March 17, 2006

Poison Pill Proposals Found Excludable Upon Reconsideration

From my Blog: Last week, the SEC Staff issued a batch of no-action responses, where on reconsideration the Staff said that Bristol Myers (and other companies) could exclude John Chevedden’s poison pill shareholder proposals. The Staff originally took the position that the companies could not exclude the proposals under Rule 14a-8(i)(10), even though the companies had eliminated their poison pills and adopted a policy that any new pill would be put to a stockholder vote. The basis for the Staff’s initial refusal was that the proposal asked for the policy to be “in the bylaws or charter if practicable.” Upon reconsideration by the Commission, the Staff then overturned its earlier refusal and now has allowed exclusion of the proposals. We have posted a copy of the reconsideration responses in’s “Poison Pills” Practice Area.

Interestingly, the Staff’s responses in the reconsideration included this commentary:

“We note that there is a substantive distinction between a proposal that seeks a policy and a proposal that seeks a bylaw or charter amendment. In this regard, however, we further note that the action contemplated by the subject proposal is qualified by the phrase `if practicable’ and that the company has otherwise substantially implemented the proposal.”

One possible interpretation of this commentary is that the Staff hung their hat on the “if practicable” language and the Staff believes that there is a substantive distinction between a corporate policy and a bylaw provision.

I think a fairer reading is that the Staff simply changed its mind on this one, but that it still believes that a policy is not as binding as a bylaw. The truth of the matter is that the phrase “as practicable” is pretty subjective – and a company would still have to convince the Staff that it is not practicable to adopt the poison pill change requested by the proposal.

This also crosses paths with the majority vote issue and the position the Staff took that a Pfizer-type policy does not substantially implement a majority vote proposal. Some practitioners believe that it was the “location matters” argument (policy vs. bylaw) that the Staff relied upon for their conclusion in those letters. It seems that Time-Warner and other companies may be testing this theory when they recently adopted a director resignation policy, but put it in their bylaws.

And then you have to consider the complaint in the lawsuit against Hewlett-Packard for repayment of Carly Fiorina’s severance. Some view that as taking the recent News Corp. decision to the next level, arguing that disclosure regarding policies in proxy statements makes them binding contracts.

Towards Better Online SEC Filings

Going back to my roots in this podcast, during which Rhoda Anderson, CEO of EZOnlineDocuments, provides some insight into how companies can improve the effectiveness of their online proxy materials and other SEC filings (here are samples of what EZOnlineDocuments can do), including:

– What are most companies doing with their financial documents or shareholder communications today?
– What are common limitations in a typical SEC filing that is posted online?
– Why isn’t a PDF good enough for shareholders’ purposes?
– Why is it challenging to get online documents into the HTML format?
– What characteristics do effective online documents have?

The Canadian Approach to Internal Controls

Recently, the Canadian Securities Administrators announced a change in approach for Canada’s version of Section 404, which would be implemented as early as December 31, 2007. At this time, the Canadian securities regulators have decided not to require companies – of any size – to have an auditor attestation on internal control, stating: “After extensive consultation, the CSA has decided not to proceed with an earlier proposal that would have required companies to obtain from their external auditors an audit opinion in respect of management’s evaluation of the effectiveness of internal controls over financial reporting.”

Further details regarding the status of the Canadian proposals is provided in CSA Notice 52-313. In essense, the Canadian regulators have proposed a new element for the existing Section 302-like certifications requirements to include a Section 404-a like management assertion as to the effectivess of internal control over financial reporting – but not require a Section 404-b like auditor attestation.

A fuller description of the Canadian approach is available in FEI’s Section 404 Blog – there also are related law firm memos in Section 3.F of our “Canadian Law” Practice Area.