Last week, the “Burdensome Data Collection Relief Act” (HR 414) was introduced to repeal Dodd Frank’s Section 953(b), the pay ratio disclosure requirement. The bill is real simple – a single paragraph. This same bill was introduced in 2013 and went nowhere. Not sure what will happen this time around…
Transcript: “The Latest Developments: Your Upcoming Proxy Disclosures”
We have posted the transcript for our recent CompensationStandards.com webcast: “The Latest Developments: Your Upcoming Proxy Disclosures.”
SEC Grants Second Bad Actor Waiver With Conditions
SEC Commissioner Kara Stein recently described what many saw as a possible model for harsher bad actor waivers after settling a matter with the SEC. According to Ms. Stein “The waiver was for a limited time, and only if certain conditions were met, creating essentially a probationary period for the firm with a right to reapply after a second showing of good cause. And the conditions are important. For example, the recent case included a review by an independent compliance consultant, and a document signed by the principal executive or principal legal officer when the consultant’s recommendations have been implemented.” Ms. Stein added “This approach represents a breakthrough in the Commission’s method of handling waivers, and I hope to see more of this and other thoughtful approaches in the future.” She also remarked “Each waiver request should receive an individualized, detailed, and careful analysis based on all of the relevant facts and the particular waiver policy.”
Many wondered if her remarks actually foreshadowed a change in policy by the SEC in granting waivers. The question may now be answered. The SEC charged Oppenheimer & Co. with violating federal securities laws while improperly selling penny stocks in unregistered offerings on behalf of customers. Oppenheimer agreed to admit wrongdoing and pay $10 million to settle the SEC’s charges.
The SEC granted Oppenheimer a waiver as a bad actor under Rule 506(d). The SEC’s order says “Oppenheimer will comply with the conditions stated in its December 10, 2014 waiver request letter, including that it will retain a law firm to review its policies and procedures relating to Rule 506 offerings, and that it will adopt improvements or changes, both as private placement agent in its investment banking business and as issuer and as compensated solicitor in its wealth management business. Oppenheimer’s waiver is also conditioned upon its completing firm wide training for all registered persons on compliance with Rule 506 of Regulation D.”
On Monday, I blogged about a statement from Glass Lewis on proxy access shareholder proposals that was contained in a WSJ article. Now, Glass Lewis has posted this on its own blog on the topic:
In 2015, approximately 100 companies will face shareholder proposals seeking a proxy access right that would allow certain large, long-standing shareholders to nominate directors to a company’s board without going through a typical proxy contest. The lion’s share will come from New York City’s pension funds as Comptroller Scott Stringer announced in the fall of 2014 the intention to submit proxy access proposals at 75 companies.
On January 16, 2015 , the SEC announced that for the 2015 proxy season it will not opine on the application of Rule 14a-8(i)(9) that allows companies to exclude shareholder proposals, including those seeking proxy access, that conflict with a management proposal on the same issue. The SEC’s decision is a reversal from its initial approach that would have allowed Whole Foods (and likely other companies seeking similar no-action treatment) to rely on the conflict rule to exclude a shareholder-submitted proxy access proposal in favor of a management proposal despite substantial differences between the proposals’ terms, including a significantly higher minimum ownership threshold in the management proposal than in the shareholder proposal.
Glass Lewis will continue to review each proxy access proposal, along with the company’s response, on a case-by-case basis. Please refer to the Glass Lewis 2015 Proxy Paper Guidelines on Shareholder Initiatives to review the Glass Lewis approach to evaluating proxy access proposals http://www.glasslewis.com/resource/guidelines/.
Glass Lewis believes that significant, long-term shareholders should have the ability to nominate their own representatives to the board. Given reasonable minimum ownership thresholds in both percentage of shares and length of ownership, we believe that a proxy access right will be rarely invoked and even more rarely successful since a majority (or plurality, if contested) of shareholders must then elect the shareholder nominee(s), preventing the election of directors not supported by most shareholders. Nevertheless, given that contested director elections are distracting and potentially disruptive to a company, its board and management, Glass Lewis believes it is therefore reasonable that the exercise of the proxy access right be subject to certain minimum ownership thresholds and holding periods as well as limitations as to the number of directors nominated through proxy access.
Consistent with our case-by-case approach to evaluating management and board responsiveness to shareholders in general, Glass Lewis will review a company’s response to the submission of a shareholder proposal on proxy access, including an alternative management proposal submitted to shareholders in lieu of or in addition to the shareholder proposal, based on the specific facts and circumstances of the company and its actions. Glass Lewis will analyze the reasonableness and proportionality of the company’s response to the shareholder proposal, bearing in mind that during the 2015 proxy season the SEC’s Division of Corporation Finance will not express views on the application of Rule 14a-8(i)(9).
For alternate management proxy access proposals, Glass Lewis will evaluate whether a company’s proposal varies materially from the shareholder proposal in minimum ownership threshold, minimum holding period and maximum number of nominees to determine whether the company’s response is reasonable or would thwart the intent of the shareholder proposal (e.g. establishing a minimum ownership threshold/period significantly higher/longer than that submitted by the shareholder, thereby rendering the provision all but unusable). In addition, Glass Lewis will review the company’s performance and overall governance profile, the board’s independence, leadership, responsiveness to shareholders and oversight, the opportunities for shareholders to effect change, e.g. call a special meeting, other differences in the terms of the competing proposals, the number/type/nature of the shareholders above the proposed threshold as well as the nature of the proponent. Glass Lewis will review the rationale provided by the company regarding its reaction to the shareholder proposal, including explanation for the difference in the terms of the management proposal compared to the shareholder proposal’s terms, and in limited cases may recommend against certain directors if the management proposal varies materially from the shareholder proposal without sufficient rationale.
Glass Lewis does not have a preferred number/percentage of directors that may be nominated through the proxy access procedure as we recognize the appropriate level may vary depending on many factors. However, we believe companies should strike a balance between allowing shareholders to nominate a meaningful percentage of directors to adequately represent them while providing safeguards against a relatively small shareholder seeking to nominate a disproportionate number of directors to a level that is tantamount to gaining control of the board.
In addition to examining proposed ownership thresholds and percentage limits on proxy access nominees, in evaluating proxy access proposals submitted by shareholders Glass Lewis will review all aspects of the proposal to ensure the terms are not overly prescriptive, do not introduce minimum ownership calculation methods open to abuse or would not impose undue or unnecessary burdens on the company or the board. Similarly, Glass Lewis will closely review the terms of a management proxy access proposal to ensure that provisions would not present overly burdensome hurdles such as excessive restrictions on shareholders working as a group that would by themselves or coupled with restrictive rules regarding ownership size, length and number/percentage of directors fundamentally vitiate the proxy access right.
Spanking brand new. By popular demand, this comprehensive “Form 8-K Handbook” covers all you need to know about “real time” disclosures via Form 8-K (it’s now posted on our “Form 8-K” Practice Area). This one is a real gem – 189 pages of practical guidance.
SEC Roundtable on February 19th: Proxy Voting
For some reason, when I saw this press release from the SEC yesterday about a February 19th roundtable on proxy voting, my initial reaction was “Hasn’t this been done before? Like every 3 years?” But it winds up just part of me becoming old & jaded. There have been roundtables on proxy advisors in ’13, securities lending & short sales in ’09 and proxy voting & state corporate law in ’07 – but none of these prior roundtables tackled the two topics of this upcoming roundtable: universal ballots & how technology can improve retail investor participation in the proxy process…
Webcast: “Proxy Solicitation Tactics in M&A”
Tune in tomorrow for the DealLawyers.com webcast – “Proxy Solicitation Tactics in M&A” – to hear Okapi Partners’ Chuck Garske, Alliance Advisors’ Waheed Hassan, Managing Director and Innisfree’s Scott Winter discuss the latest techniques used to sway opinion and bring in the vote – including social media – as well as how traditional tactics have evolved.
One of the goals of Corp Fin’s “Disclosure Effectiveness” project is to modernize its filing framework, EDGAR. Not an easy thing to do, but it definitely could use a look. For example, use of multimedia in SEC filings poses challenges that requires a work-around when making a filing, as illustrated in this short video I have posted entitled “How to File Video on the SEC’s EDGAR.”
Last week, Corp Fin issued new CDI 118.01 of Regulation S-T, which addresses whether a filing can ever contain graphics or images that include non-searchable information. The answer essentially is: “yes, if the filer also presents the same information as searchable text or in a searchable table within the filing.” One small step forward for bar graphs, etc. But more relief will be needed as companies strive to make their filings more usable for investors…
Corp Fin also issued CDI 279.01 of Regulation S to address the relatively rare scenario about whether restricted securities acquired in a Rule 144 transaction (other than Rule 144(a)(3)(v)) from an issuer that was a foreign private issuer at the time of the acquisition – but is now a domestic issuer – may be resold in an offshore transaction under Rule 904 without regard Rule 905. Corp Fin’s answer is: “Yes. Rule 905 only applies to equity securities that, at the time of issuance, were those of a domestic issuer.”
First Multimedia Prospectus Ever Filed? 1985!
In response to my blog about my video regarding “how to file video on Edgar,” David Westenberg of WilmerHale informed me that in 1985, he was part of the team that handled an IPO that included the first use of multimedia. Due to its novelty at the time, it flummoxed the Corp Fin Staff and the company was told at the time by the Staff it would never again be allowed. Here’s the story from David’s IPO book:
In the 1985 IPO of Kurzweil Music Systems, the printed prospectus was polybagged with an audiocassette that contained a sound recording to demonstrate the ability of the company’s polyphonic digital synthesizer to replicate the sound quality and dynamic range of acoustic musical instruments. (In response, one state blue sky law administrator who was reviewing the offering submitted recorded comments on an audiocassette.)
Tune in tomorrow for the CompensationStandards.com webcast – “Executive Compensation Litigation: Proxy Disclosures” – to hear Pillsbury’s Sarah Good, Shearman & Sterling’s Doreen Lilienfeld and Winston & Strawn’s Mike Melbinger as they drill down on how proxy disclosure-related lawsuits are faring and what you can do to avoid them. Please print these two sets of course materials in advance:
On Friday, Glass Lewis issued a statement about how it will treat proxy access shareholder proposals through this WSJ article. The article opens with:
Proxy advisory firm Glass, Lewis & Co. is considering recommending shareholders vote against management’s preferred directors when firms ignore certain shareholder proposals on their proxies in favor of their own diluted alternatives. Glass Lewis said Friday it may recommend shareholders dissent from management-backed candidates if companies block shareholder-submitted proposals on the grounds that they “conflict” with the companies’ own proposals.
The Glass Lewis statement quoted in the article is:
Glass Lewis will evaluate the reasonableness and rationale of a company’s response to a proxy access shareholder proposal, including when the company submits an alternative access proposal and excludes the shareholder proposal, based on the differences in the terms of the proposals as well as analysis of the company, its governance, performance, board independence and responsiveness to shareholders.”
This Glass Lewis statement isn’t posted on the Glass Lewis site nor on its blog, at least not yet. As I noted in my blog last week entitled “Proxy Access Punt: Top 5 Things People Are Asking,” the reaction from the proxy advisors to the SEC not ruling on proxy access no-action requests this season should be an important factor in how companies respond to these proposals. ISS declined to comment for the WSJ article – but I imagine they will eventually come out with a statement too. And hopefully sooner rather than later…
Meanwhile, the Business Roundtable recently sent this letter to ISS and Glass Lewis, asking them not to apply their voting policies in a way that substitutes their own judgment in place of the board’s judgment and essentially asking them not to act since the SEC isn’t. And don’t forget our new “Proxy Advisors Handbook”…
Corp Fin’s No-Action Relief: 5-Business Day Debt Tender Offers Allowed
Today, January 23, 2015, the Division of Corporation Finance (the “Staff”) granted a no-action letter that was submitted on behalf of a consortium of law firms, including Gibson Dunn, whereby the Staff agreed to not recommend Enforcement action when a debt tender offer is held open for as short as 5 business days. This letter builds upon an evolving line of no-action letters granted over the past three decades that have addressed not only the overall duration of debt tender offers (typically the rules require a minimum of 20 business days), but also formula pricing mechanisms (that allow a final price to be announced several days prior to expiration).
