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SEC Proposes Rules for Executive Pay Clawback Policies
July 10, 2015
On July 1, 2015, the SEC proposed rules requiring public companies to recover executives' incentive-based compensation following an accounting restatement to correct a material error. The proposals are controversial, because they require no misconduct by the executive, have a three-year look back and apply to a broad group of officers. The proposed rules, which the SEC was directed to create by the Dodd-Frank Act, would be implemented through new listing standards for national securities exchanges. Companies would be required to recover the amount of incentive-based compensation paid for the three years preceding the restatement that exceeded the amount the executive officer would have been paid under the restatement. For incentive-based compensation based on stock price or total shareholder return, companies could use a reasonable estimate of the restatement's effect on the applicable measure to determine the recovery amount. The clawback would apply to "executive officers," defined as the president, chief financial officer, chief accounting officer, any vice president in charge of a business unit and anyone who crafts company policy. Read the SEC press release that includes a useful fact sheet.
Delaware Prohibits Fee-Shifting "Loser Pays" Bylaws
July 10, 2015
Effective August 1, 2015, Delaware corporation law will prohibit charter or bylaw provisions that shift company litigation expenses to shareholders who bring and lose a claim against the company and its directors and officers. While some believe these provisions, often called "loser pays" or "fee-shifting" bylaws, may benefit investors by discouraging frivolous suits and preserving company resources, others have debated their propriety and have opposed adoption by companies. Read the position of the Council of Institutional Investors on fee-shifting bylaws here.
Issuers May Tweet Hyperlinks to Solicit Interest in Regulation A+ Offerings
July 10, 2015
In recent interpretive guidance, the SEC staff confirmed that issuers may solicit investor interest in a Regulation A offering using a word-limited tool like Twitter, provided that the communication links to the more complete statements required by Rule 255. New rules to facilitate smaller companies' access to capital - dubbed Regulation A+ - became effective on June 19, 2015. Under the new rules, issuers may publicly offer and sell up to $50 million of securities in a 12-month period without going through a full-blown registration process and, in some instances, without having to observe state-law regulations on offerings. In other Regulation A+ interpretations, the staff said issuers may use Regulation A+ for business combinations and noted that "voluntary filers" (companies that are not subject to either Section 13 or 15(d) of the Exchange Act) are considered eligible issuers under the rule. The SEC staff updated its Compliance and Disclosure Interpretations (CDIs) on June 23, 2015. Read CDI 182.09 (testing the waters via Twitter) and the other Regulation A+ CDIs here.
SEC Seeks Comment on Audit Committee Disclosures
July 10, 2015
The SEC has published a concept release seeking comments on the disclosure requirements for audit committees at listed companies. The SEC seeks information on the effectiveness of disclosures about the audit committees' oversight of independent auditors and whether improvements can be made. According to Chair Mary Jo White, "The way audit committees exercise their oversight of independent auditors has evolved and it is important to evaluate whether investors have the information they need to make informed decisions." Read the SEC concept release.
Regulation A+ Amendments for Smaller Offerings Become Effective
June 19, 2015
The SEC's rules to facilitate smaller companies' access to capital - dubbed Regulation A+ - became effective today. The rules enable smaller companies to offer and sell up to $50 million of securities in a 12-month period without going through a full-blown registration process, subject to eligibility, disclosure and reporting requirements. The rules provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by affiliates; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by affiliates. Tier 2 offerings are subject to certain ongoing reporting requirements, including a requirement to provide audited financial statements. Significantly, state law registration requirements are preempted in Tier 2 offerings, making Regulation A+ a more viable alternative than under the prior regulation. However, Massachusetts and Montana have asked a federal appeals court to invalidate the new rules, arguing that they unduly limit the states' ability to register and review offerings. Read the SEC press release.
SEC to Release "No-Review" Registration Letters
June 19, 2015
Starting July 1, the SEC will release letters relating to Securities Act registration statements that are not selected by the SEC staff for review. The letters will be available on EDGAR and tagged as correspondence. This practice will allow third parties to be aware of the "no review" status of company registration statements - something previously known only to the company and its advisors absent a FOIA request. The SEC will release letters with respect to registration statements that have an effective date of June 1, 2015 or later. Read the SEC press release.
