Monthly Archives: June 2006

June 15, 2006

Change in Executive Compensation Disclosure Conference Dates

With SEC Chairman Cox quoted widely in yesterday’s papers about the SEC planning to adopt the executive compensation disclosures rules by the end of the Summer (see this WSJ article and Wash Post article), we have moved up our conference – “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” – by two weeks so that it will be held on September 13-14th.

We recognize that two weeks matters when your directors and clients are clammering for the practical consequences of the new rules – so we have bumped up the conference dates to meet your needs. Of course, if the SEC doesn’t act that fast, we can easily push back the dates – that’s the beauty of the videoconference format as I blogged about a few days ago.

If you have questions about the Conference, check out our FAQs, e-mail me or contact our HQ. I will continue to flesh out the FAQs as I am getting many good queries, such as how long will the video archive be up? (answer: the end of ’07, which is roughly 15 months) or will the video archive be posted in modules? (answer: yes, each panel will have its own archive, so it will be easy to refer to later when you are drafting and reviewing disclosures).

[By the way, quite a few members have already submitted their vote for “Most Outdated Photo” in our Speaker Bios – hands down winner is Alan Kailer. Alan wins a full body massage and facelift after the Conference to maintain that youthful glow.]

Analysis of the Delaware Supreme Court’s Disney Decision

As I blogged last week, the Delaware Supreme Court has delivered its long-awaited opinion – written by Justice Jacobs – affirming the Chancery Court’s decision in the Disney litigation. Clearly affirming the business judgment rule, the Supreme Court flatly rejected the notion that a lack of good faith could be equated with gross negligence, which is the standard for finding a violation of the duty of care.

Most observers were not surprised by the outcome as the embattled plaintiffs’ counsel – Steven Schulman, the Milberg Weiss lawyer who was recently indicted for allegedly paying plaintiffs in class action cases – did a poor job of trying the case and basically failed to prove their claims factually.

Moreover, it is quite difficult to win a compensation case where the directors are not self-interested. Some commentators view the Valeant v. Panic case as a much more winnable compensation case compared to Disney. The decision in this case is expected sometime in the Summer of ’06.

On, we have just announced this webcast – “Director Liability and Responsiblities: After Disney” – featuring John Olson and Charles Elson. And we have begun to post law firm memos on the Delaware Supreme Court’s decision in the “Liability Issues” Practice Area of

Where Do We Stand on the Duty of Good Faith?

A lot has been written about the duty of good faith since Chancellor Chandler’s opinion last year in the Disney litigation. In its opinion, the Delaware Supreme Court acknowledged that the contours of the duty of good faith remained “relatively uncharted” and were not well developed.

Addressing this hot topic, the Supreme Court identified two categories of fiduciary behavior that do constitute a breach of the duty of good faith. The first category is the so-called “subjective bad faith,” which is evidenced by “fiduciary conduct motivated by an actual intent to do harm” to the company or its stockholders.

The other category has been a focal point of the Disney litigation: “intentional dereliction of duty, a conscious disregard for one’s responsibilities.” In concurring with the Chancellor and determining that such conduct was neither exculpable nor indemnifiable, the Supreme Court explained as follows:

“The universe of fiduciary misconduct is not limited to either disloyalty in the classic sense … or gross negligence. Cases have arisen where corporate directors have no conflicting self-interest in a decision, yet engage in misconduct that is more culpable than simple inattention or failure to be informed of all facts material to the decision. To protect the interests of the corporation and its shareholders, fiduciary conduct of this kind, which does not involve disloyalty (as traditionally defined) but is qualitatively more culpable than gross negligence, should be proscribed. A vehicle is needed to address such violations doctrinally, and that doctrinal vehicle is the duty to act in good faith.”

The Court left open the possibility that the duties of good faith and due care could overlap – and the Court also pointed out that its opinion did not address the issue of whether the duty of good faith can serve as an independent basis for imposing liability on directors or officers. As evident from the law firm memos written so far – and the blogs from academics – there are many issues that will continue to be debated. For example, here is a list of issues to consider from Professor Larry Ribstein:

1. The future of due care and Van Gorkom. What does this case say about the nature of gross negligence?

2. What are the case’s implications for bad faith and the application of 102(b)(7)? What kinds of facts might constitute bad faith? Given the court’s view of bad faith, is there any longer a meaningful role for gross negligence?

3. What, if anything, does the case say about how it might address the undecided questions, such as the application of the bjr to officers.

4. What does the case imply about Roe’s thesis concerning federal law’s impact on Delaware?

5. What can be said now about the relation between Delaware and the federal law of corporate governance? Has federal law taken over the Caremark business just as it has disclosure?