Following an extensive dialogue with members of the bar and numerous market participants, including issuers, investment banks and institutional investors that began several years ago, the Staff is now opening up the relief that it previously limited to “investment grade” debt securities. Under the no-action letter, “non-investment” grade debt securities are now eligible to be purchased on an expedited basis. In order to take full advantage of this relief, issuers will need to disseminate their offers in a widespread manner and on an immediate basis. This should enable more security holders to quickly learn about the offer and permit holders to receive the tender consideration in a shorter timeframe. In addition, the abbreviated offering period will allow more issuers to better price their tender offers with less risk posed by fluctuating interest rates and other timing and market concerns related to the offer.
Previously, the Staff limited “abbreviated” debt tender offers (i.e., seven to ten calendar days) to “all-cash” offers seeking to purchase investment grade debt securities where the offering materials were disseminated in hard copy by expedited means such as overnight delivery. The relief granted today enables issuers to conduct their offers for both investment grade and non-investment grade debt securities on a similarly short time-frame (i.e., five business days) so long as the offer is open to “any and all” of a series of non-convertible debt securities and the issuer widely disseminates its offer notice to investors and provides them with immediate access to the offering materials.
More importantly, the letter opens up the door to five business day exchange offers, provided that the offer is exempt from the ’33 Act registration requirements and the securities sought are “Qualified Debt Securities.” This term is generally defined as “non-convertible debt securities that are identical in all material respects . . . to the debt securities that are the subject of the tender offer except for the maturity date, interest payment and record dates, redemption provisions and interest rate.” Such exchange offers would need to be limited to QIBs and/or non-U.S. persons under Regulation S, with non-eligible exchange offer participants concurrently provided with the option of receiving a fixed cash amount that reasonably approximates the value of the Qualified Debt Securities.
While there are a handful of detailed conditions that an issuer must follow in order to qualify for the relief granted today, key amongst the conditions are that all five day offers must be announced by press release through a widely disseminated news or wire service disclosing the basic terms of the offer and an active hyperlink to the instructions or documents relating to the tender of securities. The press release must be issued no later than 10:00 a.m. (Eastern time) on the first business day of the offer. Public reporting companies must furnish the press release in a Form 8-K filed no later than 12:00 p.m. on the first business day of the offer. With respect to fixed spread tender offers that are tied to a benchmark such as Treasury or LIBOR, as well as exchange offers, the exact consideration offered (including the principal amount and interest rate of any Qualified Debt Securities offered) must be disclosed no later than 2:00 p.m. on the last business day of the offer. Also, the offer may expire as early as 5:00 p.m. on the last business day, which is significantly earlier than what prior Staff interpretations allowed, which required an offer to remain open until midnight for that day to count as a full business day.
Of course, some offers are explicitly precluded from taking advantage of the relief. Most notably offers involving a consent solicitation may not be conducted on a five business day time-frame. Similarly, the relief would not extend to, among other things: partial tender offers, third-party tender offers, waterfall debt tender offers, offers made when there is a default or event of default under the indenture or other material credit agreement, when the issuer is the subject of a bankruptcy or insolvency proceeding, or offers made in anticipation of or in response to a change of control or other extraordinary transaction such as a merger or other tender offer.
Webcast: “Alan Dye on the Latest Section 16 Developments”
Tune in tomorrow for the webcast – “Alan Dye on the Latest Section 16 Developments” – to hear Alan Dye of Section16.net and Hogan Lovells discuss the most recent updates on Section 16, including new SEC Staff interpretations and Section 16(b) litigation.
Spanking brand new. By popular demand, this comprehensive “Proxy Advisors Handbook” covers all you need to know about dealing with ISS and Glass Lewis (it’s now posted on our “Proxy Advisors” Practice Area). This one is a real gem – 32 pages of practical guidance.
