Numerous members are asking daily about which companies have filed proxy materials under the SEC’s new rules so that they can see how they addressed the new disclosure requirements related to board qualifications, leadership structure, risk oversight, etc. Here are a few samples we found so far – the first four have been truly filed under the new rules; the last three have not but have some attributes that address some of the new requirements:
Note that we present these samples just because they are the first ones filed; we haven’t analyzed them to determine if they adequately comply with the new rules nor don’t necessarily endorse their approach. Thanks to Dave, Mark Borges and Nick Varsam of Thermadyne Holdings for pointing these out. If you spot a new one, please drop me a line…
Proxy Disclosure: How to Explain the Impact of a Failure to Vote
The decrease in the level of voting in recent years by retaiI shareholders (particularly at those companies using e-proxy) – combined with the increasing likelihood of close votes at annual meetings for a variety of reasons – has pushed more companies to realize that they are involved in “real” campaigns this proxy season. This is a topic that I have repeatedly warned you about. I recently received the following from an in-house member:
“Due to the loss of the broker vote in director elections, we’re probably going to include the following paragraph in the “General Instructions” section of our upcoming proxy statement:
Effect of Not Casting Your Vote. If you hold your shares in street name it is critical that you cast your vote if you want it to count in the election of Directors (Item 1 of this Proxy Statement). In the past, if you held your shares in street name and you did not indicate how you wanted your shares voted in the election of Directors, your bank or broker was allowed to vote those shares on your behalf in the election of Directors as they felt appropriate.
Recent changes in regulation were made to take away the ability of your bank or broker to vote your uninstructed shares in the election of Directors on a discretionary basis. Thus, if you hold your shares in street name and you do not instruct your bank or broker how to vote in the election of Directors, no votes will be cast on your behalf. Your bank or broker will, however, continue to have discretion to vote any uninstructed shares on the ratification of the appointment of the Company’s independent registered public accounting firm (Item 2 of this Proxy Statement). They will not have discretion to vote uninstructed shares on shareholder proposals (Items 3 and 4 of this Proxy Statement). If you are a shareholder of record and you do not cast your vote, no votes will be cast on your behalf on any of the items of business at the Annual Meeting.
Broadridge has a standardized buckslip on this subject that they are offering to include – for an additional cost – in full set mailings. Some brokers (egs, Goldman Sachs and Morgan Stanley) are sending similar messages to clients – and some law firms and proxy solicitors have been pushing the idea that companies need to be proactive in educating shareholders (eg. see page 3 of this memo).”
Broc’s note: This is a good start on the road to real campaigning. However, since many shareholders ignore their proxy materials, companies will need to do more to get the attention of shareholders and communicate the importance of voting. Another cheap and easy step is to build an “annual meeting” home page, as I wrote about in the Spring 2008 issue of InvestorRelationships.com (still available for free).
New York Law: “Abstentions” as “Votes Cast”
Yesterday, in our “Proxy Season Blog,” I noted some feedback from a member about how abstentions and broker non-votes are counted in Delaware. Below is some information that a member recently added to the discussion in our “Q&A Forum” (ie. #4642) about how abstentions may be treated under New York law:
I recently spoke with a NYSE representative who told me that despite the fact that abstentions are not considered a “vote cast” under New York law, the NYSE takes the position that for purposes of shareholder approval of an equity plan, under NYSE rules an abstention will nevertheless be considered a vote cast on the proposal. That is consistent with the NYSE Staff’s long-standing interpretation of 312.07.