6. What, if any, role do theories of “good governance” and best practices have on directors’ liabilities after Disney?

7. What are the decision’s implications for the executive compensation debate?

8. What’s likely to be the single biggest effect of this decision?

SEC to Push Ahead on Considering Mutual Fund Governance Rules

On Tuesday, the SEC filed a status report with the US Court of Appeals for DC in connection with its embattled board independence and independent chair rules. In April, that court held that the SEC violated the Administrative Procedure Act by failing to seeks comments on the cost estimates of those two rules – but instead of vacating the rules, the Court ordered the SEC to file a status report within 90 days and reopen the rulemaking record for comments on the costs.

With a month to spare, the SEC issued this proposal, with comments due by August 21st. The five Commissioners unanimously voted to solicit comment – but reportedly are split on whether to finalize the rules again (here are the dissents by two Commissioners from the last go around; although we will soon have Commissioner Casey in the mix, replacing Commissioner Glassman). No doubt the US Chamber of Commerce and other commentators will be furiously battling this rulemaking again…

June 14, 2006

Delaware Court Watch: Mandatory By-law Amendments Could Subsume Rule 14a-8

As I blogged about recently, there are big things brewing in the Delaware courts that could shake up shareholder proposals and Rule 14a-8 as we so fondly know it.

Keir Gumbs of Covington & Burling notes: “Corp Fin has put the issue of shareholder-proposed bylaw amendments squarely in the lap of Delaware courts. Last Monday, the Division declined to address Computer Associates’ arguments that a mandatory by-law proposal submitted by Lucian Bebchuk could be excluded as contrary to state law. Although not unprecedented, this may be the first time that the Division has followed the “pending litigation” exception to its general practice of responding to shareholder proposal-related no-action requests when the proposal was a mandatory by-law proposal currently being litigated in a Delaware court.

The stakes are pretty high. With Hilton’s recent experience with shareholder proposed by-law amendments, Computer Associates’ may be faced with the tough choice of including the proposal in its proxy materials and risking shareholder approval of a by-law amendment it does not support – or waiting out the Delaware court and hoping that a decision is made before it mails its proxy materials. Not an enviable position, but other companies that are watching the development should be holding their breath as well. If the Delaware court sides with Professor Bebchuk, the floodgates for mandatory by-law proposals may soon open.

Interestingly, Grant and Eisenhofer, the firm that is representing Bebchuk in the case, already has tasted victory in this arena. Last year, it represented a group of shareholder-plaintiffs in Unisuper v. News Corporation, a case in which a Delaware Chancery court upheld the validity of terms of a contested agreement which would have required shareholder approval of the decision to adopt a poison pill. This case suggests that a by-law such as that proposed by Professor Bebchuk may not be invalid under Section 141 of the DGCL.”

On Sunday, the NY Times carried this column that touched on Computer Associates’ recent Rule 14a-8 request – but oddly, the column stated that the Staff had not yet made its decision even though it appears that it had…

Round Two: Market-Valued Employee Stock Options

Last September, you may recall that the SEC rejected Cisco’s proposal to issue exchange-traded employee options. At that time, the SEC stated that it was open to other ideas about how market instruments could be used to value employee options (and the SEC’s Office of Economic Analysis even suggested two alternatives, although the SEC’s Chief Accountant expressed skepticism about whether companies would quickly embrace them).

Last Thursday, the WSJ ran an article that Zions Bancorp planned to register securities that would mimic employee stock options for public auction – and the price fetched at auction would become a “market” value for the securities that the company could use to determine the expense it must book for awarding options to its employees. I don’t believe the registration statement is filed yet.

Here is an excerpt from the article:

“Buyers of the securities receive payments from Zions when employees exercise their options. If the options expire worthless or aren’t exercised by employees, holders of the securities receive no payments and lose the entire value of their investment. Essentially, Zions is creating what looks and feels like a so-called asset-backed security, with the underlying asset in this case being the options. The bank expects high-net-worth individuals and sophisticated investors to buy the securities. Among other things, these investors would be betting Zions’s stock will continue to rise and thus push Zions employees’ options “into the money.”

The bank hopes the auction will produce a truer — read: lower — value for employee stock options than would be derived from valuation methods such as Black-Scholes, the standard formula that has been used for years. That would happen, Zions argues, because investors would take into account factors unique to each company’s employee options program that aren’t reflected in most pricing models.”