Virtual Annual Meetings: Flat Growth Rate From Last Year
Last year, I blogged about the huge leap in the number of companies holding virtual-only annual meetings – 99 during 2013. Here’s an excerpt from the Broadridge Independent Steering Committee newsletter about how these meetings fared in 2014:
Broadridge reported that approximately 93 companies held Virtual Shareholder Meetings (VSMs) in 2014. Of these, 46% were “hybrid”, or a combination of a physical and an on-line meeting, while 54% were on-line only. Of these meetings, 83% of the meetings used an audio broadcast only, while 17% used a video and audio broadcast, The Committee was reminded that for a company to host a VSM, the shareholders must be able to vote during the meeting, see or hear the proceedings contemporaneously, and be able to ask questions or make remarks which can be heard by other shareholders. Broadridge then described a VSM that they conducted during 2014 that experienced organized cyber-attacks and the use of disruptive technology in an attempt to “trash” the meeting. By using extensive countermeasures, Broadridge was able to repel the attacks and the client’s VSM was successfully conducted.
The Steering Committee received a report on the 2014 End-to-End Vote Confirmation Pilot Program in which 26 US corporations participated. Approximately 490,000 shareholder accounts received vote confirmation during this program. The vote confirmation process revealed that a nominal amount of shares (0.11%) were not reconciled and therefore not voted. Some members of the working group questioned the return on investment of further enhancements to the reconciling process for such a small number of un-voted shares. However, the institutional investor members of the Steering Committee expressed the importance of achieving full and precise end-to-end vote confirmation for all US corporations, regarding exactness in voting as an essential element in establishing the certainty and integrity of the shareholder voting system.
The sporadic occasion of law firms coming together to issue a white paper on a topic that could use consensus perhaps has spread to the academic world. Except the professors don’t seek a consensus view – they seek a retraction. This statement from 34 senior corporate professors urge SEC Commissioner Gallagher and Professor Grundfest to withdraw their allegations against Harvard and the Shareholder Rights Project (see my latest blog about this battle). I wonder if this banding of professors will become a new trend…
Poll Results: The Longest 10-K Filed in 2014? 2000 Pages
Recently, I ran this poll asking you to guess how many pages were in the longest Form 10-K filed during 2014 – the page count included exhibits. About 20% got the correct answer: Hertz Global Holdings’ 10-K filed on March 19th, weighing in at just under 2,000 pages (47% guessed too low; 33% too high). There are many other interesting stats about filings made last year in this blog from footnoted.com…
Legal Opinions for Registration Statements: SEC Enforcement Activity
This blog by Allen Matkins’ Keith Bishop is interesting. The blog is about a recent SEC enforcement action against a lawyer for allegedly issuing a false legal opinion in support of registration statements filed by multiple shell companies. Here’s an excerpt from the blog:
The opinion doesn’t say that the lawyer investigated and examined the issuer (as the SEC’s order alleges) – it says that she examined “such records . . . as I have deemed relevant and necessary to examine for the purposes of this opinion.” The SEC’s charging order also omits the following language from the attorney’s opinion: “In expressing this opinion I have relied, as to any questions of fact upon which my opinion is predicated, upon representations and certificates of the officers of the Company.”
This is significant because the crux of the SEC’s order appears to be that the issuers did not actually receive any consideration for the issuance of shares. In issuing “fully paid” opinions, lawyers typically rely upon certificates. See, e.g., Legal Opinions in Business Transactions, Corporations Committee of the State Bar of California Business Law Section (May 2005, rev. Oct. 2007) (“To confirm ‘full payment’ an opinion giver generally obtains an officers’ certificate to the effect that the Company has received the consideration called for by the directors in approving the issuance of the shares.”). The SEC’s order, however, does not allege that the attorney failed to obtain an officer’s certificates in support of her opinions. If she did obtain certificates, is the SEC claiming that attorneys have an obligation to investigate factual matters contained in certificates upon which the attorney expressly states that she relied? “Vor dem Gesetz steht ein Türhüter“
However, I was far more distressed to see the following statement in the SEC’s announcement because it completely misapprehends the responsibilities of lawyers in private practice: “Attorneys and auditors have a serious obligation as gatekeepers to protect the integrity of our markets, and the individuals we’ve charged in this case failed the investing public in their roles,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.”
