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The SEC held an open meeting today at which it adopted final rules implementing the whistleblower provisions in the Dodd-Frank Act. As expected, the final rules do not require employees to first report allegations through a company’s corporate compliance system before coming to the SEC, despite numerous comments by members of the corporate community urging the SEC to do so. The rules do contain additional provisions that purport to incentivize whistleblowers to report their concerns internally first although it is unclear what practical effect these provisions can reasonably be expected to have. Our Client Newsflash summarizing the final rules is available here. We also expect to hold a webcast on the final rules in the coming weeks. Contact Richard Sandler.
6 years 9 months ago
May is high season for annual shareholder meetings for U.S. public companies, so we wanted to update the findings that we shared in our last memo on the subject.  As of the end of last week, 802 large accelerated filers reported the voting results from their shareholder meetings. Regarding approval of “say-on-pay”, so far: Large Accelerated Filers bySay-on-Pay Vote(as of May 20, 2011) 90-100% Approval 540 80-89% Approval 126 70-79% Approval 65 60-69% Approval 40 50-59% Approval 14 40-49% Approval 9 30-39% Approval 7 20-29% Approval 1 0-19% Approval 0 Total 802                          In other words, less than 17% of large accelerated filers reported say-on-pay results below the 80% approval level, and less than 9% reported results below the 70% approval level. A total of 16 large accelerated filers have lost their say-on-pay votes, and all of them received “against” recommendations from ISS.  To date, large accelerated filers with “against” recommendations have averaged 64% approval, while those with “for” recommendations have averaged 92% approval.  We believe the total number of public companies, including large accelerated filers, that have lost their say-on-pay votes is 26.
6 years 9 months ago
Questions have come up about whether companies can declare how frequently they intend to hold say-on-pay votes in the Form 8-K announcing annual meeting results within four business days after the meetings, or whether they must wait and make the disclosure in an amended Form 8-K.  While this seems to demand a simple "why not" response, the confusion stems from the fact that careful readers of the rules noted that the Form 8-K itself only provides for disclosing future frequency in an amended 8-K, to be filed no later than 150 days after the end of the meeting and 60 days before the 14a-8 shareholder proposal deadlines.  The instructions do not appear to be exclusive, and if a board has made a decision there seems to be no reason to later prepare an amendment and make two filings.  In fact, at least half of the companies that have announced annual meeting results so far have gone ahead and declared their future intentions with respect to the frequency of say-on-pay, in particular where (a) the board recommended annual and (b) votes were overwhelmingly in favor of annual.  Contact Ning Chiu.
6 years 9 months ago
Credit Card companies have a new pitch - "0% Interest on Balance Purchases & Transfers Until XX/1/2012". The idea is to give you credit, with no interest on the outstanding balance for 12 months. And, as an added bonus, the offering company will even take your balance, on which you are being charged 20% from another card, and let you move it, AT NO INTEREST, for the same period. Sounds too good to be true? It is!!First, all of these offers looked at closely, contain a "nominal" fee for making the balance transfer - like 5% of the amount of the transfer. That is a one time immediate capture fee, meaning they get paid by increasing your balance by that 5%. One could say that it's still a bargain because it's only 5% instead of 20%. However, if you pay the entire balance off in 3 months, you paid a rate of 20% annualized, versus paying the old card 20% balance off in 3 months which has the same effective rate. Well, same rate so you are no worse off than if you kept the old card. WRONG!That 5% fee get added to your principal balance because it's a fee, not interest. So, instead of paying interest on $5,000 (which is the amount transferred in this example) you pay interest on $5,250.
6 years 9 months ago
It has been frustrating for companies who want to benefit from the substantial cost-savings provided by the SEC notice and access rules to discover that they must also comply with the Department of Labor (DOL) ERISA rules regarding electronic communications to employees, if for example the employee shareholders hold company stock through a 401(k) plan that is registered on a Form S-8.  As a practical matter, using notice and access for employee benefit plan participants has proved prohibitively difficult.  The ERISA rules permit electronic delivery of documents only to participants who have the ability to access them at their regular place of work, and who have access to the company's electronic information system as an integral part of their duties.  Even for those participants, administrators must try to ensure actual receipt of the documents and provide notice about the documents' significance.  For participants who do not meet this test (e.g., former employees and current employees who do not work at computers) an affirmative consent, with specific content requirements, is required.
6 years 9 months ago
Companies considering new equity plans should take note that Fidelity (a large shareholder of just about every public company) has adopted a new voting policy for equity plans.  As of March 2011 its policy focuses on burn rate rather than dilution.  Fidelity will vote “no” on a plan if:   (A) the company’s three-year burn rate on equity awards is greater than:   - 1.5% for Russell 1000 companies; - 2.5% for companies not in the Russell 1000; - 3.5% for companies with a market cap below $300M; and   (B) the burn rate is not otherwise acceptable to Fidelity based on circumstances specific to the company or plan.   Note that this test is based strictly on company size and, unlike the ISS test, takes no account of industry practice.  (ISS applies a limit equal to the greater of 2% or one standard deviation from the average burn rate for the company’s industry group). Fidelity's new policy will tend to particularly impact companies in the tech sector and in other industries with high share usage rates.  If a company fails the Fidelity test, Fidelity may contact the company and try to get the company to commit to reduce its future burn rate or make other changes in exchange for Fidelity’s support.  Our sense is that Fidelity may be getting push-back from companies in a number of industries, so it would not be surprising if Fidelity reconsiders its approach.   Contact Edmond FitzGerald.  
6 years 9 months ago
As was rumored, the SEC has announced that it will hold an open meeting at 9:30 a.m. EDT on May 25, 2011 to consider the adoption of final rules implementing the Dodd-Frank whistleblower provisions. The SEC's announcement is here.  We'll be focusing on the open meeting with great interest. Our memo from last November on the proposed rules is here. Our webcast on the proposed rules is here. Contact Bill Kelly.  Contact Richard Sandler. 
6 years 9 months ago
When the SEC decided to eliminate the ability of brokers to vote on a discretionary basis without specific client instruction for director elections in July 2009, many predicted that it would seriously affect the ability of directors to obtain majority support.  The concern proved to be a false alarm.  As a result, when the Dodd-Frank Act required the elimination of broker discretionary voting for executive compensation matters, including say-on-pay, there wasn't nearly the same chatter.  But it turns out that given the closeness of many of the failed say-on-pay votes, the reported broker non-votes would have made a real difference.  We calculated that 7 of the 21 companies reporting failed votes so far would have passed, in some cases by a decent margin, if the non-votes had actually been counted as "for" say-on-pay, which is not an unreasonable assumption given these discretionary votes generally favored management.  For one company, there were more broker non-votes reported than "for" votes. 
6 years 9 months ago
This year a group of investors begin asking companies to host a "fifth analyst call" for institutional investors to take place after the proxy statement is issued and designed to focus on corporate governance.  Occidental Petroleum became the first company to sponsor such a call in late April, hosted by the lead director and audit committee chair, and the compensation committee chair. In this IR web report, Dominic Jones questions whether Occidental's call, which was not publicly announced or publicly available, may have implicated Regulation FD in light of the fact that (a) the call was held 2 days before the company announced earnings and (b) the stock closed 2.5% higher after the call, beating the results of the S&P 500 and its peers on that day. According to various reports, the company has not made any comments about the call.  The hosts and advocates of the call, Railpen Investments and F&C Asset Management, released a statement indicating 50 investors participated, and the call focused on the proxy statement and governance matters and included a "lively" Q&A. 
6 years 9 months ago
In case you missed it, Dr. Erik Roelofsen, a researcher at the Rotterdam School of Management at Erasmus University, published an interesting study surveying over 400 sell-side and buy-side analysts and portfolio managers about their views and experience with one-on-one meetings with management.  He reports that about 47% of investors and analysts say that they frequently receive material information in these one-on-one meetings.  If this is at all accurate, this is an eye-opening result and reinforces the need for careful consideration of the timing, manner, ground rules and objectives of these sessions.  Reports like this may also attract regulatory scrutiny.Contact Richard Sandler. 
6 years 9 months ago
Today's WSJ piece on what are sometimes called "nondeal road shows" is on one level a nonstory; as the story concedes, the practice is not a new one. But coming as it does on the heels of last week's Rajnaratnam verdict, the story provides a good hook to remind companies and senior executives of the perils of private unscripted meetings with hedge funds and other large investors. The effort that companies invest in their disclosure controls and procedures can be significantly undercut by an injudicious remark blurted out after the second bottle of Petrus (and yes, the wines tends to be very good indeed at these dinners). The company may not be aware of the issue until the stock moves the next day, and by then it may be too late to fix (and in any case the SEC may take the view that the communication was "intentional", in which case there is no fix under Reg FD). What's sometimes not understood is that hedge funds themselves would often rather not participate in these events in light of the compliance risks that these interactions pose. But in a competitive world it can be difficult to stay away if you think that other investors will be there.
6 years 9 months ago
The debate on the Dodd-Frank whistleblower provisions is continuing on several fronts, with the SEC rumored to be close to finalizing its rule proposals and Congress considering proposals to address some of the (perhaps) unintended consequences of the original legislation.  A link to this week's House hearings is here.  At this stage of the legislative debate the parties seem mostly to be staking out extreme positions, from the Chamber of Commerce on one side to the AFL-CIO on the other.  Our memo from last November on the SEC proposal is here. Our webcast is here.  If you'd like to order a genuine Davis Polk whistle, well, you're out of luck.   It seems fair to assume that the SEC rules will take effect before Congress will be able to act.  The hope is that the SEC will pay attention to the host of comments it received (including from Davis Polk), particularly with respect to preserving the central role of corporate compliance systems.  The challenge, though, is that some of the worst features of the system are to some extent hardwired into the statute.   Contact Bill Kelly.  
6 years 9 months ago
Although it often looks like proxy season 2011 is a one-topic event, say-on-pay is just one item on proxy cards.  Recent data reminds us that say-on-pay may even be the least controversial item.  ISS reports that as of May 9, shareholder proposals calling for declassifying boards (annual election of directors) won as much as 95% and 81% approval rates at MEMC Electronic Materials and Alcoa, respectively.  Average support so far for nine proposals is 69%, up from 61% last year.  Shareholder proposals on majority voting are also faring well, averaging 57% support at 14 companies, including 78% at SkyWest. Recognizing the increased probability of getting these types of results, companies that receive such proposals often go ahead and implement without putting the shareholder proposals on the ballot.  Companies seeking management proposals to amend governance documents for declassification and majority voting have won more than 96% approval this year.  Contact Ning Chiu.
6 years 9 months ago
The Bankruptcy Court for the District of New Jersey (Kaplan, J.) recently held that hotel revenues (including revenues generated from room occupancy, food and beverage sales, catering, gift shop purchases, spa, and related hotel services) do not constitute “rent” within the meaning of the Third Circuit decision of In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995).  Therefore, even if they are absolutely assigned to the secured lender, hotel revenues can be used by the debtor as cash collateral to pay its ordinary and necessary operating expenses and to reorganize.  In re Ocean Place Dev., LLC, No. 11-14295 (Bankr. D.N.J. Mar. 31, 2011).
6 years 9 months ago
The Bankruptcy Court for the District of New Jersey (Kaplan, J.) recently held that hotel revenues (including revenues generated from room occupancy, food and beverage sales, catering, gift shop purchases, spa, and related hotel services) do not constitute “rent” within the meaning of the Third Circuit decision of In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995).  Therefore, even if they are absolutely assigned to the secured lender, hotel revenues can be used by the debtor as cash collateral to pay its ordinary and necessary operating expenses and to reorganize.  In re Ocean Place Dev., LLC, No. 11-14295 (Bankr. D.N.J. Mar. 31, 2011).
6 years 9 months ago
When shareholders mark "abstain" on a ballot, what does it mean?  Does the meaning differ depending on whether it's to elect a director, vote on say-on-pay or a shareholder proposal?  The effect of abstentions in determining the pass/fail rate for an item depends on state law and corporate governance documents, but should they be excluded if we're trying to examine different companies' results for comparability?   You may be aware that it is ISS policy to ignore abstentions when reporting the results of shareholder proposals, citing Rule 14a-8(i)(12).  The approval rate of shareholder proposals determined by ISS feeds into their policy of recommending against boards for failure to implement proposals that receive majority support two out of three years in a row.  If abstentions were counted, it would decrease the level of support for these proposals.  Given the close votes received on written consent and special meeting proposals in recent years at some companies, whether or not abstentions are counted sometimes matter.   We're not aware that such a policy exists yet for say-on-pay.  In his RiskMetrics Insights blog, Ted Allen reports results that includes abstentions, as duly noted in the articles.  As a management proposal, abstentions have the opposite effect on say-on-pay than for shareholder proposals, by decreasing the level of support.  In both cases, the companies come out looking worse.  
6 years 9 months ago
There is a new mosaic, or one that was just not recognized, developing in the Economy, and somewhat specifically in the mortgage area. Banks, systematically getting bigger and bigger, and fewer and fewer, are dictating the rules.The Big 4 (or 4 1/2) BANKS have made it clear through their elected, and properly paid for members of Congress (politely referred to as "Lobbying"), that they do not want Elizabeth Warren to head the Consumer Financial Protection Board (CFPB) but in case she gets there (during a recess appointment), they want to emasculate (no offense Prof/Dr/Atty Warren) the agency first. The argument or rationalization: No agency should have the authority to enforce existing regulations that affect consumers or pass new regulations to fix really bad problems that hurt the economy as a whole. Even Hemp has more supporters than HAMP!The same interests have been keeping Congress itself where it is possible, from passing enacting legislation that would force mortgage modifications and punish those who knowingly created, hyped and sold securities that they themselves bet against (hedges). These "Security Instruments", known as Mortgage Backed Securities and more generally categorized as Collateralized Debt Obligations were the mainstay of Lehman Brothers' (remember them?) profits; oh, and don't forget about Goldman Sachs!
6 years 9 months ago
Here’s a Davis Polk memo on Vice Chancellor Laster’s recent decision finding that a series of spin-offs and split-offs will not be aggregated when determining whether Liberty Media has sold all or “substantially all” of its assets in violation of a covenant in its bond indenture.  In reaching this conclusion, the court adopted a test for determining when transactions should be aggregated.  The newly adopted test— which provides, among other things, that multiple transactions will generally be combined if carried out as part of a “master plan” — should come as no surprise.  The helpful fact was that the transactions occurred over a seven-year period with significant gaps in between.  The ambiguity arose because all the transactions shared a common purpose of implementing a strategic redirection of the business.  I think it was critical to the court’s conclusion that the strategic redirection was not accompanied by a specific plan of execution.   Contact Phillip Mills.  
6 years 9 months ago
We released today a memo summarizing the say-on-pay results so far this proxy season, including eleven companies who have failed to get majority support and a number of others where the vote was close enough to suggest meaningful shareholder concerns.  My anecdotal experience so far this season suggests a couple of supplemental points: With every public company required for the first time this year to comply with say-on-pay, ISS is clearly swamped, and it's showing in terms of quality control: we've seen an unusual level of cases in which ISS made factual mistakes in its report, and even a couple of situations in which ISS missed issues that in other years would likely have concerned them. If you do face a negative ISS recommendation you will wish you had planned for it, because the recommendations generally come with only about two weeks to go before the meeting, which will not allow much time to plan and execute a communications campaign.  You can't predict in advance how ISS will react, but in the vast majority of cases you can determine whether you are at risk of a negative recommendation.  If you're at risk you should have a communications plan on the shelf and ready to execute, unless you're feeling lucky. Contact Bill Kelly.  
6 years 9 months ago
In In re Montgomery Ward, LLC, 634 F.3d 732 (3d. Cir. 2011), the Court of Appeals for the Third Circuit clarified the principles of res judicata in the context of a bankruptcy proceeding and further defined the scope of 11 U.S.C. § 1111(b). The decision is significant because it is the first appellate decision to determine what constitutes privity for res judicata purposes in the context of a bankruptcy proceeding and also because it held that section 1111(b) transforms non-recourse claims into recourse claims only for distribution purposes. Facts and Procedural History Montgomery Ward, LLC (“Montgomery Ward”) contracted with Jolward Associates Limited Partnership (“Jolward”) to construct a department store, on land Montgomery Ward owned in Illinois that was the planned site to develop a mall. The parties entered into a ground lease and Montgomery Ward transferred a leasehold interest in the land upon which the department store was to be constructed to Jolward.
6 years 9 months ago