It will be interesting to see if the SEC will approve Zions’s method – one key difference from Cisco’s rejected proposal: Zions will sell the securities at the highest, “market-clearing” price it receives at the auction rather than sales through private placements. And if the SEC approve’s Zion’s deal, it remains to be seen whether there will be enough competition among bidders to ensure a real market emerges. I don’t much about Zions Bancorp but I can’t imagine the appetite for a security based on its options would be anywhere near the level of a company like Cisco…

The Evolving Relationship Between Lawyers and Auditors

Join us tomorrow for the first in a webcast series dealing with audit committees and their advisors: “The Evolving Relationship Between Lawyers and Auditors.” Among other topics, Stan Keller of Edwards Angell Palmer & Dodge; Dick Rowe of Proskauer Rose; and Stacey Geer of BellSouth will address:

– What are the latest developments for auditor engagement letters and how do they affect independence
– What are the latest developments for audit inquiry/response letters, including how to handle non-conforming requests
– What issues arise from Interpretation 47 of FAS 143 regarding Conditional Asset Retirement Obligations (essentially environmental contingencies) – and why you should care
– How are comfort letter procedures changing – and how do these changes impact legal opinions and other aspects of deals
– How do the efforts of the ABA Task Force on Attorney-Client Privilege impact audit matters

Vonage’s IPO Travails Continue

Over the past few weeks, I have blogged about the challenges faced by Vonage’s recent IPO, including the disclosures about possible securities law violations involving the lack of links to a prospectus from a Directed Share Program solicitation. The inevitable class action lawsuits have now been filed in the US District Court for New Jersey; so far, three of them have been filed.

We have posted a copy of the complaint from one of these lawsuits in the “Rescission Offering” Practice Area. I’m always looking for content from our members, but I particularly would like to enhance the content in this Practice Area if you have something hidden in a drawer that could benefit the community…please email me if you do…

June 13, 2006

Just Announced: Our “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” Conference

As I blogged yesterday, the SEC seems to be “on target” with adopting executive compensation rules by the end of the summer. For the past few months, I have been jamming to put together what I promise will be the most practical conference on how to implement these executive compensation rules. In fact, we are so confident that this Conference will meet your implementation needs, we are offering a money-back guarantee – see these “Five Good Reasons” why you should attend the conference.

As you should be able to tell from this detailed conference agenda, we have worked hard to ensure that you will be able to hit the ground running once the new rules are adopted – and we have worked hard to produce a remarkable line-up of panelists, including the SEC Staffers who are slaving over the rules right now. You probably even can use our detailed agenda as a checklist of issues that you will need to master. We obviously will tweak the agenda once the rules are finalized to adapt to any changes the SEC makes from its proposals (eg. I am still working on one panel).

Your Budget Will Not Take a Beating

As a “thank you” to our members, this Conference is priced at a fraction of what other conferences cost these days. By taking advantage of our “Early-Bird Discount,” you can attend this conference for only $495 if you are a member of or

And the savings are much greater if more than one person from your organization plans to attend – in fact, everyone in you entire company or firm can attend (and have ongoing access to the video archive and critical course materials) for only $1495! This is lower than what some conference providers charge today for just one attendee. You must act by July 20th to get these special Early-Bird rates!

Why You Will Benefit from the Videoconference Format

We have decided to conduct this Conference by video webcast primarily for two reasons. One reason is to provide you with guidance right away – so that you will be on top of the new rules right after they are adopted (ie. right when your CEO and directors and clients will be asking about them in the wake of the inevitable widespread media coverage).

Another reason for this format is to provide you with an archive of the entire videoconference (and the related practical course materials) so that they will be right there at your desktop to refer to – and refresh your memory – when you are actually grappling with drafting or reviewing the disclosures during the proxy season and beyond. Of course, this format also spares you the time and expense of traveling, etc. Register today and take advantage of the Early Bird discount!

June 12, 2006

Executive Compensation Rules Appear On Track for Adoption

SEC Chairman Chris Cox gave this speech late Thursday, which makes it seem pretty likely that the SEC will indeed adopt rules relating to its executive compensation proposals sometime this summer so that they apply to the ’07 proxy season. His speech also included some interesting comments on option backdating, a topic that I blogged about again on Friday (the Chairman’s remarks are also analyzed in this Washington Post article).

Here is a notable excerpt from the Chairman’s speech:

“The Commission is even now considering further adjustments to our executive compensation proposal to deal with the issue of backdating options. Our staff in the Division of Corporation Finance are collating all of those thousands of comments and will make a recommendation to the Commission at an open meeting soon.

As part of that review process, we will consider the need not only for any changes to the rule, but also for additional guidance to address further the backdating of stock options. So stay tuned. We want this matter settled in time for next year’s proxy season, and I have every reason to expect that it will be.”

Not sure how soon that open meeting will be – but my bet is it will be held sooner than most of us would have thought possible. Quite an undertaking by the Staff considering the sheer volume of the proposals and the number of comments submitted…

Isn’t It Ironic? Option Misdating Forces Boards to Reconsider Compensation Practices

I was all set on the theme of this blog even before this article appeared on the top of the Business section of Friday’s NY Times. The article condemns the option granting practices of yet another company, although these grants were allegedly made just before favorable company news was announced; so this is not another misdating allegation. Some of you may remember that this topic was the thrust of a speech by then-SEC Enforcement Director Stephen Cutler way back in early ’04. So this is not a new topic.

