Author Archives: Broc Romanek

I previously blogged that Delaware was considering an amendment to the Delaware General Corporation Law that would modify director voting rules. This amendment has now been adopted – and will be effective August 1st – and primarily addresses two items with respect to director elections:

– It amends Section 141(b) to provide that a director resignation can be made effective upon the happening of a future event, coupled with the authority to make such a resignation irrevocable if the director fails to achieve a specified vote for re-election. This amendment allows Delaware corporations to voluntarily switch to a voting standard that is different from a plurality one.

– It amends Section 216(b) to provide that a by-law adopted by shareholders that prescribes the vote required for director elections may not be further amended or repealed by a Board of Directors.

We continue to post law firm memos regarding this development in the “Majority Vote Movement” Practice Area.

FASB and IASB Publish First Draft Chapters of Joint Conceptual Framework

Last week, the FASB and IASB published the first installments of their joint conceptual framework – globalization is here! Here is the related press release and the draft chapters.

SEC Issues NYSE’s Proposal to Eliminate Annual Report Delivery

A few weeks ago, the SEC issued a NYSE proposal (which had just been amended since it was first submitted to the SEC last September) in an effort to eliminate the current NYSE requirement that a listed company “physically” distribute an annual report to shareholders. Note that this proposal would have the biggest impact on foreign private issuers, who aren’t subject to the SEC’s proxy rules – US companies would still be required by Rule 14a-3(b) to deliver proxy statements that are accompanied or preceded by annual reports meeting the requirements of Rule 14a-3 (at least until the SEC’s e-Proxy proposal is adopted).

The NYSE’s proposal would allow a company to satisfy the annual financial statement distribution requirement by making its annual report available on its corporate website, with a prominent undertaking to deliver a paper copy, free of charge, to any shareholder who requests it – listed companies would also be required to issue a press release stating that its annual report has been filed with the SEC and that shareholders have the ability to receive a hard copy of the company’s complete audited financial statements free of charge upon request. The NYSE’s proposal would also specifically require listed companies to maintain websites.

Yesterday, the SEC issued this concept release, as earlier promised under the SEC’s Four-Point Plan. The SEC seeks input on 35 questions related to assessing risks, identifying controls, evaluating effectiveness of internal controls and documenting the basis for the assessment. Comments are due in 60 days – doesn’t it feel like folks have commented on internal controls at least a dozen times?

The SEC still intends to announce an additional postponement of the deadline for compliance by non-accelerated filers, including foreign private issuers that are non-accelerated filers. The current deadline for non-accelerated filers is their first fiscal year ending on or after July 15, 2007.

COSO Issues Internal Controls Guidance for Smaller Companies

Yesterday, COSO announced the release of its guidance for small public companies (including an archive of a webcast held yesterday about the guidance). Here is a perfunctory statement from the SEC.

Although the guidance should prove helpful, I wouldn’t be surprised to hear complaints from small issuers that it doesn’t go far enough to reduce their burdens. For instance, I have heard some small issuers say that some of the controls are undocumented and that it would be expensive if they had to start anew to document those controls. One suggestion was that maybe the auditor could rely on extra levels of management review to compensate for fewer documented controls. On yesterday’s COSO webcast, one of the panelists said that – although the documentation could in some instances be less extensive for smaller companies – there still needs to be some level of documentation so that the auditors would be able to review and test the controls. Thanks to Bob Dow of Arnall Golden Gregory for the heads up and his thoughts!

The Evolution of Law Review Articles?

I’m not a big fan of law review articles generally – and not because I was the ultimate slacker on my own law review squad – as I often find they don’t provide much in the way of practical guidance. So I was surprised to see this paper (warning: don’t click if you are offended by profanity) which I am told will be published soon as a law review article. Ah, the changing nature of scholarship…

The media – and others – are expending quite a bit of effort commenting on SEC Commissioner Paul Atkins’s speech before the International Corporate Governance Network last week (eg. Saturday’s WSJ article). This is notable in itself just for the fact that a SEC Commissioner – not the SEC Chairman – has made a speech that has garnered so much attention.

In his speech, Commissioner Atkins states that he believes that the practice of “spring-loading” stock options (ie. setting the grant date and exercise price of an option at a time shortly before the release of positive corporate news) should not be considered insider trading, as he questions whether there was any “legitimate legal rationale” for pursuing any theory of insider trading in connection with option grants.

This is not a new issue. As well covered in past issues of The Corporate Counsel and The Corporate Executive, the underlying “offense” has sparked considerable debate ever since then-SEC Enforcement Director Stephen Cutler first commented on the practice at the 2004 Northwestern Law School Securities Regulation Institute in January 2004. Here is an excerpt from the November/December 2004 issue of The Corporate Counsel:

“Some see it as a legitimate, time-honored way to get the best price for optionees (choosing to ignore that, as with most equity compensation grants, top executives receive most of the benefit). The same skeptics also question whether, or how, Rule 10b-5 would be implicated, since (i) the grantor/issuer (obviously) is aware of the undisclosed information, and (ii) the grantee either knows or the information, being favorable to the grantee, isn’t material to the grantee in this context.

Others (e.g., investors) see evils here, e.g., the dilution/waste caused by committing to sell stock below market value, violation of the option plan requirement to price options at (or above) FMV, non-disclosure of the practice, an accounting problem (a higher fair value charge; even under APB No. 25, there is an earnings charge for discounted stock options), and just plain bad governance. Our purpose here is not to resolve the debate, but to point out that Enforcement does not appear to be stopping to argue.”

I don’t begrudge – or even disagree with – Commissioner Atkin’s opinion on whether spring-loading constitutes insider trading. However, I was miffed that he spoke out on this practice as constituting a “cheap” way to compensate officers. Putting aside the disclosure, accounting, etc. issues that would clearly need to be addressed, I just don’t see how springloading fits into a properly designed pay package, where pay is supposed to facilitate better corporate performance – what amounts to discounted options really doesn’t seem to do the trick.

At the end of the day, however, the springloading debate just doesn’t get me very excited since there aren’t many instances of positive news that continue to impact stock prices over the entire length of an option’s vesting period. The biggest issue for me is the perception that this practice holds for investors. Given today’s media and investor fascination with option granting practices, “perception” is critical and should be sufficient incentive for companies to simply avoid the controversy and use other pay design techniques.

SEC Commissioner Atkins on Option Backdating

On the other hand, I wholeheartedly agree with Commissioner Atkins’ thoughts on the witch hunting aspect of the option backdating scandal. He is the voice of reason when he says:

“But it is worth taking a step back before we plunge headlong into wholesale condemnation of all options practices. We need to distinguish scenarios that are black-and-white fraud from legitimate practices that are being attacked with attenuated theories of liability. With respect to the former, there have been many reported stories of clear-cut doctoring of documents done knowingly by executives and/or directors. I will not quibble with the vigorous pursuit of the knowing perpetrators of this kind of activity: a fraud is a fraud. Attempts to evade legal obligations through intentional alteration of documents or deliberate flouting of internal controls cannot be tolerated, because they strike at the core of our system of corporate governance.

Backdating of options sounds bad, but the mere fact that options were backdated does not mean that the securities laws were violated. Purposefully backdated options that are properly accounted for and do not run afoul of the company’s public disclosure are legal. Similarly, there is no securities law issue if backdating results from an administrative, paperwork delay. A board, for example, might approve an options grant over the telephone, but the board members’ signatures may take a few days to trickle in. One could argue that the grant date is the date on which the last director signed, but this argument does not necessarily reflect standard corporate practice or the logistical practicalities of getting many geographically dispersed and busy, part-time people to sign a document. It also ignores that these actions reflect a true meeting of the minds of the directors, memorialized by executing a unanimous written consent.”

In some cases, I think companies now caught up in the option backdating scandal were probably just trying to be fair way back when those options were granted in the ’90s. Newly public companies really struggle with the idea that option price differs by grant date, so an employee hired this month could end up with a totally different price than an employee hired last month. Particularly if you have a highly volatile stock, the randomness of option prices can seem very unfair.

These companies were used to the way it was when they were private, where everybody hired during the year had the same price. So they came up with some bizarre pricing procedures in an attempt to be fair. Then, unless someone questions them early on, those procedures get formalized – and here we are ten years later with a scandal on our hands…

Director Liability and Responsibilities: After Disney

Don’t forget tomorrow’s CompensationStandards.com webcast – “Director Liability and Responsibilities: After Disney” – featuring John Olson and Professor Charles Elson.

Warning! Less than 10 days left until the Early Bird Discount expires for the important conference: “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” The Early Bird expires on July 20th – so take advantage of the huge savings while you can. For example, the Early Bird member rate for a single attendee is only $495, after July 20th – it goes up to $750 (which is still reasonable but 50% more than the Early Bird rate).

The Role of Investment Bankers

The third installment of DealLawyers.com’s M&A Boot Camp is now available: “The Role of Investment Bankers.” Join Kevin Miller of Alston & Bird, who is a former in-house lawyer for an i-bank, for an entertaining session that teaches the basics of what you need to know about what investment bankers do – and the top issues that bankers face today.

If you are not a DealLawyers.com member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

Although it appears that the SEC still is considerably behind in the monumental task of uploading comments/responses to its comment letter database, Steve Quinlivan and Jill Radloff have put together this excellent memo that identifies commonly-given comments from the SEC Staff on Form 10-Qs. This memo is posted on our home page in the “Hot Topics Box” as well as in our “Form 10-Q” Practice Area.

State Comparison of Mandatory By-Law Amendments

In light of CA’s recent by-law proposal dispute with Professor Bebchuk, it is interesting to compare some of the different state approaches to by-law amendments. Keith Bishop provides us with the following analysis:

– Delaware – Section 109 of the DGCL provides that after a corporation has received any payment for its stock, the power to adopt, amend or repeal bylaws is in the hands of the stockholders. However, Section 109 permits the certificate of incorporation to confer the same power on the directors. The statute makes it clear that conferring such power on the directors does not divest the stockholder of the power. Thus, Delaware has an “opt-in” approach to the power of directors to adopt, amend or repeal bylaws.

– California – California takes a different approach. Section 211 of the California Corporations Code confers the authority to adopt, amend or repeal bylaws on the shareholders and on the board. The required vote of the shareholders is a majority of the shares entitled to vote. In addition, the articles of incorporation or bylaws may restrict or eliminate the power of the board to adopt, amend or repeal bylaws. Finally, only the shareholders can change a bylaw changing the number of directors or the range of directors. Thus, California has essentially an “opt-out” approach with respect to the board’s authority to change bylaws.

– Nevada – Nevada has its own approach. Under NRS 78.120(2), directors have the authority to “make” the bylaws. The statute further provides that unless prohibited in a bylaw adopted by the stockholders, the directors may adopt, amend or repeal any bylaw (including any bylaw adopted by the stockholders). Unlike California, however, Nevada does not require approval by a majority of the shares entitled to vote. The default vote required is a majority of the votes cast and this can by changed by the articles or bylaws. Some companies, such as Amerco, have specified higher shareholder vote requirements such as 2/3 of the shares entitled to vote. A big difference is that Nevada (unlike both Delaware and California) permits the articles of incorporation to vest authority to adopt, amend or repeal bylaws exclusively in the directors. Thus, Nevada corporations have the ability to divest shareholders of the right to change bylaws.”

Query: Item 5.04 of Form 8-K

As the number of questions in our Q&A Forum rapidly approaching the “Big 2000” mark, I feel bad because someone e-mailed me the query below and I erased it before I could send some thoughts on it (and I can’t remember who sent it). So I decided to blog the query – and my thoughts – with the hopes that it will reach the inquisitive mind who sent it:

Question: A public company has a 401(k) profit sharing plan under which the company matches a portion of its employees’ contribution in cash. The company’s stock is not used to fund the plan, nor is it an investment option for employees under the plan. The company intends to discontinue some of its investment choices under the 401(k) plan and automatically route the discontinued funds to a new fund unless the participant directs the company to do otherwise. Neither the discontinued funds nor the new funds have any company stock. The company will be required to temporarily suspend trading by participants during this process.

Assuming that no notice to the company is required pursuant to Section 101(i)(2)(E) of ERISA, we believe that because the plan does not permit investments in the company’s equity securities, the suspension of trading under the plan does not require disclosure pursuant to Item 5.04 of Form 8-K. Do you have a different view?

Answer: I agree. If there’s no issuer stock in the plan, I don’t think that Item 5.04 is triggered.

A few weeks back, the PCAOB issued Q&As on adjustments to prior period financials audited by predecessor auditors, including addressing issues when companies change auditors and then have to restate or adjust prior financials.

Nasdaq’s New Tier System is Effective

The Nasdaq’s new market tiers went into effect this past Monday, July 3rd. Here is a memo explaining how the new tier system will work (including the new abbreviations) – and here is a list of the companies included in the new Nasdaq “Global Select Market” tier. Note that the Nasdaq hasn’t yet officially become an “exchange” – that is expected next month…

Future of Hedge Fund Registration

In this podcast, Erik Greupner of Gibson, Dunn & Crutcher analyzes the recent opinion from the US Court of Appeals for the District of Columbia Circuit that vacated the SEC’s controversial rule – in Goldstein v. SEC – that had required most hedge fund advisers to register with the SEC, including:

– Why did the D.C. Circuit Court vacate the SEC’s rule that required most hedge fund advisers to register with the SEC pursuant to the Adviser’s Act?
– Will hedge fund advisers – that recently registered with the SEC under the Advisers Act as a result of the vacated rule – now de-register in droves?
– What do you think the SEC will do next?

Yet another executive compensation case appears to be heading to the courtroom. On June 23th, New York Supreme Court Justice Charles Ramos denied Viacom’s motion to dismiss, finding that there was sufficient evidence supporting the plaintiffs’ claims to let the case go forward. The case next moves to the discovery phase and then on to trial.

The case, In re Viacom Inc. Shareholder Litigation, was brought in 2005 by two shareholders alleging that Viacom’s directors breached their fiduciary duty in approving nearly $160 million in compensation to three executives in 2004 (a year when the company reported a $17.5 billion loss and the stock price declined 18%). The case also involves a claim for unjust enrichment against the three executives: Viacom’s then-chairman and CEO, Sumner Redstone, and co-president and COOs, Tom Freston and Leslie Moonves. The plaintiffs are demanding that the executives pay back the money and for Viacom to enact stricter corporate-governance rules.

In its motion to dismiss, Viacom claimed that a majority of its board (seven of twelve of its directors) were independent, but Justice Ramos found that there was sufficient evidence to doubt the independence of one of the seven, who was a former chairman of Bear Stearns – and Bear Stearns had advised Viacom on a number of major transactions.

This case is different than Disney because a finding that the board wasn’t independent likely would change the standard against which to measure the board’s conduct – from a “business judgment” standard to the more challenging “entire fairness” standard. An entire fairness standard would put the onus on Viacom’s directors to prove that they acted fairly in determining the amount of compensation.

Two week warning! Only two weeks left until the Early Bird Discount expires for the important conference: “Implementing the SEC’s New Executive Compensation Disclosures: What You Need to Do Now!” The Early Bird expires on July 20th – so take advantage of the huge savings while you can. For example, the Early Bird member rate for a single attendee is only $495, after July 20th – it goes up to $750 (which is still reasonable but 50% more than the Early Bird rate).

Reminder: Accelerated Filer Testing Date

As I have blogged about before, don’t forget that last Friday – June 30th – was the testing date for calendar year-end companies as to whether or not they are “accelerated filers”…

DOL’s Administrative Review Board Hands Down Important Whistleblower Decision under Section 806

At the end of May, the Administrative Review Board of the US Department of Labor handed down an important decision in a whistleblower case under Section 806 of Sarbanes-Oxley. In Klopfenstein v. PCC Flow Techs. Holding, the Review Board held that a private subsidiary (or its employees) may be covered by Section 806 under an agency theory of liability – and that it did not matter that the employee did not believe that anything fraudulent had occurred so long as the employee reasonably believed a SEC rule, or other subject in “the realm covered by the SOX,” had been violated. The Review Board adhered to the letter of the DOL regulations in applying a low standard for causation, concluding that a terminated employee need prove only that retaliation was a “contributing factor” in the discharge decision, and not the only or even the main reason for his termination.

This is the first ruling by the Review Board on the question of whether non-public subsidiaries are covered under the Act. We have posted a copy of the decision and order – as well as related law firm memos – in our “Whistleblowers” Practice Area.

This is a big deal because of who issued the ruling. It is the Administrative Review Board, which is the appellate (ie. higher) authority in the DOL. So what the Review Board says matters a lot, as it will now guide future Adminstrative Law Judge decisions, as ALJs are supposed to follow the Review Board. All the whistleblower decisions under Section 804 of Sarbanes-Oxley have been handed down by ALJs until this one.

As I blogged last month, there are significant developments for any LLC that does any business in New York. In her podcast last month, Monica Lord provided some analysis of the coming changes in New York’s LLC laws and she had identified some potential problems.

Just one day before the June 1st effective date, New York Governor George Pataki signed an amended bill into law that removed most of these problems. For example, as noted in this Kramer Levin memo, the original bill would have changed New York’s procedures to require that published notices disclose the names of the ten persons who hold the most valuable membership interests – but the amended legislation deletes the “ten person” requirement from the published notice – so that the form of the notice now reverts essentially to the form that old law required. Other law firm memos on this topic are posted in our “Limited Liability Companies” Practice Area.

July E-minders is Up!

Our most recent issue of our monthly e-mail newsletter is posted.

Attack on Foreign Private Issuer Exemption Beaten Back

Jay Kesner and Scott Musoff of Skadden Arps give us this news: A recent decision in favor of Tower Semiconductor is significant for foreign companies that access U.S. capital markets. The Second Circuit Court of Appeals affirmed the SEC’s authority to exempt foreign private issuers from certain sections of the ’34 Act. Had the Court not ruled in our client’s favor, the result would have been a chilling effect on foreign issuers accessing US markets.

The Second Circuit’s decision resolved the novel issue of the SEC’s authority to exempt foreign private issuers from Section 14(a) and Rule 14a-9. Shareholders alleged that Tower issued a proxy statement that was false and misleading in violation of those federal securities laws. Skadden argued that, as a foreign private issuer, Tower was exempt from the strictures of Section 14(a), including the antifraud provisions of Rule 14a-9, by virtue of Rule 3(a)(12)-3.

Plaintiffs argued that the SEC exceeded its authority in exempting foreign private issuers from Section 14(a) and Rule 14a-9 because it failed to make a formal finding as to the need for a such an exemption – and because the exemption was inconsistent with Congress’ mandate that any exemptions adopted by the SEC be consistent with the public interest and the protection of investors.

The Second Circuit agreed with Tower, holding that although “novel,” plaintiffs’ argument was ultimately unpersuasive. “3(a)(12)-3 weathers this storm not because of its impressive longevity. Rather, Rule 3(a)(12)-3 survives [plaintiff’s] challenge because it was promulgated pursuant to the Commission’s statutory mandate.”

The Court explained that although “[t]he rule exempting foreign private issuers from section 14(a) is nearly as old as section 14(a) itself,” – and virtually no rationale for it had been expressed at that time – in 1965, the SEC published a notice of proposed rulemaking to amend Rule 3a12-3 that included the Commission’s underlying rationale for the amendments. The considerations included “the available protections for investors in foreign securities – the quality of foreign corporate law, the nature of foreign stock exchange rules, and the amount of information voluntarily disclosed . . . . [and] determined that these protections were adequate in light of the important goal of ‘maintaining existing markets in foreign securities.'” The Court rejected as illogical and unsupportable plaintiff’s contention that “the Commission may not sacrifice any investor protection, regardless of the public interest an exemption might serve.”

In this podcast, Bob Smith, Associate General Counsel of Progress Energy, discusses how – and why – Progress Energy voluntarily proposed to change its charter to adopt a majority vote standard (a proposal which shareholders recently approved), a standard that ISS now refers to as the new “gold standard” in the majority vote area, including:

– What did Progress Energy’s board do recently that led ISS to call it the “gold standard”?
– Can you describe Progress Energy’s charter amendment?
– What reaction have you received from shareholders?

Prevalance of Majority Vote Reforms

According to this recent Washington Post article, nearly 145 of the companies in the S&P 500 now either have a majority vote standard or a director resignation bylaw or policy.

Growing Support for Majority Vote Proposals

As noted recently in the ISS “Corporate Governance Blog,” shareholder support for proposals seeking majority voting in director elections has averaged 47.3% support at 80 meetings this season. Last year, those proposals averaged 44% at 60 firms. This season, majority vote proposals received an average of 54.5% approval at 33 meetings where companies had not previously announced board election reforms, such as a director resignation policy. Support was lower at firms with director resignation policies such as the one at Pfizer and over 90 other firms, averaging 42.1% at 47 meetings this season.

Yesterday, Judge Kaplan of the US District Court of Southern New York handed down this opinion in U.S. v. Stein (for background on this case, see this blog). Keith Bishop notes: This is a stunning defeat for the Department of Justice. Judge Kaplan found that the government violated the Fifth and Sixth amendments to the U.S. Constitution by causing KPMG to cut off payment of legal fees and other defense costs upon indictment. Now, it seems that KPMG (with the government’s acquiescence) will be under considerable pressure to advance defense costs. Judge Kaplan did not dismiss the indictment, but he left open that possibility if KPMG decides not to advance legal fees.

Judge Kaplan’s lengthy 88-page opinion is thoughtful and scholarly – full of the language of liberty and individual rights. Among other things, the Judge’s opinion states that “[t]he imposition of economic punishment by prosecutors, before anyone has been found guilty of anything, is not a legitimate governmental interest – it is an abuse of power.”

A lot of happy companies out there. For example, the Association of Corporate Counsel had joined in an amicus brief in this case – and now has issued this press release trumpeting the decision. We have posted a copy of the Stein opinion in our “Advancing Legal Fees” Practice Area – and check out the commentary regarding Judge Kaplan’s opinion in WSJ’s “Law Blog.”

On the other hand, the practical consequences could be limited. Here is an excerpt from the “D&O Diary Blog“:

“While Judge Kaplan’s ruling is unquestionably a significant event that will impact pending prosecutions across the country, the specific practical consequences outside the KPMG tax shelters case will remain to be seen. His ruling is based on a detailed record of the particular facts and circumstances of that specific case. In addition, as the opinion of a U.S. District Court Judge, the decision has persuasive but not precedential authority. Nevertheless, Judge Kaplan’s opinion is important and will have ramifications, and raises a host of potentially interesting questions in connection with the indictment of the Milberg Weiss law firm, among many other pending cases.”

As an aside, Keith points out Monday’s U.S. Supreme Court’s decision in U.S. v. Gonzalez-Lopez. That case also involved the Sixth Amendment’s right to counsel. In the Stein case, Judge Kaplan found that the Thompson Memorandum – and the government’s implementation of it – violated the defendants’ right to counsel under the Sixth Amendment. More analysis of this case is available on the SCOTUS Blog.

The Evolving Relationship Between Lawyers and Auditors

We have posted the transcript from the recent webcast: “The Evolving Relationship Between Lawyers and Auditors.”

Executive Compensation in the News

Heading out today to moderate a panel on executive compensation for the Society of Corporate Secretaries’ Annual Conference and thought I would point out these two recent interesting articles:

– NY Times’ “The Winding Road to Grasso’ s Huge Payday” gives a detailed and fascinating account of the behind-the-scenes machinations (including some juicy e-mails) leading up the lawsuit that was filed three years ago – which already has cost the NYSE more than $40 million in legal fees!

– WSJ’s “As Workers’ Pensions Wither, Those for Executives Flourish” is a detailed article illustrating how much relative pay in this country has gotten out of whack, as executive officer pensions – covering just a few hundred employees in a large company – can stack up fairly nicely against the pension obligations for a workforce well exceeding 100,000. Includes some interesting stats on how executive pensions is a drag on earnings – and most of us already knew about the lack of disclosure of all this, as pointed out in the article…

CA Decides to Include Mandatory By-Law Amendment Proposal In Its Proxy Statement

Following up on yesterday’s blog regarding VC Lamb’s decision to dismiss Professor Bebchuk’s lawsuit against CA without prejudice – because the issue wasn’t “ripe” – Kaja Whitehouse of Dow Jones wrote an article noting that the company has decided to include Bebchuk’s mandatory shareholder proposal that seeks to change the company’s by-laws.

CA shareholders will now get to vote on this shareholder proposed by-law amendment at the company’s annual meeting in August – and the rest of us will have to wait for another case to “ripen” before we find out what the Delaware courts decide in this important area. The floodgates for mandatory by-law proposals may soon open.

Here is an excerpt from the Dow Jones article:

“The company originally denied a request to add the proposal to its upcoming proxy statement, claiming the proposal was a violation of Delaware law. The rejection resulted in a court challenge by the drafter of the resolution, Harvard professor and shareholder rights activist Lucian Bebchuk.

A ruling by the court would have shed light on the currently murky issue of whether shareholders have the power to decide bylaw issues, which are normally governed by directors. A company’s bylaws are the official rules that govern its management.

Shareholder proposals are typically advisory, meaning management has the option to adopt or ignore the recommended action. As part of a growing effort by shareholders to gain more control over how public companies are governed, more shareholders are looking to submit proposals that would require companies to adopt their plans if approved by a majority of shareholders.

The CA case has broader legal and governance consequences for corporations. For one, companies may be more reluctant to reject proposals that seek to change the bylaws. Companies can reject shareholder proposals for a number of reasons, including concern that a resolution would interfere with internal affairs.

Before definitively rejecting a proposal, however, corporations tend to seek the blessing of the Securities and Exchange Commission in the form of a “no-action” letter.

Before Bebchuk brought the case to court, CA sought a no-action letter from the SEC to test whether its rejection would pass muster. The SEC refused to issue a letter in this case, citing the pending ruling.

Without a clear answer from the Delaware courts on the legality of this issue, the SEC may not feel comfortable issuing no-action letters for similar requests, said Michael Barry, of Grant & Eisenhofer, the Wilmington, Del., law firm that filed the lawsuit on behalf of Bebchuk.

“They’re hesitant to opine on matters of unsettled state law,” said Barry, adding, “It would put then in an awkward position.”

SEC officials declined to comment on the matter, said spokesman John Heine. Agency staff will make its position known when the issue comes up again, said Heine.

A lack of clarity from the court system, which indicates that Delaware judiciaries feel shareholders could have a right to change a company’s bylaws, prompted CA’s change of heart about the proposal.

“The Delaware Court has ruled that it should not decide the legality of the by-law [issue] until our stockholders have first voted on it,” said Jennifer Hallahan, a spokeswoman for the company.”

A few weeks ago, I blogged about big things brewing in the Delaware courts that could shake up shareholder proposals and Rule 14a-8. On Thursday, Vice Chancellor Lamb of the Delaware Court of Chancery issued this opinion and order in Bebchuk v. CA. In his opinion, VC Lamb denied the request for declaratory relief without prejudice because the case isn’t ripe yet. Importantly, the Vice Chancellor notes that Professor Bebchuk’s by-law is not invalid on its face – so VC Lamb has tee’d up the issue about whether bylaws can restrict pill authority under the right circumstances.

Although it looks like CA (“CA” is the company formerly known as “Computer Associates”) has avoided a bullet, it could be just temporary. I guess the next suit from Professor Bebchuk might be in federal court – if he trys to enjoin the mailing once CA files its proxy statement – as VC Lamb won’t act before the vote is in.

And Another Rule 14a-8 Development for CA…

And there developments related to another CA shareholder proposal: this proposal relates to the removal of directors from the board. Last week, an investment fund submitted this reconsideration request asking the Commission to review a no-action response from Corp Fin. In that response, Corp Fin allowed the exclusion of a shareholder proposal under Rule 14a-8(i)(8) because the proposal seeks to give shareholders the power to remove directors outside the director election context. We have posted this reconsideration request and the VC Lamb opinion in our “Shareholder Proposals” Practice Area.

Although some commentators (such as this Sunday NY Times column) have raised the profile of this issue (ie. whether there should be democracy in the boardroom), I don’t believe appeals regarding the SEC’s (i)(8) position will work since the rule is pretty clear and the Commission already has considered this issue a number of times. Of course, the Commission sometimes does change it’s position – so I guess it can’t hurt to try…

NASPP’s 14th Annual Conference: Las Vegas Baby!

With this year’s NASPP Annual Conference including the entirety of the “3rd Annual Executive Compensation Conference” at no extra charge, an overwhelming number of attendees have already registered for this three-day event to be held October 10-13 in Las Vegas. Here is a detailed conference brochure providing descriptions of the 40+ breakout panels for the NASPP’s Annual Conference.

Whether you attend just on October 12th for the “3rd Annual Executive Compensation Conference” or the entire three-day NASPP Annual Conference, you will want to reserve your room at the conference hotel soon as it’s filling up fast…