Earlier this week, the Council of Institutional Investors (CII) issued these Proxy Access: Best Practices outlining its position on seven proxy access bylaw or charter provisions that companies use and which CII characterizes as troublesome. According to this WSJ article, none of the 32 companies that had implemented proxy access as of late June comply with all seven, i.e., each had at least one of the “troublesome” provisions.
Seven “Troublesome” Proxy Access Provisions
– Ownership threshold of 5%
– % or number of directors that may be elected could result in fewer than two candidates
– Aggregation of stockholders limited to specified number
– Lack of clarity on whether loaned shares count toward the ownership threshold
– Requirement to continue to hold shares after annual meeting
– Restrictions on renominations when nominee fails to receive specific % of votes
– Prohibition on third party compensation arrangements with proxy access nominee
In this blog, Gibson Dunn describes each of the provisions, along with CII’s position on what constitutes “best practices,” the treatment of the issue under Rule 14a-11, and data on prevailing practices among companies that have adopted proxy access.
ESMA Best Practice Principles: Chartered Secretaries Cite No Improvement in Proxy Advisor Practices
Hat tip to the Society of Corporate Secretaries & Governance Professionals for this blurb:
ESMA Publishes Responses on Shareholder Voting Rights to Best Practice Principles
Yesterday, the European Securities and Markets Authority (ESMA) published the responses received to its call for evidence on shareholder voting rights. ESMA had sought specific feedback from investors, proxy advisors, corporate issuers and other stakeholders on how they perceived the most recent proxy seasons since the Best Practice Principles for Providers of Shareholder Voting Research and Analysis (BPP) were initially published in March 2014.
Referencing its Summer 2015 Boardroom Bellwether survey, the Institute of Chartered Secretaries and Administrators’ (ICSA) comment letter noted that 58% of companies perceived the influence of proxy advisers on shareholder engagement with the company to be negative (only 14% cited a positive influence), and that its members have noticed no changes in the BPP signatories’ practices since the BPP publication other than a deterioration in the time given for issuers to respond to proxy advisor reports (in the case of at least one of the original signatories to the BPP).
The ICSA’s letter further indicates that the BPP has made no difference in improving issuer understanding of – or confidence in – the proxy advisory industry and that, although it may be premature to evaluate the impact of the BPP, additional measures would be necessary to achieve this, including requirements to, e.g., provide issuers with a minimum time to respond to reports before they are issued; take into account any errors identified by issuers and correct reports; clarify actions responsive to conflicts of interest; and disclose processes for checking report information.
Podcast: Survey Reveals GC’s Value to the Board/C-Suite
In this podcast, John Gilmore discusses the increasing value of the GC to the Board and C-Suite based on Barker Gilmore’s recent survey of CEOs and directors, including:
Why did you conduct this study?
What were the key findings relating to GC succession planning?
Why do you think so few companies have a GC succession plan?
What are some practice tips for sound GC succession planning?
1. Effective Date is Not Imminent (But You Still Need to Gear Up Now): We can look forward to new “Top 10” Lists in a couple years. Highest and lowest pay ratios. Although the rules aren’t effective until the 2018 proxy statements for calendar end companies, you still need to start gearing up, considering the optics of your ultimate disclosures. The rules don’t require companies to make pay ratio disclosures until fiscal years beginning after January 1, 2017.
2. You Don’t Need to Identify a New Median Employee Every Year! – This is the BIG Kahuna in the rules! A big cost-saver as the rules permit companies to identify its median employee only once every three years (unless there’s a change in employee population or employee compensation arrangements). You still need to disclose a pay ratio every year – but you don’t have to go through the hassle of figuring out who your median employee is each year. During those two years when you rely on a particular median employee, your median employee’s – and CEO’s – pay are the variables.
3. Pick Your Employee Base Within 3 Months of FYE – The rules allow companies to select a date within the last three months of its last completed fiscal year to determine their employee population for purposes of identifying the median employee (so you don’t count folks not yet employed by that date – but you can annualize the total compensation for a permanent employee who did not work for the entire year, such as a new hire).
4. Independent Contractors Aren’t Employees – Duh. Except there are nuances – so unfortunately it’s not a “duh”!
5. Part-Time Employees Can’t Be Equivalized – The rules prohibit companies from full-time equivalent adjustments for part-time workers – or annualizing adjustments for temporary and seasonal workers – when calculating pay ratios.
6. Non-US Employees & The Whole 5% Thing – For some reason, the mass media is in love with this part of the rules. The rules allow companies to exclude non-U.S. employees from the determination of its median employee in two circumstances:
– Non-U.S. employees that are employed in a jurisdiction with data privacy laws that make the company unable to comply with the rule without violating those laws. The rules require a company to obtain a legal opinion on this issue – can you say “cottage industry”!
– Up to 5% of the company’s non-U.S. employees, including any non-U.S. employees excluded using the data privacy exemption, provided that, if a company excludes any non-U.S. employee in a particular jurisdiction, it must exclude all non-U.S. employees in that jurisdiction.
7. Don’t Count New Employees From Deals (This Year) – The rules allow companies to omit employees obtained in a business combination or acquisition for the fiscal year in which the transaction took place (so long as the deal is disclosed with approximate number of employees omitted.)
8. Total Comp Calculation for Employees Same as Summary Comp Table for CEO Pay – The rules state that companies must calculate the annual total compensation for its median employee using the same rules that apply to CEO compensation in the Summary Compensation Table (you may use reasonable estimates when calculating any elements of the annual total compensation for employees other than the CEO (with disclosure)).
9. Alternative Ratios & Supplemental Disclosure Permitted – Companies are permitted to supplement required disclosure with a narrative discussion or additional ratios (so long as they’re clearly identified, not misleading nor presented with greater prominence than the required ratio).
10. Register NOW for Our August 25th “Pay Ratio Workshop” – You need to register now because the discount ends at the end of this Friday, August 7th. Registration also includes access to our two October conferences “Proxy Disclosure/Say-on-Pay” (for those, it’s either in person in San Diego or by video webcast – for the “Pay Ratio Workshop,” it’s an audio-webcast only event). The Course Materials will include model disclosures and more. Here’s the agendas for all three conferences. Act by Friday, August 7th to save!
According to my poll yesterday, pay ratios remind the most folks of Pink Floyd’s “Another Brick in the Wall”…and see Mark Borges’ blog on the rules…
Whistleblowers: SEC Issues Interpretive Release on Retaliation
A few days ago, as noted in this blog by Steve Quinlivan, the SEC issued this interpretive release that appears to lay to rest some uncertainty raised by a 5th Circuit case in 2013. The SEC confirmed that an individual who reports internally and suffers employment retaliation will be no less protected as a whistleblower than an individual who comes immediately to the SEC. Here’s an excerpt from the release:
Since our adoption of the whistleblower rules, we have consistently understood Rule 21F-9(a) as a procedural rule that applies only to help determine an individual’s status as a whistleblower for purposes of Section 21F’s award and confidentiality provisions. Similarly, it has been our consistent view that Rule 21F-2(b)(1) alone controls the reporting methods that will qualify an individual as a whistleblower for the retaliation protections. Notwithstanding our view that Rule 21F-2(b)(1) alone controls in the context of determining the relevant reporting procedures for an individual to qualify as a whistleblower eligible for Section 21F’s employment retaliation protections, the Court of Appeals for the Fifth Circuit expressed some uncertainty about this reading in a recent decision. [Asadi v. G.E. Energy (U.S.A.), L.L.C., 720 F.3d 620, 630 (5th Cir. 2013).] Although we appreciate that if read in isolation Rule 21F-9(a) could be construed to require that an individual must report to the Commission before he or she will qualify as a whistleblower eligible for the employment retaliation protections provided by Section 21F, that construction is not consistent with Rule 21F-2 and would undermine our overall goals in implementing the whistleblower program. ………. [reasons]
For the foregoing reasons, we are issuing this interpretation to clarify that, for purposes of Section 21F’s employment retaliation protections, an individual’s status as a whistleblower does not depend on adherence to the reporting procedures specified in Rule 21F-9(a).
Transcript: “Selling the Public Company – Methods, Structures, Process, Negotiating, Terms & Director Duties”
We have posted the transcript for our recent DealLawyers.com webcast: “Selling the Public Company: Methods, Structures, Process, Negotiating, Terms & Director Duties.”
With the SEC Commissioners gathering for an open Commission meeting at 10 am this morning to consider adopting final pay ratio rules, you may ask yourself: “Might the Commissioners actually not vote in favor of adoption?” Based on historical evidence, the answer is simply “no.”
Over three decades of observing the SEC, I can’t recall a rule not being adopted when brought to a vote at an open Commission meeting. Any SEC Chair worth her salt would save herself the embarrassment of not getting a desired rule over the finish line by not bringing it up for a vote at a public meeting. Bear in mind that there are plenty of proposed rules that never get adopted – but none of those were brought up for a final vote at an open Commission meeting.
And even proposals don’t get shot down at open Commission meetings. At least not since the ’80s. Former SEC Secretary Jack Katz notes a few instances way back when proposals were shot down in a public forum. One was when the SEC’s Chief Accountant proposed new accounting treatment for oil production that was rejected unanimously by all the Commissioners in the early ’80s. And another one followed the ’87 market break, when Market Reg proposed a series of legislative changes to be forwarded Congress – some of which were blessed by the Commissioners and some were not.
Note that there are rules that die during the seriatim process – not because they got explicitly rejected, but because a Commissioner’s office “sits” on it (often for years) and refuses to advance the seriatim to the next Commissioner’s office. The Chair then has to decide whether it’s worth it to take the languishing rule to an open meeting – and typically will not do so for fear of a public rejection. So the seriatim just withers on the vine. So we don’t even know that a final rule has essentially been rejected because all of this plays out behind closed doors (see this blog about whether an open Commission meeting is necessary). Thanks to Hunton & Williams’ Scott Kimpel for his help!
Also note that enforcement matters get voted down at closed Commission meetings periodically…
Pay Ratio Workshop: Discounted Rates End at End of This Friday, August 7th! – We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
ISS Seeks Input: Annual Policy Survey
ISS has opened its annual survey ahead of updating its policies. The survey closes on September 4th – and then the results are released a few weeks later. Then there’s an open 30-day comment period in October – with the final policy updates arriving sometime in November typically. The entire policy process is described on ISS’ website. ISS has also posted its preliminary ’15 proxy season review…
Poll: Pay Ratio Reminds You of Which Song?
Take a moment to participate in this anonymous poll:
According to a recent WSJ analysis, the SEC has more than doubled the typical fine against individuals over the past decade – responding, at least in part, to ongoing post-financial crisis pressure to crack down on potential bad actors.
For the first six months of fiscal 2015, the SEC levied more civil penalties than in any comparable period since at least 2005. Median fines on individuals were the highest since 2005 – with half of the fines exceeding $122,500, representing a 66% increase when adjusted for inflation. Although median fines against companies (as opposed to individuals) were down relative to prior periods, the number of fines was up – from 66 in the first half of last year to 103 for the comparable period this year.
The record is seemingly at odds with recent political (see, e.g., Sen. Warren’s letter and this New Republicarticle) and internal (see Aguilar and Stein) attacks on the strength (or alleged weakness) of the SEC’s enforcement program. Logically, it seems that both the number and dollar value of enforcement actions should be variable over time because they should be contextual – i.e., dependent on actual company and individual conduct, which is – to a great extent – influenced by risks, pressures, opportunities, economics, international crises, etc., in the larger macroenvironment within which companies operate. Perhaps lower fines and/or fewer actions ought to be viewed as a positive indicator rather than a sign of weakness.
See also Jeff Werbitt’s previous blog on Chair White’s response to Senator Warren’s attacks, the Chamber of Commerce’s recent report suggesting enhancements to the SEC’s enforcement program and SEC Enforcement Director Andrew Ceresney’s response, and Gibson Dunn’s mid-year securities enforcement update.
Securities Litigation Update: Steady State
Gibson Dunn’s mid-year securities litigation update reveals these key statistics and trends (among others) for the first half of 2015:
– Filing and settlement trends continue to reflect a “steady state” of several hundred case/year.
– The number of “merger objection” cases filed so far this year represents about 20% of total cases filed in the federal courts – on pace to meet or exceed last year’s level.
– Cases naming financial institutions as the primary defendants are at the lowest level in this decade–only 10% of new cases filed, compared to 40% in 2008 at the onset of the credit crisis.
– Median settlement values are less than half of the level of just three years ago – $5.2 million in the first half of 2015 vs $12.3 million in 2012.
– Average settlement amounts increased dramatically – from $34 million in 2014 to $64 million in the first half of 2015, fueled by two very large settlements.
– 60% of 2015 settlements were under $10 million, while roughly 20% were over $50 million.
– Median settlement amounts as a percentage of investor losses was only 1.3%, continuing to reflect a decades-long pattern of investor losses ≤ 3%.
We continue to post new items daily on our blog – “The Mentor 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:
– Board Portals: Potential Downsides & Mitigation Tips
– Emerging Trends (Including Litigation) in ESG Reporting
– Few 10-K Amendments Triggered by Restatements
– Optimizing the CEO-Chair Relationship
– Emerging Growth Companies Dominating the IPO Market
SEC Chair White sought to quash increasing concerns – and temper a recent debate between Commissioners – about compliance officer liability in these recent remarks, wherein she indicated that the SEC did not intend to use its enforcement program to target compliance professionals, but rather only took enforcement action against them when “their actions or inactions cross a clear line that deserve sanction.” Her remarks presumably were responsive to last month’s debate between Commissioners Gallagher and Aguilar about whether the SEC is appropriately supporting (or inappropriately targeting) compliance officers on the heels of two recent enforcement actions against investment advisor compliance chiefs.
By way of background, in April, the SEC charged BlackRock’s then-CCO with violations of the 1940 Investment Company and Investment Advisers Acts for failing to report a conflict of interest-related compliance violation to the funds’ boards of directors and failing to adopt and implement certain compliance policies and procedures. In June, the SEC charged the CCO of SFX Financial Advisory Management Enterprises with violating the Advisers Act for causing the firm’s compliance failures by negligently failing to conduct certain reviews required by the firm’s compliance policies and perform an annual compliance review, and making a misstatement in SFX’s Form ADV. Commissioner Gallagher dissented in both cases.
In his recent remarks, Gallagher expressed concern that the enforcement actions put the onus on the CCOs to implement their firms’ compliance policies and procedures, and held them strictly accountable for failure to adhere to what is more appropriately a firm (rather than CCO) obligation. That being the case, these actions could disincentive CCOs (or prospective CCOs), thus ultimately harming the compliance function, which Gallagher described as “not only the first line of defense” but – for the vast majority of advisers – “the only line of defense.” Commissioner Aguilar disagreed, citing the SEC’s “relatively few” CCO-targeted enforcement actions over the past five years, which he claims have been limited to a handful of cases wherein the CCOs demonstrated specific types of egregious misconduct.
Although I’m not taking sides, I believe the potential for missignaling the compliance officer’s role and potential liability both within and outside of the financial services arena is real. As noted in one of my earlier blogs, based on a recent survey of more than 600 CCOs and other financial services compliance practitioners, most CCOs are worried about the threat of increasing personal liability for corporate misconduct. And a compliance lawyer reportedly advised that compliance officers outside that sector “should be paying close attention” (and I believe they are) “to what is happening in these cases, as other agencies could follow suit in their rulings and enforcement activities.”
While I think Chair White’s remarks were necessary in view of the public nature of this debate, I tend to doubt that they will reverse the trend toward increasing concerns among compliance professionals about potential personal liability for non-rogue behavior. Although when she talks, I believe that people generally listen (very carefully), I think all bets are off when it comes to concerns about personal liability – where actions tend to speak much louder than words.
Survey: Compliance Program Effectiveness Favors Dual GC/CCO Role
LRN’s recently released 2015 Ethics & Compliance Effectiveness Report, based on a survey and analysis of over 280 companies, reveals some particularly important findings about compliance program effectiveness. Most notably, among programs reporting directly to the CEO, those led by dual GC/Chief Compliance Officers are more effective than those led by standalone CCOs.
The study explains this surprising finding this way: “What we see suggests that the greater effectiveness of the GC/CECOs’ programs reflects the nature of the GCs’ interactions and other roles within their organizations…[G]enerally speaking, the dedicated CECO today has neither the corporate stature nor the internal relationships associated with the GC. In this light, building stature and cultivating key relationships may be seen as one of the dedicated CECO’s most important tasks, and the key to higher impact programs.”
Additional noteworthy findings include:
– Programs where the CCO reports to the CEO or the board are noticeably more effective than are those reporting to the GC.
– It is increasingly common for the CCO to report directly to the CEO and – to a lesser, but noteworthy, extent (14%) – to the board or a board committee (typically the audit committee). And while a direct reporting line to the GC remains the most common structure (41%), it is no longer true of a majority of programs.
– Top-performing programs conduct assessments more frequently and use more metrics than those ranked in the bottom fifth.
– Companies whose codes of conduct emphasize corporate values, and whose employees are likely to look to the code when faced with a decision or dilemma, tend to be associated with higher program effectiveness.
– Program effectiveness ranks highly in those companies where members of the C-Suite often address ethics and compliance issues in staff meetings, operational reviews and similar settings.
In a related and interesting development on compliance program effectiveness, Reuters reports that the DOJ is hiring a compliance expert to assist in evaluating whether companies’ compliance programs are “robust…or mere window dressing” for charging decision-making purposes.
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor 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:
– Many Companies Still Using Old COSO Internal Controls Framework
– An Alarming Liability Award Against Non-Profit Organization’s D&Os
– A Bad Mix: Small Cap Exchanges & Larger Tick Sizes
– Germany Sets Gender Quota in Boardrooms
– ISS Study: Board Practices & Refreshment Studies
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!
I probably haven’t been touting our numerous checklists – over 300 of them now – sufficiently. For example, this one on “’34 Act Reports – Benchmarking Law Firm Bills” provides practical guidance – for those in-house – about benchmarking your ’34 Act bills and how to best create a RFP for ’34 Act work…
SCOTUS: Poised to Address Insider Trading Standard
Yesterday, as noted in this Orrick memo, the Solicitor General filed a petition for a writ of certiorari in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), asking the United States Supreme Court to address the standard for insider trading in a tipper-tippee scenario. Specifically, the Solicitor General argues that the Second Circuit’s Newman decision is in conflict with the Supreme Court’s 1983 decision in Dirks v. SEC, 463 U.S. 646 (1983), and the Ninth Circuit’s recent decision in United States v. Salman, No. 14-10204 (9th Cir. July 6, 2015). Because the Supreme Court grants certiorari in nearly three out of four cases filed by the Solicitor General, the likelihood of a cert grant in Newman is particularly high…
Europe: Shareholder Rights Directive II Moves Ahead
A few weeks ago, as noted in this article, the European Parliament passed the Shareholder Rights Directive – and it will now be considered by member states before a final vote. Some provisions were watered down – but new ones were added. Among others, the topics include say-on-pay (non-binding every 3 years, instead of binding originally proposed); investor disclosure (disclose how investments align with long-term interests and how engagement policies are implemented, but only on a comply-or-explain basis); and proxy advisors (adopt code of conduct & describe changes annually). The prior Shareholder Rights Directive in Europe was enacted in ’09…
Last night, the SEC posted its Sunshine Act notice to adopt the pay ratio rules next Wednesday, August 5th. My blog on CompensationStandards.com gives a guess as to some of the rule’s final parameters.
We want to help you get prepared – so I have put together a “Pay Ratio Workshop” that will be held on Tuesday, August 25th, which will be held online via audio webcast. Here’s the “Pay Ratio Workshop” agenda.
This “Pay Ratio Workshop” is part of a registration to the “Proxy Disclosure Conference” & “Say-on-Pay Workshop” that will be held on October 27th-28th in San Diego and by video webcast. In other words, this new audio-webcast only event is paired with our prior pair of executive pay conferences. So it’s three conferences for the price of one! Register now – discounted rate available only through August 7th!
– For those registered to attend in San Diego in person or by video, you also gain access to the August 25th “Pay Ratio Workshop” that is available only by audio webcast
– You will receive an ID/pw to access the August 25th “Pay Ratio Workshop” by the middle of August (although it will just be your existing ID/pw to our sites if you already have a membership)
– There is no CLE available for the “Pay Ratio Workshop” (but there will be CLE for the “Proxy Disclosure/Say-on-Pay” Conferences in October in most states)
– An audio archive of the “Pay Ratio Workshop” will be available starting on August 25th in case you can’t catch that event live
Survey: Pay Ratio Disclosures So Far
Last week, I blogged about Mark Borges’ blog about a comprehensive pay ratio disclosure – and then Mark followed up by blogging about some more samples. And now thanks to Simpson Thacher, we have this survey on pay ratio disclosures posted on CompensationStandards.com that they prepared in late March. The survey also includes some examples of companies that provide a comparison of compensation increases/decreases among the CEO and average employee.
To prepare this survey, Simpson Thacher searched all SEC filings since 2010 for companies that have disclosed the ratio of CEO to employee pay and found 16 examples. In reviewing these 16 examples, they noted the following data points for their disclosure:
1. Employees Included in Comparator Group
– Three (19%) note that the employee comparator group includes all employees, including part-time or temporary employees.
– Three (19%) note that the employee comparator group is limited to full-time employees.
– Three (19%) impose geographic restrictions on which employees are included in the comparator group (e.g., limiting to strictly U.S. or UK employees).
– Seven (44%) did not specify which employees are included in the comparator group.
2. Compensation Included
– Nine (56%) compare the CEO’s total compensation to the average total compensation for the company’s employees.
– Three (19%) compare the salary of the CEO to the average salary for the company’s employees.
– Three (19%) have two separate ratios: one based on salary, and one based on both salary and bonus.
– One (6%) has two separate ratios: one based on salary, and one based on total compensation.
3. Basis of Employee Comparison (Average vs. Median Salary)
– Three (19%) use the average salary for employees as the basis of comparison.
– Five (31%) use the median salary for employees as the basis of comparison.
– Eight (50%) use both the median and average salary for employees as a basis of comparison.
The first section, titled “Examples of Pay Ratio Disclosure”, includes the disclosure of the 16 companies discussed above, as well as information regarding the data points. Among these 16 examples, five companies (31%) have a market cap under $100 million; four companies (25%) have a market cap between $100 million and $1 billion; and seven companies (44%) have a market cap of over $1 billion. In addition, of these 16 companies, nine (56%) employ fewer than 1,000 employees, while only Whole Foods and Israel Chemical employ more than 5,000 employees. Further, seven companies (44%) are incorporated in Israel, as such disclosure appears to be encouraged under Israeli corporate law.
The survey also includes an additional chart at the end, titled “Examples of Compensation Increase Disclosure,” which includes seven examples of companies that disclose percentage pay changes (i.e., the annual percentage increase in pay of the CEO and other top executives, and the comparable percentage increase for all other employees). This disclosure, although it does not provide pay ratios, was provided by companies that all employed more than 1,000 employees (or, with respect to Aon, Astrazeneca, Avery Dennison and Reed Elsevier, employed more than 25,000 employees), and indicates the type of compensation used and the employees considered for the disclosure.
We have the winners in the 12 categories for our “Proxy Disclosure Awards”! Congrats to them & all the nominees! As promised, the voting was transparent as here are the results of the final tallies. Thanks to the 500+ of you who voted! The winners are:
1. Best Overall Proxy (Combined Online & Print) – Coca-Cola
2. Best Print Proxy – Large Cap – ConocoPhillips
3. Best Print Proxy – Mid-to-Small Cap – KBR
4. Best Online Proxy – Coca-Cola
5. Most Improved Print Proxy – Hologic
6. Most Improved Online Annual Meeting Information – UPS
7. Most Persuasive Supplemental Letter/Additional Soliciting Materials – DuPont
8. Best Executive Summary – Nasdaq (huge surge at end to overtake American Express!)
9. Best CD&A – Merck
10. Best CD&A Summary – Staples
11. Best Shareholders Letter – Target
12. Best Director Bios – CVS Health
Corp Fin’s Michele Anderson Promoted to Associate Director
Congrats to Michele Anderson for the much-deserved promotion to Associate Director in Corp Fin. Michele is the long-standing head of Corp Fin’s Office of Mergers & Acquisitions, which she will continue to run – but she will now oversee the Office of International Corporate Finance too…
Here’s the latest about the rumors of who might become a SEC Commissioner when Aguilar and Gallagher depart…
Transcript: “Nasdaq Speaks ’15 – Latest Developments and Interpretations”
We have posted the transcript for our recent webcast: “Nasdaq Speaks ’15: Latest Developments and Interpretations.”
A lot of ink has been spilled about crowdfunding in the press, such as this Huffington Post piece that gives a plain vanilla take on crowdfunding (and here’s another piece). In addition, there are some misunderstandings in the press about the capital options that a company has – this infographic by Kiran Lingam and Anthony Zeoli can help sort that out.
Here’s some thoughts from members on crowdfunding (similar to this series of blogs a few years back): In response to a question about the effects of an initial crowdfunding investment on a possible later venture capital transaction, Patrick Reardon of The Reardon Firm had the following thoughts:
First, on your other point about representations and warranties in crowd-funding, please note that, while there may not be any reps or warranties in an initial crowdfunding round, there are the duties under SEC Rule 10b-5 and state securities laws to disclose all material information. So, one could view those as a form of statutorily-mandated representations and warranties.
Now to your point on later VC financings. Although my experience does not directly involving crowdfunding, my belief is that once a crowd-funder, always a crowd-funder. Well, if not “always,” at least to every conceivable statute of limitation expires.
The appeal of crowdfunding is that small (and often unsophisticated) investors make up the initial investors. Unfortunately, these people do not understand basic investment concepts like investment risks, dilution by subsequent investments, or corporate principles such as approval of related party transactions, dissenters’ rights, governance of the internal affairs of the entity by the state of formation, not the state where the investor resides, etc. For example, try explaining to a school teacher/investor why the company has to have a down-round venture capital financing for legitimate business reasons that don’t involve wrongdoing. Very likely, he or she will only see that his or her investment has decreased by X% in value.
Also, unsophisticated investors also often have unsophisticated attorneys. In Texas, I have seen cases where obvious corporate and securities law causes of action have been ignored, and other, what I consider off-the-wall causes of action, are pled. Our Texas courts have relatively lax pleading and procedural rules, and a significant portion of the trial bar will not bring cases in Federal courts. So you might get a securities law case brought under state law instead of Federal law, just to avoid the U.S. Dist. Cts. The effect of this is exacerbated by elected state judges who often have limited business litigation experience. Texas, unlike Delaware, does not have separate business courts.
Do not misunderstand. I am not singling out my home state. I think many states have a legal system similar to that I described above. The point is that foregoing all create far more than the usual uncertainty of possible claims. After years of representing professional investors, I feel that VC or other investors will see crowd-funded companies as fraught with unknown risks. This will scare off most professional investors from subsequent rounds.
That is why I say once a crowd-funder, always a crowd-funder. If your start-up company can limit itself to investments from accredited investors, I recommend a public solicitation under Reg. D, Rule 506(c), instead of crowdfunding.
Crowdfunding: Status of SEC vs. State Laws
Brad Hamilton of Jones & Keller (see his blog) had these thoughts about that issue:
In the US, it is currently a theoretical question – there is no federally allowed crowdfunding equity investment regime in the U.S. The SEC’s “crowd funding” rules mandated by the JOBs Act are proposed rules only, and have not been approved and adopted. “Crowdfunding” in the U.S. currently applies only to (1) donations, or pre-sale purchase of goods or services, through websites such as gofundme, KickStarter, indiegogo, etc., and does not involve sale of equity, or (2) state crowdfunding registration exemptions.
Recently, you may have seen that several states are proposing and implementing rules for intrastate equity investment through “crowdfunding.” Most of those rely on the intrastate offering exemption from federal registration requirements, allowing offers and sales only to residents of that state, though you may have seen that Maine’s recent rules allow investment from non-Maine residents, although Maine’s rule is brand new, so I would be surprised if there have been any offerings under it. Texas, Indiana, Wisconsin, Washington, and Michigan are some of the states that have pending proposed, or adopted, intrastate crowdfunding rules. I believe Florida proposed, but did not adopt its own crowdfunding scheme. Here is a list covering a rundown of state exemptions.
Many practitioners and commentators, include me, think that the crowdfunding rules proposed by the SEC are worthless and if adopted as proposed would never be utilized by our clients. Some of the state crowdfunding rules eliminate the costly SEC proposals, such as audited financial statements, and may be more useful. Some states virtually mirror the SEC proposals, and are unlikely to see much use. All of the state crowdfunding rules are recent, and I too would be interested if anyone has a client who funded through state crowdfunding exemptions, and then had a subsequent exit. As I am a pessimist on this issue, I would be pleasantly surprised if any enterprise that included a crowdfunding of less than $1 million as part of its financial history, eventually succeeded to the point that a potential real-money acquirer was looking at the crowdfunding investors’ reps and warranties.
The Brits Are Winning the Crowdfunding Battle…
This article from last year about how the United Kingdom regulates crowdfunding compared to the United States is an eye-opener…
We have posted the transcript for our popular CompensationStandards.com webcast: “Clawbacks – What Now After the SEC’s Proposal.”
Proxy Access: Comments on the SEC’s Review of (i)(9)
Given the high level of interest in the topic, I was a little surprised to find that there hasn’t been more commentary – in the form of official comments submitted to the SEC – regarding the SEC’s review of Rule 14a-8(i)(9). So far there has been a dozen and a half comment letters sent in, about half from the corporate world and half from investors…
This Cooley blog describes the most recent meeting of the SEC’s investor advisory committee and includes some discussion of proxy access shareholder proposals from this proxy season…
Form 8-K: Taking It Too Seriously
Just saw this in my neighborhood. Honestly, it’s not mine…
