a total-return swap may be deemed, for purposes of Section 13(d), the beneficial owner of the underlying shares underscores the need for SEC action. We have previously set forth detailed proposals on the subject, and continue to believe that SEC action is both necessary and overdue.
The concluding statement in Judge Winter’s concurrence eloquently articulates the need for SEC leadership on the issue:
Total-return cash-settled swap agreements can be expected to cause some party to purchase the referenced shares as a hedge. No one questions that any understanding between long and short parties regarding the purchase, sale, retention, or voting of shares renders them a group — including the long party — deemed to be the beneficial owner of the referenced shares purchased as a hedge and any other shares held by the group.
Whether, absent any such understanding, total-return cash-settled swaps render a long party the beneficial owner of referenced shares bought as a hedge by the immediate short party or some other party down the line is a question of law not fact. At the time of the district court opinion, the SEC had no authority to regulate such “understanding”-free swaps. It has such authority now, but it has simply repromulgated the earlier regulations. These regulations, and the SEC’s repromulgation of them, offer no reasons for treating such swaps as rendering long parties subject to Sections 13 and 16 based on shares purchased by another party as a hedge. Absent some reasoned direction from the SEC, there is neither need nor reason for a court to do so.