Yesterday, General Electric filed this Form 8-K, disclosing that the company has adopted a proxy access bylaw, so that a shareholder, or a group of up to 20 shareowners, owning 3% of the company’s common stock continuously for at least 3 years to nominate directors constituting up to 20% of the board. This blog notes two other companies have done this too: HCP and CF Industries. So it looks like these companies have figured out a way to avoid placing competing proxy access proposals on the ballot, etc. – and perhaps they will now file a no-action request with Corp Fin, making a “substantially implemented” argument under Rule 14a-8(i)(10). We’ll see.
Yesterday, ISS posted 104 new FAQs – over 43 pages – on its US compensation policies, covering all sorts of topics…
Trouble in SEC Commissioner Paradise Continues: Lost Comment Letter Triggers Dissent
This WSJ article by Andrew Ackerman describes a situation that will not help the already-soured relationships among some of the SEC Commissioners (also see this Reuters article):
Shortly after the Securities and Exchange Commission voted on January 14 to finalize a batch of post-crisis rules for the multi trillion-dollar swaps market, SEC staffers realized they forgot something: they had lost a comment letter filed by a key industry group. The 20-page letter was one of several filed by the International Swaps and Derivatives Association. It outlined a range of technical points about the rules, which would establish data hubs to collect and store information on swaps trades for the portion of the market overseen by the SEC. Unfortunately, the SEC misplaced it because of a clerical error.
Because the letter was not considered by the five-member agency when it met last month to complete the rules, staff scrambled to quickly analyze it, amend the final rules and vote on the measure again this week. While the substance of the rules didn’t change, the modified version includes references to the previously-omitted letter.
For the multitrillion-dollar derivatives industry, that is good news, as the SEC on Wednesday was finally able to post the text of the final rules on its website, nearly a month after the initial vote.
But that’s not the end of the story. The SEC’s two Republican commissioners, Daniel Gallagher and Michael Piwowar, who voted against the rules in January, lodged another dissent to the amended text. They cited the fact the letter was not considered by staff in developing their original recommendation to the commission nor published on the SEC’s website for the benefit of the general public. “The innocent nature of this mistake does not alter the fact that a fully transparent public comment process is the foundation of the SEC’s rulemaking process,” the two commissioners wrote in a joint statement Wednesday. “We cannot support the publication of this modified rulemaking release, as it glosses over a significant failure of our internal processes.” ISDA, for its part, had no comment on the matter.
Yesterday, Corp Fin Director Keith Higgins delivered this interesting speech entitled “Rule 14a-8: Conflicting Proposals, Conflicting Views.” There are some really interesting things in this speech on counterproposals, etc., although there isn’t much that helps those companies grappling with proxy access shareholder proposals this proxy season (but there is some, such as #6 below). Here’s some notables from Keith’s speech (and here’s more analysis from this Cooley blog):
1. (i)(9) Rarely Invoked Before 2009: “The substantial uptick in Rule 14a-8(i)(9) activity began in 2009 with proposals involving the right of shareholders to call a special meeting of shareholders.”
2. Keith’s Disclaimer Disclaims Some of His Own Speech: “Of course, because the Division has just begun its review, all of these thoughts are very preliminary and, as mentioned in my disclaimer, do not reflect anyone’s views, in this case likely including my own. But, it’s a place to start.” [emphasis included in the speech]
3. Precatory v. Mandatory Nature of Proposals Not Historically a Factor: “The Division has not considered the precatory/mandatory distinction as factoring into our view of Rule 14a-8(i)(9) conflicts. There are two reasons for this. First, virtually all shareholder proposals are precatory. Applying the precatory/mandatory distinction to conclude there is no conflict would make the exclusion applicable to a small number of situations. Perhaps the exclusion was meant to be narrow; the regulatory history is not clear. Second, even accepting that the vote on the shareholder proposal would be a data point for the directors to consider, the concern was that the data, taken as a whole, may be ambiguous for the directors to interpret and, just as importantly, that it would make it difficult for shareholders to decide how to send their message.”
4. Proxy Rules Could Be Structural Obstacle to Dealing With Competing Proposals: “As we do our review, we may consider whether there may be a structural limitation in our current proxy rules that makes it difficult to have a side-by-side comparison. Exchange Act Rule 14a-4(b)(1) requires that a form of proxy permit a shareholder to vote for or against or to abstain from voting on each separate matter other than the election of directors or say-on-frequency votes. Putting the 10% and the 25% proposals side-by-side and asking shareholders to choose which one they prefer may provide the board with better information than full “for” and “against” votes on conflicting proposals, although it still would not accommodate the preferences of shareholders who either want a different threshold or do not believe that shareholders should be entitled to call a special meeting at all. But should Rule 14a-4(b) be amended to permit more flexibility than a thumbs up or thumbs down approach?”
5. Concerns Over Company Motives: “The concern about management’s motives goes further. We have heard the concern expressed that management could continue year after year to come up with a slightly different proposal for the purpose of keeping the shareholder proposal from ever making it into the proxy materials. While we have not yet seen this concern materialize, it is certainly not beyond the realm of possibility. Should the Commission consider addressing this concern by, for example, amending Rule 14a-8(i)(9) so that the exclusion is not available to a company two years in a row for the same shareholder proposal or perhaps another shareholder proposal on the same subject matter?”
6. Need for More Disclosure When Companies Exclude Shareholder Proposals?: “Should the Commission, for example, require that when management uses Rule 14a-8(i)(9) to exclude a shareholder proposal, it needs to include in the proxy statement something akin to a “Background of the Merger” discussion that appears in a merger proxy statement to explain the circumstances that led it to present its proposal, a discussion of alternatives and management’s rationale for crafting its proposal as it did? Another approach might be to require the company to allow the shareholder proponent whose proposal was excluded to include a statement in opposition, much as management does when it is required to include a shareholder proposal in the proxy.”
7. Reminders About False & Misleading Arguments: “To be clear, we did not abdicate our responsibility over shareholder proposals that may be materially false or misleading. From our perspective, there are three threshold questions we consider when asked to exclude a proposal or supporting statement as false or misleading. First, is it really a “fact”? Sometimes, we are asked to exclude based on inferences and opinions. These generally seem like issues best addressed in the opposition statement. Second, is it false or misleading? The Commission’s rules make clear that the company has the burden of demonstrating that it is entitled to exclude a proposal. So the staff is looking for objective, demonstrable evidence of falsity. Finally, is it “material”?”
I received quite a few emails from members expressing surprise that Keith would address this topic in the midst of the SEC’s review of how it will apply (i)(9) going forward. I find it quite useful – both for its analysis of the issues, as well as a way to publicize the fact that the Staff is soliciting comments on (i)(9) as part of its review (even though it’s not obligated to do so). This comment solicitation gives the speech the feel of a proposing release, which may be prudent given the Chamber’s recent letter expressing concerns about the Staff not taking a view on the possible exclusion of proxy access shareholder proposals during this proxy season…
Don’t forget our upcoming webcast: “Proxy Access: The Halftime Show.” And don’t forget to tune in today for the webcast – “Conflict Minerals: Tackling Your Next Form SD” – to hear our own Dave Lynn of Morrison & Foerster, Schulte Roth’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2015.
Yesterday, the SEC posted this proposing release on hedging disclosure, a rulemaking dictated by Section 955 of Dodd-Frank. It came out of the blue, based on seriatim action taken by the Commissioners – not at an open Commission meeting. Commissioners Gallagher & Piwowar supported getting the proposal out of the gate, but they issued this joint statement noting there are aspects of the proposal that they have concerns about (meanwhile, Commissioner Aguilar issued this statement supporting the proposal). That might be one of the reasons why the proposing release is loaded with specific requests for comments, running on longer than the explanation of the proposed rule! Anyways, this Cooley blog summarizes the rule proposal, as well as the novelty of Commissioners issuing written statements on a proposal. And here’s a blog from Mark Borges.
There is a 60-day comment period. And we’re posting memos in our “Hedging” Practice Area. It’s hard to predict whether this means that we’ll soon see action on the other “Four Horsemen” rulemakings left from Dodd-Frank, including adoption of the pay ratio rules…
Webcast: “Conflict Minerals: Tackling Your Next Form SD”
Tune in tomorrow for the webcast – “Conflict Minerals: Tackling Your Next Form SD” – to hear our own Dave Lynn of Morrison & Foerster, Schulte Roth’s Michael Littenberg, Elm Sustainability Partners’ Lawrence Heim and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare your Form SD for 2015.
Elm Sustainability Partners’ Lawrence Heim is seeing a good deal of interest in IPSAs and mock IPSAs for both 2014 and 2015. However, even though the SEC considers IPSAs to be a “non-audit service” for purposes of Regulation S-X, auditor independence standards are still applicable – this article should be read before making any decisions about engaging an audit firm for either…
Meanwhile, this blog notes the point/counterpoint of the reputational risks & human rights implications of the conflict minerals rule…
On Friday – after a battle lasting 3 years! – the SEC announced that the China-based affiliates of the Big 4 (Deloitte Touche Tohmatsu, Ernst & Young, KPMG and PwC) settled SEC administrative charges by each paying $500k and admitting that prior to the commencement of the agency’s enforcement proceedings, they didn’t provide the SEC with the work papers for audits conducted for US companies. As noted in this Reuters article, the settlement also lays out the process that the firms must follow for future record requests and also details the consequences that may face if they fail to follow it.
It’s amazing how long this battle dragged out – an administrative law judge from the SEC suspended the Big 4’Chinese affiliates over a year ago. And bear in mind that WSJ reported last June that settlement talks had commenced. Not easy to settle with four large organizations based overseas…
Meanwhile, as noted in this blog, the SEC’s concept release on audit committees is expected as early as next month…
SEC Grants Second Bad Actor Waiver With Conditions: Redux
Recently, I blogged about the SEC granting its second bad actor waiver with conditions – to Oppenheimer & Co. Since then, there has been some backlash starting off with this dissent from SEC Commissioners Aguilar and Stein (which was issued about a week after the SEC’s order) and more, as noted in this blog – and this WSJ article and DealBook column…
SEC Approves PCAOB Budget
Last week, the SEC approved the 2015 budget of the PCAOB and the related annual accounting support fee.
Notes from San Diego
Mike Gettelman has been dribbling out notes from the recent Northwestern securities conference in San Diego in his blog, with his unique take on many topics including fee-shifting and forum selection bylaws, economic shareholder activism, financial advisor liability, Section 162(m) disclosure, the disclosure reform project, crowdfunding alternatives available now, class action claims administration, admissions in SEC Enforcement actions, accounting stuff, and numerous gems from the lips of Delaware CJ Strine. Don’t forget to sign up on Mike’s blog to get future entries pushed to you…
Early Bird Rates – Act by April 24th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by April 24th to take advantage of the 33% discount.
Pay Ratio: Petition Hits 36k
A month ago, I blogged about how I would be shocked if this Politico article was correct when it predicted that the SEC would finalize its pay ratio rules by mid-January. I’m still laughing about that one! Anyways, check out this online petition from Credo Action, which has hit 36,000 so far…
Speaking of petitions, over a million folks have written in to the SEC in support of the agency conducting rulemaking in the “disclosure of corporate political spending” area. It’s remarkable because no one ever writes in about a mere petition of rulemaking. The SEC is not obligated to consider – or act – on a rulemaking petition…
Transcript: “Pat McGurn’s Forecast for 2015 Proxy Season”
We have just posted the transcript for the webcast: “Pat McGurn’s Forecast for 2015 Proxy Season.”
The answer is: “I don’t know.” Those companies (and their advisors) with proxy access shareholder proposals are still scrambling – particularly since we still have no guidance from ISS. My guess – and it’s a total guess – is that we will see different types of reactions. And I do believe that proxy access shareholder proposals that make it onto the ballot will garner significant shareholder support. In this blog, Davis Polk’s Ning Chiu notes that “a proxy access proposal submitted by John Harrington received 53.46% of the votes cast in favor at Monsanto’s annual meeting on Friday. In a press release, the company indicated that the board will take the vote into consideration, including the discussions they have had with shareholders regarding the evolving role of proxy access, and will also seek additional shareholder input.” Given the madhouse, I just calendared a webcast for March 24th: “Proxy Access: The Halftime Show.”
Meanwhile, CII has written this letter in response to the Business Roundtable letter to ISS and Glass Lewis. And in our “Q&A Forum” yesterday, I answered a question about whether there was a list of companies that have received proxy access shareholder proposals (#8329)…
Section 16: SEC Posts New Forms 3 & 4 – But They Expire Soon
Here’s some Section 16 trivia. The SEC recently updated the Form 3 and Form 4 posted on its website – but the expiration date on those forms changed only from December 31, 2014 to February 28, 2015 (the expire date is listed in the upper right corner in a box). Alan Dye & I have no idea why it’s just a two-month extension – perhaps the SEC (or the OMB, which is the federal agency which approves the forms) can extend automatically for up to two months while a re-approval application is pending. It will be interesting to see what happens after February 28th. Anyways, it has no real world impact because the SEC accepts Section 16 filings on expired forms – but it’s definitely an oddity…
Note that the SEC’s Form 5 has an April ’17 expiration date…
Just Launched: The “Section16.net Listserv”
At the recent “Section 16 Workshop” in DC, Alan Dye & I came up with the idea of creating a Section 16 listserv because the audience was so interactive. That new listserv is now up live on Section16.net (for Section16.net members only) and I encourage you to sign up so that you can gain the benefit of the knowledge of your peers. It’s simple to join – just input your email address and click the “subscribe” button. Here are FAQs about the listserv, including instructions about how to email to group and how to unsubscribe…
Transcript: “Alan Dye on the Latest Section 16 Developments”
We have posted the transcript for our recent Section16.net webcast: “Alan Dye on the Latest Section 16 Developments.”
“Form 5” Poll: What Keeps You Up At Night?
For companies whose fiscal year ends December 31, 2014, the due date for Form 5 is Tuesday, February 17th. So you have a few extra days to file this year, as Valentine’s Day falls on a Saturday (two reminders in one blog!), followed by a Monday holiday – and Rule 0-3 under the Exchange Date allows you to push the due date forward accordingly. Take a moment to participate in this anonymous poll:
In this blog, Cooley’s Cydney Posner does a nice job of analyzing a recent 7th Circuit case – Greengrass v. International Monetary Systems – that illustrates the potential problems of disclosing the name of an employee in your legal proceedings disclosure. Here’s an excerpt from Cydney’s blog:
Disclosure in SEC filings is usually considered to be protective in most cases, but disclosures regarding litigation can often be something of a mixed bag. For example, disclosures might result in indirectly revealing the company’s assessment of the viability of its own defense or the extent of potential loss, especially under the GAAP requirements. This particular case presents an instance where the disclosure itself triggered further claims because of the nature of the disclosure, the inconsistent presentation and the alleged harm inflicted on the plaintiff, which may or may not ultimately prove to have been retaliatory.
Reading this case, a public company might feel caught between Scylla and Charybdis: what to do if SEC rules require disclosure of the principal parties but the company could face charges of retaliation if it discloses the litigating employees’ identities? Once a case is determined by the company to be material under Item 103, as noted above, that Item requires disclosure of the principal parties, and it seems unfair to impose these consequences on a company that consistently complies with the mandate of the rule. The Court in this case appeared to place a lot of weight on the inconsistencies and the “suspicious” timing of the company’s disclosures, not to mention the incriminating email traffic from members of management. Describing her charges as “meritless” probably didn’t help either; stating instead that the company “denies the charges” or just indicating that the company intends to defend itself vigorously, without more, might have been more palatable.
If the company concludes that a case involving an employee is not material under Item 103, the company might determine that it should still be disclosed under general materiality principles or even on a purely voluntary basis. Neither disclosure would involve specific mandatory requirements, including naming the plaintiff, and, in determining whether to disclose the names of employee-plaintiffs, the company should take into account the risks associated with this case as well as the importance (or lack thereof) to investors of disclosing an employee-plaintiff’s identity. If disclosure is elected, the company should ensure consistency in the nature and extent of that disclosure.
Interestingly, among a number of companies, even for mandatory disclosure under Item 103, there appears to be a practice in class actions to describe the class but not to disclose named plaintiffs. Given the potential adverse consequences to employees resulting from public disclosure of their involvement in cases against their employers, perhaps the SEC might consider interpretive guidance that would allow omission of employee names in these cases. Certainly, from an investor standpoint, as in class actions, the generic description of “employee” or “former employee” would usually provide as much insight into the case as the actual name of the employee-plaintiff.
And here’s a blog about this case from some employment lawyers at Dorsey Whitney entitled “Naming Names in SEC Filings?” – it’s interesting to compare how employment lawyers look at this case and the related disclosure obligations…
Delaware Chancery Rejects Delaware Choice of Law
In this blog, Keith Bishop describes the latest case in the battle of choice of laws. Here’s the intro paragraph:
The public policies of California and Delaware both espouse freedom. Ironically, the freedoms that they espouse are antithetical to each other. California embraces the freedom of people to pursue any lawful and employment of his or her choice. Hence, Section 16600 of the California Business & Professions Code declares, with narrow exceptions, covenants not to compete unenforceable. Delaware, in contrast, embraces the principle of freedom of contract, even with respect to reasonable covenants not to compete. The fundamental antagonism between these freedoms is evidenced by Vice Chancellor Sam Glasscock III’s recent ruling in Ascension Ins. Holdings, LLC v. Underwood, 2015 Del. Ch. LEXIS 19 (Jan. 28, 2015).
Webcast: “Rural/Metro & the Role of Financial Advisors”
Tune in tomorrow for the DealLawyers.com webcast – “Rural/Metro & the Role of Financial Advisors” – to hear Steve Haas of Hunton & Williams, Kevin Miller of Alston & Bird and Blake Rohrbacher of Richards Layton discuss a whole host of topics, including the viability of claims for aiding and abetting breaches of fiduciary duty in connection with M&A transactions as well as the widely-talked about paper from Delaware Chief Justice Leo Strine about “documenting the deal.”
Glass Lewis is pleased to announce enhancements to the performance metrics used in its US and Canadian pay-for-performance (P4P) models, as well as its US equity plan model. These changes will go live on February 2, 2015. Glass Lewis’ P4P models evaluate the linkage between pay and performance at companies versus their peers. Weighted-average executive compensation percentiles and weighted-average performance percentiles are reviewed to determine how well a company aligns its executive pay with its corporate performance. When calculating the performance percentiles, the current models evaluate the following five metrics: Change in Operating Cash Flow, Change in Earnings Per Share, Total Shareholder Return, Return on Equity, and Return on Assets.
Glass Lewis has determined that changing some of the performance metrics for certain industries will better reflect how the operating performance of companies in these industries is measured and evaluated by management, boards, and industry analysts. Along those lines, Glass Lewis will:
– Replace Change in Operating Cash Flow with Tangible Book Value Per Share Growth for companies in the Bank, Diversified Financials, and Insurance sectors
– Replace Change in Operating Cash Flow with Growth in Funds From Operations for REITs, with the exception of Mortgage and Specialized REITs.
In order to be consistent with these updates, Glass Lewis will also make the same changes to the performance metrics used in its US equity plan model. Glass Lewis has back-tested these changes in the P4P and equity plan models. The results indicate that there will be minimal impact on the grades generated by the P4P models, as well as minimal impact on the pass/fail assessments generated by the equity plan model.
