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A unanimous D.C. Circuit panel this morning invalidated Rule 14a-11 as "arbitrary and capricious", ruling that the SEC had failed to consider the potential costs and other impacts of the rule.  This outcome was fairly predictable given the composition of the panel that decided the case, but even so the scathing and dismissive tone of the opinion is remarkable.  The panel essentially swallowed the Business Roundtable and Chamber of Commerce arguments hook, line and sinker, even to the point of second guessing which academic studies the Commission should have relied upon and which it should have disregarded. Where do we go from here?  Barring intervention from the Supreme Court, the decision sends the SEC back to square one: a dispiriting prospect, given that the subtext of the opinion is that this panel at least would have thrown out pretty much anything that the SEC might have put forth.  It's also hard to imagine the current Congress coming up with a statutory solution.  This means that the initiative on this subject may be back with companies and shareholders, where it arguably should have been all along. Contact Bill Kelly.
7 years 10 months ago
As a result of targeted activism in the last few years, more than half of the S&P 500 companies now allow shareholders to call special meetings.  The number of shareholder proposals relating to special meetings declined this year, to 28 in 2011 from 54 in 2009.  The decline can be attributed in part to companies submitting management proposals in order to exclude the shareholder proposals from their proxy statements.   Shareholder proposals generally seek the ability of 10% or more shareholders to call special meetings, but if companies include a management proposal giving shareholders the same right, but at a different ownership level (for example, 40% for EMC and 25% for Weyerhaeuser), then the SEC staff permits the shareholder proposal to be excluded from a company's proxy statement on the basis that the company is submitting a conflicting proposal under Rule 14a-8(i)(9).
7 years 10 months ago
The other day, I responded to a comment on Twitter from a knowledgeable mortgage financing friend regarding the current housing situation vis a vis foreclosures. His view is that the "market should find its own level" ; that the Federal Government should not interfere with modification programs, the EHLP program etc.After some thought, I must agree with him. If the pace of foreclosures returns to normal (once the robo-whatever is done and docs are corrected) and evictions follow promptly, there will be plenty of Housing For The Homeless. There will be no need to build new shelters. Mortgagees can just allow cities to house "The Homeless" in these abandoned/emptied OREO properties. The cities would pay but only by not taxing the mortgagee/foreclosing entity. If the mortgagee does not incur this liability by recording a deed, then more properties will be formally owned by the entity which won the foreclosure sale bid.Now, one might ask,"Why should the homeless get to live in someone else's house when the someone else just got evicted and became HOMELESS?" Answer: "Well, that's the market finding its level!!!". Further, the new homeless family can move into another "victim's" house as he/they get thrown out!
7 years 10 months ago
As is their customary timing, on Friday afternoon the SEC issued several updated CD&I interpretations of particular interest to the governance community:   –Information About Non-Continuing Directors.  The SEC clarified a previous CD&I regarding disclosure of certain biographical information, under Item 401(a) and Item 401(e), about directors whose terms of office will not continue after the annual meeting.  Both requirements may be omitted so long as a company provides its Part III of Form 10-K information by incorporating from the proxy statement, and the company files its proxy statement within 120 days after its fiscal year-end.  This means most public companies would not have to provide this disclosure.  (116.10 of the Regulation S-K CD&Is)   –Use of Non-GAAP Information in Proxy Statements.  The SEC indicated that non-GAAP financial information that does not relate to pay target levels, but is included in the CD&A or other parts of the proxy statement, are subject to the non-GAAP rules under Regulation G and Item 10(e).  The rules provide a specific exemption for disclosure of target levels that are non-GAAP financial measures.  As part of the increased effort to demonstrate the connection between pay and performance, companies are more frequently referring to corporate financial data, including non-GAAP financial information, in their discussion of executive compensation.  
7 years 10 months ago
With the vast majority of this year’s annual shareholder meetings for U.S. public companies behind us (at least for those with calendar-year fiscal years), we wanted to update the findings that we shared in our last post on the subject.  As of the end of last week, 1,193 large accelerated filers had reported the voting results from their shareholder meetings. Regarding approval of “say-on-pay”: Large Accelerated Filers bySay-on-Pay Vote(as of July 1, 2011) 90-100% Approval 791 80-89% Approval 195 70-79% Approval 97 60-69% Approval 55 50-59% Approval 29 40-49% Approval 16 30-39% Approval 9 20-29% Approval 1 0-19% Approval 0 Total 1,193                          Generally, approval for say-on-pay votes has remained high as the season has progressed, and the average say-on-pay result for all large accelerated filers is 89%.  Similar to what we reported at the height of the proxy season, less than 18% of large accelerated filers reported say-on-pay results below the 80% approval level, and less than 10% reported results below the 70% approval level.
7 years 10 months ago
Proposals to elect directors by a majority vote fared well this season, averaging 56.6% at 31 companies as of early June.  This was the topic with the most number of submissions, as Carpenters, CalPERS and other proponents sent over 80 shareholder proposals to companies, almost twice as many as in 2010.  Activists were angered by the fact that the requirement for all public companies to adopt majority voting was dropped from the final version of the Dodd-Frank Act.  Many companies decided to proceed with implementation and negotiate for withdrawal of the proposal rather than putting it to a shareholder vote.
7 years 10 months ago
This is the first of a series of posts to discuss key shareholder proposals during proxy season 2011.  While ISS reports that 39% of S&P 500 companies continue to have staggered boards, shareholder proposals requesting that the board of directors be elected annually continue to receive the highest level of support of any shareholder proposals.  As of early June, 39 proposals received more than majority support, averaging 73%, while only 5 failed.  Many proposals never reach shareholder vote as companies, recognizing the likelihood of strong support for the proposal, negotiate for withdrawal by agreeing to take action.  For example, eBay agreed to conduct a review of declassification within 6 months. 
7 years 11 months ago
Some shareholders are using lawsuits as a new tactic to fight what they perceive as an escalation in executive compensation. Shareholders are likely to find these suits difficult to push through the courts on their merits, but the suits can cost subject companies time and money, not to mention reputational harm brought on by negative media attention. Contact Kyoko Takahashi Lin. Contact Gillian Emmett Moldowan.
7 years 11 months ago
Earlier this month, the SEC readopted rules to ensure that its current definition of "beneficial ownership" would continue to apply to persons who purchase or sell security-based swaps ("SBS") on and after July 16, 2011.  The reproposal was prompted by Dodd-Frank's addition of Section 13(o) to the Exchange Act, which would have otherwise excluded security-based swaps from the disclosure and short-swing profit rules.  The SEC did not give any guidance as to when SBS constitute beneficial ownership for Section 13.  However, the SEC staff is evaluating possible changes to the Section 13 reporting requirements but the outcome and timing of that evaluation remains uncertain.  Here's a copy of the Davis Polk memo describing the new rule. Contact Phillip Mills.
7 years 11 months ago
The Dodd-Frank frequency vote is of course "nonbinding", but companies that have "lost" the vote for triennial frequency have almost without exception decided that the better part of valor is to follow the shareholders' expressed will for an annual vote. With more than 60% of large accelerated filers having announced their decisions, only two companies have bucked the trend. Annaly Capital Management just filed an amended Form 8-K declaring that its board has determined that future say-on-pay votes will be submitted to shareholders every three years, even though annual say-on-pay received majority approval. Annaly Capital Management is the first large accelerated filer to follow the example previously set by American Reprogaphics Company, a small company, to conduct triennial votes. The vote wasn't close in either case; each company had received 70% or more shareholder support for an annual vote.
7 years 11 months ago
There used to be a TV show, weekly, called appropriately "THAT WAS THE WEEK THAT WAS". It provided a satirical review of the weeks happenings - especially politics. Kind of like a fast paced, hit-a-run version of John Stewart. Actually, "The Daily Show" is a modern day iteration. This Is The Month That Was:FORECLOSURES1. Foreclosures still moving at a brisk pace. Some slowing but due to paperwork issues. The mortgage servicers, led by the Mortgage Backed Security Investors, want to foreclose, and actually do so, even when they do not have the legal rights. IT GOES LIKE THIS :a. You get a loan from the "We Saw You Coming Mortgage Company"b. The mortgage company has already sold the loan to a large bankc. The holder of the mortgage only (not the note, the I.O.U.) is company called MERS, short for Mortgage Electronic Registration System. This is mortgage industry registry to avoid recording mortgage transfersd. The loan is "sold" into a Pool of 3000 other loans paying the Bank for its investment in your mortgage.
7 years 11 months ago
The Delaware Chancery Court recently rejected a challenge to an advance notice requirement for shareholder proposals that appeared in the Company’s proxy statement, not in its bylaws, and that imposed a deadline of more than 150 days before the meeting. Most Delaware advance notice bylaws require notice 90-120 days prior to the anniversary of the previous year's annual meeting. In Vermillion, the Court rejected the claim that the advance notice requirement was unreasonable and unduly restrictive, noting that advance notice requirements are “useful in permitting orderly shareholder meetings” and that the board (which was disinterested) had established the deadline on a proverbial ‘clear day’, well before the plaintiff shareholder appeared to have expressed his dissatisfaction to the Company. Here is a copy of Vice Chancellor Noble’s opinion in Goggin III v. Vermillion, Inc. (C.A. No. 6465-VCN) (Del. Ch. June 3, 2011) Contact Phillip Mills.
7 years 11 months ago
In recent months, the SEC staff has increasingly raised the disclosure of loss contingencies required by FASB ASC 450-20-50 (formerly known as FAS 5) in comment letters and as a discussion point at conferences and meetings. In particular, the staff is focusing on whether and when a company discloses an estimate of the "possible loss or range of loss" associated with unaccrued loss contingencies. Prodded by the staff, several large financial institutions (American Express Company, Bank of America Corporation, Citigroup Inc., The Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Company) gave an estimate of possible loss or range of loss above their existing reserves for the first time in their Form 10-Ks for the 2010 fiscal year and updated those estimates in their 2011 first quarter Form 10-Qs. The staff is now pressing other companies to also do so. Recently, the staff has indicated that it is also focused on understanding when a company determines it has sufficient information to make an accrual. If a company discloses a significant litigation settlement or a change in its loss contingency accrual, the staff is now more likely to scrutinize the company's previous loss contingency disclosures and inquire as to whether a company disclosed sufficient information about the impending loss. Accruals (or updates to accruals) or settlements for which there was no prior disclosure may be challenged. Contact Richard Sandler.
7 years 11 months ago
We presented a webcast today discussing the final Dodd-Frank whistleblower rules that the SEC adopted a couple of weeks ago.  It was a good discussion covering the range of challenges that companies are facing and expecting to face.  Based on questions raised by listeners both during and after the podcast it's apparent that many are struggling with how to continue to motivate employees to submit information internally through existing compliance systems, such as hotlines, rather than starting with the government.  Lots of variations on the theme: Can I provide by policy that employees are required to provide the company with information concerning suspected noncompliance? (yes) Can I enforce this policy by disciplining employees who take their complaints to the government first? (no) Can my policy state that employees should raise issues internally before going to the government? (generally not advisable, and in any case most companies have decided it's better not even to allude to the whistleblower bounty program)
7 years 11 months ago
Commenters to the SEC's proposed rules on listing standards for compensation committees, including issuers, law firms, consultants and organizations like the Society of Corporate Secretaries and Governance Professionals and the Chamber of Commerce, argued vehemently for the SEC to (a) narrow the definition of "advice" given by a consultant and (b) retain existing disclosure exemptions for consultants that work only on broad-based plans and non-customized data. The SEC may be surprised to find such passion surrounding what are merely proposed amendments to existing disclosure obligations. Disclosure would be required when a compensation committee has retained or obtained the advice of a compensation consultant, a change from the current rule which is triggered when a consultant plays a role in determining executive compensation. Commenters' discord stems from a proposed instruction indicating that "obtained the advice" could include whenever a committee or management has requested or received advice from a consultant, even in the absence of a formal engagement, a client relationship or any fees paid. The SEC suggests this change would have minimal practical impact, but commenters decried this instruction as being overly broad and captures all types of information generated by consultants, even casual conversations or materials soliciting potential clients.
7 years 11 months ago
Last week, the SEC proposed rules to implement Section 926 of Dodd-Frank's requirements to disqualify "bad actors" from issuing securities pursuant to Rule 506 of Regulation D.  (Rule 506 of Regulation D permits sales of an unlimited amount of securities to accredited investors and up to 35 accredited investors).  As required by Section 926 of Dodd-Frank, the bad actor provisions to be added to Rule 506 are substantially similar to those currently contained in Regulation A (an offering exemption for offerings not exceeding $5 million in a 12-month period) and would prevent issuers from issuing securities in reliance on Rule 506 if the issuer, its affiliates or predecessors, directors, officers, partners, managing members, 10% beneficial owners or underwriters, had been involved in a “disqualifying event”, such as a criminal conviction, court injunction or restraining order related to the sale of securities or other broker dealer activities.  The rules generally provide for a ten year lookback for disqualifying events.
7 years 12 months ago
The deadline for comments about the SEC proposed rules regarding compensation committees has passed, with 54 submissions sent.  While many commenters support the approach of directing the listing exchanges to adopt independence standards for compensation committees, taking into account issuer affiliation and source of compensation, several activists advocated for additional standards.  The Council of Institutional Investors (CII), AFSCME, AFL-CIO, among others, argued that independence is also impaired through other relationships, including:  (a) family linkages (employment of a director's family member by the company); (b) business, financial and personal relationships between directors and executive officers (a director is employed by a firm that advises management or affiliated with a non-profit that receives grants from executive officers); (c) any related person transactions involving directors and (d) relationships amongst directors (one director is instrumental to the nomination of another director).  Since none of the cited relationships have any particular relevance to the specific duties of compensation committees, it is clear that these rules are being viewed by activists as an opportunity to weigh in generally on director independence, which hasn't been up for consideration in some time.  More to come about other comments. Contact Ning Chiu. 
7 years 12 months ago
In an important development defining when Revlon duties apply to a mixed cash and stock deal, the Court of Chancery last week applied Revlon to a deal where target shareholders would receive roughly 50% in cash and 50% in stock, with target shareholders owning an aggregate of 45% of the surviving company. Previously, the Delaware courts had not established the precise bounds of when the heightened Revlon standard of review applied in deals with mixed consideration. Vice Chancellor Parsons recognized that this case obviously falls between the 33% cash out that the Supreme Court held did not trigger Revlon in Santa Fe and the 62% proportion of cash consideration that Vice Chancellor Lamb determined would trigger Revlon in Lukens. “Assuming the Court’s analysis in Lukens was correct, as I do, this case is necessarily approaching a limit in relation to the Supreme Court’s holdings in Santa Fe and Arnold, which, again, involved a stock for stock transaction,” he states. However, he notes (for the second time), “my conclusion that Revlon applies here is not free from doubt.” This case (Smurfit-Stone Container) is consistent with the finding earlier this year in Occam Networks, where Vice Chanceller Laster found that Revlon would likely apply to a roughly 50/50 cash and stock deal where target shareholders would own about 15% of the resulting entity. Read the decision in In re Smurfit-Stone Container Corp. Shareholder Litigation (C.A. No. 6164-VCP) (Del. Ch.
8 years 17 hours ago
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.
8 years 2 days 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.
8 years 4 days ago

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