As option backdating allegations have been around for more than a year, I wonder why all the media attention is peaking now? I’m not sure. Perhaps because this scandal offers a concept that the general public can fairly easily understand on its face – even though the laws related to it are pretty complicated (see the March-April 2006 issue of The Corporate Counsel). Or maybe it’s the last straw of greed that the general public can handle.

Ironically, it looks like this narrow problem could be the motivator that finally forces laggard boards to look deeply into their own executive compensation practices and clean up their act. I consider it ironic because the dollar amounts and misguided rationales related to other practices really dwarf the issues related to option misdating. But I will take responsible actions any way I can get them – and for that, I am glad for this issue to peak now.

Is the Option Misdating Furor Becoming a Witch Hunt?

But I do get concerned that the option misdating furor could – or already has – become a witch hunt as I continue to upload articles and research reports about option timing unto our “Timing of Stock Option Grants” Practice Area on at an incredulous rate – even though just a few dozen companies have announced that they are being investigated so far.

And the key word here is “investigated.” I know the studies and reports place impossible odds on coincidental timing, but the integrity of these documents should be fully evaluated before given too much credability. After speaking with some of my in-house friends, I am now taking some of these studies with a grain of salt – as allegations of option misdating sometimes appear to be based on small samplings, incorrect data or misused data.

For example, consider this situation: a research report names a company as having option misdating issues when only four option grants were used in the report’s sampling – of which two were annual grants that were given to the entire population of plan participants (and which were granted in the normal course at a regularly scheduled meeting of the company’s compensation committee). Another grant was given to a newly elected President in connection with his promotion – and the last grant in the sampling was to a lower level officer for whom the related exercise prices were much higher than the company’s stock price as of the grant date because premium-priced options were used. Despite accurate proxy disclosure regarding the exercise prices, the report plainly got it wrong.

Given the regulator, media and market reaction to allegations of option misdating, this seems irresponsible and I imagine there can be other companies that might have similar stories. Of course, it seems clear that there also are companies that truly did engage in nefarious behavior as 15 officers have already lost their jobs in the wake of this scandal so far. But the message is that care should be taken – and facts checked – before publishing studies, reports and media articles on this topic…

How to Go Public on the London Stock Exchange’s AIM

We have posted the transcript for the recent webcast: “How to Go Public on the London Stock Exchange’s AIM.”

June 9, 2006

Delaware Supreme Court Finally Rules on Disney Case

Excuse me if I’m cranky, but I had decided to take a day off blogging today in honor of my half-birthday – been trying to get my wife to celebrate it for years to no avail – but the Delaware Supreme Court didn’t cooperate. Late yesterday, the Court released it’s long-awaited opinion – written by Justice Jacobs – affirming the Chancery Court’s decision in the Disney litigation. We have posted a copy of the 91-page opinion in’s “Compensation Litigation” Portal. Analysis to follow next week…

Option Grants to Get Attention in Final Compensation Disclosure Rules

From Mark Borges’ “Proxy Compensation Disclosure” Blog yesterday: “The brewing scandal about possible stock option grant timing abuses could lead to significant changes in the final executive compensation disclosure rules. As reported in several media outlets, yesterday SEC Chairman Chris Cox indicated that the Commission is considering revisions to the proposals in response to concerns about option dating. In fact, one article notes that Cox is going to address the subject later today – I’ll update this post once his comments have been made public.

As you probably know, one of the items included in the proposed Compensation Discussion and Analysis would require companies to consider discussing the timing of their option grants as part of this report. Proposed Item 402(b)(2) includes, as one example of the type of material information that may need to be discussed in the CD&A, “[f]or equity-based compensation, how the determination is made as to when awards are granted.”

At this point, I suspect that the changes under consideration would go much further than just revising this particular item. If you want to get a flavor of what might be under discussion, take a look at the comment letter of the CFA Centre for Financial Market Integrity (which was submitted on May 30th). The CFA recommends four specific enhancements to the current proposals to cover option timing concerns:

– The dates for all prior-year compensation committee meetings be disclosed in the CD&A;

– The dates on which the compensation committee approves equity awards be disclosed on an on-going basis in Form 8-K filings and, by reference, in the proxy statement;

– The effective grant dates for all equity awards that differ from the previously-disclosed approval dates be disclosed on an on-going basis in Form 8-K filings and, by reference, in the proxy statement; and

– The compensation committee be required to determine and disclose if any effective grant date was selected to take advantage of the pending release of material information about the company, and whether executives are permitted to select or recommend grant dates for their options.

