October 23, 2006

Sample Director Confidentiality Agreement

Reading the latest details about how H-P’s hired gumshoes closely followed a WSJ reporter gave me the shivers. Folks, feel free to sift through my trash anytime – trust me, there’s nothing in there too interesting save maybe some old boxers (my wife is now applying a one-year rule).

In our “Board Duties” Practice Area, I just posted a sample director confidentiality agreement contributed by a member.

Another member asked me recently: “On the issue of director confidentiality, because of some of the “defects” with regard to common law duties of confidentiality, we ask directors to sign a confidentiality agreement. We’ve purposely made it as benign as possible, under the theory that it supplements, rather than supplants, common law director duties and it is too difficult to negotiate with prospective directors over the terms of their confidentiality agreements. So far, we’ve had no issues with directors signing it. We’ve wondered about the types of things that would cause concern and the only context we could come up with is in the case of some sort of investigation—would a director be compelled by the terms of the agreement to not disclose something to a regulator?”

This question will be posed to the panel during our upcoming webcast, “The Art of Boardroom Etiquette and Confidentiality.” During a recent prep call I held with the panel, most agreed that entering into confidentiality agreements with directors is a bad idea – because directors already are bound by their fiduciary duties and thus there is no reason to bind them with contractual obligations. On the other hand, the use of agreements can be useful to remind directors that their obligations to the company are very real. This issue will be discussed during the webcast, but I’d be interested to hear your own thoughts on this practice.

A Record-Breaking IPO

Did you catch the numbers for Friday’s record-breaking IPO of Industrial & Commercial Bank of China? Not only did the IPO raise $21.9 billion, the total volume of orders was $430 billion! $350 billion of demand from global investors and $80 billion within China. Mind-boggling! And according to this WSJ article, demand for Chinese IPOs has been stimulated all year; last month, China Merchants Bank had $100 billion of demand for its $2.4 billion IPO.

With the ICBC deal under its belt, the Hong Kong Stock Exchange surpassed the London Stock Exchange for the highest aggregate volume of IPOs for 2007 so far (with the NYSE way back behind both). A global shift seems to have occurred…

First Shareholder Access Proposal Submitted for this Proxy Season

As Pat McGurn of ISS notes, investors are chanting “I want my MTV,” meaning majority threshold voting standards. He predicts that over 200 companies will receive shareholder proposals calling for majority vote standards to be adopted; over 150 were submitted this year and they garned average support levels of 47%. As noted below, and as will be discussed during our upcoming webcast: “Shareholder Access and By-Law Amendments: What to Expect Now” – the first proposals seeking shareholder access have been submitted (as well as the first letters to the SEC opposing access, see this Business Roundtable letter that I just posted in our “Shareholder Access” Practice Area).

From the ISS Corporate Governance Blog: “Four pension funds this week submitted a resolution that seeks to allow shareholder-nominated candidates to run for seats on Hewlett-Packard’s board of directors. This was the first proxy access proposal filed after a Sept. 5 federal court ruling that the Securities and Exchange Commission improperly allowed American International Group to omit a 2005 access resolution by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME).

The proposal at H-P was filed Sept. 25 by AFSCME, the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds, and the North Carolina Retirement Systems. The resolution asks the company to change its bylaws to allow any shareholder group holding 3 percent of the shares outstanding for at least two years to nominate one or more directors. Collectively, the pension funds own more than 30 million H-P shares with a market value of $675.9 million, according to their press release.

“Proxy access is critical to insuring shareholder rights,” New York State Comptroller Alan G. Hevesi said in a press release. “While we wait for the SEC to rule on this topic regarding all corporations, we are moving forward on a case-by-case basis to establish what should be a basic right for all shareholders.”

H-P had no immediate comment on the shareholder proposal. The Palo Alto, California-based computer manufacturer has been embroiled in a controversy over a boardroom leak investigation authorized by former Chairman Patricia Dunn. Dunn resigned Sept. 22, two weeks after the company acknowledged that it hired a private investigator to obtain the phone records of directors and journalists. The SEC, federal prosecutors, and California Attorney General Bill Lockyer are investigating the company’s handling of the leak probe, while U.S. lawmakers are holding hearings on the matter.

“The H-P board is completely dysfunctional and has been for a long time, which is an example of why shareholders have fought so hard for proxy access,” Richard Ferlauto, AFSCME’s director of pension investment policy, told Governance Weekly. “We seek to nominate directors at H-P who will make the board do its job better through an election process that is not stacked against investor interests.”