June 30, 2008

Hang On! SEC Certifies “Reimbursement of Third-Party Solicitation Expenses” Binding Bylaw to Delaware Supreme Court

On Friday, the SEC Staff referred a shareholder proposal to the Delaware Supreme Court under a certification process we wrote about in the Nov-Dec 2007 issue of the The Corporate Counsel and discussed in this February podcast with a Delaware lawyer. The Delaware Constitution was amended last summer to create this process, allowing for greater cooperation between the SEC and Delaware Supreme Court on issues related to Delaware law. This is the first time that this new certification process is being used – the Delaware Supreme Court has the option to refuse the SEC’s request, but is unlikely to do so.

Submitted to CA (formerly known as Computer Associates) by AFSCME, the shareholder proposal would require – yes, its a binding bylaw proposal – the company to pay for the expenses related to a successful election of a short slate of directors. Submitted to several companies in each of the past three years, this type of proposal is AFSCME’s response to the stalled shareholder access debate; see this RiskMetric’s blog where Professor Charles Elson calls it the “ultimate solution” – and here is a 2006 WSJ article that portrays VC Strine as supporting a similar type of proposal.

In its no-action request to Corp Fin (among other exclusion bases), CA argued that, under Rule 14a-8(i)(1), the proposal is an improper subject under Delaware law and, under (i)(2), it would cause the company to violate Delaware law because reimbursement of solicitation costs is a decision for the company and its board. Both of these exclusion bases has a legal opinion requirement and Richard Layton was hired to provide one to support the company’s arguments.

AFSCME responded that its proposal doesn’t violate state law and Grant & Eisenhofer supported this argument with a legal opinion. Faced with dueling legal opinions, Corp Fin refused the exclusion request since the Division doesn’t resolve disputed questions of Delaware law – but also sent a request for certification to the SEC Commissioners, who approved certifying this question of law to the Delaware Supreme Court.

If the Delaware Supreme Court doesn’t weigh in timely, it appears Corp Fin won’t allow CA to exclude the proposal when it files and delivers its proxy materials on July 17th. Given the topic of the proposal, this is a huge development and one that may be resolved within a few weeks.

Here are the documents relating to this development:

Corp Fin No-Action Response to CA

SEC’s Certification of Question of Law to Delaware Supreme Court

Attachment A – Company’s Initial Exclusion Request (copy of proposal is on page 11)

Attachment B – Proponent’s Letter in Support of Proposal

Attachment C – Company’s Response to Proponent

At the Society Conference on Saturday, I caught up with AFSCME’s Rich Ferlauto and taped this interview with him about this development.

Last Day: Early Bird Discount for Our Conferences

Don’t forget today is the last day to take advantage of the early bird discount for both the “16th Annual Naspp Conference” and the combined “Tackling Your 2009 Compensation Disclosures: The 3rd Annual Proxy Disclosure Conference” & “5th Annual Executive Compensation Conference.” The deadline won’t be extended.

Coming SEC Staff Review: On Friday, Corp Fin Director John White – who will keynote our Proxy Disclosure Conference, just like last year – said the SEC Staff will be conducting some form of executive compensation review – and a report of the Staff’s findings is likely sometime in the Fall. At this time, the Staff doesn’t know the form of either of these related projects. So executive compensation disclosure will continue to remain in the spotlight. [More notes from John’s remarks at the Society’s Annual Conference coming in tomorrow’s blog.]

And remember that registration for attendance to these Conferences – either in New Orleans or by video webcast – entitles you to a discount for the upcoming Lynn and Romanek’s “The Executive Compensation Disclosure Treatise & Reporting Guide.” So there are two benefits to registering for one (or both) of these Conferences today.

Senate Confirms Three New SEC Commissioners

On Friday, the US Senate confirmed three new SEC Commissioners – Luis Aguilar, Elisse Walter and Troy Paredes – meaning that Paul Atkins will now depart and the Commission has a full five members. As I blogged about before, it’s unprecedented to have three new Commissioners start at one time since the Commission was formed in ’34. Here is a statement from SEC Chairman Cox about the three nominees.

– Broc Romanek