It’s unclear whether the Commission is entertaining any of these recommendations or what other ideas it may be considering. However, as the investigations into option grant timing continue to expand, it seems a virtual certainty that the disclosure rules are going to get adjusted to address this issue.”

Broker Votes vs. Broker Non-Votes II

After I initially blogged on this issue a few days ago, I went back and tweaked my entry after numerous responses from members addressing what is the proper meaning of “broker non-votes.” I continue to get conflicting e-mails from members, so proxy mechanics is an area where more education appears necessary for many of us. Here is one member’s thoughts on the topic:

“Broker non-votes” has a specific meaning and is not the same as broker votes on behalf of their customers. A broker non-vote occurs when a broker’s customer does not provide the broker with voting instructions on non-routine matters for shares owned by the customer but held in the name of the broker. For such matters, the broker cannot vote either way and reports the number of such shares as “non-votes.”

Like abstentions, broker non-votes are counted as present and entitled to vote for quorum purposes. Unlike abstentions, at least for Delaware corporations, broker non-votes are not the equivalent of an “against” vote on those items that require the affirmative vote of a majority of shares present in person or by proxy and entitled to vote. Proxy statements must discuss the treatment of “broker non-votes,” and in Item 4 of Part II of Form 10-Q, registrants must report, for each item voted on at the shareholder meeting, the number of “broker non-votes” along with the number of shares cast for, cast against or withheld, and abstained.

And one more from another member:

Rather than being the same thing as a broker vote, I would say that a broker non-vote is the flip side of a broker vote. Both broker votes and broker non-votes relate to the ability of the broker to vote shares with respect to which the broker has not received specific voting instructions from the beneficial owner of the shares. But a broker vote occurs in a situation where NYSE Rule 452 does not prohibit the broker from casting a discretionary vote with respect to uninstructed shares, so the broker goes ahead and votes those uninstructed shares in its discretion, whereas a broker non-vote occurs in a situation where NYSE Rule 452 does prohibit the broker from casting a discretionary vote with respect to uninstructed shares, so the broker is unable to vote those uninstructed shares.

Broker votes show up as a “for,” “against” or “abstain” vote, depending on how the broker casts its discretionary vote, whereas broker non-votes are excluded from the “for,” “against” and “abstain” counts, and instead are reported by the company as broker non-votes. Depending on the approval standards applying to a particular matter, broker non-votes may or may not have an impact on the outcome of the matter.

June 8, 2006

New EDGAR Text Search Tool

The SEC recently added this new beta version of an EDGAR search tool that allows for text searches. Give it a whirl…

And You Thought the American Proxy Season Was Crazy!

With the proxy season now behind most calendar year companies here in the US, I thought it would be interesting to note that nearly all Japanese companies hold their annual meetings within a few days of each other – after providing shareholders with just two weeks notice as to the agenda! This really causes problems for shareholders who want to follow more than a handful of meetings.

Learn more from ISS’ description of the Japanese proxy season:

“Most Japanese firms send meeting agenda notices to shareholders just two weeks – the legal minimum – before annual meeting dates. The short notice leaves investors only a few days at most before voting deadlines to translate, analyze, and execute votes for their holdings.

Equally problematic is the concentration of shareholder meetings on a few days each year. The perennially lopsided distribution was illustrated again last year. Of the 80 percent of Japanese firms tracked by ISS that held their annual meetings in June, 83 percent scheduled their meeting on June 24, June 28, or June 29.

These hurdles to voting have sparked complaints by international investors since many began voting their Japanese shares in the early 1990s, as well as by Japanese institutions that have started to systematically vote their domestic holdings in recent years.

Two rules that have helped sustain short notice and meeting concentration practices remain in the law, but as companies take advantage of the dividend approval deregulation, their justifications may start to ring hollow.

Because shareholder approval of profit allocation has long been a requirement before dividends could be paid, there has been a rationale for requiring that each year’s annual shareholder meeting be held within three months of the fiscal year close, so that the year-end dividends could be paid in a timely manner. This requirement in turn presents a scheduling challenge, since audited profit figures are necessary for any profit allocation resolution, and they must be circulated to shareholders in meeting notices some time before the meetings.

In most international markets, annual meeting agenda notices reach shareholders three weeks or more before the meeting date, but Japanese companies have argued that they must rush to complete audits in time to meet even a two-week notice requirement. Even after the amendments, Japan’s company law would still allow companies to wait until just two weeks before the meeting date before mailing the agenda.

However, if the bulk of Japanese firms ultimately opt to waive this dividend approval requirement, this justification used to defend the old practices will vanish.