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture:
– The Staff’s new Non-GAAP measure C&DIs
– Shareholder education about the loss of discretionary voting
– An analysis of the SEC’s climate change release
– Snow stories
Clarification: “Lightning Fast” Arbitration in Delaware Chancery Court
Here is a clarification on my recent blog about Delaware’s new arbitration process from a member:
Unless folks read Francis’ alert closely, I think it might confuse people, as I know it confused me. This new development is about bringing arbitration of contract claims to Delaware Chancery Court, with the Chancellors serving as arbitrators. It seems like a good idea and one that is noteworthy. But the blog post incorrectly suggests this new development is for all suits in Chancery (where the state pretty much already has a “rocket docket” whenever needed) – and misses the important point that the new rules allow the Chancellors to get involved in cases that normally wouldn’t be in Chancery to begin with.
More on our “Proxy Season Blog”
With the proxy season in full gear, we are posting new items regularly on our “Proxy Season Blog” for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Determining Number of NEOs: Not as Easy as 1, 2, 3
– Examples: Disclosure of Director Nominee Selection Criteria
– Disclosing Pending Litigation: The Challenges
– Australian Companies to Disclose Gender Diversity
– Registered Holders: Broadridge vs. Transfer Agent?
– Shareholder Choice in a World of Proxy Access
– SEC Reverses Omission of Antibiotics Shareholder Proposal
I won’t whine since I grew up in Chicago, but a second blizzard is expected today in Washington as federal government offices are closed here for a second straight day as we dig out from the first. As I blogged on Friday, federal government closings due to weather doesn’t shut down EDGAR – so filings can continue to be made despite the snow storm (so yes, Form 10-Qs are still due today).
But has “snowpocalypse” panic spread to underwriters and the securities bar as they wonder whether there will be any bodies in Corp Fin to declare their deals effective? The markets are still open and having registration statements declared effective is particularly important this week, as the staleness date for calendar year-end financial statements fast approaches.
Fortunately, the answer is “yes.” Corp Fin has procedures in place to help as Staffers are available to assist with filings even though the government is shut down by the storm. When OPM shuts down the government in DC, emergency personnel (ie. “essential”) still must show up for work – and as a result there will be Corp Fin staffers available to ensure that essential operations continue.
The most important thing when faced with this situation is getting in touch with someone at the SEC – leaving a message with the examiner assigned to your filing probably isn’t going to be sufficient. Rather, you will need to work the phones to get in touch with (or leave a message for) the Assistant Director of the group that is handling your filing, or call the Corp Fin Front Office. These numbers are available in our constantly-updated “Corp Fin Staff Organization Chart.” To play it safe, you should attempt to make contact with the Staff as soon as possible if you anticipate a need to go effective this week so that any last minute issues can be resolved.
If you are expecting comments from Corp Fin and there is no urgent need to go effective, you may experience some delay in the processing of your filing thanks to the snow. There is no need to contact the limited Staff available to ask about the status of your comments, because they probably won’t be able to step in and move the process along, particularly right now. The Staffers that are available during the government shutdown are really there to deal with the most urgent situations, so bogging them down with less urgent matters is not the best idea…
Thanks to Dave who wrote the bulk of this entry, as he fondly remembers being “essential” himself and trudging to be one of the few folks in the government at work during a snow day…
Feedback: SEC’s Settlement with BofA
Below is some feedback on my recent blog regarding the SEC’s settlement with Bank of America from Brink Dickerson of Troutman Sanders:
Interesting settlement between BOA and the SEC, but I think that it reflects some worrisome practices by the SEC:
– The concept of “effectiveness,” which is the standard that the SEC proposes for the auditor attestation report, is not directly applicable to disclosure controls. It is uniquely a SOX 404 concept. Rather, for disclosure controls the test is whether they “are designed” to assure compliance, not whether they are effective. See Rule 13a-15(e). While the effectiveness determination is only one of five items that he auditor is to review, it is the one that stands out as not being mandated by the 1934 Act and, more critically, is almost impossible to fulfill.
– I doubt that an audit firm is qualified to assess disclosure controls without relying on a report from special counsel. If anyone could do the report solo, it would be a law firm, and for an audit firm to do it, it is going to have to rely on someone with the necessary disclosure expertise. In the Sony settlement the SEC did require that an audit firm “audit” Sony’s MD&A, but that is a much easier requirement.