SEC Budget: Obama Seeks 15% Raise to $1.7 Billion
According to this WSJ article (and this Bloomberg article), President Obama submitted his budget yesterday for the SEC. Here’s the WSJ’s opening paragraph:
The Securities and Exchange Commission would see its funding levels rise about $200 million to $1.7 billion under the White House’s 2016 budget blueprint, according to people familiar with the matter. The Obama administration is set to unveil the proposal Monday. The plan would fund the federal government for the fiscal year beginning Oct. 1. The blueprint is widely seen as an opening bid for budget negotiations with congressional Republicans and is unlikely to be enacted without tweaks. It marks the second consecutive year the White House has sought $1.7 billion in funding for the SEC. For the current fiscal year, lawmakers agreed to boost the agency’s funding by $150 million—$250 million less than what the White House sought—as part of a last-minute federal spending plan enacted in December.
Here’s what SEC Chair White said in a statement:
The FY 2016 $1.7 billion budget request is a 15 percent increase above the enacted level for FY 2015. The request would allow the SEC to hire an additional 431 staff for key priorities, including 225 examination staff, 93 enforcement personnel and 37 positions to enhance market oversight. The SEC’s funding comes from securities transaction fees and does not impact the federal deficit or the funding available for other agencies.
If you’re a “gotta know everything about the budget” kind of person, this “What’s New” page on the SEC’s site has no less than 7 documents related to the SEC’s proposed budget, including this “budget request by program” with Corp Fin’s stuff on pages 73-74. Corp Fin seeks 7 new positions next year – and reviewed 5100 filings last year (the same number forecast for this year & next)…
Recorded Conversations with In-House Counsel Permitted as Evidence in FCPA Trial
This Akin Gump blog would give any lawyer the chills. Here’s the intro:
Earlier this month, a federal judge in New Jersey held that a secretly recorded conversation between a former chief executive officer and his general counsel may be used by prosecutors as evidence against the former executive in a bribery trial. The ruling serves as an important reminder regarding the limitations of the attorney-client privilege.
Here are the survey results from our recent poll about whistleblower policies & procedures:
1. Over the last year, when it comes to our whistleblower policy, our company:
– Has changed existing policies to address the latest whistleblower developments – 12%
– Hasn’t yet, but intends to change existing policies within the next year – 24%
– Not sure yet if will change existing policies – 24%
– Has decided not to change existing policies – 41%
2. The board committee charged with consideration of the SEC’s whistleblower rules is:
– Audit Committee – 94%
– Corporate Governance Committee – 6%
– Risk Committee – 0%
– Compliance Committee – 0%
– Compensation Committee – 0%
– Board as a whole – 0%
3. Our company:
– Has provided incentives for whistleblowers to report internally first – 0%
– Hasn’t yet, but intends to provide incentives for whistleblowers to report internally first – 6%
– Has decided to not provide incentives for whistleblowers to report internally first – 94%
4. Our company:
– Has created a system to alert employees of the benefits of reporting internally (eg. sign updated employee handbook, fill out compliance questionnaires) – 28%
– Hasn’t yet, but intends to create a system to alert employees of the benefits of reporting internally – 6%
– Has decided not to create a system to alert employees of the benefits of reporting internally – 67%
5. Since the SEC adopted its whistleblower rules, our company has had:
– More whistleblower claims reported internally – 0%
– Same number of whistleblower claims reported internally – 100%
– Fewer whistleblower claims reported internally – 0%
In this podcast, Russell Maher of QDiligence explains how electronically organizing your D&O questionnaires provides benefits, including:
– What does QDiligence do?
– What is the process to move a company’s D&O questionnaires online?
– Companies often have questionnaires that are personalized and have attachments and appendices. How do those work online?
– Can companies pre-populate the responses? If they do pre-populate, how do they know what they changed?
– Can companies print the questionnaires that are electronic?
Our February Eminders is Posted!
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