Some institutions this year are expected to vote for proposals to delegate dividend and profit allocation authority to Japanese boards, in the hope that this may one day lead to further legal and regulatory reform that will enable a more manageable proxy voting calendar in Japan. Other investors who have developed policies concerning dividends may oppose granting boards discretion over income allocation, concluding that there’s no guarantee that companies will then decide to actually hold their meetings substantially earlier.”

Section 404 and Small Business

In this podcast, Ralph Martino of Cozen O’Connor provides some thoughts on internal controls and the likely impact on smaller companies, including:

– Why do you think the SEC refused to exempt small public companies from the provisions of Section 404?
– Do you think Section 404’s long term effect on small public companies and their capital formation will be positive or negative?
– Do you think Section 404 provides material protection from financial fraud?
– What do you think the SEC was getting at when it stated – in its four-point plan – that it was going to work with the PCAOB in the application of Section 404 to small business?

June 7, 2006

NYSE’s Proxy Working Group Recommends Elimination of Broker Voting for Director Elections

Last week, the NYSE’s Proxy Working Group unanimously adopted six recommendations embodied in this Final Report and Recommendations. As I blogged last month, the principal recommendation is the one that would amend the NYSE’s Rule 452 (commonly known as the 10-day broker voting rule) to make director elections a non-routine matter. This means that brokers would no longer be permitted to vote the shares of beneficial owners who do not provide specific voting instructions within 10 days of the close of proxy voting. As many of you know, brokers typically side with the board and management when they vote for directors. Here is a related article from BusinessWeek.

Coupled with hedge fund activism, this could mean that directors who are subject to withheld votes will find it much more difficult to obtain a majority vote. Add in the growing majority vote movement and this is a whole new ballgame folks! It is not hard to find director elections this year where directors received a majority vote- but would not have done so if this rule had been effective.

I predicted as much for the recent Home Depot election. Consider how high the level of withhold votes was there without the extended media and Web campaign that took place at Disney a few years ago. Wake up and smell the coffee Mrs. Bueller, the playing field is shifting all around us! The NYSE wants the SEC to approve the rule change so it can be effective for the 2007 proxy season! Better lock in your favorite proxy solicitor now because demand is gonna be sky high!

Thankfully, the Proxy Working Group rejected the idea of totally eliminating broker voting, recognizing that it plays an important role in allowing companies to achieve a quorum for regular meetings.

The six recommendations from the Proxy Working Group are:

1. The elimination of discretionary broker votes for director elections by amending the NYSE’s Rule 452.

2. The SEC’s review of the OBO-NOBO rule to make it easier for companies to communicate with their street-name shareholders.

3. The NYSE’s engagement of an independent party to analyze and make recommendations to the SEC regarding the structure and amount of fees paid to ADP.

4. The SEC’s study of the role of groups like ISS and Glass Lewis that impact the voting decisions over shares in which they have no ownership and no economic interest. The Proxy Working Group believes that there is the potential for conflicts of interest and/or other issues given the multiple roles that such groups play in the proxy season.

5. The NYSE’s taking a lead role in efforts to educate investors about the proxy voting framework.

6. The NYSE’s monitoring of the impact of amending Rule 452 to make director elections a “non-routine” matter.

The NYSE Staff seeks comments by the end of June – it will share these comments with the SEC. After reviewing these comments, the NYSE Board will consider them and any proposed rule changes will then be filed with the SEC so that the SEC can then directly solicit additional public comment. So for those of you worried about the tight window period for commenting now, recognize that the public will have two opportunities to comment. Lots more to come on these groundbreaking recommendations!

Study on Investor Attitudes

As part of the NYSE’s Proxy Working Group process, they had this Investor Attitudes Study prepared by the Opinion Research Corporation to gain a better understanding of investors’ knowledge of the existing proxy voting process.

No surprise that the study results show that investors generally are confused about proxy mechanics since so few of us professionals fully understand how it all works. In fact, I was floored that 25% of the respondents understood that their brokers get to vote in their place if they didn’t respond. My guess is that no more than 5% of shareholders would have understood that…

Broker Votes vs. Broker Non-Votes

Some of you may wonder what is a “broker non-vote” – and how it differs from a “broker vote”? They are one and the same thing, just different terminology (except sometimes people refer to broker non-votes as being “non-routine” meeting agenda items for which brokers aren’t entitled to use discretion to vote; this stuff is confusing!). One of my favorites John Wilcox, formerly of Georgeson and now at TIAA-CREF, taught me long ago that the proper terminology is “broker non-vote” because the broker gets the discretion to vote due to non-voting of the beneficial owner.

But it’s entirely a “tomato, tomahto” thing and reminds me of this recent exchange among academics regarding whether “shareholder” or “stockholder” is the appropriate term under Delaware law…

June 6, 2006

Notices of Effectiveness Now Online

As I blogged a month ago, the SEC recently announced that it will use EDGAR to post notices of effectiveness for registration statements (and post-effective amendments). The SEC has now begun posting these notices on this web page – and here is an example of what these online notices look like. Notices of effectiveness can also be found by searching for the EDGAR form type “EFFECT.”

The SEC states it will post these notices on the morning after the filing is declared effective and will no longer mail out paper copies (although it will continue to notify registrants by telephone that a registration statement or post-effective amendment has gone effective).

Who could possibly care about all this? Well, I guess it’s a big deal for the associates and paralegals who no longer will have to try to track down paper notices for a deal closing; they often were mailed by the SEC weeks and weeks after effectiveness in the past.

Alan Beller Rejoins Cleary Gottlieb

Following the footsteps of former SEC General Counsel Giovanni Prezioso, Alan Beller has decided to also return to his old law firm, Cleary Gottlieb Steen & Hamilton. Alan will practice in the firm’s New York office.

Yesterday, the SEC announced that it had woo’ed Andy Vollmer from his partnership at Wilmer Hale to serve as Deputy General Counsel of the SEC. Andy, who specializes in internal investigations, will nicely complement General Counsel Brian Cartwright, who specialized in Corp Fin issues during his private practice days.

Remembering Ken West – In Gratitude and Deep Respect

I am sad to say that Ken West passed away recently. Those of you that heard Ken speak at last year’s “2nd Annual Executive Compensation Conference” know what a source of strength he was for all of us endeavoring to “do the right thing.” Below is a remembrance from Don Delves (and here is a brief article written by Ken for Directors & Boards):

“The corporate governance community lost one of its finest members with the recent passing of Ken West. As long-time Chairman of the NACD, Governance Consultant to TIAA-CREF, and board member, Ken fostered a tremendous amount of positive change in the operation and effectiveness of countless boards. He worked quietly, behind the scenes, gently wielding a big stick and systematically persuading wayward boards to adopt better practices.

He did so as a gentleman and veteran business leader, talking to other business leaders about how they might operate with greater integrity and higher standards. Ken used his position as an extraordinarily well-liked and well-respected member of the director community to challenge that community–our community–to recognize our shortcomings and to be our best. He was also a mentor and advisor, encouraging many of us to take thoughtful, measured and sometimes risky stands for changes we thought were in the best interests of company and shareholders. We will miss Ken for his candor, his courage and his friendship.”

June 5, 2006

Lessons Learned from the Fannie Mae Settlement

I held off blogging about Fannie Mae’s agreement to a $400 million fine – as reflected in this SEC press release and Fannie Mae press release – until I got a chance to read the 348-page OFHEO report. Here is a summary of the report – and the related OFHEO settlement agreement.

My first thought in reading the OFHEO report was to compare it with Richard Breeden’s “Restoring Trust” WorldCom report – which is now three years old. The Breeden report seemed so novel at the time; the Fannie Mae report is also fascinating, but not as shocking since we have all read so many of these things by now.

To get some guidance on what boards should not do, I recommend focusing on pages 287-330 of the OFHEO report; here is a smattering of the many lessons from the report that I found worth considering:

1. Boards should question any fast-tracked settlement of whistleblower claims (pg. 281 of the PDF)

2. Any failure of the audit committee is also a failure of the Board (p. 283)

3. Boards should ensure the audit committee charter doesn’t limit the ability of the audit committee to challenge management (p. 293-294)

4. Audit committees should actively oversee the internal audit department, including ensuring that the internal auditor’s compensation is not tied to corporate performance (p. 296-298)

5. Compensation committees should ensure that their charter doesn’t create a bias in their oversight role (nor should the charter include standard statements that they can’t comply with, such as “pay-for-performance” and reliance on stock-based compensation to align management’s interests with shareholders) (pg. 310-312)

6. Compensation committees shouldn’t allow management to script out their meetings in advance (p. 313)

7. Compensation committees shouldn’t allow the CEO to influence which independent compensation consultant they hire (p. 314)

8. Boards need to stay informed about the corporate strategy (p. 315)

9. Boards need formal policies as to how (and when) to approve large transactions and if (and when) management needs to inform directors about them (p. 319)

10. Boards need to act fast in a crisis, including launching an independent investigatons (p. 324-329)

Here are some joint remarks from SEC Chairman Cox and the head of the OFHEO – and the SEC’s litigation release and complaint.

SEC Historical Society’s Annual Meeting

Check out tomorrow’s SEC Historical Society annual meeting, which includes this free webcast program: “Who’s Counting? The Critical Role of Financial Reporting in the Capital Markets.”