– Having management certify as to the accuracy of a proxy statement, although understandable in the context of the disclaimers by BOA management with respect to their familiarity with the document, seems a bit odd, particularly given the absolute liability – i.e., no scienter required – provisions of Section 14(a). In the Tyco litigation, the SEC thought that Section 14(a), on its own, was strong enough to go after a CEO for misstatements in a proxy statement. I do not think that anything has changed, and worry from a policy perspective whether the SEC should be suggesting that a certification is necessary in order for there to be liability of the part of a CEO.
– Requiring “super” independence for the compensation committee members and their advisors seems little more than window dressing given the progression toward that independence standard by most large companies for all purposes and the new compensation advisor disclosure rules. But at least this one will not cost the shareholders anything.
– Most of our larger clients already have well-considered, written compensation principles. It is increasingly hard to write a good CD&A without them. So, again, hopefully something this is something that will not cost the shareholders anything.
– Requiring a “say on pay” advisory vote, even though just advisory, appears to be meddling by the SEC in corporate governance (again!), rather than their sticking to their disclosure mandate. I find the proposed order’s comments on the governance implications of advisory votes – “shall not be binding on the BAC Board of Directors and shall not be construed as overruling a decision by such Board, nor will it create or imply any additional fiduciary duty by such Board” – interesting, and hope that the plaintiffs’ bar believes them too.
In short, in order to craft an outcome that will get Court approval (this time), I think that the SEC may have gone a bit too far down the wrong path.
Dave & Marty on Capital Raising, Rule 163 Proposal, and Conference Hot Spots
In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion regarding capital raising, Rule 163 proposal and conference hot spots.
A new voluntary expedited procedure for new cases – under these new rules – is coming to the Delaware Court of Chancery. It will provide a new streamlined, “lightning fast” litigation timetable for the adjudication of certain types of business disputes that fit within the parameters of the new rules. Highlights of the new rules were presented last month by Chancellor William Chandler to the Delaware Bar.
This new procedure gives new meaning to the term “alacrity.” It is designed to provide another option to litigants seeking expedited or summary proceedings for certain business disputes that fit the new “streamlined” process provided for in the new rules that will become effective on February 1, 2010. Learn more in this memo.
Treasury Releases First Quarterly PPIP Report
A few weeks ago, Treasury released its initial quarterly report for the Legacy Securities Public-Private Investment Program. The report includes a summary of PPIP capital activity, portfolio holdings and current pricing, and fund performance.
In addition,Treasury has released a TARP Warrant Disposition Report, which provides an overview of the warrants received by Treasury under TARP and an explanation of the warrant disposition process and the results achieved.
This January-February issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Now is the Time for a True Walkaway Number: Model Disclosure for Your CD&A
– Our Model CD&A Walkaway Disclosure
– RiskMetrics Revises Poison Pill Policy; On-the-Shelf Rights Plans on the Rise
– Defining the Rules of the Road for Differential Consideration in M&A Transactions
– SEC Staff’s New Guidance: Facilitating Lock-Up Agreements with Registered Exchange Offers
– Earnouts: A Siren Song?
If you’re not yet a subscriber, try a 2010 no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Yesterday, the SEC announced that it has settled its two actions against Bank of America regarding alleged disclosure deficiencies in connection with BofA’s acquisition of Merrill Lynch (one action regarding bonus amounts; the other over operating losses). Not only will BofA pay $150 million to the SEC (to be distributed to harmed shareholders), it will adopt seven governance reforms – if Judge Rakoff approves the settlement (he rejected a $33 million settlement last September). The settlement doesn’t levy any penalties on current or former executives. Here’s the SEC’s litigation release – and here is the SEC’s brief supporting the settlement and notice of motion (with Exhibit A to that).
Here are the seven governance reforms that BofA would be required to implement for a period of three years:
– Provide shareholders with an annual non-binding “say on pay” on executive compensation
– Retain an independent auditor to perform an audit of the company’s internal disclosure controls
– Have the CEO and CFO certify they have reviewed all proxy statements
– Retain disclosure counsel who will report to the audit committee on the company’s disclosures
– Adopt a “super-independence” standard for the compensation committee that prohibits them from accepting other compensation
– Hire a “super-independent” consultant for the compensation committee
– Implement incentive compensation principles & procedures and prominently post them on the company’s site
While BofA’s problems with the SEC may be coming to a close, it’s problems with NY Attorney General Andrew Cuomo may just be starting over these alleged disclosure deficiencies. Yesterday, Cuomo announced that he had filed a civil suit against Bank of America, Lewis and former CFO Joe Price.
The SEC Enforcement Division’s Use of Governance Reforms: Something New?
I know there have been a number of “governance by gunpoint” settlements driven by judges over the past decade, where institutional investor plaintiffs obtained governance reforms from companies whom they had sued and then settled. But is this something new for the SEC?
Going back in time a little bit, it’s fair to say the SEC has somewhat engaged in this type of practice, but I had trouble digging up examples from the past few years. And there certainly hasn’t been a prior instance of the SEC requiring an advisory say-on-pay vote or imposing “”super-independent” criteria as part of a settlement. It’s certainly an interesting way to remediate what was essentially a disclosure issue (how about the one where an outside law firm will report to the audit committee on disclosure!).
Here are the few precedents I could think of where the SEC has used the settlement process to obtain some type of quasi-governance reform from a company: requiring the company to hire an independent consultant to review and recommend improved policies on things like accounting (e.g., Xerox and others) and FCPA compliance (many FCPA settlements in the 2002-2006 time frame), etc. Can any of you Enforcement gurus out there think of others?
A huge snowfall is expected in DC today. Remember that EDGAR remains open as usual as it does not shut down even if the government closes.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Delaware Court of Chancery Addresses Critical Advancement/Indemnification Question
– SEC v. Cuban: SEC Files Appeals Brief
– Travel Tips: DOT Now Helping Those with Airline Beefs
– Corp Fin’s “Common Financial Reporting Issues for Smaller Companies”
– Lessons Learned: Initial Submissions of XBRL Filings
It was good to see SEC Chair Schapiro’s statement about President Obama’s request for the SEC’s budget, with a 12% increase for 2011 so that the agency’s total would be nearly $1.3 billion. As one former Staffer emailed me: “I remember when they struggled to pass $500 million!” They will need the resources to implement the coming reforms, as well as continue they tasks they have already been performing.
Here’s the SEC’s justification report for the budget request. On page 47 (page 49 of the PDF), there is a page devoted to Corp Fin, where the Division seeks 30 additional positions (translating into nine full-time equivalents). In comparison, Enforcement seeks 90 more positions; IM seeks 20 and Market Reg seeks 40. RiskFin seeks 30 positions – it already has 72. I’m surprised it has grown so fast already…
This action by the Administration is interesting because Obama’s State of the Union last week announced a freeze on government spending for the next three years. But the “freeze” is not absolute – rather, some agencies will see their budgets go up and others will go down, producing an overall freeze effect. So it appears that the SEC may be a “winner” here, as it should be in my opinion.
This excerpt from the SEC’s justification report is noteworthy: “Between fiscal years (FY) 2005 and 2007, the SEC experienced three years of flat or declining budgets, losing 10 percent of its employees and severely hampering key areas such as the agency’s enforcement and examination programs. Even with the funding increases provided by Congress in the last two years, under the SEC’s current funding level, the agency’s workforce still falls about one percent–or 35 full-time-equivalents (FTE)–short of the FY 2005 level. And yet while the workforce at the SEC has shrunk, the job that the SEC has been asked to do has grown even larger. Since 2005, the number of investment advisers registered with and overseen by the SEC has grown by 32 percent, and the number of broker-dealer branch offices has grown by 67 percent.
