June 24, 2011

A Dodd-Frank Act Tally Sheet: Some Down, Many More to Go

At this time last summer, we were watching the legislative process unfold that gave birth to the Dodd-Frank Act (aka FrankNDodd), and we were anxiously wondering what sort of post-apocalyptic world we might be living in once the various provisions of Dodd-Frank came into effect. With Dodd-Frank’s first birthday fast approaching (I already have some Dodd-Frank birthday gigs on my calendar), we find ourselves in more of a state of limbo than “Mad Max.” The SEC Staff has been working incredibly hard to develop rules to implement many provisions of the Act under difficult circumstances, most notably the ridiculous implementation deadlines set forth in the statute, the perennial problem of understaffing and intermittent threats of government shutdown. With all that, some progress has been made, and there will no doubt be much more progress coming soon. As for the corporate governance and compensation provisions of the Dodd-Frank Act affecting public companies, the lay of the land today is as follows:

1. The SEC has completed rulemaking on the Say-on-Pay provisions and whistleblower provisions of Dodd-Frank. Say-on-Pay turned out to be more like “Y2K” than the apocalypse, with significant support for Say-on-Pay resolutions at most companies.

2. The SEC expects to adopt rules with regard to the compensation committee and adviser independence provisions in the second half of 2011. It seems likely that the final rules on these provisions will be adopted this summer, to be followed by the exchanges’ efforts to establish the applicable listing standards.

3. The SEC expects to adopt rules implementing the “specialized corporate disclosure” provisions (conflict minerals, payments by resource extraction issuers and mine safety) in the second half of 2011. It seems that the SEC wants to treat all of these disclosure provisions as a package deal, otherwise they probably would have adopted the mine safety rules by now, given that mining companies already have to comply with the statutory requirements. The conflict minerals disclosure provisions continue to present many challenges in coming up with workable rules for a potentially very large proportion of the universe of public companies, so we should all be thankful that the Staff and the Commission are taking their time to deliberate the outcome.

4. The SEC currently plans to propose rules in the second half of 2011 regarding pay for performance disclosure, the median employee/CEO pay ratio disclosure, compensation recovery listing standards (and related disclosure), and disclosure regarding employee and director hedging. With the press of other business under the Dodd-Frank Act and otherwise, I could see some or all of these provisions getting pushed back even further, perhaps even past the 2012 proxy season.

5. The SEC has not yet come out with any proposal as to the other significant matters which would be excluded from broker discretionary voting, although that one might be expected some time later this year in anticipation of getting something on the books for the 2012 proxy season.

6. A decision by the U.S. Court of Appeals for the DC Circuit in the lawsuit challenging Rule 14a-11 (adopted in August 2010 after authority issues were cleared up by Dodd-Frank) is still expected this summer.

Will Congress Help?

It doesn’t seem that Congress will have much appetite to pare back the most onerous provisions of Dodd-Frank applicable to public companies, however earlier this week there was at least a sliver of hope when the House Financial Services Committee held a hearing to consider bills which included H.R. 1062, the Burdensome Data Collection Relief Act, which would repeal the pay ratio disclosure requirement in Dodd-Frank. At the hearing, the Financial Services Committee ordered that the bill be reported to the full House. It is anybody’s guess as to whether the bill may ultimately get voted on, but at least it made it out of the Financial Services Committee.

Delaware Addresses Advance Notice For Shareholder Proposals

An interesting advance notice development from Steven Haas of Hunton & Williams:

Recently, the Court of Chancery issued an interesting decision in Goggin v. Vermillion, Inc. applicable to shareholder proposals and annual meetings. In denying a motion to enjoin a stockholders meeting, the court enforced an advance notice requirement for shareholder proposals that was set forth in the company’s 2010 proxy statement rather than its bylaws.

By way of background, the company’s 2010 proxy materials mailed last October provided that the advance notice deadline for shareholder proposals at the 2011 annual meeting was January 1, 2011. At the time, however, it wasn’t clear when the company’s 2011 annual meeting would be held. While the company traditionally had held its annual meetings in June of each year, it had filed for bankruptcy in 2009 and decided to hold its 2010 meeting in December–just weeks before the January 1, 2011, advance notice deadline disclosed in the proxy materials.

In February 2011, more than a month after the advance notice deadline had passed, the company announced that its 2011 annual meeting would be held on June 7, 2011. As a result, the January 1 deadline resulted in a 150-day advance notice requirement for the 2011 meeting–far more than the typical 90 or 120-day requirements found in many bylaws of Delaware corporations.

The court observed that Delaware law does not require that shareholders provide advance notice of proposals or of director nominations to be raised at an annual meeting. It also acknowledged that the company didn’t have an advance notice bylaw, although it had since adopted one applicable to its 2012 stockholders meeting. Nevertheless, the court held that “the Company set forth its notice requirement for the 2011 Meeting in the October 20, 2010 proxy and that the plaintiff was unlikely to prevail on the merits by showing that the advance notice requirement was unreasonably long or unduly restrictive of [his] franchise rights.”

The court seems to have been strongly influenced by the fact that 5 of the 6 directors were independent and there were no clear signs of entrenchment motives (e.g., the plaintiff did not signal his dissatisfaction with management until after the advance notice deadline had passed). Thus, the deadline was established on the “proverbial clear day” and conformed to the company’s pre-bankruptcy practices.

Still, many observers may be surprised to see the court enforce an advance notice provision that was not set forth in the company’s governing documents. It also is notable that shareholders had approximately 2½ months notice of the pending deadline (i.e., the time in between the mailing of the October 2010 proxy statement and the January 1, 2011, deadline), and that the deadline turned out to be 150 days before the then-unknown meeting date. In contrast, many advance notice bylaws provide that, if the date of an annual meeting significantly deviates from the prior year’s meeting date, shareholders can provide notice of proposals or director nominations within 10 days after the announcement of the meeting date.

– Dave Lynn