Growing Importance of Computer Forensics in Litigation

In this podcast, Stephanie Weiner, Director of Computer Forensics in BDO Seidman’s Litigation & Fraud Investigation practice, provides some insight into why computer forensics will begin to play an even greater role in trial preparation (ie. beginning December 1, 2006, when new Federal Rules of Civil Procedure go into effect) as new rules require parties to discuss issues pertaining to discovery of electronically stored information (ESI) at the initial rule conference, including:

– What is ESI, and what role does it play in court cases?
– What questions should you ask to determine if ESI is accessible or non-accessible?
– How can computer forensics assist in establishing a timeline to comply with electronic discovery requests?
– What is the impact of electronic discovery on budgets and what are some ways to minimize cost?

June 2, 2006

Spotlight on Legality of Binding Anti-Pill Bylaw Amendments

Following up on a recent blog, this Wachtell Lipton memo lays out this development: “Stockholders of Hilton Hotels Corporation recently approved a labor union-initiated proposal to amend Hilton’s bylaws to provide that Hilton “shall not maintain a shareholder rights plan [sometimes known as a `poison pill’] . . . unless such plan is first approved by a majority shareholder vote.” The passage of this proposal is lamentable as a matter of policy. It also puts a spotlight on the so-far-unanswered question of whether binding, shareholder-initiated bylaws of this nature are valid under Delaware law.

For very fundamental reasons, we believe that a binding bylaw of the type voted upon at the Hilton meeting is not valid under Delaware corporation law. Hilton, based on the opinion of Delaware counsel, reached the same conclusion, and has stated that its board will treat the proposal as a non-binding recommendation. We believe this approach is correct. Under Delaware Code Section 141(a), directors have not only the power, but the obligation to at-tempt actively and in good faith to protect and advance the interests of the corporation and its stockholders.

This fiduciary obligation requires that directors exercise their informed judgment in the circumstances as they appear from time to time. In our view, a majority of the voting shares may not in a bylaw limit the board’s power to take such action as the board itself believes in good faith is necessary or appropriate to protect and advance the interests of the corporation and its stockholders. Should a majority of shares wish to pursue a policy of board disempowerment, as the union is attempting to do with its bylaw proposal at Hilton, the corporation law does not leave them without means to do so. Stockholders are free to elect new directors with different views of the best way to advance the purposes of the corporation.

In addition, an amendment to the corporation’s certificate of incorporation could validly constrain the powers of the board. That these alternative avenues for the enhancement of shareholder power over management are more difficult to effect is not, in our view, a flaw of the long-existing law, but rather a recognition that the complex governance of the large modern business corporation is a most serious matter that requires greater deliberation than is likely to occur in a single vote on a bylaw amendment.

Moreover, the use of shareholder-initiated binding bylaws to disable directors from fulfilling their obligation to protect the interests of stockholders is bad policy. The statutory duty to be active in protecting the interests of all stockholders is never more important than when a company is evaluating a potential sale of control or responding to activist stockholders seeking to influence or control the company for self interested purposes.

A board’s ability to adopt and maintain a rights plan is among the most powerful and flexible tools available to enable directors to fulfill their obligations. Rights plans are also critical to the ability of a public company to conduct an orderly auction in the event the company seeks to sell itself. Repeated shareholder referenda are no substitute for board judgment, and are likely to prove impractical, ineffective and vulnerable to abusive tactics of small but vocal groups of shareholders whose interests may not be aligned with, or may be hidden from, stockholders generally. A bylaw that effectively demands director passivity at the very moments when active business judgment is most keenly needed contradicts the fundamental principles of our corporate law and does not serve the best interests of corporations or stockholders generally.”

Home Depot: Calling Off the Dogs

In the wake of shareholder outcry at the way Home Depot’s annual meeting was handled last week (as I blogged about a few days ago – also see this WSJ editorial), Home Depot issued this press release yesterday noting that next year’s shareholder meeting will return to “normal” (ie. shareholders will be permitted to ask questions and directors will attend).

In addition, the company announced that it intends to implement “majority vote measures” since a shareholder proposal seeking a majority vote standard received support from 56% of those voting. It will be interesting to see what those “measures” comprise of given that 10 of Home Depot’s 11 directors received high levels of withheld votes: over 30% (the only director not receiving a similar level is a brand new director). According to this WSJ article, these high levels are mainly due to anger over CEO pay. Depending on the math, if broker non-votes were not counted and a majority vote standard had been in place, this board might have been gone!

Interestingly, Home Depot has landed near the top of the ISS CGQ scoring system in recent years (99.6% right now) – which can be taken one of two ways, either the conduct of this meeting was an aberration or CGQ scores should be taken with a grain of salt…

June Eminders is Up!

The June issue of our monthly email newsletter is now posted.