As Corp Fin Staffers have been warning folks at conferences, etc., the Office of Chief Counsel is shutting down its email address used to ask questions, submit no-action letters, etc. – cfletters@sec.gov – on April 1st. The reason is that the Staff has been getting too much spam at this email address, so it’s no longer an efficient way for them to receive communications from the public.
Going forward, you should instead use this form to ask interpretive questions – and this form to submit no-action requests. And of course, you can still call OCC to ask questions by phone (at 202.551.3500, leaving your name, phone number and a phrase describing the topic on their voicemail) or submit no-action requests by mail…
CFTC Takes Down a Comment Letter: Is That Allowed?
As noted in this ZeroHedge blog, the CFTC deleted a comment letter that was allegedly posted by a JPMorgan employee in response to a rule proposal’s request for comments (here is a Businessweek article mentioning it).
The purpose of my blog is not to delve into whether the alleged whistleblower letter was real, but rather whether a federal agency has the authority to pull comment letters posted by the public? The honest answer is “I don’t know.” I’m not aware of any legal limits on a federal agency to do this other than what Keith Bishop has just blogged – and I am not aware that the SEC ever has done so. But I definitely can envision a situation where someone posts a comment letter that is false and potentially harmful (remember this blog about forged comment letters) – and in those situations, it seems wise for the agency to act. The question remains what happens if a whistleblower posts something, how does the agency know if its real? I imagine in that case that the agency would try to do some diligence but that would be tough in a situation where the commenter is anonymous or the circumstances require some time to conduct an investigation.
Steve Quinlivan notes: Early on, when the SEC was soliciting comments on the whistleblower rules, some whistleblowers got confused and submitted their complaints in the form of comments to the whistleblower proposal. At least two that I recall. The SEC removed those comments.
PCAOB’s Auditor Rotation Roundtable: Materials Available
Today is the second day of the PCAOB’s roundtable on its vast reform project to consider mandatory auditor rotation, among other things. The PCAOB has been posting statements from the numerous participants as the roundtable unfolds. Here is an article describing the events from Day One, including former Fed Chair Volcker’s support of auditor rotation.
March Madness Continues…
I didn’t reveal my Final Four picks this year because I wanted my Michigan team to go all the way. We never get the respect we deserve, as illustrated by this photo:
Yesterday, the Senate held a vote to amend the JOBS bill that was recently approved in the House. The amendments – proffered by Senators Reed, Landrieu and Levin – would include some very basic investor protections (protections which the Obama Administration originally had called for, but more recently has become deafening silent on). The vote today was 55-44 in favor, with one abstention – and was along party lines except for Republican Senator Brown (R-Mass.) who is in a tough reelection fight and he voted for these protections. That tally fell five votes short of the 60 needed to end debate on the measure.
In a surprise move, coming after Senate Republicans killed an amendment to reauthorize the Export-Import Bank, Senate Majority Leader Harry Reid (D-NV) canceled a remaining vote on the bill and called a meeting of Senate Democrats. As noted in this article from The Hill, there is some dissension among Democrats over the bill. This WSJ article states that the bill “is now expected to clear the Senate by week’s end.”
Mike Gettelman notes: “After the JOBS (jobbed?) Act, the Securities Act of 1933 should be called the Securities Act of 2012. Lots of late colleagues turning over in their graves.”
Anatomy of Another Groovy Proxy Statement: Pfizer
So many members enjoyed my blog dissecting Prudential’s proxy statement on Monday that I decided to see what Pfizer is doing with that company’s proxy statement. It also is a fine example of how to make a proxy statement more “usable,” including:
– Overall usable design, including greater use of graphics and charts than in the past, particularly in the CD&A
– Committee reports from the Corporate Governance and Regulatory and Compliance Committees (pages 14-15), not just from the committees required to provide reports
– Excellent discussion of board leadership structure (pages 8-9; they recombined the CEO/Chair positions in December)
– Response to 2011 say-on-pay vote (page 34)
– Inclusion of CEO letter (3rd page from front)
– Use of proxy summary (page i) and CD&A executive summary (page 42)
The Latest Developments on Proxy Access Shareholder Proposals
In this podcast, Rebekah Toton of O’Melveny & Myers provides some insight into Corp Fin’s recent no-action responses on proxy access shareholder proposals, including:
– What no-action responses has the Corp Fin Staff issued so far on proxy access proposals?
– Are there more responses expected this proxy season?
– Based on what has happened, what should companies be doing now?
As I blogged last week on CompensationStandards.com’s “The Advisors’ Blog“: In our “Say-on-Pay” Practice Area, we have posted the court order issued last week in the Superior Court of California-LA that rules against the plaintiffs. We have also posted this week’s order from the US District Court for the District of Maryland dismissing the lawsuit against BioMed Realty Trust. As Mark Poerio notes in his blog:
The directors and officers of Jacobs Engineering, and their compensation consultant, have successfully challenged a complaint alleging that poor corporate financial performance made their authorization of significant pay increases for executives “unreasonable, disloyal, and not in good faith, and violated the Board’s pay-for-performance executive compensation philosophy.”
A Los Angeles Superior Court dismissed the complaint for failure to adequately allege either (1) demand futility or (2) facts sufficient to constitute their claim. Notably, the court observed that “The Dodd-Frank Act did not create any binding obligation on the Board” [through its advisory say-on-pay vote requirement], and that there was “no actionable misrepresentation alleged or culpability” alleged to support claims based on false disclosures in the company’s proxy statements.
Webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees”
Tune in tomorrow for the CompensationStandards.com webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance “tell it like it is. . . and like it should be.”
Time permitting, the panel hopes to tackle all of these topics during the program:
– Weaknesses in ISS’ P4P assessment
– How ISS over values options
– Whether to consider ISS’s peer group in addition to their own
– How to best demonstrate pay/performance alignment (like Jan’s “right” pay and “right performance”)
– Rethinking severance (contracts, benefits, etc.) in a P4P world
– Whether to ‘fight’ a ISS recommendation with supplemental materials, etc.
– How and when to move away from a relative TSR program
– Whether to implement a clawback if they haven’t already
Last week, 20 members of Congress sent this letter to the SEC urging the agency to prioritize the pay disparity rulemaking. As noted in this article, Sen. Robert Menendez – the author of Section 953(b) – is leading the charge…
Poll: How Many Companies Will Receive a “Failed” Say-on-Pay Vote in ’12?
Now that we’ve already had one failed vote in 2012 – please take a moment to participate in this anonymous poll and express how you read the tea leaves for the number of failed say-on-pays to befall companies this year (last year, there were over 40 – many more than I expected, evident by how much I vastly underestimated the range of choices in last year’s poll):
On Friday, Prudential filed its preliminary proxy statement and Peggy Foran has done it again. Here are some of the features of this year’s proxy statement that make it a cut above:
1. Overall, there are even more charts than the many that Pru has included in the past (eg. book value)
2. As there has been in the past, there are both letters from the CEO and the board to shareholders (including each director’s picture on the board letter this year – see page 2)
3. The board’s letter explain its reaction to last year’s say-on-pay vote and discusses shareholder engagement (page 2); and there is a shareholder engagement discussion on 25
4. There is a discussion on corporate political contributions and lobbying expenditures (page 27)
5. There are multiple discussions on sustainability (see pages 3 and 26). Sustainability also is now part of the director qualifications chart on page 22 (and the charter of the governance committee was changed to address sustainability too)
6. There is a new box devoted to board diversity on page 11
7. The board risk oversight disclosure has been expanded on page 24
8. There is a discussion about the courage of Pru’s Japanese colleagues in the wake of last year’s tragic earthquake on page 4
Overall, the proxy is very readable – and the online version will be quite functional once the definitive proxy is filed (see last year’s proxy) – as always. A great example for the rest of us…
STA Petitions SEC Over Proxy Service Fees for Separately Managed Accounts
Last week, the Securities Transfer Association (STA) filed this rulemaking petition with the SEC regarding proxy processing fees being charged for managed accounts. The petition requests that the SEC either issue interpretive guidance prohibiting broker-dealers (and their agents – read Broadridge) from charging companies at the beneficial owner level for investment advisory accounts (where the beneficial owner has delegated proxy voting authority to an investment adviser) or have disputed fees placed into escrow until this managed accounts flap is resolved by the NYSE and SEC.
Webcast: “The SEC Staff on M&A”
Tune in tomorrow for the DealLawyers.com webcast – “The SEC Staff on M&A” – to hear Michele Anderson, Chief of the SEC’s Office of Mergers and Acquisitions, and former senior SEC Staffers Dennis Garris of Alston & Bird and Jim Moloney of Gibson Dunn discuss the latest rulemakings and interpretations from the SEC.
On Tuesday, I posted a list of links to articles and letters criticizing Congress and its proposed JOBS Act for planning to deregulate the securities markets. Since then, there have been hordes of articles reporting in a similar vein (there are have been over 2000 articles on the Act this week).
Rather than list another dozen pieces attacking the bill, below is an update from Lynn Turner explaining the bizarre process of this bill so far:
There have been many stories about how the Senate is conducting its business in recent days. The Senate has often claimed it is more reasoned and thoughtful than the US House of Representatives, but that is not necessarily so. In the case of the JOBS Act, its process has been much worse.
Usually a bill is introduced. To get any traction though, it needs to be introduced and sponsored by a Senator on the appropriate Senate Committee with jurisdiction over the subject matter of the bill. If the committee chair, and sufficient number of committee members are supportive, hearings about the legislation are held in the committee, as well as in subcommittees. The regulators are called to testify, as well as people who are expected to support or oppose the bill.
Typically the party in power picks most of the panel members testifying and the minority party is given one or at most two slots in which people they pick can testify. Then comes what is known as a “mark-up” when the committee members in a public meeting discuss the proposed bill, make proposed amendments and vote on those amendments. If approved, the marked up bill goes to the full floor for debate, when the Majority Leader puts in on the agenda and schedule for debate.
However, in the case of this legislation, a Senate hearing in a subcommittee planned for March 21st was canceled. And the legislation was pulled from the Senate circumventing any mark-up session and further hearings. None of the SEC Commissioners testified. The SEC Chair has written this letter to the Senate citing serious problems and deficiencies in the bill leaving investors further exposed to scams and schemes ala Bernie Madoff.
On Wednesday morning, I understand Harry Reid went to the floor saying he was pulling this out of the hands of the Banking Committee and he began pushing it through in rapid fire this week. That was not what some Senators expected. There was a caucus of the Democratic Senators on Wednesday over lunch at which Senators expressed concern with what Harry Reid and Charles Schumer were doing.
Later on as widely reported, a trade off of relief for blocked judges in exchange for deregulation of securities markets entered the fray making things even more confusing. First thing on Wednesday morning, some thought the Dems would introduce their own version of the bill, but Harry Reid in a nod of the cap to the venture capitalist and bio tech lobbyists (and their campaign contributions) decided that he would go with the House Republican’s bill (probably following the White House’s directions). While an amendment would be offered making it look like investors protections requested by the state regulators, the SEC and many investor and consumer groups would be entertained, that is merely a facade – a token effort which was dead on arrival before it was even introduced.
Perhaps the funniest thing, is that only people in Congress are calling this a jobs bill. It has become widely referred to in the media as “The Bucket Shop Reauthorization Act of 2012.” Most of the people that the Dems did call to testify have said it will not create new jobs, (except perhaps among law enforcement agencies and prison guards)!!! As they say, God Bless America.
And if you want to read about more bizarre behavior from Congress, read this piece – entitled “What’s Behind Congressional Freeze on SEC Funding?” – which explains how the House Financial Services Subcommittee has voted against the SEC’s budget – not because the government doesn’t have the money – but as a way to punish the SEC for conducting unnecessary rulemaking. Except that rulemaking was mandated by Congress in Dodd-Frank…
Second Circuit Stays Judge Rakoff’s Citigroup Decision
Yesterday, in a sharply worded per curiam opinion, a three-judge panel of the Second Circuit granted the motions of Citigroup and the SEC to stay district court proceedings in the SEC’s enforcement action against the company, so that the appellate court could consider the merits of the question of whether Judge Rakoff had properly rejected the parties’ $285 million settlement agreement. Here’s some analysis from Kevin LaCroix in his “D&O Diary Blog” and David Smyth’s analysis from the “Cady Bar the Door Blog.”
SEC Marks The Ides By Bringing Actions Involving Secondary Market For Private Company Shares
As noted in this blog, Keith Bishop has been writing about some of the issues related to secondary trading in private company shares for a few years. Two days ago, the SEC brought an action against several firms and individuals related to activities involving secondary trading of private company shares. Read more in Keith’s blog as well as this analysis from Vanessa Schoenthaler’s “100 F Street Blog.”
Last week, Corp Fin Director Meredith Cross delivered this speech that kicks off with a quick recent history of the SEC’s FPI rulewriting in various areas as a way to demonstrate that the Staff is always evaluating: does this make sense anymore? I’m not sure that I read this speech as the Staff seeking to undertake a “full review” of the SEC’s FPI framework as noted in this Jones Day memo (although the memo does a great job of recapping the speech), particularly given all the Dodd-Frank rulemaking still ahead for the Staff…
Transcript: “Conduct of the Annual Meeting”
We have posted the transcript for the recent webcast: “Conduct of the Annual Meeting.”
The Latest in GRC Software
In this podcast, John Banas and Bruce Olcott of MyComplianceManager provide some insight into how software can make GRC compliance easier, including:
– What are the biggest trends you’re seeing in GRC over the past few years?
– We hear about GRC frequently, what does that term mean to you and what functions does it encompass?
– So what should a Compliance, Legal or Audit Executive look for when considering purchasing a GRC Suite or specific GRC modules?
Please take a moment to participate in this “Quick Survey on GRC Software” – and this “Quick Survey on Board Minutes & Auditors.”
Spanking brand new. And shiny to boot! If you have a director that is resigning, retiring, not standing for re-election, quitting in disgust, being appointed or dying, we have the Handbook for you. Posted in our “Director Resignations” Practice Area, this comprehensive “Director Resignation & Retirement Disclosure Handbook” provides practical guidance – including numerous hypotheticals – about how to handle these situations including how to prepare in advance for them. In particular, the Handbook focuses on the company’s reporting obligations under Item 5.02 of Form 8-K when these inevitable situations arise…
A “Fresh Eyes” Restatement Report
Ahead of next week’s PCAOB roundtable – on March 21st and 22nd – on whether it should propose an auditor rotation requirement for the largest companies, Audit Analytics prepared this report that examines the restatements disclosed by the Russell 1000 – as well as their auditor changes – in an attempt to determine if auditor changes in any way played a part in the discovery of outstanding accounting misstatements and, if so, to what extent. For the report, Audit Analytics reviewed 1,355 companies (a five-year aggregate), 378 restatements, and 173 auditor departures.
Some of the observations contained the report:
– About 7.5% (4 out of 53) of the Annual Restatements linked to an auditor departure were detected, in part, by the “fresh eyes” of the newly engaged auditor.
– About 64% (34 out of 53) of the Annual Restatements linked to an auditor departure were detected prior to the auditor’s departure (“no fresh eyes”).
– About 15% (8 out of 53) of the Annual Restatements linked to an auditor departure were detected by the companies themselves or their regulators, such as the SEC (“no fresh eyes”).
– About 13% (7 out of 53) of the Annual Restatements linked to an auditor departure were restatements that corrected misstatements that occurred after the new auditor’s engagement (no restatement of work during predecessor auditor engagement).
– About 82% (238 out of 291) of the Annual Restatements disclosed by the Russell 1000 were disclosed by companies that did not experience an auditor departure.
– The total auditor changes experienced by the Russell 1000 since January 1, 2005 had a “fresh eyes” restatement discovery rate of no more than about 3.0%.
Lynn Turner notes: “This report highlights just how poor quality audits really are today and just exactly what are they worth. Of 1335 Russell 1000 companies, 291 or 21.8% had errors in their financial statements that went undetected and had to be corrected. These audits are exclusively done by the Big 4 who are suppose to be the best of the best – one can only wonder then what an error rate for the worst is like.
Not only does these findings call into question the quality (or lack thereof) of audits, it also continues to call into question the competence of the CFO/Controller at these companies, the lack of internal controls, and the continuing unreliability and lack of oversight by the audit committees. Why was it the error was not detected at least by the auditors before the original financial statements with errors in them were released to investors? Were the auditors either incompetent or lacking independence or devoid of skepticism? Was the audit committee members merely going thru the motions and what steps did they take to establish accountability for the problems?
What the report is unable to report, as there is often no transparency in SEC 8-K and other reports, is just exactly what did turn up the errors in each of these instances where the restatement occurred prior or subsequent to a change in auditor. While a few instances are noted, such as the SEC finding three of the 291 errors, in most instances how the error is actually found and by whom is not disclosed.
Using Online Video to Announce a Restatement
Thanks to Howard Dicker of Weil Gotshal for turning me onto this restatement announcement study which used executive MBA students as guinea pigs. The study finds that although text-based press releases have been the norm for years, companies have recently begun using online video for such announcements. And that when a CEO accepts responsibility by making an internal attribution for a restatement, investors viewing the announcement online via video recommend larger investments in the firm than do investors viewing the announcement online via text. Pretty wild…
Yesterday, Dave did a great job in describing the JOBS Act and how it would fast-track capital formation reform (we are posting memos on the Jumpstart Our Business Startups Act in our “IPOs” Practice Area). Dave also noted that the Senate was fast tracking the bill – and that some were questioning the measures in the bill.
As I’ve blogged before, count me among those that think this is a wrongheaded thing that Congress is doing in the capital formation area. This bill has nothing to do with jobs and everything to do with fewer protections for investors. I am not the only one who feels that way as noted in these articles (note that last one that argues that the bill won’t even be good for IPOs!):
Yesterday, the SEC posted two sets of recommendations from its Advisory Committee on Small and Emerging Companies – one for reporting obligations and one for market access. And last week, Facebook filed its Pre-Effective Amendment No. 2 to its Form S-1
US Investors as an “Easy Mark”: More Evidence
As noted in this blog, it’s now pretty well known how scores of Chinese companies – that turned out to be fraudulent – listed their securities here in the US because they weren’t able to do so in China. As noted in this article from “The Telegraph,” the London Stock Exchange is exploring ambitious plans to push its junior AIM market into the United States. To be honest, I thought AIM was dead since so many of the companies that have gone public and listed there have since gone down the tubes. As noted in the article: “In 2007, Roel Campos, a commissioner at the Securities and Exchange Commission voiced his concerns that 30% of new firms listing on AIM “are gone in a year.”
Transcript: “Company Buybacks: Best Practices”
We have posted the transcript for our recent webcast: “Company Buybacks: Best Practices.”
Late last week, the House of Representative passed H.R. 3606, The Jumpstart Our Business Startups (JOBS) Act, with strong bi-partisan support. This bill was comprised of a collection of bills that have been introduced in the House over the past year, all of which focus in one way or another on the ability of companies to raise capital and stay private longer. The key measures included in the JOBS Act are:
Title I, Reopening American Capital Markets to Emerging Growth Companies. This portion of the Act is what is most commonly referred to as the “IPO On-Ramp” legislation, and it is meant to encourage smaller companies to go public through a process where public company obligations would be phased in over time (hence the on-ramp reference). This legislation would amend the 1933 Act and 1934 Act to create a new category of issuer referred to as an “emerging growth company,” which is an issuer with total annual gross revenues of less than $1 billion, and would continue to have this status until (i) the last day of the fiscal year in which the issuer had $1 billion in annual gross revenues or more; (ii) the last day of the fiscal year following the fifth anniversary of the issuer’s initial public offerings; and (iii) the date when the issuer is deemed to be a “large accelerated filer” as defined by the SEC. The legislation provides for scaled regulation to be applied to the emerging growth company for up to five years following the IPO, including breaks on compliance with things like Section 404(b) of the Sarbanes-Oxley Act, mandatory Say-on-Pay, and the Dodd-Frank CEO pay ratio rules (to come). On the 1933 Act registration front, the legislation would permit greater pre-filing communications, allow for expanded research at the time of the IPO by offering participants, and would provide for pre-filing confidential review of draft registration statements by the SEC Staff.