Attorneys are most emphatically not gatekeepers – they are advisors to, and advocates for, their clients. See A Washington Fable For Our Time.
Last week, as noted in this article, the GOP passed the package of bills in HR 37 that got defeated a few weeks ago. This time, only a simple majority was needed to pass – and the House voted 271-154 to pass HR 37 (entitled the “Promoting Job Creation and Reducing Small Business Burdens Act“). Among other things, the bill includes a number of JOBS Act-like changes (see more in this MoFo memo):
– Aligns Exchange Act 12(g) threshold for savings and loan holding companies
– Clarifies the termination of EGC status
– Requires a study of XBRL requirements that may exempt XBRL for many companies
– Permits issuers to submit a summary page on Form 10-K
– Requires a Regulation S-K study intended to simplify disclosure requirements
But as noted in this blog, it’s uncertain whether this bill will pass the Senate. And then as noted in this blog, the White House issued a formal veto threat because the bill also delays part of the Volker Rule effectiveness until July 21, 2019. So the chances of this becoming law are slim at this time…
Congress: Broader Subpoena Power for Committee Chairs – Impact on the SEC?
Egads. The last thing Congress needs is more power to force government employees to come and participate in the theater known as Congressional hearings. But, as noted in this WSJ article, the number of GOP chairs empowered to issue subpoenas without holding a committee vote first is expected to double to 12 by the end of the month. Last Tuesday, the House Financial Services Committee voted to allow Chair Jeb Hensarling (R. Texas) to send a subpoena without a committee vote – so expect to see a steady line of SEC Staffers headed to the Hill as part of the GOP push to pare back Dodd-Frank, etc. Learn more about this change in this memo…
Don’t forget to take advantage of our free “Job Board” – to either post job openings or your profile if you’re looking for a new gig…
The SEC Does Not Care about Its Injunctions
David Smyth of BrooksPierce recently wrote this interesting blog entitled “The SEC Does Not Care about Its Injunctions.” Here’s an excerpt:
It won’t surprise you to learn that the U.S. Code includes this provision: “A court of the United States shall have power to punish by fine or imprisonment, or both, at its discretion, such contempt of its authority . . . as . . . [d]isobedience or resistance to its lawful writ, process, order, rule, decree, or command.” It’s right there at 18 U.S.C. § 401(3). District courts also have inherent power to enforce compliance with their orders through civil contempt. E.g., Roadway Express, Inc. v. Piper, 447 U.S. 752, 764-65 (1980).
Meanwhile, the SEC’s enforcement staff works pretty hard to seek and obtain injunctions against its defendants. They’re odd injunctions. They don’t command someone to avoid particular behavior. In addition to ordering disgorgement and civil penalties, they just order defendants to do what the securities laws already require them to do – that is, obey the law. Some federal trial and appellate courts don’t love these injunctions, finding them overly vague under Rule 65. But they are what they are, and it takes a lot of effort to get them.
So . . . True or False: Having gotten those injunctions from a federal court, the SEC doesn’t really care if defendants violate them. True! If you are such a defendant, and you agree or are compelled not to violate specific provisions of the federal securities laws – as the law itself already requires – the SEC will not seek to have you held in contempt of court if you go ahead and violate those provisions anyway. It might sue you again for new things it thinks you did, but contempt related to the old injunction? Bygones. The past is the past.
Tune in today for the always entertaining webcast – “Pat McGurn’s Forecast for 2015 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS (the proxy season expert) to recap what transpired during the 2014 proxy season and what to expect for 2015. Please print off this deck before the program. And yes, we will discuss proxy access…
Isn’t It Strange That the US Gets to Fine a French Company for Bribery Not In The US?
This DOJ announcement last month that a French company – Alstom – agreed to pay $772 million in a Foreign Corrupt Practices Act case made my head twirl. $772 million! And the DOJ brought a FCPA case against a non-US company for bribery that didn’t take place in the US! See this Forbes article for more…
Poll: How Would You Treat a Proxy Access Shareholder Proposal?
Pretend you are at a company that received a proxy access shareholder proposal – and that you’re the ultimate decision-maker about how to handle it. What would you do? Answer via this anonymous poll:
On Friday – after the SEC’s closing bell of 5:30 pm – the SEC issued a statement (and Corp Fin posted this reconsideration letter to Whole Foods), prompting me to post my first-ever nighttime blog. Now I find myself blogging on a holiday. Here are the top 5 questions that I have been fielding:
1. How Big a Deal Is This? – Certainly it’s bigger than Tiny Courtney Lee. For companies dealing with counterproposals – proxy access or otherwise – it’s huge because they have challenging decisions to make right now. Looking at the bigger picture, it could be monumental as the future of the 14a-8 process might be in play. That might be an exaggeration – and hopefully it is – but perhaps the house of cards falls down if companies begin to routinely exclude proposals without consulting the Corp Fin Staff if they comfortably believe a proposal fits an exclusion. At the end of the day, this isn’t likely to come about for a host of reasons, including the expense of litigating and the threat of SEC’s Enforcement Division getting into the fray. Not to mention earning the ire of shareholders and proxy advisors. But it is a possibility.
2. Has the SEC Ever Done This Before? – There have been a handful of Commission reversals of Corp Fin Staff positions in the shareholder proposal arena over the years. This situation isn’t that – at least, not yet. But even the SEC taking a proxy season off to ponder a reversal isn’t unprecedented either. As noted in this memo, the SEC took a similar approach in ’07 with Hewlett-Packard’s shareholder proposal after the AFSCME v. AIG court decision because the Staff hadn’t yet firmed up its views (this was the 1st proxy access shareholder proposal after the 2nd Circuit handed down its decision nullifying part of the SEC’s proxy access rule). As I recall, H-P decided to include the proposal in its proxy statement rather than exclude without no-action relief. But it’s a rare occurrence. I went back to review the Cracker Barrel saga in the early ’90s and I believe employment-related proposals under (i)(7) played out like this too, with the SEC taking a powder for a season (see pages 149-150 of my “Shareholder Proposal Handbook“).
Bear in mind that the appeals process for shareholder proposals is vague as there are no formal procedures (as covered on pages 39-41 of my Handbook). Also note that it’s unclear if this was a decision by Chair White alone or a majority of Commissioners.
3. Can Companies with Counterproposals Just Exclude Them & See If They’re Sued By the Proponent? – Companies with counterproposals appear to have 5 options:
1. Exclude the shareholder proposal but also not include their own proposal (not likely to be chosen as it completely flouts the law)
2. Exclude the shareholder proposal after seeking declaratory relief from a court & include their own proposal
3. Exclude the shareholder proposal without court relief & include their own proposal
4. Include the shareholder proposal & include their own proposal too
5. Include the shareholder proposal but not include their own proposal
Let’s deal with the 2nd & 3rd options. Here’s a paragraph from one law firm memo I saw:
“It is important to note that companies are not required to obtain no-action relief from the staff in order to exclude a proposal under Rule 14a-8. The relevant SEC rule, Rule 14a-8(j), requires only that the company “file its reasons” with the SEC no later than 80 calendar days before it files its definitive proxy statement. Furthermore, the SEC staff has expressly confirmed that “the staff’s no-action responses to Rule 14a-8(j) submissions reflect only informal views. The determinations reached in these no-action letters do not and cannot adjudicate the merits of a company’s position with respect to the proposal. Only a court such as a U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials.”
