Here’s a follow-up note from Keir Gumbs of Covington about my blog yesterday illustrating how Corp Fin is not going back to “Square #1”: To clarify how to best interpret the H&R Block no-action letter – the letter was about amending an existing bylaw, not just the adoption of a bylaw:

RESOLVED: Shareholders of H&R Block, Inc (the “Company”) ask the board of directors (the “Board”) to adopt, and present for shareholder approval, revisions to its provisions allowing “Shareholder Nominations Included In The Corporation’s Proxy Materials” and associated bylaws to ensure the following:
1. The number of shareholder-nominated candidates eligible to appear in proxy materials should be one quarter of the directors then serving or two, whichever is greater.
2. Loaned securities should be counted toward the ownership threshold if the nominating shareholder or group represents that it has the legal right to recall those securities for voting purposes, will vote the securities at the annual meeting, and will hold those securities through the date of that meeting.
3. There should be no limitations on the number of shareholders that can aggregate their shares to achieve the required 3% ownership to be an “Eligible Shareholder.”
4. There should be no limitation on the renomination of shareholder nominees based on the number or percentage of votes received in any election

The letters last year were asking companies to adopt bylaws, which gave the companies the ability to argue that they’d implemented the proposal. The Corp Fin Staff picked this up in their response. Note for example the difference in language:

The proposal requests that the board amend its “proxy access” bylaw provisions in the manner specified in the proposal.

We are unable to conclude that H&R Block has met its burden of establishing that it may exclude the proposal under rule 14a-8(i)(10). Based on the information presented, we are unable to conclude that H&R Block’s proxy access bylaw compares favorably with the guidelines of the proposal. Accordingly, we do not believe that H&R Block may omit the proposal from its proxy materials in reliance on rule 14a-8(i)(10).

The use of the word “amend” in the description of the bylaw, the use of the phrase “burden” and “Based on the information presented” tells me that:

1. The Staff viewed this as an amend the bylaw proposal (and not an adopt a bylaw proposal like those that it confronted earlier this year; and

2. The use of the burden language signals that there is an argument that they could have made that would have been successful; the staff rarely uses burden language except to signal that the company didn’t make the right arguments.

Compare that with the language used in the letters where the Staff granted relief earlier this year:

The proposal requests that the board adopt a “proxy access” bylaw with the procedures and criteria set forth in the proposal.

There appears to be some basis for your view that Quest Diagnostics may exclude the proposal under rule 14a-8(i)(10). We note your representation that the board has adopted a proxy access bylaw that addresses the proposal’s essential objective. Accordingly, we will not recommend enforcement action to the Commission if Quest Diagnostics omits the proposal from its proxy materials in reliance on rule 14a-8(i)(10).

Commentary: I’ve been saying since earlier this year that the fight over bylaws was not ended by the letters last year. This proposal – and ones like it – may survive challenge to the extent that they are asking companies to adopt changes to bylaws that have already been adopted.

This will be especially true with respect to what I call “single issue” proposals that focus on one or more specific features of a company’s proxy access bylaw. In those cases, it seems like the Staff will find it hard to say that a bylaw has implemented a proposal where the proposal identifies a provision in that bylaw that is material and asks the company to change that provision.

ISS Survey: 2017 Policy Updates

As noted in this Gibson Dunn blog, ISS has posted its annual policy survey (here’s info about the survey). The deadline is August 29th – and the big topics include:

– Overboarded CEO-Chairs
– Director Tenure & Refreshment
– Pay-For-Performance & Non-TSR Financial Metrics
– Say-on-Frequency
– Dual-Class Companies

Transcript: “Best Efforts Offerings – Nuts & Bolts”

A long while back, we posted the transcript for our DealLawyers.com webcast: “Best Efforts Offerings – Nuts & Bolts.”

– Broc Romanek

This blog by Cooley’s Cydney Posner describes the circumstances surrounding this new no-action response given to H&R Block a few weeks ago (also see this blog from Ning Chiu). It involves a proposal from Jim McRitchie asking the company to amend its existing proxy access bylaw provisions – and the company sought to exclude the proposal under Rule 14a-8(i)(10)’s “substantially implemented” basis.

