In this podcast, Dave Lynn and Marty Dunn engage in a lively discussion of the latest developments in securities laws, corporate governance, and pop culture. Topics include:
– Choice of forum provisions
– The crowdfunding phenomenon
– Breweries we’d like to buy
Stan Keller on the Future of Proxy Access
In this brief memo, Stan Keller of Edwards Angell Palmer & Dodge weighs in on the future of proxy access, including the status of the Rule 14a-8 amendment. We have posted a number of memos on proxy access in the wake of the Business Roundtable/Chamber lawsuit in our “Proxy Access” Practice Area.
Speaking of lawsuits, there will be oral argument in the US District Court of DC held today in the PETA v Merck shareholder proposal case. Here’s the complaint filed back in April.
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:
– Private Placements: New “Know Your Customer and Suitability Obligations” for Brokers
– “Fifth Analyst Call” and Reflexive Confrontation
– HSN Board Refuses to Accept Director Resignation
– The LinkedIn IPO: A Favorable Comparison to the Internet Bubble Years
– More on “Insider Trading Analysis of Sokol Charges”
– During the first year of advisory votes on executive compensation under Dodd-Frank, investors overwhelmingly endorsed companies’ pay programs, providing 91.2% support on average.
– Shareholders voted down management “say on pay” proposals at 37 Russell 3000 companies, or just 1.6% of the total that reported vote results. Most of the failed votes apparently were driven by pay-for-performance concerns.
– “Say on pay” votes spurred greater engagement by companies and prompted some firms to make late changes to their pay practices to win support.
– Investors overwhelmingly supported an annual frequency for future pay votes, even though many companies recommended a triennial frequency.
– Among governance proposals, the biggest story this year was the greater support for board declassification. Shareholder resolutions on this topic averaged 73.5% support, up more than 12% from 2010, and won majority support at 22 large-cap firms.
– Shareholder resolutions on environmental and social issues reached a new high of 20.6% average support. Five proposals received a majority of votes cast, a new record.
– The arrival of “say on pay” contributed to a significant decline in opposition to directors. As of June 30, just 43 directors at Russell 3000 firms had failed to win majority support, down from 87 during the same period in 2010. Poor meeting attendance, the failure to put a poison pill to a shareholder vote, and the failure to implement majority-supported investor proposals were among the reasons that contributed to investor dissent.
Proxy Access: Will Shareholders Submit Shareholder Proposals in 2012?
The July 22 federal appeals court ruling that struck down the SEC’s marketwide proxy access rule, Rule 14a-11, did not affect the SEC’s amendments to Rule 14a-8 that would permit shareholders to resume filing proxy access bylaw proposals. Those amendments were placed on hold by the SEC last October after two business groups brought a legal challenge to Rule 14a-11. At that time, the SEC said the 14a-8 changes were “intertwined” with the marketwide access rule.
If the SEC lifts its stay on its Rule 14a-8 amendments, shareholders will be able to submit access bylaw proposals in 2012. Investors would not face any additional ownership hurdles other than the requirements that already apply to proponents–i.e., owning at least $2,000 in company stock for more than a year.
Several investors said last week they are looking into submitting access proposals next season. Investors could file binding or non-binding resolutions, but some states require higher ownership thresholds for binding bylaw proposals. It appears likely that proponents would seek holding periods and ownership thresholds that are more permissive than Rule 14a-11’s requirements of a 3 percent stake for at least three years. Labor funds generally prefer a two-year period, and some activists have argued for a lower threshold (such as 1%) at large-cap firms.
So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don’t want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues.
Back in 2007, two well-targeted shareholder access proposals did attract broad investor support, winning at least 43 percent approval at UnitedHealth Group and Hewlett-Packard. There also was majority approval for access at Cryo-Cell International, a small-cap firm. However, the SEC, which then had a Republican majority, approved a rule in late 2007 to stop investors from filing access resolutions.
If shareholders bring access resolutions in 2012, no-action challenges by companies would be inevitable. Some companies may seek to exclude investor access proposals (as firms have done in response to special meeting requests) by offering their own management resolutions with greater hurdles to access – such as a 10% (or higher) ownership threshold.
Transcript: “Top IP Pitfalls in Deals: How to Avoid Them”
We have posted the transcript for our recent DealLawyers.com webcast: “Top IP Pitfalls in Deals: How to Avoid Them.”
As it has done before, the SEC has adjusted its tentative rulemaking calendar to push back some of the expected proposal and adoption dates for the remaining executive compensation and corporate governance items on its agenda. Thanks to Mike Melbinger, who blogged this information yesterday on CompensationStandards.com (see Davis Polk’s blog for more analysis):
On Friday, the SEC modified its schedule for adopting rules relating to the Dodd-Frank Act, including the key provisions applicable to executive compensation, as follows:
August – December 2011 (planned)
– §951: Adopt rules regarding disclosure by institutional investment managers of votes on executive compensation
– §952: Adopt exchange listing standards regarding compensation committee independence and factors affecting compensation adviser independence; adopt disclosure rules regarding compensation consultant conflicts
January – June 2012 (planned)
– §953 and 955: Adopt rules regarding disclosure of pay-for-performance, pay ratios, and hedging by employees and directors
– §954: Adopt rules regarding recovery of executive compensation
– §956: Adopt rules (jointly with others) regarding disclosure of, and prohibitions of certain executive compensation structures and arrangements
July – December 2012 (planned)
– §952: Report to Congress on study and review of the use of compensation consultants and the effects of such use
Dates still to be determined
– §957: Issue rules defining “other significant matters” for purposes of exchange standards regarding broker voting of uninstructed shares
Thus, it seems unlikely that all five of the clawback, pay-for-performance, CEO pay ratio, incentive compensation rules for large financial institutions, and hedging by employees and directors provisions will be effective for next year’s proxy season. However, if they meet this schedule, one or two of the provisions will be effective for proxies filed after January (as with the say on pay rules, published in January 2011). Fortunately, the SEC will propose rules first (and already has for a couple of the provisions), so we should know well in advance which provisions will be final for the 2012 proxy season.
1st Annual Reports: CIGFO and FSOC
As noted by Vanessa Schoenthaler in her “100 F Street Blog,” Section 989E of Dodd-Frank created the Council of Inspectors General on Financial Oversight (CIGFO). Appropriately named, CIGFO is made up of the Inspector Generals of nine federal agencies-the Fed, CFTC, HUD, Treasury, FDIC, FHFA, NCUA, SEC and SIGTARP- involved in financial oversight. Last week, CIGFO released its 1st annual report.
In addition, as noted in the Dodd-Frank.com Blog, the Financial Stability Oversight Council, or FSOC, issued its 1st annual report last week too. The report fulfills the Congressional mandate to report on the activities of the Council, describe significant financial market and regulatory developments, analyze potential emerging threats, and make certain recommendations.
Lehman Case Hints at Need to Stiffen Audit Rules
Last week, Judge Kaplan of the Federal District Court for the Southern District Court of New York delivered his decision – In re Lehman Brothers Secs. and ERISA Litig. (SDNY; 7/27/11) – involving Lehman, its executives, its investment bankers and auditors. As noted in this NY Times article, Judge Kaplan’s conclusion was “the company misled investors and its officers and directors may be held liable. But the company’s auditor seems likely to escape any responsibility for an audit that wrongly concluded the company’s financial statements were completely proper.” As a result, some experts have opined that there could be shortcomings in a number of accounting standards including those on disclosures of risk, SOP 94-6, SFAS 107 and SFAS 140.
Maybe the debt ceiling standoff is making everyone act a little strange in this town, as noted in this observation from Lynn Turner about the latest from Congress:
This newly proposed legislation – the “SEC Modernization Act of 2011” – raises serious questions in light of the fact members of Congress have proven themselves incapable of any resemblance of managing of the debt issues and their own spending bills. It also reflects badly on Congress which has seriously failed to carry out its own oversight functions and in light of those shortcomings, is “piling on” the SEC in a manner which is likely to increase its costs of operations significantly – and refocus significant attention away from its core mission of protecting over 100 million investors.
In this legislation, the sponsors – who apparently fail to have a basic understanding of the SEC – have nonetheless decided it is they who are best to:
1. Decide the structure for the SEC, rather than leaving it up to the CEO they nominate as Chair of the SEC.
2. Take away the revolving discretionary fund that the SEC has used to direct spending to top priorities and instead direct it should only be spent on information technology, notwithstanding the House is now proposing also to “starve” the SEC of sufficient funding for carrying out its duties.
Some of the sponsors are the same very people who have severely criticized the SEC for its failure to act on tips on the Madoff matter, yet they are also failing to give the SEC the money to do so, cutting off sufficient funding to staff the new office of whistleblowers. So they want to have their cake and eat it to, criticizing the SEC while at the same time, legislating that it cannot possible do what it is being criticized for not doing.
This legislation is duplicative of existing legislation that already requires the SEC to consider cost benefits. And as noted in the recent proxy access decisions of the DC district court, when the SEC has failed to do so to the satisfaction of the court, it is held accountable. Yet at the same time, the GAO has issued a number of reports (see this example) which highlight how the SEC is doing its job and doing it well. Given the vast magnitude of rule making that has been thrust upon the SEC, Chair Schapiro has done a tremendous job working through it, including seeking public comment from all the proposed rules.
When the Congress cannot even figure out how to deal with deficits and spending, one would think they would not have time for such unnecessary and duplicative legislation, that can only serve to impede the protections investors need, as highlighted by the lack of regulation directing contributing to the worst financial crisis in 75 years, which cost, and continues to cost, tens of millions of Americans their jobs. It is very clear the sponsors of this legislation want to return to unregulated markets which created this economic mess in the first place, putting their own jobs and campaign financing necessary to keep their jobs, well ahead of the interests of those on Main Street.
Piling On: Trio of House Reps Ask SEC for Report on Proxy Access Workload
In this letter to the SEC sent on Thursday, a trio of House Representatives seek information about how many Staff hours were spent on proxy access rulemaking over the past decade, including a dollar amount associated with that labor (and an estimate of these items for litigating over the rule) including any amounts spent on outside counsel. To me, it’s funny how the letter mentions that the origins of the rulemaking were politically motivated – when it sure seems that this request after the SEC lost the Business Roundtable/Chamber case is…
Sidenote: The FEI has made this silly music video entitled “Hey There Bob Pozen,” just in time for the 3rd anniversary of the ‘Pozen Committee” report.
Our August E-minders 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!
Regardless of your political bent, you will enjoy’s last night’s 5-minute skit from “The Daily Show with Jon Stewart” that tackles the 1-year anniversary of Dodd-Frank. Jon Oliver is dressed up in a beaten-up costume representing the legislation and sings his answers to Jon’s questions about where the rulemakings stand now, etc. Pure comical genius:
Recently, the Canadian securities regulators issued a Staff Notice about how their continuous disclosure review program was faring (see this press release). The CSA (Canadian Securities Administrators) is a council of the securities regulators of Canada’s provinces and territories.
I don’t know enough about how the Canadian’s review program works to compare it to Corp Fin’s (both use some sort of risk-based approach), but the Staff Notice is interesting. For starters, note the example disclosures in the appendix – including examples of deficient disclosures! It’s rare that a regulator provides example disclosures of any kind (due to fear of one-size-fits-all disclosures, not blessing any particular disclosures in case they prove problematic, etc.) – but it definitely can be helpful to those of us drafting the darn things…
July-August Issue: Deal Lawyers Print Newsletter
This July-August issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Tweeting Transactions: Social Media, Business Combinations & the Federal Securities Laws
– The Evolution of Poison Pills
– Advance Notice Bylaws: The Current State of Second Generation Provisions
With the debt ceiling deadline approaching, a number of companies are likely considering the need to include risk factor or other disclosures in their Form 8-Ks (when reporting earnings) or Form 10-Qs – or already have done so. For example, EBay included a risk factor in its Form 10-Q filed last Friday. And Centene Corp. included the following risk factor in its Form 10-Q filed Tuesday:
The failure of the federal government to raise the federal debt ceiling could affect funding for Medicaid and our cash flow.
As has been widely reported, the United States Treasury Secretary has stated that the federal government may not be able to meet its debt payments in the relatively near future unless the federal debt ceiling is raised. If legislation increasing the debt ceiling is not enacted and the debt ceiling is reached, the federal government may stop or delay making payments on its obligations, including funding for Medicaid. A failure by the federal government to fund or a material delay in the funding for Medicaid could have a material adverse effect on our cash flows.
Whether a company should include this type of disclosure will depend on the potential impact of the debt crisis on its business. Brian Breheny of Skadden notes: “My general sense is that unless the company is in a specific industry that is reliant on government funding, holds a material amount of government securities, or can specifically identify a risk it may experience if the debt ceiling negotiations fail, then general disclosure regarding the debt ceiling negotiations is generic and probably unnecessary.”
More on “SEC Filings: What is the Difference Between a ‘Schedule’ and a ‘Form’?”
In response to my recent musings about the differences between an SEC “form” and “schedule,” Scott Cooper of Rayburn Cooper & Durham responded with this interesting note:
In reading your blog regarding Schedule 13Fs, I recalled that I was involved with that rule-making as a Investment Management Staff attorney under the direction of Lee Spencer. That project was a long time ago and I do not remember any extensive discussion of whether to call it a “form” or “schedule.” One distinction was that IM had responsibility for Section 13(f) while Corp Fin was responsible for the rest of the Williams Act. I believe that all IM reports and registration statements were called forms but I’m not sure about that.
A more important distinction – at least in my memory – is that Form 13F was to be one of the first forms/schedules designed to be filed in a computer format which meant at the time sending in a tape with the data. The idea was the market and the SEC would be able to manipulate the data and that it could be quickly dispensed if it was received on tape in a standard format. My principal mission was to design the standard format working with some of the few technology staff that the SEC had at the time. We also required a paper copy that was quite massive. Public dissemination became controversial as the SEC wanted to have an outside firm do it and there was a perceived economic benefit to having the data first.
In my undergraduate days, I had taken a computer science course and knew a little about programming, since the course work in the early 70’s was to actually prepare punch cards to run programs. You spent a lot of time in the computer lab printing cards and hoping that the result was correct. Not many of my attorney colleagues at the SEC had done so and I always assumed that is why I was asked to assist.
Based upon the Form 13F experience, I transferred to Corp Fin’s Office of Disclosure Policy and worked to develop other Williams Act rules with John Granda and John Huber and then in Integrated Disclosure projects. Thanks for letting me take a trip down memory lane (for at least the parts that I can remember!)
Understanding Corporate Espionage
In this podcast, Carolyn McNiven of DLA Piper – a former federal prosecutor – explains how companies can better protect themselves from corporate espionage, including:
– What are the most common types of corporate espionage?
– What steps can boards take to ensure that management is protecting corporate assets against these acts?
– When does a company have a duty to disclose that something has been stolen from them?
Yesterday, the SEC unanimously voted to adopt rule changes that remove references to credit ratings from some of its rules and forms to implement Section 939A of Dodd-Frank. These changes help preserve the availability of shelf and short-form registration – Forms S-3 and F-3 – for companies widely followed in the market. To replace the credit ratings criteria, the SEC created four new tests, one of which must be satisfied to use short-form/shelf registration – and subsidiaries of WKSIs do qualify. The rules include a transition 3-year grandfather period. Here’s the SEC’s press release (the adopting release is not out yet).
According to SEC Chairman Mary Schapiro, the SEC expects just about all issuers that currently rely on the existing test also to continue to qualify under the new criteria. While this may be the case, there are issuers of investment grade debt securities that do not meet the Form S-3 or Form F-3 public equity requirements and will not meet the new criteria adopted today. Once the grandfathering period is over, these issuers will lose access to Form S-3 or Form F-3 until they issue substantial amounts of registered debt. We expect, however, that most of these issuers will issue debt pursuant to Securities Act Rule 144A if they are not able to use Form S-3 or Form F-3, given the potential time delay in making registered offerings using a long form registration statement, and thus will likely never satisfy the new criteria adopted today.
SEC Re-Proposes Shelf Eligibility Requirements for Asset-Backed Securities
Yesterday, the SEC also issued this re-proposing release related to shelf-eligibility requirements for asset-backed securities. There is a 60-day comment period. Here’s the SEC’s press release.
The GAO’s Study on Securities Fraud Liability for Secondary Actors
Last week, as required by Section 929Z of Dodd-Frank, the GAO published this study on the impact of creating a private right of action against secondary actors who aid and abet violations of the federal securities laws.
We have posted the survey results regarding the latest Regulation FD trends, repeated below. This new survey supplements several prior surveys that we have conducted on this topic:
1. Our company has a written policy addressing Reg FD practices:
– Yes, and it is publicly available on our website – 11.8%
– Yes, but it is not publicly available on our website – 62.7%
– No, but we are in the process of drafting such a policy – 13.6%
– No, and we do not intend to adopt such a policy in the near future – 11.8%
2. Regarding reaffirmation of earning announcements, our company uses one of the following rules of thumb regarding private reaffirmations:
– We do not allow private reaffirmation – 63.6%
– Rule of thumb allowing for private reaffirmations of one week or less – 10.9%
– Rule of thumb allowing for private reaffirmations of one to two weeks – 10.9%
– Rule of thumb allowing for private reaffirmations of two to three weeks – 5.5%
– We permit private reaffirmations – but never use a rule of thumb, instead we require confirmation of no material change with CEO, GC, etc. – 9.0%
3. At our company, our CEO and other senior managers: (multiple answers apply, may total more than 100%):
– Are not permitted to meet privately with analysts – 6.9%
– Are only permitted to meet privately with analysts so long as someone else accompanies them (such as general counsel or IR officer) – 63.8%
– Are permitted to meet privately with analysts after briefing by IR officer, general counsel, etc. – 32.8%
– Are only permitted to meet privately with analysts during certain designated times – 25.9%
Please take a moment to participate in this “Quick Survey on Whistleblower Policies & Procedures.”
– What is the research population for the latest study?
– What do audit fee trends look like?
– What about non-audit fee trends?
– What were the biggest surprises from the latest study?
The SEC has amended its agenda for today’s open Commission meeting and will not be voting on adopting rules requiring institutional investment managers to disclose their voting records yet (the proposal came out last October). No word on why the sudden cancellation of this agenda item – but I imagine adoption of these rules is merely postponed as they don’t appear controversial looking at the comments submitted. The remaining three agenda items will still be dealt with at the meeting.
On Friday, the US Court of Appeals for the DC Circuit issued its much-anticipated opinion in the Business Roundtable’s and Chamber of Commerce’s challenge to the SEC’s proxy access rule (we are posting memos in our “Proxy Access” Practice Area). The court found that the SEC “was arbitrary and capricious” under the Administrative Procedure Act in promulgating Rule 14a-11 and vacated it.
The news was greeted with much glee by the corporate community, much like Steve Martin when he received a new phonebook in “The Jerk” – even though the decision to vacate was not much of a surprise to those who followed the harsh line of questioning from the three judges during oral argument back in April (see this blog). The only surprise may have been that this decision was reached in July – more folks in my poll on when the decision would be rendered selected August.
Obviously, the SEC is not happy as reflected in this statement (nor are investor groups like CII – see their statement). As I blogged before, the SEC has various alternatives available to it going forward. This excerpt from a Skadden alert drives this point home:
It remains to be seen how the SEC responds to the decision. It is possible that the SEC will refine its economic analysis and re-propose a proxy access rule. In light of the SEC’s continuing work load relating to the implementation of the Dodd-Frank Act and other time constraints, it seems likely that any new proxy access rule would not be effective in time for the 2012 proxy season.
It is worth noting that when the SEC adopted the proxy access rule, it also amended Rule 14a-8 in a way that would permit stockholders to propose additional proxy access (by narrowing the so-called “election exclusion” under Rule 14a-8(i)(8)). This amendment was not challenged by the Business Roundtable and Chamber of Commerce. When the SEC granted the stay of the proxy access rule in October 2010, it also stayed the effectiveness of the Rule 14a-8 amendment because the amendment was “designed to complement” the proxy access rule and the SEC viewed the two as “intertwined.”
It is not known whether the SEC will keep this part of the stay in place while it considers its next steps on a proxy access rule or, alternatively, if it will allow the Rule 14a-8 amendment to take effect and open the door to proxy access stockholder proposals for the 2012 proxy season. A statement released by the Director of the SEC’s Division of Corporation Finance, expressing disappointment in the Court’s decision, specifically noted that the Rule 14a-8 amendment was not affected by the Court’s decision.
It’s been a while since we heard of a development in the insider trading case, SEC v. Cuban (here’s the last one I blogged about). Here’s news from Knowledge Mosaic:
On July 18th, the Court overseeing the SEC’s insider trading case against Mark Cuban, the owner of the Dallas Mavericks, held that Cuban cannot assert unclean hands as an affirmative defense to the SEC’s action. The defense is strictly limited to cases where the SEC’s misconduct is egregious, the misconduct occurs before the SEC files the enforcement action, and the misconduct results in prejudice to the defense rising to a constitutional level and established through a direct nexus between the misconduct and the constitutional injury.
The SEC’s Report on Credit Ratings Reliance
On Thursday, the SEC issued this 24-page report on the reliance on credit ratings, as required by Section 939A(c) of Dodd-Frank.
Happy anniversary Dodd-Frank! For those of us that received job security when Dodd-Frank became law a year ago, today should be a day of celebration (the anniversary was yesterday, but it seems more appropriate to celebrate on a Friday). I’m celebrating by not being too serious in today’s blog. [Here’s a Morrison & Foerster memo; Davis Polk memo; O’Melveny & Myers memo; and a Sullivan & Cromwell memo on “what’s happened” in different areas – how far we’ve come and how much we have to go kind of thing. Certain provisions of Dodd-Frank become effective today and are identified in the memos. SEC Chair Schapiro delivered this anniversary testimony yesterday before the Senate Banking Committee.]
I imagine some of the celebrations would remind us of the Seinfeld episode where Elaine took offense with the large number of office parties. “Get well, get well soon, we wish you to get well!”
Poll: How I Plan to Spend Dodd-Frank’s Anniversary