The traditional thinking has been that companies don’t exclude a shareholder proposal unless they get no-action relief from the Corp Fin Staff. But there have been cracks in that thinking in recent years as a smattering of companies have sought declaratory relief from a court instead of following the Staff process – or even going as far as excluding a proposal without seeking court relief either – so there is precedent for going forward without no-action relief. Note that Rule 14a-8 doesn’t require that a company obtain a favorable no-action response. And then there’s the recent matter of Trinity v. Wal-Mart, where the Staff granted no-action relief to the company – but the proponent then won in court to compel inclusion. In other words, the court overturned Corp Fin’s decision – so the value of obtaining a no-action response perhaps has become somewhat tainted. [As noted in this blog, that court decision currently is being appealed.]
Early rumblings from over the weekend indicate some companies may take one of the 2nd or 3rd routes. The 2nd route has litigation risk and would entail proponents incurring litigation costs if they sued to compel inclusion of their proposals. The 3rd route ensures that the company will incur litigation costs even if the proponent doesn’t. There probably isn’t much of a SEC enforcement risk as there have been law suits in recent years that illustrate how the SEC is unlikely to take action in the shareholder proposal area. That, of course, could change – but unlikely given the SEC’s statement on Friday. Both of these routes are tempting because the law (and courts unfamiliar with shareholder proposals) appear to favor companies (to fully explain this sentence would take a whole series of blogs; the counterproposal area is much more challenging than you would think – it’s not black and white like it appears on its face).
But I urge caution for companies tempted to step into the morass. Think of what your shareholders will think (and do) if the company starts excluding proposals without going through any sort of regulatory or judicial process. And perhaps even a bigger risk is what ISS and Glass Lewis do. A few years ago, as noted in this blog, Kinetic Concepts pointed to a court ruling that KBR won and said they wouldn’t include a shareholder proposal because the circumstances were similar, so they didn’t bother asking for a no-action letter. ISS then said they would recommend voting against the entire board. Kinetic capitulated and adopted the proposal. If ISS still maintains the same position, this should be determinative in my opinion. You don’t want your board under siege. The key is to engage your shareholders and see what they want you to do. Don’t exclude a shareholder proposal by only engaging with your advisors.
4. Can Companies Include the Counterproposals But Also Include Their Own Proposal To Give Shareholders an Alternative? – Yes, they can – this is option #4 from above. And it’s something that shareholders might view as a preferable alternative. There would be a few things to think about, with a primary one being what to do if both proposals garner a majority vote? In that scenario, I imagine the company proposal would be considered implemented because it’s binding and the shareholder proposal would be precatory – even if the shareholder proposal received more votes than the company proposal. But the optics of that aren’t good if the shareholder proposal majority winds up being higher than the company’s proposal majority. This is uncharted territory and needs to be thought through before you file your proxy statement as the disclosure should be fulsome about the possible voting outcomes.
Other disclosure considerations include: Would the company include a statement in opposition of the proponent’s proposal – or would it use its own proposal for that purpose (or also allow the proponent to include a statement in opposition to the company’s proposal). How would the proxy card look (and don’t forget to give Broadridge a head’s up to ensure their systems can handle that)? I presume management would put its proposal first.
5. Does the SEC’s New Position Impact Counterproposals That Aren’t Proxy-Access Related? – The answer here is “yes.” There are a bunch of other (i)(9) letters beyond proxy access (eg. special meeting and pro rata vesting proposals) and it looks like those are collateral damage for this proxy season. According to this Gibson Dunn blog, there are 49 no-action requests pending that argue for exclusion under Rule 14a-8(i)(9), 41 of which assert (i)(9) as the only basis for exclusion. All (i)(9) requests are impacted by the SEC’s statement – not just the proxy access ones – based on this language in the SEC’s statement: “we will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.” In fact, the SEC’s announcement doesn’t even mention proxy access proposals specifically…
Tomorrow’s Webcast: “Pat McGurn’s Forecast for 2015 Proxy Season”
Tune in tomorrow for the always entertaining webcast – “Pat McGurn’s Forecast for 2015 Proxy Season” – when Davis Polk’s Ning Chiu and Gunster’s Bob Lamm join Pat McGurn of ISS (the proxy season expert) to recap what transpired during the 2014 proxy season and what to expect for 2015. And yes, there will be discussion about proxy access. Please print off this deck before the program…