The SEC oversees a total of more than 35,000 registrants, including over 10,000 public companies, 7,800 mutual funds, about 11,500 investment advisers, 5,400 broker-dealers, 600 transfer agents, 12 securities exchanges, 10 nationally recognized statistical rating organizations (NRSROs), and self-regulatory organizations (SROs) such as the Financial Industry Regulatory Authority, Municipal Securities Rulemaking Board, and Public Company Accounting Oversight Board. While other financial regulators have close to parity between the number of staff and the number of entities they regulate, in recent years SEC staffing and funding simply have not kept pace with industry growth.”
The SEC Approves FASB’s “Support Fee”: What Is It?
Speaking of budgets, a few days ago, the SEC approved FASB’s “accounting support fee” for 2010. The support fee is sort of the FASB’s budget – and the SEC’s approval process is an annual exercise that the SEC now conducts in accordance with Section 109 of Sarbanes-Oxley. The FASB is limited to collecting fees from issuers not to exceed its “recoverable expenses.” In reality, the PCAOB collects the FASB’s support fees when it collects its own fees and then hands over that money to FASB.
The PCAOB’s redesigned website is not bad. My fixes to the home page would include losing the fake Scotus graphic at the top; minimize the huge and long title and move the intro sentence that takes up a lot of valuable real estate to the “About Us” page. It was odd that the PCAOB announced the redesigned site a few days before it went live – less confusing to announce it when it actually happens…
Last week, the SEC approved a rule change to Nasdaq’s delisting procedures that modify the length of certain of the automatic and Staff-authorized “compliance periods” as well as the length of time available for a company to submit a plan to regain compliance. To help you understand these changes, in our “Delisting” Practice Area, we have posted a chart – courtesy of Suzanne Rothwell of Skadden Arps, explaining delisting procedure changes.
Yesterday, the SEC finally posted its climate change interpretive guidance in this 29-page interpretive release. The guidance is effective on the date it is published in the Federal Register, which should happen fairly shortly. We’ll continue to post memos analyzing this guidance in our “Climate Change” Practice Area.
Some might ask why the release is only 29 pages. Two related reasons. First is that since this is not a rulemaking, all of the requisite jargon that typically is in the back half of a rulemaking release was not required. Second is that since this is not a rulemaking, the SEC was forced to limit its guidance within its existing disclosure framework. Otherwise, it could be accused of violating the Administrative Procedures Act – something that someone might challenge given the political hot potato nature of this topic, as I blogged yesterday.
Don’t forget the transcript and audio archive for our recent – and timely – webcast: “ESG Disclosures: Environmental, Climate Change, Social Responsibilities.” Even though this webcast was held before the SEC adopted its new interpretive guidance, the panelists covered many topics that can help you meet your new disclosure obligations.
RiskMetrics: Farewell CGQ! Long Live “Governance Risk Indicators” aka “GRId”
After nearly a year in development, RiskMetrics finally has announced its successor product to its governance rating product known as Corporate Governance Quotients or “CGQ.” The new governance rating service is called “Governance Risk Indicators” (to be known as “GRId”) and is expected to be launched in early March. GRId will assess companies along four independent dimensions: board, compensation/remuneration, shareholder rights and audit.
CGQ scores will be frozen as of early March and retired completely at the end of June. RiskMetrics also will soon discontinue its accreditation for director education programs. For those of you in-house, you will want to inform your directors of this change. It will be interesting to see if this spells the end of all the director colleges, etc. that have sprung up this decade.
I’m not sure why, but the convoluted spelling of the “GRId” nickname really bothers me…
How to Implement E-Proxy in Year Three
Tune in tomorrow for the webcast – “How to Implement E-Proxy in Year Three” – to hear Lyell Dampeer of Broadridge, Tom Ball of Morrow & Co., Keir Gumbs of Covington & Burling, Carl Hagberg of The Shareholder Service Optimizer and Paul Schulman of The Altman Group discuss new e-proxy developments, including the elimination of broker nonvotes in director elections and “lessons learned” from the first two seasons. They will also explain the voting patterns you should expect — and provide solicitation strategies to help you be better prepared for this proxy season.
Before the program, print off these three sets of course materials:
I’m getting numerous requests asking when the SEC’s climate change guidance – adopted last Wednesday by the SEC, but still not available – will be posted. As others have, I thought the SEC would act fast to release the interpretive guidance – just as it did last month with the new proxy enhancement rules (ie. adopting release out the same day as the SEC’s open Commission meeting) – given that we are knee-deep in proxy season.
I imagine the interpretive guidance has to put out real soon given that Form10-Ks are required to be filed in merely four weeks by large accelerated filers. My guess for the hold-up is the politically-charged nature of the guidance, so that some of its language may still be a subject of debate internally within the SEC. As soon as it’s made available, I will tweet on it.
When I blogged last week about the SEC’s open Commission meeting to adopt interpretive guidance on climate change, I mentioned that there was a heated debate about whether the SEC was getting itself into politics. I’ve blogged before how the SEC has been dragged more and more into the political arena over the past decade – so much so that many think the independent nature of the agency is seriously at risk.
As could be expected, some members of Congress have jumped on the SEC’s climate change guidance as a hook to add fuel to the fire. Here is a letter to the SEC from Reps. Barton-Walden that serves as Exhibit A – and here is a rebuttal published Sunday in the NY Times.
I believe we shall be seeing numerous shareholder proposals on this topic going forward – and recently, this petition was submitted to the SEC, urging that Regulation S-K be amended to require that companies disclose all electioneering expenditures under a “Political Influence” heading.
Here are the remarks from each Commissioner delivered at last week’s open Commission meeting:
Tune in tomorrow for the DealLawyers.com webcast – “The Latest on Fairness Opinions” – to hear Kevin Miller of Alston & Bird, Steve Kotran of Sullivan & Cromwell, Stuart Rogers of Credit Suisse Securities and Chris Croft of Houlihan Lokey explore the latest trends and developments in fairness opinion practices. You may want to print these course materials in advance – one set regarding recent case developments and another set regarding the role of investment bankers.
Act Now: As all memberships are on a calendar-year basis, renew now if you haven’t yet – or try a ’10 no-risk trial if you’re not a member.
As you may recall from Corp Fin Deputy Director Shelley Parratt’s speech at our Conference in November, the SEC Staff appears to be drawing a “line in the sand” this year regarding when proxy statement amendments may be necessary. The Staff expects companies to carefully consider the Staff’s positions -including those expressed in comments to other companies – when drafting executive compensation disclosure, and that material noncompliance with the rules and the Staff’s positions will potentially trigger a request for an amendment of the disclosure (rather than fixing the disclosure in future filings).
We just mailed the January-February issue of The Corporate Executive, which includes a comprehensive analysis of typical Staff comments and how you may avoid related pitfalls, including:
– Representative Staff Comments–and Our Practical Guidance
– Guidance for Your 2010 Proxy Disclosures: The Staff’s Executive Compensation Comments
– How We Got To This Point on Executive Compensation Disclosure
– Getting the Analysis Right
– Revisiting Performance Target Disclosure
– Individual Performance
We have posted the February issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Survey: Bifurcation of Record Dates for Annual Shareholder Meetings
To address the issue of empty voting, the Delaware legislature amended Section 213(a) of the DGCL – effective last August – to allow boards to set a two different record dates for their annual shareholder meeting: one for those shareholders entitled to notice and one for those entitled to vote. This dual-dating system is already used in Europe, where the concept of street-name holders doesn’t exist.
Below is an anonymous survey about whether your company has taken action to adopt this bifurcated record date format: