Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Here’s something that Mike Melbinger blogged recently on CompensationStandards.com:
I don’t recall that any court has decided in favor of plaintiffs alleging that the payment of executive compensation was a breach of fiduciary duty for a waste of corporate assets – until now. The reason is that [in the face of the business judgment rule] corporate waste is very difficult to prove. But last week, the Delaware Chancery Court allowed plaintiffs to continue with their shareholder derivative claims against the board of CBS Corporation in Feuer v. Redstone.
This court has commented many times on the difficulty of pleading a viable claim for waste against a corporate director under our law. But the particularized allegations of the complaint here depict an extreme factual scenario—one sufficiently severe so as to excuse plaintiff from having to make a demand on the CBS board of directors to press claims concerning certain (but not all) of the challenged payments, and to permit plaintiff to take discovery so that an evidentiary record may be developed before the court adjudicates whether those payments were made in accordance with the directors’ fiduciary duties.
Two full pages of the opinion are devoted to listing facts and information “demonstrating that it should have been abundantly clear to the members of the Board—from their attendance at Board meetings, press publicity, and other interactions with the Company—that far from being “actively engaged” in the CBS’s affairs, Redstone was providing no meaningful services to the Company beginning at some point in the latter part of 2014 or in 2015.” During and after that period, CBS paid Mr. Redstone more than $13 million, most of it in performance bonuses.
Note that this is far from a complete victory for plaintiffs. The decision only allows the plaintiffs to continue to trial with their lawsuit. But no allegations of compensation being corporate waste have made it this far in more than 30 years.
Happy Anniversary Baby! 16 Years of Blogging & Counting
Today marks 16 years of my blither & bother on this blog (note the DealLawyers.com Blog is nearly 15 years old – not shabby!). It’s one time of the year that I feel entitled to toot my own horn – as it takes stamina & boldness to blog for so long. A hearty “thanks” to all those that read this blog for putting up with my personality. I’m sure I won’t get more refined with age. So glad to now have John & Liz blogging with me!
Did you know that this is one of the oldest law blogs out there? When I started, nearly all of the few other lawyers that were blogging covered the marketing aspects of blogging – not substantive law. And since those folks wrote the “lists” that covered which lawyers were blogging, they frequently overlooked this blog because they tended to focus on marketing, not law.
Plus, the list compilers tended to be solo or small firm practitioners – they were nowhere near the securities law space. Bob Ambrogi compiled this list in 2007 of the first law bloggers – if he had placed us on the list, we would be the 8th blog to be started. And now we are the third oldest – only two of the 7 blogs started before us are still regularly active.
This blog still is overlooked by those handing out law blogging accolades. Our blog has long dropped out of the ABA’s Blawg 100, even when this blog won the popularity contest the first year they allowed the public to vote (they discontinued public voting soon thereafter). The ABA’s Blawg 100 list rarely includes securities law blogs – and their “Hall of Fame” doesn’t contain a single blog devoted to securities law…
Sexual Misconduct Claims: D&O Policy Implications
This D&O Diary blog delves into how D&O insurance policies might be implicated if claims are made against a company’s directors or senior managers for sexual harassment…
Is it me? Or is “Regulation Best Interest” a dorky name for a SEC regulation? #nerdy. This is something I tweeted when the SEC proposed its new broker regulation about providing investment advice – and nice to see Matt Levine link to my tweet in his Bloomberg article…
On the “Mentor Blog,” I recently blogged about the top of “who administers political spending policies?” – and I posted five examples. Following up on that, we have now posted a “Quick Survey on Political Spending Oversight.” Thanks to Teco Energy’s David Schwartz for the idea!
In addition, a member posted this query in our “Q&A Forum” (#9416): “Enjoyed the “Mentor Blog” on this topic a few days ago. How does the board ensure it doesn’t find itself in an embarrassing situation, like some companies have—where contributions have been made to candidates who end up supporting positions that are in conflict with the company’s mission?” John provided this simple answer:
If you’re worried about that, don’t give. If you trust a politician not to betray you, you deserve what you get.
– Industrial sector spiked: The Industrial sector saw 22 percent of traditional accounting case filings in 2017, double the historical average. The Disclosure Dollar Loss (DDL) for accounting case filings in this sector was the largest among all sectors for the first time in the last 10 years.
– Restatements declined: For the third consecutive year, the number of traditional accounting case filings involving restatements declined. The number of 2017 restatement cases was 35 percent lower than the historical average; restatement case DDL was 49 percent lower than the historical average.
– No auditor defendants named: There were no auditor defendants named in traditional accounting case filings during 2017—the first year that has happened since enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).
– Total settlement value declined: The total settlement value attributable to accounting cases was the lowest since 1999, with only two accounting-related settlements reaching $100 million or more.
– Larger defendant firms observed as settlement size shrinks: Despite smaller settlement sizes, issuer defendants involved in accounting settlements were the largest observed over the past five years.
– Restatement cases garnered higher settlements: Cases involving financial statement restatements settled for substantially higher amounts than non-accounting cases.
Yesterday, the SEC issued this 71-page proposing release to amend its auditor independence rules to refocus the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of its client at any time during an audit or professional engagement period.
The proposed amendments would focus the analysis solely on beneficial ownership rather than on both record & beneficial ownership; replace the existing 10% bright-line shareholder ownership test with a “significant influence” test; (3) add a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the client’s equity securities; and (4) amend the definition of “audit client” for a fund under audit to exclude funds that otherwise would be considered affiliates of the client. See more in this Cooley blog…
As I recently blogged, the SEC Staff has long been able to modify – or – waive disclosure requirements in response to requests to modify what’s required for the financials in a SEC filing – but over the past few months, the Staff has announced that it’s now more amenable to grant Rule 3-13 requests than it was before. This is part of SEC Chair Clayton’s goal of removing unnecessary barriers to going public, etc.
Rumor has it that the Wall Street Journal has made a FOIA request for all 3-13 correspondence with the SEC Staff. That’s pretty wild if true! I hope this doesn’t lead to an article that distorts the purpose of these requests. It will be interesting to see how this plays out…
How Companies Grow Their In-House Teams
One of our more popular “sample documents” is our deck that in-house folks can use to argue for more resources in their department. Along these lines, a long while back, Splunk’s Scott Morgan sent me this note about how different industries might experience varying levels of growth in their in-house teams:
Over the past decade, I have seen a significant increase in the size and sophistication of in-house teams at technology companies. My experience is that companies are increasingly bringing specialty practices such as privacy/data security, M&A, securities/governance, benefits, technology transactions/products and IP/patents in-house. These experts are typically from big firms – so it’s the same expertise at a fraction of the cost. And there the work is closer to the business so the amount of firm-to-practice translation is significantly reduced in these areas. We still have a big need for firms (big and small) in certain subject matters, in larger projects and litigation, for benchmarking across companies and in foreign jurisdictions.
– A Small World After All: R&W Insurance in Cross-Border M&A
– Maximizing Value & Minimizing Risks in Carve-Outs: Seller’s Pre-Sale Preparation
– Director’s Abstention on Merger Vote Deemed Material to Shareholders
– LLCs: The Limits of the Implied Covenant of Good Faith
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
We have found that most companies are arming their managers with FAQs rather than delivering a set of FAQs to employees directly. Obviously, you’ll need to modify our sample FAQs to best fit your circumstances…
By the way, this pay ratio article about Wal-Mart was trending #1 on my Facebook feed a few days ago. The pay ratio extremes so far: Kinder Morgan – 3.7; Mattel – 4987 (supplemental ratio excluding one time awards of $22 million lowers it to 1527)…
Pay Ratio: What the S&P Companies Have Disclosed So Far
Here’s something that I blogged last week on CompensationStandards.com: As reflected in this deck, Deloitte Consulting just completed a review of 293 “S&P 500” companies that have filed their proxies as of April 10th. Here are the highlights:
– Median pay ratio is 153:1
– Median employee’s total annual compensation $70,867
– 21% of companies disclose information about the median employee’s employment status, geographic location and/or role
– Pay ratio and median employee’s total annual compensation varied significantly across industries. As expected, consumer discretionary (i.e., “retail”) had the highest median ratio of 396x and lowest median employee compensation at $32k while utilities had the lowest median ratio of 96x and second highest median employee compensation at $122k)
– Larger companies (in terms of revenue) had higher median ratios than smaller companies; however, the median employee’s pay did not correlate with revenue size
– 51% of companies chose a date other than the fiscal year end as the measurement date
– CACM used to identify the median employee varied significantly, with total cash compensation used by 32%, base pay and wages 23%, W-2 wages 20% and total direct compensation at 18%
– Only 8% used statistical sampling
– Only one company adjusted pay for the cost-of-living (CEO lives in Switzerland)
– 16% of companies added health benefits to total annual compensation
– 81% of companies placed the pay ratio disclosure immediately following the termination tables, while only 4% included it in the CD&A
Here’s something that I blogged yesterday on CompensationStandards.com: Since the SEC provided companies with some flexibility, there has been a debate as to where a pay ratio should be disclosed within a proxy statement – we cover this starting on page 72 of our “Pay Ratio” chapter in our Treatise. But where within the proxy pales in comparison to whether a company highlights its pay ratio on its online proxy or “Investor Relations” page.
That’s why I found what United Techologies did to be so notable – they broke out the disclosure of its pay ratio onto a separate page on its site. If you scroll down on the home page of the company’s interactive proxy, you’ll see a tab for “CEO Pay Ratio” in the 3rd row, two spots in from the left. Kudos…
As Liz foretold in a recent blog, the auditor ratification vote at yesterday’s annual meeting for General Electric is the big story of this proxy season. While shareholders at GE ratified KPMG for another year, as noted in this WSJ article and Cooley blog, there was a “no” vote of 35%.
That’s absolutely unprecedented in my lifetime. Auditors never get less than 90% support – and typically receive favorable votes in the mid-to-high 90s. Last year, 94% of GE shareholders voted in favor of KPMG (which has been GE’s auditor for 109 years). Maybe auditor rotation is here to stay…
By the way, Wells Fargo’s annual meeting also was yesterday. This article portrays it as quite explosive…
Poll: Auditor Rotation After Specified Period of Years?
Let’s presume you’re in favor of an arbitrary cut-off for auditors serving at a single client – most of the more established companies have had their auditors for well in excess of 50 years – what period of time would you consider appropriate? Please participate in this anonymous poll:
surveys & polls
More on “Proxy Season Blog”
We continue to post new items daily on our blog – “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:
– Length of Pay Disclosures? Growth, But Not Much
– Bank of America’s Proxy: A Few Notables
– Political Spending Proposals: “First Come, First Served”
– Voting Results for Last Half of ’17
– Online Movie Ratings: Men Drive Them?
Recently, NIST released an updated cybersecurity framework. This popular framework is entitled “Version 1.1” rather than the “2.0” that some have been calling it (including us) when the proposal was released last year.
The updated Framework, entitled Version 1.1, is intended to clarify and refine (rather than replace) NIST’s original 2014 Cybersecurity Framework, Version 1.0, and builds on the original version’s five core cybersecurity functions—Identify, Protect, Detect, Respond, and Recover—and tiered implementation system. Instead of a “one-size-fits-all” approach, the Framework continues to be a flexible platform that can be customized to address the particular cybersecurity risks faced by any company.
Of broader import, the updated Framework encourages companies to integrate cybersecurity objectives into strategic planning and governance structures and to ensure that cybersecurity is a central part of overall risk management. In terms of other specific changes, Version 1.1 provides new guidance on how to use the Framework to conduct self-assessments of internal and third-party cybersecurity risks and mitigation strategies, includes an expanded discussion of how to manage cyber risks associated with third parties and supply chains, advances new standards for authentication and identity proofing protocols, and addresses how to apply the Framework to a wide range of contexts, such as industrial controls, the use of off-the-shelf software, and the Internet of Things.
Cyber Threats Keeping Investors Up At Night?
Recently, PwC completed its “2018 Global Investor Survey” – reflecting insights from almost 700 investor professionals across the world. PwC’s goal was to compare these views to the results of their earlier CEO survey. One interesting point is that investors don’t seem to share CEO anxiety regarding over-regulation, availability of key skills and tax burdens – but both groups worry about cyber threats & geopolitical uncertainty. Here’s some other key findings:
– Investors are more confident about the global outlook than they were last year: 54% think global economic growth will improve over the next 12 months – versus 45% in 2017. But investors are cautious about the longer term – they think companies should aim to grow organically and reduce costs.
– Geopolitical uncertainty, cyber threats and the speed of technological change are top concerns for investors: Populism and protectionism ranked next among investors’ concerns.
– Investors think the biggest challenge facing companies is the pressure to focus on short term: But investors are also more likely to view “declining trust” as an issue, compared to CEOs.
– Investors think cybersecurity should be a top priority for building trust with customers: 64% of investors think that companies should be investing more heavily in cybersecurity protection.
Despite the SEC’s recent cybersecurity guidance, the creation of its “Cyber Unit” and public statements that more cyber enforcement actions are likely, a new study from NYU & Cornerstone Research found that enforcement activity generally declined last year. This McGuireWoods blog explores this more:
The timing of the decline suggests that the Trump Administration may be reining in regulatory enforcement. However, despite the empirical slow down, Stephanie Avakian and Steven Peikin, the co-directors of the SEC’s enforcement divisions, deny that there has been any directive from the Trump Administration to slow the enforcement arm of the SEC. In fact, during the annual American Bar Association’s white collar conference, the co-directors cautioned that more enforcement actions—especially related to cybersecurity—may be on the horizon. Indeed, the SEC’s new cybersecurity guidelines coupled with the creation of the SEC Cyber Unit at the end of fiscal 2017 will give the SEC new tools to combat cyber related misconduct in 2018.
Farewell to Lynn Stout
I’m sad to note that Professor Lynn Stout has passed away. Here’s a remembrance from Cornell.
You know you’re old when you’re writing a book with career advice. John & I have wrapped up our latest paperback – “101 Pro Tips – Career Advice for the Ages” Paperback. Here’s the “Table of Contents.” It’s free for members of TheCorporateCounsel.net (but it does cost $20 in shipping & handling).
This book is designed for fairly young lawyers – both in law firms and in companies. It’s written in an “easy to read” style, complete with some stories & anecdotes to make it interesting. A fairly unique offering in our field. This is a unique offering – and I’m pretty happy about how it came out. Members can request it now.
A Picture Says a Thousand Words
So this is what John & I feel like giving career advice:
Like it did back in 2012, Broadridge recently convened a group of 17 different stakeholders to look at the state of virtual annual meetings – both “virtual only” and hybrid. The end product is this set of “Principles & Best Practices for Virtual Annual Meetings.” Like before, the report’s conclusions are not that profound – but can be useful to help guide those considering virtual meetings (and it includes a useful appendix that summarizes each state’s laws governing electronic participation in shareholder meetings).
Shareholder Nominations: A Second Bite at the Apple?
Now that we are midway into the 2018 proxy season, most deadlines for shareholder submissions of director nominations for upcoming annual meetings have come and gone. Nevertheless, shareholder activists who have missed a nomination deadline for whatever reason should be aware that in certain circumstances they may have a second bite at the apple.
Where a company experiences a material change in circumstances set in motion by its board of directors after the passing of the nomination deadline, the shareholder may have grounds to compel the company to reopen the nomination window if the shareholder can demonstrate that the change in circumstances would have been material to its decision whether or not to nominate directors had it been known at such time. There is already case law in Delaware holding that it is inequitable for directors to refuse to grant a waiver of an advance notice deadline under such circumstances.
In his highly publicized campaign against Xerox, Darwin Deason, the third largest shareholder of Xerox, recently commenced an action in New York State Supreme Court seeking to enjoin Xerox from enforcing its December 11, 2017 nomination deadline based on the Delaware standard on this issue. This Client Alert provides an overview of Deason’s allegations and his legal claim seeking to compel Xerox to reopen the nomination window for him and all shareholders as a matter of New York law. This is a case of first impression in New York and the adoption of the Delaware holding by a New York court would be a major victory for shareholder activists.
However, as a vast majority of corporations are incorporated in Delaware, this Client Alert is also intended to remind shareholder activists who desire to nominate directors after a deadline has passed that material developments triggered by a company’s board that come to light after the deadline may give them grounds to request a waiver of the deadline.
Early Bird Extended to This Friday! Our “Pay Ratio & Proxy Disclosure Conference”
1. The SEC All-Stars: A Frank Conversation
2. Parsing Pay Ratio Disclosures: Year 2
3. Section 162(m) & Tax Reform Changes
4. Pay Ratio: How to Handle PR & Employee Fallout
5. The Investors Speak
6. Navigating ISS & Glass Lewis
7. Proxy Disclosures: The In-House Perspective
8. Clawbacks: What to Do Now
9. Dealing with the Complexities of Perks
10. Disclosure for Shareholder Plan Approval
11. The SEC All-Stars: The Bleeding Edge
12. The Big Kahuna: Your Burning Questions Answered
13. Hot Topics: 50 Practical Nuggets in 60 Minutes
Early Bird Rates – Act by the End of This Friday, April 20th: 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 20th to take advantage of the 20% discount.
Just days after Senator Tammy Baldwin introduced a bill to repeal Rule 10b-18, the Investors Exchange (known as the “IEX”) filed this rulemaking petition asking the SEC to “modernize” the rule. This all follows years of complaints about the rule (as reflected by this article).
IEX believes that the cost of buybacks is being artificially increased as a result of the current market structure which makes buyback orders seeking to comply with 10b-18’s safe harbor easily identifiable and a source of profits for short-term traders. IEX’s proposed solution is to amend the rule to add an exception that allows buybacks to be executed priced at the midpoint of the national best bid & offer. According to IEX, the exception would allow companies to execute buybacks under the protection of safe harbor at the best prevailing prices with minimal detection by front running short-term traders.
Rule 3-13 Relief from SEC’s Financials Requirements
Loving this EY memo about what the SEC considers when deciding to grant relief from Rule 3-13 of Regulation S-X. As we’ve blogged before, while the SEC Staff has long been able to modify – or – waive disclosure requirements in response to requests to modify what is required for the financials in a SEC filing, the Staff is now more amenable to grant Rule 3-13 requests than it was before. This is part of SEC Chair Clayton’s goal of removing unnecessary barriers to going public, etc.
Last Call for Early Bird Registration! Our “Pay Ratio & Proxy Disclosure Conference”
1. The SEC All-Stars: A Frank Conversation
2. Parsing Pay Ratio Disclosures: Year 2
3. Section 162(m) & Tax Reform Changes
4. Pay Ratio: How to Handle PR & Employee Fallout
5. The Investors Speak
6. Navigating ISS & Glass Lewis
7. Proxy Disclosures: The In-House Perspective
8. Clawbacks: What to Do Now
9. Dealing with the Complexities of Perks
10. Disclosure for Shareholder Plan Approval
11. The SEC All-Stars: The Bleeding Edge
12. The Big Kahuna: Your Burning Questions Answered
13. Hot Topics: 50 Practical Nuggets in 60 Minutes
Early Bird Rates – Act by the End of This Friday, April 13th: 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 13th to take advantage of the 20% discount.
Oddly late for the proxy season, ISS updated its “FAQs on US Voting Procedures” late last week (changes are highlighted in yellow). In comparison, these FAQs were updated last proxy season in late February (arguably also late for those grappling with the proxy season). As noted in this Steve Quinlivan blog, the updates relate to:
– When are ISS’s proxy reports issued?
– How and when will ISS change a vote recommendation in a proxy alert?
– How can a company request engagement with the U.S. research analysts?
– When is the best time to request an engagement?
– What topics are generally discussed in engagements regarding non-contentious meetings?
– Is there a blackout period for engagement with research?
– What exceptions to the attendance policy apply in the case of a newly-appointed director?
– Proxy access proposals: How will ISS evaluate a Board’s implementation of proxy access in response to a majority-supported shareholder proposal?
– How will ISS apply the new 2018 policy whose previously-grandfathered poison pills will be expiring shortly?
– How do companies terminate poison pills prior to the expiration date?
– Does ISS still consider deadhand or slowhand provisions problematic?
– What if a company adopts a poison before the company goes public?
– Removal of Shareholder Discretion on Classified Boards
– Which types of charter/bylaw adoptions are likely to result in continued adverse voting recommendations?
– What is the purpose of the Governance Failures Policy?
Congress Boosts Edgar Funding – SEC May Move HQ
Over the past year, Broc has blogged repeatedly about the importance of Edgar – and its ongoing problems. So we had our fingers crossed when the SEC’s proposed budget for fiscal 2019 included requests for technology modernization & cybersecurity.
And now, the omnibus spending bill that’s supposed to fund the government for the balance of fiscal 2018 increases the SEC’s funding for IT initiatives by a cool $45 million (see pg. 231). There’s also $244 million available to relocate the SEC’s headquarters – a notion that has been floating around for a few years (see this blog) and that the GSA started more seriously pursuing last year.
What’s not in the budget? Well, page 240 says the SEC is prohibited from using funds to finalize, issue or implement any corporate political contributions disclosure requirement (something that’s been stipulated in the past few budget bills). And as far as I can tell, the budget doesn’t permanently rescind the SEC’s Dodd-Frank reserve fund – an idea that was discussed last year. Overall, the SEC’s $1.6 billion budget has remained essentially flat since 2016.
Dodd-Frank Reform: Hensarling Pressures Senate to Negotiate
Here’s an excerpt of this blog by Steve Quinlivan about the “Crapo bill” that the Senate has already passed:
The future of the bill in the House is uncertain. House Financial Services Committee Chairman Jeb Hensarling (R-TX) is seeking to include a “bucket of bipartisan bills” in the legislation which previously passed the House. In a TV interview, Representative Hensarling said: “We have called on the Senate to negotiate. Otherwise, the bill that the Senate passed – which is sitting on the Speaker’s desk – is going to remain on the Speaker’s desk until and unless the Senate negotiates. We are trying to negotiate in good faith. They have to give us some reason –you know, Maxine Waters voted for roughly half the bills we’re trying to negotiate with the Senate….so somebody needs to explain to me why they can’t accept this legislation.”
Some of the provisions Representative Hensarling is seeking to include are discussed in this Forbes article.