Corp Fin did not allow the exclusion – but that doesn’t necessarily mean the tactic of a company implementing their own version of proxy access to stave off a possible shareholder proposal on the topic is dead. So Corp Fin isn’t back to “Square #1,” as explained in this blog. And here’s the conclusion from Cydney’s blog:

Arguably, depending on your point of view, the practical effect of the staff’s new position may be to repudiate the prior line of 14a-8(i)(10) no-action letters issued commencing in February, even though it is not technically doing so. Whether this position will be repeated or could possibly be anomalous remains to be seen. In any event, given the proponent involved, companies that adopted versions of proxy access that McRitchie et al would view as “proxy access lite” may well be seeing new proposals for revisions to proxy access bylaws.

Audit Report Reform: The PCAOB’s Resource Page

Yesterday, the PCAOB launched this resource page dedicated solely to its re-proposal regarding audit reports. The format is friendly for mobile – but a little difficult to navigate on a laptop as the font is huge and requires much scrolling. Scrolling feels natural on a smart phone; not so much for a laptop…

Conflict Minerals: IPSA Uncertainty Likely to Carry Over to ’17

Here’s the intro from this note from Elm Sustainability Partners:

With the Securities and Exchange Commission’s decision earlier this year to forego an appeal to the US Supreme Court of NAM v. SEC, much uncertainty hangs around the requirement for filers of Form SD and Conflict Minerals Reports (CMRs) to conduct an Independent Private Sector Audit (IPSA) for filing year 2016. We expected the question to be resolved once and for all before the end of CY2016. However, that now appears doubtful.

As of last Friday, a judge had not yet been assigned to the case in the lower court that is to provide the SEC direction. And the SEC’s Flex Agenda published June 6, 2016 does not list the matter as a rule making activity currently planned by the Commission.

So for the time being, it appears the the CY2016 IPSA trigger will be identical to CY2015 – the IPSA is necessary only when an issuer voluntarily chooses to classify a product as “DRC Conflict Free” or “not DRC Conflict Free” after due diligence. It is important to understand that when the Reasonable Country of Origin (RCOI) indicates that there is no reason to believe that tin, tantalum, tungsten or gold in a product did originate – or may have originated – in the Covered Countries, only a Form SD is to be filed and no IPSA is required in such instances.

– Broc Romanek

Here’s a scary piece from Carl Hagberg’s “Shareholder Service Optimizer”:

The SEC’s Enforcement Division has issued wide-ranging subpoenas to the four largest ADR banks – and to many of their top officials, we are told – demanding detailed information going all the way back to 1997, according to our source – the chief whistleblower, who, while wanting to be anonymous for now, knows the ADR business inside and out.

The Treasury Department and the FBI are also heavily involved – investigating the use of ADR programs to launder money on a huge, global scale according to our source, who has provided investigators with a detailed “roadmap” as to exactly how it’s done. The Senate Banking Committee is following this closely too, with one staffer reportedly sending a message to regulators that “We will not be looking for millions in fines and penalties, but billions.”

All four banks have ‘lawyered up’ with four of the country’s biggest and best-known law firms, who are scrambling like mad to reach a settlement and avert disclosures that are likely to rock the banks in a major way. More class action suits will be filed soon, according to our source, revolving around foreign exchange transactions that were systematically rigged in favor of the big-four players – and the big-four ADR banks recently settled massive IRS claims for back taxes on their ill-gotten, and we guess, previously concealed gains – “for pennies on the dollar.”

And oh yes, a book – and a movie – entitled “ADRmageddon” are on the drawing boards as we write this.

For over 25 years we have been asking why there are ADRs anymore – since issuers of securities are perfectly capable of issuing ‘ordinary shares’ – and easily making any and all payouts in currency of the owners’ choosing, based on current, and well-publicized exchange rates.

The answer is a simple one: ADR banks have been charging excessive fees for buying, selling and ‘lending’ ADRs, short-changing owners on the exchange rates and ‘nicking’ the proceeds a second and sometimes a third time with fees and surcharges…because they make tons of money this way and have been blithely getting away with it….until now.

We think the upcoming revelations may well turn out to be an Armageddon for ADRs…and may do serious harm to the already tarnished reputations of several major banks – which we used to expect would deal with clients fairly, and honestly…so do stay tuned.

Our August Eminders is Posted!

We have posted the August issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek