In addition to the loads of memos posted in our “Regulation D” Practice Area, we have this upcoming webcast during which WilmerHale’s Meredith Cross, Morrison & Foerster’s Dave Lynn, Calfee’s John Jenkins, Western Reserve Partners’ Dave Mariano and SecondMarket’s Annemarie Tierney will analyze the SEC’s new rules and predict how market practice will be developing in their wake.
Meanwhile, Reps. McHenry and Garrett have sent this letter to the SEC with a number of questions including requesting that the SEC clarify that companies can rely on new Rule 506(c) following the September effective date without having to comply with the SEC’s new proposals.
– What are your views on CEO succession?
– How about director succession?
– What can a director do when a colleague goes rogue?
– What is the best advice you ever gave a board?
There have been more failures during the past weeks, including:
– McKesson – Form 8-K (22%)
– Freeport-McMoRan – Form 8-K (29%)(failed in ’11 – passed in ’12 – failed in ’13)
– Spectrum Pharmaceuticals – Form 8-K (31%)
– The Active Network – Form 8-K (49%)
– VeriFone Systems – Form 8-K (21%)
– Jos. A. Bank Clothiers – Form 8-K (48%)
– Wave Systems – Form 8-K (44%)
Last week, McKesson saw fireworks with a pretty low vote on its say-on-pay (22%), along with its comp committee also receiving significant opposition (support of 60-71%), and a shareholder proposal seeking stronger clawback policies passed (53%) – for only the 4th time since 2006.
Freeport-McMoRan also had fireworks as two of the four shareholder proposals on its ballot also received majority support – independent chair (56%) and “call special meeting at 15% threshold” (70%). I believe Freeport-McMoRan is only the second company, after Cogent Communications, to fail in 2011, pass in 2012, only to fail again this year.
Thanks to Karla Bos of ING for the heads up on these!
Senate Confirms SEC Commissioner Nominations; Extends Chair’s Term
Last Thursday, the Senate confirmed the nominations of Kara Stein and Michael Piwowar to the Commission by unanimous consent, rather than a roll-call vote. The swearing in ceremony should come soon. The Senate also extended Mary Jo White’s term as Chair so that it expires on June 5, 2019.
Given that Michael Piwowar has an economist backgroup – and is from the GOP – it is not surprising that this article predicts he will have a strong “cost-benefit” view on regulations…
More on our “Proxy Season Blog”
We continue to post new items regularly on our “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:
– Nabors Vote Reporting Prompts Questions
– Novel Clawback Proposal to Watch
– Litigation Over “Unbundling” Spills Over into the Employee Plan Context
– Why the Shareholder Rescue Never Comes
– Three Social Proposals Win Majority Support at One Company
Probably because people have been focusing on the Royal Baby (and rightfully so – life is too short to hone in solely on the negative stuff), the following matter has not gotten much attention and it really should. In mid-June, the UK Parliamentary Commission on Banking Standards (known as the “Tyrie Commission”) issued a final report with recommendations for wholesale revisions on how large banks should be regulated in the United Kingdom. Then a couple weeks ago, Her Majesty’s Government (Chancellor Osborne and Secretary Cable) published its response to the report, which was generally favorable.
Most of the press has focused on potential criminal liability for senior officers at banks. However, one of the recommendations is:
The Government should consult on a proposal to amend the Companies Act “to remove shareholder primacy in respect of banks, requiring directors of banks to ensure financial safety and soundness of the company ahead of the interests of its members.”
The Government’s response states “Changing director’s duties in [large banks] has the merit of signaling clearly that shareholders’ interest do not overrule the long-term safety and soundness of the firm. But it may have drawbacks. The Government determines that it is appropriate to seek views on the issue.” Can you imagine the uproar in the United States if Treasury and the Fed suggested something similar?
IASB Issues Discussion Paper on the Conceptual Framework of Financial Reporting
As described in FEI’s Financial Reporting Blog and this Accountancy Age article, the IASB has issued a discussion paper on the contextual framework of financial reporting – this is the next step after IFRS. The comment period is long – ending in January 2014, which is reasonable given the wide scope of the project. If you want just a snapshot, the IASB has provided one…
Meanwhile, former SEC Chief Accountant Jim Kroeker has been named Vice Chair of the FASB board…
Transcript: “Post-Closing Claims: What Really Happens”
We have posted the transcript for the DealLawyers.com webcast: “Post-Closing Claims: What Really Happens.”
