August 22, 2006

The Latest ISS Proxy Season Update

ISS has released an updated version of its Proxy Season Scorecard, whose highlights include:

– Majority vote to elect director proposals received an average level of support of 47.8 percent, up from 43.7 percent in 2005

– Use performance-based vesting proposals received an average level of support of 41.5 percent, jumping more than nine percentage points from 2005

– Disclose political contribution proposals received an average level of support of 20.7 percent, which is more than double last year’s average

Majority Vote Standards: The New Proxy Card

Several companies that have adopted pure majority vote standards have tweaked their proxy cards (and voting instruction forms) to allow for shareholders to vote “against” director nominees – we have posted several of these samples in our “Majority Vote Movement” Practice Area. It is important to note that ADP has the systems in place for those companies who need to make similar changes.

Incorporation by Reference and Written Statements: The PSLRA’s Safe Harbor

We seem to get a fair number of queries about incorporation by reference in our Q&A Forum, so I thought it would be informative to repeat this development (and analysis) from a recent Wachtell Lipton memo: “The Private Securities Litigation Reform Act of 1995 (the “PSLRA”) creates a “safe harbor” from liability under the federal securities laws for earnings projections and other forward-looking statements, both written and oral, that are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”15 U.S.C. § 78u-5(c)(1). In the case of oral forward-looking statements made by or on behalf of an issuer subject to Exchange Act reporting requirements, the statute provides that “meaningful cautionary statements” contained in an identified written statement may be incorporated by reference. Id. § 78u-5(c)(2).

Because the PSLRA’s “safe harbor” expressly permits incorporation by reference with respect to oral statements, shareholder plaintiffs have argued that a corporate defendant’s written statement (e.g., a press release) that incorporates by reference the “meaningful cautionary statements” contained in another written document (e.g., the corporation’s annual report) is not entitled to “safe harbor” protection.

This argument was recently rejected in Yellen v. Hake, 2006 U.S. Dist. LEXIS 47012 (S.D. Iowa July 7, 2006). The court reasoned that “[w]hile the Safe Harbor provision does not explicitly provide for incorporation by reference for written forward-looking statements,” a defendant’s ability to avail itself of the “safe harbor” in this manner was implicit in the statute. The court also noted that numerous federal courts have concluded that cautionary language is not required to be in the same document as the allegedly false statement for a defendant to get the benefit of the “safe harbor.”

Although the decision in Yellen offers some comfort that a press release containing forward-looking statements can come within the PSLRA’s “safe harbor” by incorporating by reference cautionary statements contained in prior SEC filings, the safer course remains for companies to avoid the issue altogether by simply repeating verbatim in their forward-looking press releases the same cautionary statements contained in their prior SEC filings.” We have posted a copy of this memo in our “Forward-Looking Information” Practice Area.