Title II, Access to Capital for Job Creators. This portion of the legislation would remove the prohibition against general solicitation and general advertising in private offerings under Regulation D, provided that all of the purchasers of securities are accredited investors. Similarly, general solicitation and general advertising would not be prohibited in secondary sales so long as only QIBs are purchasers in the offering. In addition, the legislation would provide that offline and online forums bringing together companies and investors would not be treated as broker-dealers unless they receive transaction-based fees for their activities.
Title III, Entrepreneur Access to Capital. This part of the bill would provide an exemption for crowdfunding, by permitting offerings up to $1 million ($2 million in some cases), provided that investor contributions are limited to $10,000 or 10% of the investor’s annual income, whichever is less. Requirements targeted at investor protection are imposed on the issuer and/or the intermediary involved in the crowdfunding effort.
Title IV, Small Company Formation. This part of the legislation is what is commonly referred to as Regulation A reform, raising the limit for Regulation A offerings from $5 million to $50 million. Most importantly, the legislation would exempt Regulation A offering from state securities laws when the Regulation A securities are (i) offered or sold through a broker-dealer; (ii) offered or sold on a national securities exchange; or (iii) sold to a qualified purchaser as defined by the SEC.
Title V, Private Company Flexibility and Growth. This portion of H.R. 3606 increases the 1934 Act registration shareholder of record threshold from 500 to 2,000 (only 500 of which can be non-accredited investors). Employees receiving company securities under employee benefit plans would be excluded from calculating the number of record holders.
Title VI, Capital Expansion. This portion of the Act would increase the shareholder of record threshold from 500 to 2,000 for banks and bank holding companies, and would provide that a bank or bank holding company could terminate 1934 Act registration if the number of holders of record drops to less than 1,200.
Title VII, Outreach on Changes to the Law. This part of the Act requires SEC outreach to certain small and medium-sized businesses informing them of the effect of the law, so that these business are made fully aware of the benefits of the legislation.
What’s Next for These Legislative Efforts?
The Administration issued a statement supporting the JOBS Act. Meanwhile, Senate Majority Leader Harry Reid (D-NV) has said that the Senate will move forward with its own legislation, most likely consolidating a number of the companion bills that have been introduced in the Senate over the last year, and Senate Banking Committee Chairman Tim Johnson (D-SD) said his panel will hold a hearing tomorrow on the content of the legislative package. All reports are pointing toward quick action in the Senate, although at this point it is difficult to say if and when a bill that can be reconciled with the House bill will be passed.
Questions Remain About These Measures
Not everyone is wild about the approaches contemplated by these JOBS Act measures. Beyond the obvious question of whether, as the name implies, these securities law tweaks will actually have any impact at all on the employment market, some have raised concern with the investor protections that might be compromised by some of these legislative initiatives. For example, last week Lynn Turner testified before the Senate Banking Committee on the state of IPOs and capital formation in the US and noted: “The proposed legislation is a dangerous and risky experiment with the U.S. capital markets, and the savings of over 100 million Americans who depend on those markets. The evidence does not support the need for it. In fact, it contradicts it. I do not believe it will add jobs but may certainly result in investor losses. … As a result, I do not support the various bills including the IPO on ramp and crowd funding legislation.” Similar concerns have been expressed by groups such as the Council for Institutional Investors, Consumers Federation, Americans for Financial Reform, and AFL-CIO.
Yesterday, the Staff posted responses to a number of no-action requests relating to proxy access shareholder proposals. This sort of “batch” posting of letters related to one particular topic tends to happen with shareholder proposals that relate to difficult policy issues for the Staff, and in this inaugural year of proxy access private ordering, this has certainly been the biggest issue of the season thus far. The requests that the Staff answered deal with several different bases for exclusion, reflecting the different approaches taken by the proponents and the particular issues raised by the wording of their proposals. Here is a summary of how the Staff came out on these letters:
1. More than one proposal. In responses to Bank of America Corporation, The Goldman Sachs Group, Inc. and Textron, the Staff indicated that there appeared to be some basis that the companies could exclude the proxy access proposals under Rule 14a-8(c), which provides that a proponent may submit no more than one proposal. In particular, the Staff noted that several paragraphs of the proponents’ submissions contained a proposal relating to the inclusion of shareholder director nominations in the companies’ proxy materials, while one paragraph of the submissions included a proposal relating to events that would not be considered a change in control. The Staff concurred with the view that this paragraph constituted a separate and distinct matter from the proposal relating to the inclusion of shareholder nominations for director in the companies’ proxy materials.
2. Vague and indefinite. In responses to Chiquita Brands, Inc., MEMC Electronic Materials, Inc. and Sprint Nextel Corporation, the Staff indicated that there appeared to be some basis for the view that the companies could exclude the proxy access proposals under Rule 14a-8(i)(3) as vague and indefinite. The Staff particularly noted that the proposals provided that the companies’ proxy materials shall include the director nominees of shareholders who satisfy the “SEC Rule 14a-8(b) eligibility requirements,” without describing the specific eligibility requirements. The Staff viewed the specific eligibility requirements as representing a central aspect of the proposals, and that while some shareholders voting on the proposals may be familiar with the eligibility requirements of Rule 14a-8(b), many other shareholders may not be familiar with the requirements and would not be able to determine the requirements based on the language of the proposal. Based on this ambiguity, the Staff believed that neither shareholders nor the companies would be able to determine with any reasonable certainty exactly what actions or measures the proposals required.
3. Website Reference Cannot be Omitted Under 14-8(i)(3). In responses to The Charles Schwab Corporation, Wells Fargo & Company and The Western Union Company, the Staff indicated that it was unable to concur with the view that the companies could exclude a reference to the proponent’s website in the proposal under Rule 14a-8(i)(3), which permits the exclusion of a proposal or a portion of a proposal if it is materially false or misleading. The Staff particularly noted that the proponent had provided the companies with the information that would be included on the website, the companies had not asserted that the content to be included on the website was false or misleading, and the proponent represented that it intended to include the information on the referenced website when the companies filed their 2012 proxy materials. For these reasons, the Staff was unable to conclude that the companies demonstrated that the portion of the proposal was materially false or misleading and could be omitted.
4. One Proposal Not Excludable Based on a Substantially Implemented Argument. In a response to KSW, Inc., the Staff addressed a proposal seeking to amend the company’s bylaws to require that the company include in its proxy materials the name, along with certain other disclosures and statements, of any person nominated for election to the board by a shareholder or a group of shareholders who beneficially owned 2% or more of the company’s outstanding common stock and to allow shareholders to vote with respect to such nominee. The company had adopted a bylaw that allows a shareholder who has owned 5% or more of the company’s outstanding common stock to include a nomination for director in the company’s proxy materials. Given the differences between the shareholder proposal and the company’s bylaw, including the difference in ownership levels required for eligibility to include a shareholder-nominated director nominee in the company’s proxy statement, the Staff was unable to concur that the proposal could be omitted as substantially implement under Rule 14a-8(i)(10).
What’s Next for Proxy Access?
What can we glean from these responses on proxy access proposals? Probably not much in terms of what will happen with private ordering in seasons to come. As we noted in the January-February 2012 issue of The Corporate Counsel, this current crop of proxy access shareholder proposals demonstrates the principle that it is important to focus on the specific language of the proposal itself, which often paves the way for substantive bases for exclusion that might be available even without the company having to go out and take defensive measures like adopting some sort of proxy access regime. As is usually the case with the type of exclusions that we see here on a number of these proposals, the proponents will no doubt get smarter next year and try to correct the language which led to exclusion this year, so the landscape might be quite different in 2013. Over the next few months, we will see how these proposals go over with shareholders, which of course will be the real test of whether shareholders really want proxy access in the first place.
Webcast Transcript: “Transaction Insurance as a M&A Strategic Tool”
We have posted the transcript for our recent DealLawyers.com webcast: “Transaction Insurance as a M&A Strategic Tool.”