This article noting that Judge Judy is more trusted than the entire US Supreme Court gets me depressed…
I got many emails last week when Reuters reported about the SEC’s low morale as described in this new GAO report. Much of the “news” wasn’t really new as the SEC’s low spot in the federal agency rankings was known at the beginning of the year, as I previously blogged.
As the GAO report points out, the SEC could improve its effectiveness. Of course, any large organization could (as any smaller ones). And let’s bear in mind the reality that this is the government we are talking about. There is some ineffectiveness that is just plain impossible to overcome (eg. much harder to fire someone compared to private sector).
But in terms of real morale, my experience is that most SEC Staffers are pretty happy in their job and have learned to tune out most of the persistent negative energy around them although the constant bashing in the press, endless budget battles and varied political shenanigans – not to mention the numerous court losses – undoubtedly can dint morale. At the end of the day, most Staffers have worked “on the other side” and recognize that what they have ain’t so bad…
If this pending legislation limiting the SEC’s ability to access emails goes through, that won’t be good for Enforcement’s morale…
SEC Going to Wider Telecommuting
And it’s about to get better for some SEC Staffers! As noted in this Bloomberg article, the SEC has reached a new deal with its employee union that permits new flexible work schedules and includes new rules for furloughs caused by federal budget cuts. Here is an excerpt from the article:
The e-mail says telecommuting will be available for three, four, or five days a week and will be “phased in across the agency.” Currently, 10 percent of the agency’s non-management staff telecommutes two days a week, Gilman said in an e-mail responding to questions about the agreement. “Only a small handful of employees” work from home five days a week, Gilman said. Most of them review corporate filings, he said.
Within a fairly short period of time, SEC Chair White has made changes on a number of fronts – some of which are bound to boost morale – particularly in the Enforcement area. See this Sidley article about the Chair’s first 100 days in office – and this NY Times article about the changes in the Enforcement program. And see this blog from David Smyth about the deeper meaning of the SAC’s Steve Cohen case (as well as this WSJ article by Russ Ryan about the SEC’s low burden of proof).
– How long did it take to put together this app?
– What is the best way for practitioners to use it?
– Any surprises since you launched?
– Any plans for other apps?
A few weeks ago, I blogged about a rumor that the SEC is close to proposing pay disparity rules. This rumor appears to be confirmed, as noted in this article, when new SEC Chair White testified on Tuesday before the Senate Banking Committee that a pay disparity rule proposal will be coming in the next month or two.
So we don’t know the exact timing of a proposal – but we do know that it will be soon. Likely before our combined conferences, where it would be covered by Corp Fin Director Keith Higgins and other panels…
As noted in this Gibson Dunn blog, ISS has posted its policy survey to solicit comments ahead of announcing its 2014 voting policies – the comment period ends September 13th. ISS intends to announce its final policies about 1-2 weeks earlier than in previous years – in early November.
This is your opportunity to make yourself heard. As well as during the 75-minute panel entitled “Q&A with ISS” during our conference – if you have questions that you want asked, please email them to me – you will be kept anonymous.
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!
Here are the latest survey results about loan prohibitions & cashless exercises:
1. For cashless exercises of stock options, due to Section 402 of Sarbanes-Oxley, we:
– Don’t allow Section 16 insiders to conduct cashless exercises at all – 10%
– Don’t allow Section 16 insiders to conduct cashless exercises through our plan’s captive broker (so they have to use their own broker) – 7%
– Don’t allow executive officers to conduct cashless exercises through our plan’s captive broker but do allow directors to – 2%
– Allow Section 16 insiders to conduct cashless exercises through our plan’s captive broker – 81%
Please take a moment to participate in this “Quick Survey on Exclusive Forum Bylaws” and “Quick Survey on Annual Meeting Conduct.”
More Companies Acting on Exclusive Forum Bylaws Before Appeal
Speaking of the “Quick Survey on Exclusive Forum Bylaws,” Michelle Leder of footnoted.org counts 7 companies since the beginning of July who have made a change to their bylaws to add an exclusive forum provision, including Integrated Device Technology and JC Penney.
Interesting that companies are acting despite the fact that the forum selection bylaws case has been appealed – although the survey results bear this out so far with 54% of the respondents indicating they intend to adopt this type of bylaw soon rather than wait for the Delaware Supreme Court to weigh in. A number of the memos posted about the Boilermakers v. Chevron decision include a model bylaw…
It’s Done: 2014 Edition of Romanek’s “Proxy Season Disclosure Treatise”
We have wrapped up the 2014 Edition of the definitive guidance on the proxy season – Romanek’s “Proxy Season Disclosure Treatise & Reporting Guide” – and it’s done being printed. You will want to order now so that you can get your copy as soon as you can. With over 1350 pages – spanning 30 chapters – you will need this practical guidance for the challenges ahead. Order now.
At a recent event, a member joked with me that his CEO was asked: “What was the average age of directors on his board?” – and the CEO answered: “Dead.” Based on recent stats, it appears that many directors are comfortable as turnover is quite low these days. This is reflected in Jim Kristie’s Directors & Boards piece entitled “Troubling Trend: Low Board Turnover.” As Jim points out, a director with a certain background might make sense for the company now – but might not ten years down the road as the circumstances change.
Perhaps even more important is the independence issue – is a director who sits on the board for several decades likely to still be independent after such a long tenure (see this WSJ article about the 40-year club)? Does it matter if management turns over during the director’s tenure? And if so, how much? These are issues that are being debated. What is your take?
As blogged by Davis Polk’s Ning Chiu, CII is considering policy changes linking director tenure with director independence, under which it would ask boards to consider a director’s years of service in determining director independence. According to the proposed policy, 26% of all Russell 3,000 directors have served more than 10 years and 14% have served more than 15 years. CII would not advocate for any specific tenure, unlike the European Commission, which advises that non-executive directors serve no more than 12 years. Note that under the UK’s “comply or explain” framework, companies need to disclose why a director continues to serve after being on the board nine years. I have heard that seven years is the bar in Russia.
How Does Low Board Turnover Impact Board Diversity?
Related to proper board composition is the issue of whether low board turnover is just one more factor that stifles board diversity. As well documented in numerous studies (see our “Board Diversity” Practice Area), gender diversity on boards has essentially flat-lined over the past decade – and actually has regressed in some areas. This is a real-world problem as it’s been proven that differing views on a board lead to greater corporate performance. To get boards back on track, I do think bold ideas need to be implemented – and plenty are out there, such as this one. I can’t believe that more investors haven’t been clamoring for greater diversity – but I do believe that day is near…
Meanwhile, check out the nifty artwork from the cover of this issue of Directors & Boards:
Should Directors Talk to the Press?
Written from the perspective of a journalist, this article clamors for more directors to talk to the press. The author believes that directors are reticent to open up because of fear of being misquoted or uninformed. Apparently, the author is not aware of Regulation FD, which was adopted in 2000 – three years after his example of when a director was helpful to him in reporting a story. [Of course, Reg FD doesn’t apply to communications to the news media, but FD does cast a big shadow.]
As noted in this press release, Senator Elizabeth Warren has asked – via this letter – the NYSE and Nasdaq to adopt rules that would require listed companies to adopt “one share, one vote” policies. Old-timers will have flashbacks of controversial Rule 19c-4 – which was adopted in 1988 to limit the ability of companies to deviate from “one share, one vote” – and which was struck down in 1990 by the District of Columbia Court of Appeals in Business Roundtable v. SEC.
As you may know, it’s become fairly common practice for companies conducting an IPO to set up a corporate structure with Class A/Class B common. One class, typically help by founders and management, has ten to one voting rights, which generally allows that class to control the outcome of voting on most matters submitted to stockholders. Because the prevalence of unequal voting rights has increased, if adopted, the proposal could have a significant impact on current practices.
The proposal would make companies that seek an initial listing ineligible if they have two or more classes of common stock with unequal voting rights and prohibit already listed companies from issuing additional classes of common with unequal voting rights. Warren argues that, with unequal voting rights, ordinary investors, including workers and retirees, “have limited recourse in holding management and the board accountable if the company heads in a wrong direction. In addition, unequal voting helps entrench management and a board that can enrich themselves at the expense of the general investors.” She notes that many mutual fund providers, such as Fidelity and Vanguard, oppose the introduction of new classes of stock with unequal voting rights.
Wildest Idea of the Year? Creating a “Vote Buying” Framework
I agree with the start of this Financial Times article entitled “Shareholder democracy needs people to pay for their votes” about how the proxy plumbing is broken and needs to be fixed (a project that the SEC started but that got stalled due to constant Congressional mandates in other areas). But that is as far as I got before I started scratching my head.
Two Professors from the U. of Chicago – Eric Posner and Glen Weyl – have used their economic backgrounds as a way to devise a solution to shareholders who are too lazy to vote or too ill-informed when they vote as noted in their study. So the essence of their idea is to force shareholders to buy votes so that only “interested” parties have a right to vote – owning shares would only provide a shareholder with a right to profits.
There are things in the article that I disagree with – including the end when they say the “corporate governance movement has been spinning its wheels for decades and has little to show for its efforts.” I can say with great certainty that before Sarbanes-Oxley in 2002, only a handful of people ever heard of the term “corporate governance” – including most corporate lawyers and even corporate secretaries. Reform really is only in its infancy.
Corporate elections have only just started to become more “real” in the last year or so. We may have already found at least part of the solution as more institutions spend the resources necessary to be informed. Flash forward five years and who knows what the proxy season landscape will look like – it really is changing that fast, reflected by this NY Times article about how BlackRock is becoming more active (or watch my video about BlackRock). And that’s true even if no additional reforms are enacted.
My bottom line is that I just don’t see vote buying as an idea that will catch on. I believe it could wind up with individuals or small groups (eg. corporate raiders) controlling many outcomes, some of them pretty extreme. And I’m not convinced that having some shareholders who don’t vote or read proxy statements as being that bad a thing. As it stands now, the percentage of shareholders who vote during corporate elections is far higher than what happens in the political world, albeit partly due to a position taken by the Department of Labor many years ago (ie. proxy voting is a fiduciary act).
1. Beyond Professor Bainbridge’s rightful skepticism about legislative adoption, to the extent shareholders control bylaws (ultimately in the Model Act they do – and likely in the Delaware Code), which shareholders have an incentive to disempower themselves vis a via those with lesser holdings? To what degree? So such a provision in the statute alone as an option is inadequate and it would not be adopted as a default rule.
2. On a historical note, the antecedent to this proposal lies in the very old practice of granting one vote per shareholder rather than one vote per share as now is the norm. The proposal doesn’t go all the way to such equality – but it moves in that direction. The older practice was scrapped, so a compelling case must be made as to why a variation on it should now be restored.
3. If such a rule were in place, do we know how investors who favored various transactions would behave to dampen its effect? For example, rather than buying 64 shares pre-transaction to get 8 votes, perhaps buying 144 shares to get 12 votes to combat the votes of smaller holders will suffice. And so on. (Doubtless others can devise better examples). Thus, I raise the usual problem of the market workaround of a rule change that seems sufficiently unknowable ex-ante to warrant change.
After nearly six years of service as Corp Fin’s Chief Counsel (& Associate Director), Tom Kim has left the SEC to return to private practice. Tom was one of the SEC’s best and brightest, overseeing the venerable Chief Counsel’s office during a time of great change. Tom leaves having accomplished the rare legal job trifecta (government/in-house/law firm), having also worked in SEC Chair Cox’s office, for General Electric and Latham & Watkins. Tom is using up some of his vacation days before officially departing the agency.
Survey: Most Companies Not Ready for Conflict Minerals Compliance
With the SEC’s conflict minerals rules seemingly in limbo until the court decision this week, perhaps a PwC survey – discussed in this WSJ article – showing that most companies are not ready to comply is not surprising – but it is scary based on the consensus in the memos about the court decision that any appeal will take some time. Here are stats from the PwC survey pulled from this Elm Consulting blog:
– 26% of the respondents did not know if the rule was even applicable to their companies.
