Yesterday, ISS released the results of its latest policy survey, which both companies and investors are invited to fill out. Although investors and companies appear to be on the same page regarding some pay practices, there are many where they may not be. Among the findings per Mike Melbinger in his blog:
– A majority of both investor (60%) and companies (61%) cited executive compensation as one of the top 3 governance topics for the coming year, similar to last year.
– Investors and companies had different views on when companies should address shareholder opposition during “say on pay votes.” On a cumulative basis, 72% of investors said there should be an explicit response from the board regarding pay practice improvements if opposition exceeds 30%. Among companies, 48% said an explicit response wasn’t necessary unless there was more than 50% dissent. (The most commonly cited level of opposition on a say-on-pay proposal that should trigger an explicit response from the board regarding improvements to pay practices was “more than 20%” for investor respondents.)
– A majority of investors (57%) indicated more engagement activity with companies in 2011. When asked about engagement activity with institutional shareholders, companies almost equally cited “about the same as in 2010” and “more engagement in 2011.”
– Pay levels relative to peers and a company performance’s trend are relevant for both investors and companies when determining pay for performance alignment. When determining whether executive pay is aligned with company performance, an overwhelming majority of investors considered both pay that is significantly higher than peer pay levels and pay levels that have increased disproportionately to the company’s performance trend to be very relevant. On the other hand, most companies indicated that both of these factors to be “somewhat relevant.”
– A majority of investors (57%) and 46% of companies agreed that discretionary annual bonus awards (i.e., those not based on attainment of pre-set goals) to be sometimes problematic if the awards are not aligned with company performance.
– Regarding new equity plans, responses from investor and companies varied as to whether positive factors, such as above median long-term shareholder return; low average burn rate relative to peers; double-trigger CIC equity vesting; reasonable plan duration; robust vesting requirements, should be taken into account to mitigate an equity plan where shareholder value transfer (SVT) cost is excessive relative to peers. Most investors were reluctant to indicate that any of those factors would “very much” mitigate the cost.
– Where SVT cost is not excessive and whether negative factors, such as liberal CIC definition with automatic award vesting; excessive potential share dilution relative to peers; high CEO or NEO “concentration ratio”; automatic replenishment; prolonged poor financial performance; prolonged poor shareholder returns, weigh against the plan, a majority of investors indicated all of the factors, with the exception of high CEO/NEO “concentration ratio,” should “very much” weigh against the plan.
– An overwhelming majority of investor respondents do not consider automatic accelerated vesting of outstanding grants upon a change in control or accelerated vesting at the board’s discretion after a change in control to be appropriate. The vast majority of companies disagree, and consider both scenarios appropriate.
During our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price), come hear investor views from the investors themselves during the panel – “Say-on-Pay Shareholder Engagement: The Investors Speak” – featuring T. Rowe Price’s Donna Anderson; Cap Re’s Anne Chapman; Blackrock’s Michelle Edkins; CalSTRS’ Anne Sheehan and AFL-CIO’s Vineeta Anand. In addition, investors are sprinkled throughout the panels over the two days to help you learn their latest thinking.
Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.
Beazer Home’s Say-on-Pay Lawsuit Dismissed
Last week, I blogged how the Cincinnati Bell say-on-pay lawsuit survived a motion to dismiss. Now the count is 1-1 since – as noted at the end of this Thomson Reuters article – a state court judge in Georgia dismissed the shareholder derivative say-on-pay lawsuit against Beazer Home with a ruling from the bench.
Meanwhile, Steve Quinlivan has analyzed the Cincinnati Bell decision and has identified errors in his “Dodd-Frank Blog” – and Marty Rosenbaum characterizes the decision as a “game-changer” in his “OnSecurities Blog.”
Webcast: “How to Handle Contested Deals”
Tune in tomorrow for the DealLawyers.com webcast – “How to Handle Contested Deals” – to hear Chris Cernich of ISS, Joele Frank of Joele Frank Wilkinson Brimmer Katcher, David Katz of Wachtell Lipton; and Paul Schulman of MacKenzie Partners discuss planning for and responding to deal contests.
A few weeks ago, I blogged both about the SEC’s efforts to study a push to get more companies public – a push fueled by Congressional interest – as well as the Groupon gunjumping saga. Both of these blogs are related in a sense because some would view Groupon as a good example of a company not ready to go public.
On Friday, the company filed it’s Pre-Effective Amendment #3 to its Form S-1. This amendment includes an Appendix A consisting of the information that the CEO sent to employees at the end of August – not the first instance of potential gunjumping for the company.
More importantly, the amendment changes the way that the company counts revenue – calling into question whether the company’s accountants can be trusted, as noted in this WSJ article and this blog. Simply opening the floodgates to allow more companies to prematurely lure investors into parting with their money – before these companies develop the proper type of compliance culture – will not magically cure what is wrong with our economy and job situation. If anything, it will make it worse as the credibility of our markets will take yet another hit…
Last week, Corp Fin Director Meredith Cross and Deputy Director Lona Nallengara delivered this testimony before the House Subcommittee on Capital Markets in a hearing about small business capital formation and job creation. Meanwhile, Meredith has recused herself from any further deliberations about crowdfunding because of some work she did for Lending Club before she came to the SEC, even though she had been cleared by the SEC’s ethics counsel.
Growing Activism on Corporate Political Spending Disclosure
For over a decade – well before the controversial Citizens United decision from the Supreme Court last year – there has been activism to elicit more disclosure from companies about their political contributions. The Center for Political Accountability has been successful in pressuring quite a few large companies into posting their political spending policies online. And there have been numerous rulemaking petitions submitted to the SEC, the latest coming last month from Professor Bebchuk and 9 others.
Activism through the shareholder proposal process on this topic has been growing, as reflected on pages 11-12 in this ISS post-season report.
And now we have this letter that recently was sent to all S&P 500 companies from the Sustainable Investments Institute (Si2) asking them to review their profile and provide feedback. Si2 is planning to release a report on November 10th based not only on the responses it receives, but on much drilled down data it has been collecting. The report, sponsored by the IRRC Institute, should be more comprehensive than research on this topic to date since it will focus on more than just the top tier companies – and it will enable us to see how things have moved from last year to this, now that companies have had a chance to react to Citizens United in their policies.
Ceres’ New “Proxy Voting for Sustainability” Guide
Last week, Ceres released a “Proxy Voting for Sustainability” guide which is designed to assist investors respond to environmental, social and governance – aka “ESG” – issues. The guide lays out 4 sets of principles and provides sample proxy voting guideline language. It also includes more than 75 specific best practice examples of proxy guidelines. There have been 720 ESG shareholder proposals over the past 2 years – and I expect there will be more going forward…
Early yesterday, I tweeted that the first say-on-pay lawsuit has survived a motion to dismiss and boy, did a get a reaction as nearly everyone had predicted that these lawsuits would be seen as frivolous. As noted in this order, the US District Court for the Southern District of Ohio refused to grant Cincinnati Bell’s motion because the company had not proven that it had met its fiduciary duties. The fiduciary duty standard in Ohio is a “deliberate attempt to cause injury to the corporation” or “reckless disregard for the best interest of the corporation.” Pretty breathtaking that the court thought the complaint supported “deliberate intent to injure” or “reckless disregard.” Thanks to Paul Hastings’ Mark Poerio for pointing this lawsuit out.
What does this all mean? A few things to consider:
1. More Lawsuits Coming – There have been 9 say-on-pay lawsuits filed so far. But I hear there are more in the pipeline because these 9 didn’t include demands on the board first. There are a slew of others that have first made demands – and if an agreement is not reached, lawsuits will be filed. And this development will likely encourage more suits to be filed as well.
2. More Failed Say-on-Pays in ’12 – I’ve been saying that this year was a test year for say-on-pay and that companies who just had their say-on-pay pass should not rest easy for next year. Here are just some of the factors that have led me to this belief:
– Conversations with institutions who appear willing to fail more companies next year now that they have had real experience with voting on large numbers of SOPs and realize that more engagement is possible if necessary
– Increasing anger about income inequality generally, including ramped-up rhetoric in an election year
– A rapidly declining economy and stock market – compared with all boats rising earlier this year
– Throw into the mix that we don’t know what positions ISS and Glass Lewis might change for the coming year. As well as investors and their policies.
– Directors were spared “against/withhold” vote campaigns this year in deference to say-on-pay. I wouldn’t necessarily bank on that happening again. And directors are likely to take a large number of “no” votes personally compared to SOP votes.
As I have learned from the prep calls for our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price), I can tell you that we are still in the infancy of how say-on-pay will ultimately play out. And you will hear for yourself the horror stories when a company does fail its say-on-pay – and how the say-on-pay lawsuit really shakes up a boardroom – during the “Failed Say-on-Pay? Lessons Learned from the Front” panel during the conference.
Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.
For Good Reason: Prominent Lawyers Support David Becker
A group of prominent member of the securities bar sent this letter yesterday to the House committees who held a hearing on the David Becker matter that I have been blogging about. A quick read of the letter illustrates pretty clearly how the SEC Inspector General’s investigation – and criminal referral – have all the trappings of a witch hunt.
In private conversations with lawyers more senior than me – those that know David far better than me – I have learned even more to support the notion that David might be the most ethical lawyer in the bar. So it clearly is no time to be idly sitting by and watch those not interested in justice and fairness do whatever they wish to accomplish personal (and unprofessional) goals. Here is David’s testimony – and SEC Chair Schapiro’s testimony – from yesterday’s hearing. Both are worth reading. And here is David Kotz’s testimony...
Tweeting Away! A Fake SEC Inspector General Employee
And apparently someone else think that the SEC’s IG referral is a crock. A few days ago, someone created this Twitter account pretending to be in Kotz’s IG office – Bill Hanrahan – and he has been sarcastically tweeting since. The fake guy’s tagline is “Bucking for a promotion since ’85.” Here are a few of the tweets so far:
– I can’t read lips so well but I think Schapiro asked my boss if he’d conduct an investigation into how he got to be so awesome. #madoff
– Need suggestions for new, totally appropriate venue to announce investigation. Used Fox Business on Goldman; maybe sit in Rick Perry’s lap?
– Proud of our new Becker precedent: if 7 or fewer people know you are not doing anything wrong…you are committing wrongoing.
– Heard DOJ paid for $8 muffins at conferences. Scones at my testimony prep right now taste like Harvey Pitt’s beard. Will ‘vestigate. #javert
– Need investigation re SEC failure to build time machine so it can predetermine all the unwitting mistakes it should not have made #TerraNova
– Working out a lot at #SEC gym a lot recently (you’ve got to be in shape to drag people through the mud)…
Let me be clear that this fake tweeter is not me! I do have a fake alter ego to have a little fun – @MrPoorCEO – but just the one. But these fake Twitter accounts can be worth real money – read this article.
From Suzanne Rothwell: A few weeks ago, FINRA published Regulatory Notice 11-41 warning broker-dealers that their regulator will closely scrutinize the research issued by an underwriter for compliance with FINRA and SEC research analyst regulations when an issuer has made advance public statements explicitly or implicitly indicating that participation in the issuer’s anticipated public offering is conditioned on the broker providing favorable research.
Although FINRA recognizes that “such uninvited pronouncements place prospective offering participants in a challenging situation,” FINRA nonetheless warns that “even tacit acquiescence to such overtures to be a violation of NASD Rule 2711(e),” the FINRA rule prohibiting brokers from promising favorable research to a company as an inducement or consideration for receiving business. Such acquiescence may also violate NASD Rule 2711(c)(4), which prohibits brokers from soliciting investment banking business, and the SEC’s research analyst certification.
The specific situation of such an issuer’s statements discussed in the FINRA Notice related to a recent WSJ article that reported that AIG “Chief Executive Robert Benmosche has complained to senior executives at investment banks about the unfavorable stock research . . .” and quoted Mr. Benmosche as saying: “For the next offering, I want to make sure there is a clear understanding of who AIG is and our trajectory, and why AIG is a stock that investors should own.”
Are there other areas where an issuer’s demands could lead to regulatory problems for their underwriters? Yes. When an issuer conditions a broker/dealer’s participation in its underwriting on a pre-offering purchase of the issuer’s unregistered securities, FINRA Rule 5110 will generally treat such purchases within 180 days prior to the issuer filing its offering with the SEC as additional underwriting compensation (valued on the difference between the purchase price and the offering price) and the securities will be locked-up for 180 days following the issuer’s offering.
At times, the value of the securities does not, when added to the discount and other compensation, make the arrangement unreasonable under FINRA underwriting compensation limits – but at times it does. If the compensation is unreasonable, sometimes the only solution is for the purchasing broker/dealer to withdraw from the underwriting. Not a good result. These situations can generally be avoided by the underwriter’s counsel reviewing the proposed pre-offering purchase and ensuring that the arrangement would not create later problems.
House Bill Seeks to Relieve Smaller Companies of Internal Controls Obligations
As noted in this Cooley alert, a new House bill introduced by Rep Benjamin Quayle (R-AZ) – “Startup Expansion and Investment Act” – would make internal control reporting and assessment requirements of SOX 404 optional for “smaller” companies. Have I lost count of many bills before this seeking the same thing or was that just a dream?
Congress wants smaller companies to go public more frequently. Congress wants smaller companies to not have strong financial controls. Congress wants investors to lose their money…
RSUs Don’t Constitute a Separate Class for Purposes of Section 12(g)
A few weeks ago, Corp Fin granted no-action relief to Twitter – allowing the company to treat restricted stock units as a separate class for Section 12(g) purposes. The Staff has taken the position that options aren’t counted either for Section 12(g) purposes for some time, going way back to ’01 – and this RSU position has been taken since this Facebook response in ’08.
Yesterday, the SEC’s release on lifting the Rule 14a-8 stay on proxy access shareholder proposals was published in the Federal Register – so it’s now “live.” I was in the midst of cross-country travel last week when I blogged about the SEC’s rulemaking that related to the lifting of the stay. Given that it was a 4:45 am blog before I jumped on a plane, I wondered – but didn’t have time – to research the technical question of why the SEC issued a release titled “Final rule; notice of effective date” that seemed to time the lifting of the stay with publication of that release in the Federal Register. Since the SEC did post a separate order granting the stay – and its language didn’t seem to require any further release or publication – I was left with curiosity.
Administrative law is not my bailiwick so I admit that I still don’t know the answer. I have perused some of the numerous law firm memos that have been drafted in the wake of the order, but the only thing that I have found somewhat related was an excerpt from this Sullivan & Cromwell memo:
The SEC’s effectiveness order relates not only to Rule 14a-8, but also to the other related rules adopted as part of the proxy access rule changes (other than Rule 14a-11). Many of these related rules seem to have no practical impact because they relate only to the now-vacated Rule 14a-11 – these include the exemptions from the proxy rules for solicitations by nominating shareholders to form a nominating group or in support of a candidate, as well as the safe harbor for Schedule 13G eligibility. As they now stand, these provisions do not apply to nominations made through a company’s proxy access bylaws.
Some of the new rules, however, will have an impact on nominations made through a company’s proxy access bylaws. These include Rule 14a-18, which requires the nominating shareholder to file a Schedule 14N containing specified information and representations, and Rule 14a-6, which confirms that inclusion of a proxy access nominee will not require filing of a preliminary proxy.
By the way, here are the results from my poll regarding how many proxy access proposals folks think there will be in ’12: 30% – less than 10 proposals; 30% – 11-20; 20% – 21-30; 7% – 31-100; 7% – over 100.
The Witch Hunt Continues: The SEC’s IG Report on Madoff
Six months ago, I blogged about the ridiculous witch hunt regarding former SEC General Counsel David Becker. In what may be one of the low points for the SEC in its history, the SEC’s Inspector General David Kotz released his 123-page report on the matter – which states that he has made a referral to the Department of Justice under a criminal conflict of interest provision. I received emails all day long from former Staffers bemoaning the state of affairs at the agency.
Beginning on page 100, the report notes that David Becker did, in advance, seek an answer from the SEC Ethics Counsel as to whether he should work on Madoff matters. He fully disclosed the fact that he had been a beneficiary of his mother’s estate which had invested in Madoff funds. The Ethics Counsel told him he did not need to recuse himself. And as noted on pages 10 and 11 of the report, SEC Chair Shapiro knew of the investment too – the Chair issued this statement yesterday. Here is an excerpt from this NY Times article:
Mr. Becker’s lawyer, William R. Baker III, said in a statement that the report confirmed that Mr. Becker had notified seven senior SEC officials about his late mother’s Madoff account, including Ms. Schapiro and the agency’s designated ethics officer.
“The inspector general concluded that ‘none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff liquidation,’ ” wrote Mr. Baker, a lawyer at Latham & Watkins who worked at the SEC for 15 years, working alongside Mr. Becker at times. He said the report contained “a number of critical factual and legal errors,” but declined to enumerate them. Mr. Becker left the SEC last February.
There will be a joint House Financial Services Committee and Committee on Oversight and Government Reform hearing tomorrow regarding the report, where IG Kotz can once again demonstrate that he somehow is the most important person at the agency, assisted by some on the Hill. Simply amazing. And depressing as David did what he was supposed to do and they’re continuing to put him through the ringer…
More Congress Nonsense on SEC Modernization, Accountability
Mommy, please make it stop! Last week, the House Financial Services Committee dragged down senior officials once again – this time for a hearing entitled “Fixing the Watchdog: Legislative Proposals to Improve and Enhance the SEC” – to discuss two bills: the “SEC Regulatory Accountability Act” and “SEC Modernization Act of 2011.” I’ve already blogged bashing the latter and the former would require the SEC to engage in additional cost-benefit analysis before promulgating any new regulation. Here’s SEC Chair Schapiro’s testimony – and it’s worth reading this Washington Post article about former SEC Chair Harvey Pitt’s blasting of both proposals (he also had sharp words – indirectly – for SEC Inspector General Kotz).
Meanwhile, season senior SEC Staffers continue to make their way to the exits. 25-year vet Jamie Brigagliano, Deputy Director of SEC Division of Trading and Markets, is the latest to make a departure announcement. John Walsh also recently left after 25 years of service in OCIE…
With the proxy season long over, it’s been a long time – 9 weeks – since we’ve seen a company fail to garner majority support for its say-on-pay. But as Mark Borges reported last week in his blog, Exar has become the 41st company to do so this year.
In this Form 8-K, Exar reports that it was a close vote with the company receiving more “for” votes compared to “against” – but as Mark notes, the Delaware company counted its “abstentions” as “against” votes back when the company filed its proxy statement (see pg. 4) – thus resulting in the receipt of 49% in support. A list of the Form 8-Ks of the “failed” companies is in CompensationStandards.com’s “Say-on-Pay” Practice Area.
Are Companies Doing Their Say-on-Pay Homework for ’12?
As I prepared to speak on social media to the crowd last week at the Society of Corporate Secretaries’ Western Regional Conference, I took in a say-on-pay panel – and almost dropped to the floor when Janice Hester-Amey of CalSTRS said no one that they had voted against say-on-pay wise had bothered to contact them yet to ask why they had voted negatively. Since CalSTRS voted “no” for 24% of the 3000 US companies in its portfolio, this means that not a single company out of hundreds has bothered to pick up the phone yet.
As I’ve learned from my prep calls ahead of our pair of executive pay conferences, other institutional investors have been getting calls asking “why” – but this still is startling considering how large CalSTRS is. And it begs the question whether companies who held say-on-pay votes this year remember that they will be required by Regulation S-K Item 402(b)(1)(vii) to disclose whether, and if so how, they considered the say-on-pay advisory vote in determining compensation policies and decisions and how that affected their executive compensation decisions and policies. Maybe some companies are just intending to disclose that they didn’t consider the advisory vote in their deliberations? A dangerous prospect if you ask me…
A Careful Orchestration: Two Days of Intensive Say-on-Pay Workshops
I’ve now been in this business quite a long time and I can honestly say that the upcoming pair of say-on-pay conferences will be a career peak for me. I’m proud of the high caliber of panelists that I have procured – and I’m now spending several months carefully orchestrating what topics each panel will cover so that there is minimal overlap. In fact, any overlap is intentional as there are numerous panels that have a distinct perspective.
There is a panel comprised solely of institutional investors; two panels with just ISS and Glass Lewis. There is a great panel with experienced corporate directors. But that’s not all – I have tailored many of the panels so they will drill down on practical topics that you hold dearly, such as “How to Work with ISS & Glass Lewis: Navigating the Say-on-Pay Minefield” and “Failed Say-on-Pay? Lessons Learned from the Front.” Check out the agendas for the conferences and see for yourself.
With the economy going into another funk – and anger over CEO pay likely to hit a fever pitch in an election year – I do believe that next year will bear out that this year was just a “test year” and many companies whose pay sailed through in ’11 could experience real struggles next season. This pair of conferences – focusing on both disclosures and practices – takes place on November 1st-2nd in San Francisco and by video webcast. Register now.
If you are experiencing budget woes but recognize that these conferences are a “must” – drop me a line as always.
Recently, I’ve blogged several times about the SEC’s upcoming efforts to engage in capital-raising reform – particularly for pre-IPOs. This is a big topic for Rep. Darrell Issa. Thanks to Michelle Leder of footnoted.com for catching the 25 words that President Obama devoted to this topic during his recent jobs speech. Here’s the President’s Fact Sheet that also references it.
Soon afterwards, the SEC announced the formation of the Advisory Committee on Small and Emerging Companies – this press release included this note:
The committee is intended to provide a formal mechanism through which the Commission can receive advice and recommendations specifically related to privately held small businesses and publicly traded companies with less than $250 million in public market capitalization.
Then on Friday, the House Oversight & Government Reform committee held hearings on crowdfunding (see this Cooley alert previewing the hearing) at which Corp Fin Director Meredith Cross delivered this testimony. As noted in this WSJ article:
SEC Corporate Finance Division Director Meredith Cross, in a House hearing, said the key to easing restrictions on crowd-funding would be to create an exemption “that wouldn’t present significant concerns of fraud.” “Then I see real benefits,” Ms. Cross told a subcommittee of the House Committee on Oversight and Government Reform. “If it becomes viewed as a tainted market where people go to fraudulently steal money, then that won’t help anyone.” The SEC is currently looking at easing restrictions on crowd-funding as part of a wide-ranging review of its rules governing capital-raising. Cross said her remarks reflected her personal views, and that the SEC hadn’t yet weighed in on the matter. She said she expected the agency to complete its broad review in the near future.
This Cooley alert covers Meredith’s testimony in greater detail. And this Cooley alert covers another House effort to end the ban on general solicitation. Love this excerpt from that memo:
And you think you already get a lot of junk mail? So can we now look forward to seeing clever entreaties for funding pasted onto every frozen burrito at Safeway and every pair of socks on sale at Target?
The ironic part about this Congressional obsession with getting more companies public is that it was widely reported on Friday that this year has become a record one for scrapped IPOs. As noted in this article, a total of 215 IPOs have been withdrawn or postponed so far in 2011. These were scrapped due to market conditions, not SEC regulatory restrictions.
Groupon’s Gun-Jumping Saga: Will It Ever End?
Back in June, I blogged about potential gun-jumping by Groupon in the wake of the company filing a Form S-1. Since then, there have been several other instances of Groupon potentially gun-jumping (eg. memo to employees leaked to this popular blog). I imagine some are questioning whether Groupon’s management team has tough enough skin to run a public company as they can’t seem to take criticism. Anyways, DealBook reported that the company was considering delaying its IPO, with gun-jumping cited as one of the factors.
As for Groupon’s Form S-1 amendments, it’s too early to tell if the company’s filings have caught up with the potential gun-jumping incidents (and Corp Fin comments on such) as the last amendment was filed a month ago: Pre-Effective Amendment No. 2. I didn’t read this latest amendment too closely – but at a glance, the only unusual part seems to be this “Letter to Potential Stockholders” from the company’s CEO filed as an exhibit. Let me know if you spot anything else unusual…
Nuggets from “The Advisors’ Blog”
We continue to post new items daily on our blog – “The Advisors’ Blog” – for CompensationStandards.com 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:
– Internal Pay Disparity: Comments Coming In Ahead of SEC Proposals
– Say-on-Pay Post-Mortems
– An Analysis of Recently Adopted Clawback Provisions
– AFL-CIO’s White Paper: “Why CEO-to-Worker Pay Ratios Matter for Investors”
– Study: Companies Change Peer Groups Often
Sure enough, not long after I blogged yesterday about how the US Court of Appeals for the District of Columbia Circuit had not yet finalized its decision, I got word that the court had indeed done so in this brief ruling on Wednesday. But trust me, no one knew about it – so I have my excuse. So yesterday, the SEC posted this release and order lifting the stay – and thus the Rule 14-a(8) stay will be lifted once the new rules are published in the Federal Register. That might be today or next week sometime…
MSCI Slides Over Chief Administrative Officer to Head ISS
As I get ready for an early flight cross-country, I’m bashing out this blog. I thought this press release was notable yesterday – that MSCI has moved over its Chief Administrative Officer Gary Retelny to head ISS. It has long been rumored that MSCI would unload ISS after it bought RiskMetrics, but I guess the right buyer hasn’t yet emerged. By the by, Gary will remain as the corporate secretary of MSCI…
Poll: How Many Shareholder Proposals on Access Do You Expect in ’12?
Now that the SEC’s stay is being lifted, it’s a good time to gauge how many shareholder proposals dealing with proxy access do you think will be submitted to companies next proxy season:
Although this “Staff Observation” – maybe that will be the shorthand reference to these? – is merely informal guidance and not blessed by the Commission, it likely is somewhat of a higher level of guidance than CDIs because of the format (eg. one tip is the “Supplementary Information” section). It appears that this will be an ongoing form of guidance since the Staff bothered to label this as “No. 1.”
You may recall Dave wrote two great pieces in The Corporate Counsel back in ’08 (March-April and May-June issues) explaining all the various flavors of informal guidance that Corp Fin offers. At one point, there was a Staff movement afoot to begin consolidating these forms of guidance – but Corp Fin recently issued this WKSI Waiver Statement and now we have this new form of guidance…
Proxy Access: Is the Court’s Decision “Final” and the SEC’s Shareholder Proposal Stay Lifted?
When the SEC decided last week to not appeal the adverse proxy access decision by the US Court of Appeals for the District of Columbia Circuit, the SEC’s statement noted that the court’s decision was likely to be finalized on September 13th. That finalization is significant because – as noted in the SEC’s statement: “Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.” In other words, the stay on shareholder proposals regarding access would be lifted. As I flew across the country yesterday, I fielded numerous member queries asking if this indeed has happened – and to my knowledge, it has not yet. I’ll let you know when I hear differently…
New California Law: Time to Consider Charter Provisions to Exempt Preferred Stock Preferences
Recent amendments to California Corporations Code Section 500 et seq. look like they will have broad application to companies doing business in California as a result of Section 2115 for pseudo-California corporations. John Tishler of Sheppard Mullin notes “there is a “sleeper” in here allowing California corporations – and presumably foreign corporation subject to Section 2115 – to include language in the articles of incorporation permitting distributions (that is, dividends in cash or property, repurchases and redemptions of shares) without regard to preferences of senior series of preferred stock. Presumably, such language could also be included in the certificate of designation for a newly authorized series of preferred stock.
We speculate it will become market standard to include that waiver language, since preferred stock protective provisions will generally do a better job protecting preferred holders than Section 500. Although AB 571 is not effective until January 1st, we are recommending that companies now adopt or amend their charters or authorize new series of preferred stock consider including language permitting distributions without regard to preferred stock preferences.”
Here’s an excerpt from this Sheppard Mullin memo:
Recently, California Governor Jerry Brown signed Assembly Bill No. 571, which simplifies restrictions on dividends, repurchases and redemptions of shares. The restrictions are set forth in Sections 500 to 509 of the California Corporations Code, and are commonly referred to collectively as “Section 500.” These provisions are designed to protect the interests of creditors and senior equity holders against transactions that might undermine their seniority in the capital structure. Section 500 applies to companies incorporated in California and to companies incorporated elsewhere but deemed subject to the same restrictions by virtue of satisfying the requirements of Section 2115 of the California Corporations Code for “pseudo-California corporations.” Section 500 uses the term “distributions” to encompass dividends of cash or property (other than shares of the corporation) and repurchases and redemptions of shares.
Section 500 has served as a trap for the unwary, a significant impediment to the ability to effect many transactions that do not intuitively threaten the interests of creditors or senior equity holders, a substantial risk for directors who face personal and potential criminal liability for distributions made in violation of Section 500, and a source of frustration to lawyers and clients who struggled to explain, apply and perform the financial gymnastics required under Section 500. In extreme cases, companies incorporated in California have had to reincorporate in other jurisdictions prior to effecting a transaction because the transaction would otherwise be prohibited under Section 500.
The changes to Section 500 create an opportunity for issuers of preferred stock (e.g., companies receiving venture capital in its most common form) to exempt the preferences of classes or series of preferred stock from the application of Section 500. This would have the potential to improve companies’ flexibility to undertake various actions that would otherwise require unanimous consent of holders of a class or series of preferred stock.
When I blogged last week about the SEC deciding to not appeal the proxy access court decision, I noted that one importance of the SEC’s announcement was that the stay on Rule 14a-8 access proposals was being lifted. And I used the phrase “opening floodgates” in my title to intimate that a lot of shareholder proposals touting access might be forthcoming in ’12.
I’m now doubting myself for using that phrase as it remains to be seen just how many access proposals will be submitted next year. On the one hand, CII issued a press release that stated: “Council member funds and the broader investor community are ready and willing to seek access to the proxy to nominate directors judiciously, at companies where boards have been asleep at the switch or chronically unresponsive to shareowner concerns.”
On the other hand, ISS’s Ted Allen’s blog on the topic notes:
Amy Borrus, CII’s deputy director, said she expects to see “probably not more than a handful” of access proposals in 2012. “I expect that shareowners will file proxy access proposals selectively at companies where boards have a history of not being responsive to shareowners or have been asleep at the switch,” she said.
This view is supported by this statement in Ted’s blog:
There is concern among some activists that corporate advocates will argue that federal access standards are not needed if investors file a large number of access resolutions next year.
But you never know what will really happen until it happens – so it’s too early to tell, although not too early to poll (I’ll post a poll soon). But one thing is sure, as noted in Ted’s blog:
Even with the revised Rule 14a-8(i)(8) in place, it appears likely that shareholder access resolutions will face no-action challenges from companies on proof-of-ownership or other procedural grounds. Some companies may try to argue that an access proposal conflicts with state law or is impermissibly vague and misleading.
Second Circuit Clarifies Materiality Requirement in Securities Fraud Cases
The Second Circuit held that defendants’ alleged failures to write down goodwill in a timely manner and to increase loan loss reserves sufficiently during the financial crisis were not actionable, because defendants’ challenged statements were matters of opinion rather than fact. Thus, plaintiffs had to allege that defendants did not believe the statements were true at the time they were made, something the complaint failed to do. Fait promises to be a useful tool in defending claims under the Securities Act, as well as claims that a defendant otherwise misstated financial figures, when those figures depend on the judgment of management rather than strictly objective criteria. The decision may be particularly important with respect to claims against accounting firms, whose conclusions based on their audits of financial statements and internal control regularly take the form of an expression of opinion.
The SEC’s New “MAP”: Organization Reform is Coming!
On Monday, the SEC posted this 25-page report entitled “Implementation of SEC Organizational Reform Recommendations” as required by Section 967 of Dodd-Frank and in response to a 267-page Boston Consulting Group study provided to Congress earlier this year (I’ve blogged about that twice – here and here).
At 25-pages, I was more willing to spend more time with this report than the formidable Boston Group Study – but it still wasn’t my type of “quiet read.” Here are a few notes based on a skim of this new report:
– Implementation of the recommendations will be expensive – $42-55 million over two years, per pg. 6 – and the SEC is budget-constrained right now.
– Program formally named the “Mission Advancement Program” aka “MAP” (pg. 10)
– Corp Fin seems to have escaped any further reshaping since it recently did some realignment (pg. 13)
– SEC will seek flexibility from Congress when creating four new Offices as required by Dodd-Frank (and since stalled due to budget limits)(pg. 17)
– SEC is following up on its momentum towards technological sophistication by devoting more attention to developing a technology strategy including eventually forming a “Technology Center for Excellence” (pgs. 19-20)
– SEC focused on addressing high priority hiring needs – those “hard to recruit or hire” (pg. 23)
A great compilation of highlights for those that want to relive Michigan’s epic win over Notre Dame on Saturday…