– 58% of respondents see this only as a compliance exercise and don’t anticipate additional value from the required efforts.
– 26% of respondents have not established a conflict minerals policy or feel it isn’t applicable.
– For those that have gathered some data on their suppliers, 54% of the respondents could not determine if minerals originated from covered countries or not.
– Almost 27% of respondents plan on relying solely on due diligence information received from suppliers; 58% don’t know if they will extend their efforts beyond their Tier 1 suppliers.
– For data management, 76% of respondents have not determined if they will implement a conflict minerals specific IT solution; almost 9% plan on using an existing system for their conflict minerals data.
– 44% of respondents expect to file a Form SD, but only 8% expect to also file a Conflict Minerals Report, or CMR (required where a company knows, or has reason to believe, that minerals originated from the Covered Countries).
– 9% of respondents expect that their CMR will be audited in 2013 (we are not sure why this number is greater than the number of respondents who think they will issue a CMR to begin with); 26% of respondents expect to defer the audit because they anticipate being classified as “undeterminable” for 2013.
– 25% of respondents appear not to have developed their internal team and don’t know how needs to be involved.
– 34% of respondents don’t know how many direct suppliers are in their supply chain; 23% have between 100 – 1000 and 17% have less than 100.
Director Roles in Going Private Deals
In this podcast, Matt Orsagh of the CFA Institute talks about the SEC’s recent enforcement case in which it charged and fined Revlon for misleading shareholders – as well as the company’s independent directors – as a result of a “going-private” transaction:
– What was the SEC’s recent Revlon enforcement action about?
– How can independent directors break down informational barriers during “going-private” transactions?
– Why are so many boards short-term focused – actively or passively?
– How should boards communicate with shareholders about these types of transactions?
We are very excited to announce that Corp Fin Director Keith Higgins will be part of our “Annual Proxy Disclosure Conference” on September 23rd. Registrations for our upcoming pair of conferences (combined for one price) – in DC and via video webcast – are strong and for good reason. The full agendas for the Conferences are posted – but the panels include:
– Keynote: “Keith Higgins, Director, SEC’s Division of Corporation Finance”
– Keynote: “Former Congressman Mike Oxley”- Q&A with ISS
– Q&A with Glass Lewis
– Say-on-Pay Shareholder Engagement: The Investors Speak
– Compensation Committees & Advisors: The NYSE & Nasdaq Speak
– Realizable Pay Disclosure: How to Do It
– How to Improve Pay-for-Performance Disclosure
– We Don’t Have a Good Pay Story: What Do We Disclose?
– How to Avoid Executive Pay Disclosure Litigation
– Peer Group Disclosures: What to Do Now
– In-House Perspective: Strategies for Effective Solicitations
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Supplemental Materials
– Dealing with the Complexities of Perks
– Say-on-Parachute & Post-Deal Disclosure Developments
– Compensation Accounting, Tax & Risk Assessment Disclosures
– Shareholder Proposals & Executive Pay
– The Rise of Political Contribution Disclosures
Dodd-Frank’s Whistleblower Protections: First Appeals Court Weighs In
As noted in the memos posted in our “Whistleblowers” Practice Area, the Fifth Circuit became the first appellate court to deliver an opinion on the Dodd-Frank whistleblower rules (Asadi v. G.E. Energy(USA)) – finding that a whistleblower can be protected only if they provide information to the SEC. It is noteworthy that some district courts have ruled differently.
Since the SEC’s new Reg D rules were published in the Federal Register yesterday, they become effective on September 23rd (60 days thereafter)…
More on our “Proxy Season Blog”
We continue to post new items regularly on our “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:
– For Proxy Advisers, Influence Wanes
– The Battle Over Shareholder Written Consent Bylaws
– More on “Shareholder Proposals: Goldman Sachs for President!”
– How Voting Rights in Corporate Elections Get Compromised Worldwide
– Waning Support for Some Shareholder Proposals
– Activists Unite to Obtain Majority Support for “Split the Company” Shareholder Proposal