SEC Publishes Economic Analysis of Proposed Pay Ratio Rule
June 19, 2015
The SEC recently released an economic analysis of its pay ratio disclosure rule previously proposed in September 2014. The analysis by the SEC's Division of Economic and Risk Analysis considers the impact of various methods of calculating the required disclosures, based on including or excluding certain categories of employees. The publication of this analysis suggests that the SEC is moving closer to finalizing its rule. The SEC notes that the analysis will help in evaluating the relative accuracy of the pay ratio calculation using various calculation approaches. Not surprisingly, whether non-U.S. employees are included or excluded can have a considerable impact on a company's pay ratio calculation. Read the published report and related news coverage.
DOJ Issues Cybersecurity "Best Practices"
June 19, 2015
In the wake of headline-making cyber breaches and government investigations over data losses, companies face growing scrutiny and evolving legal and regulatory standards. According to the DOJ, "A quick, effective response to cyber incidents can prove critical to minimizing the resulting harm and expediting recovery." The DOJ offered some "best practices" to assist organizations in preparing a cyber incident response plan, reflecting lessons learned by federal prosecutors while handling cyber investigations and prosecutions. It was drafted with smaller, less well-resourced organizations in mind. Read the DOJ report.
Proxy Access Update
June 19, 2015
The 2015 proxy season has seen a significant increase in proposals seeking to give shareholders the ability to nominate directors of U.S. public companies using the company's ballot. While voting results for proxy access proposals have been mixed, these proposals generally have received unprecedented levels of shareholder support. One driver of the increase in proposals was the campaign launched by the New York City Comptroller on behalf of the city's large pension funds seeking proxy access at 75 companies. According to a mid-season report by Proxy Monitor, 72 percent of proxy access proposals coming to a vote by the end of May won the support of a majority of shareholders, compared to 3.5 percent of all other proposals. Read the Proxy Monitor report. In addition, five law firms submitted a joint letter to the SEC regarding the agency's ongoing review of the shareholder proposal process for no-action requests made under Rule 14a-8(i)(9) relating to conflicting proposals, which is an important rule when a company seeks to implement proxy access on its own terms. Read more at bna.com.
SEC Proposes Pay-For-Performance Rules
May 1, 2015
On Wednesday, the SEC proposed rules to require pay-for-performance disclosure as mandated by the Dodd-Frank Act. The proposal would require companies to include a new table in their proxy statements that shows compensation "actually paid" to top executives, as well as the total shareholder return (TSR), as defined in Regulation S-K, on an annual basis for the company and the peer group selected by the company for its stock performance graph or CD&A. Compensation "actually paid" is derived from the current summary compensation table, except that pension amounts are adjusted and equity awards are considered paid only when vested and are valued as of the vesting date. Companies would also be required to describe in a narrative or in graphics the relationship between the compensation "actually paid" and the company's TSR performance data,and the relationship between the company's TSR performance data and the TSR performance data of its selected peer group. The SEC would require these pay-for-performance disclosures to cover a five-year period (three years for smaller reporting companies). Companies would have to provide the new information for their principal executive officer and an average for the group of other named executive officers in the summary compensation table. Commissioners Gallagher and Piwowar opposed the rule, noting that it imposed an intrusive "one-size-fits-all" standard for calculating performance. Read the SEC press release and rule proposal.
More Calls for Transparency in Political Spending Disclosure
May 1, 2015
Last week, a group of 144 business leaders, entrepreneurs, investors and philanthropists petitioned the SEC to require public companies to disclose their political spending. In a separate petition that day, the treasurers of five states made a similar request. A 2011 petition calling for SEC rulemaking on this disclosure has been the most commented-upon petition in SEC history. Pressure on the SEC has also appeared in an innovative ad campaign in Washington DC's Union Station, featuring a comic strip of frightened investors calling on SEC Chair White to save them from "the menace of dark money." Because SEC rules are unlikely to be proposed anytime soon, shareholders have submitted proposals calling for transparency in political spending at more than 100 companies' annual meetings this year. While many public companies have provided some disclosure voluntarily, shareholders complain that the lack of disclosure rules "leaves shareholders...with a complex system of partial and disjointed information to consider." Read more at BNA.com. See the ad campaign on the Corporate Reform Coalition's website.
Wanted: NASAA Representative at the SEC
May 1, 2015
SEC Commissioner Aguilar recently reiterated a request that he introduced in 2009 by calling for a NASAA representative to be embedded at the SEC. His call for more involvement by state securities regulators in the SEC follows approval of Regulation A+, which becomes effective on June 19. Regulation A+ enables smaller companies to offer and sell up to $50 million of securities in a 12-month period without going through a full-blown SEC registration process and preempts state review of "Tier 2" offerings under the rule. According to Commissioner Aquilar, "having a state regulator representative as part of the review team will create synergies that will go well beyond Regulation A+." Aguilar also hopes to have a state regulator embedded in the SEC's Division of Enforcement. Read Commissioner Aguilar's speech.
Constitutionality of SEC Administrative Proceedings Upheld
May 1, 2015
Ever since the Dodd-Frank Act made the SEC's choice of forum more permissive, the SEC has been pursuing enforcement actions through administrative proceedings rather than filing charges in federal district court. Targets of these actions have argued that the SEC's approach deprives them of the discovery and other rights they would have in federal court. In Duka v. SEC, a former S&P official argued that the SEC's administrative proceedings were unconstitutional because the SEC's administrative law judges were protected from removal by the President, thus violating the separation of powers. A federal district judge ruled that Duka had failed to show she was likely to win her claim, allowing the SEC's administrative action to proceed. Read more in Forbes and the New York Times.
SEC Adopts Regulation A Amendments
April 10, 2015
As mandated by the JOBS Act, the SEC adopted rules to amend Regulation A to facilitate smaller companies' access to capital. The amended rules, referred to as Regulation A+, enable smaller companies to offer and sell up to $50 million of securities in a 12-month period without going through a full-blown registration process, subject to eligibility, disclosure and reporting requirements. The rules provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by affiliates; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by affiliates. Tier 2 offerings are subject to certain ongoing reporting requirements, including a requirement to provide audited financial statements. Importantly, however, state law registration requirements will be preempted in Tier 2 offerings, making Regulation A+ a much more viable alternative than under the prior regulation. Read the SEC press release.
Potential to Violate Whistleblower Protections in Confidentiality Agreements
April 10, 2015
The SEC recently announced its first enforcement action against a company for requiring employees to sign confidentiality agreements "with the potential to stifle the whistleblowing process." The action, brought against KBR, Inc., alleged a violation of Exchange Act Rule 21F-17 even though the SEC was not aware of KBR having taken action to enforce it or of any KBR employee having been prevented from communicating with SEC staff. KBR required employees interviewed in connection with an internal investigation to sign a confidentiality agreement that prohibited them from discussing their interview without clearance from KBR's law department. As part of a settlement with the SEC, KBR paid $130,000 and agreed to amend its confidentiality agreements with language that expressly permits regulatory reporting by the employee. In light of this development, public companies should review their confidentiality agreements to ensure compliance with Rule 21F-17, including by adding language that permits regulatory reporting. Read the SEC press release and the SEC order, which includes KBR's remedial language permitting regulatory reporting at paragraph 8.
SEC Civil Insider Trading Case Proceeds Despite Newman Ruling
April 10, 2015
Ever since the Second Circuit overturned the insider trading convictions of two former hedge fund managers in United States v. Newman, there has been considerable debate about how difficult it may be for the SEC to move forward with insider trading cases. On Monday, U.S. District Judge Jed Rakoff allowed a civil insider trading suit filed by the SEC to proceed, suggesting that Newman may not present a substantial hurdle, at least at the motion to dismiss stage. In SEC v. Payton, the court held that the SEC's complaint had adequately alleged that the tipper of material nonpublic information had received a personal benefit for the disclosure and that the remote tippees had had sufficient knowledge of that benefit under the "recklessness" standard applicable to civil cases. Judge Rakoff found that, to establish the personal-benefit requirement established by Newman, a "close, mutually dependent financial relationship" between tipper and tippee is sufficient. According to the New York Times, "Under this approach, [Newman] should not present much of a hurdle for the SEC if it can demonstrate evidence of a benefit that appears to be of some reasonable value and a relationship that goes beyond a work friendship or being golf buddies." In Newman, the Second Circuit set a new standard for the "personal benefit" element for tippee liability, holding that "in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit." Previously, courts had used a low standard for showing the insider's personal benefit, allowing it to be inferred from circumstances such as mere friendship and not requiring the tippee's knowledge of the benefit. The more demanding standard set by the Second Circuit requires that the tipper receive "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." Read more in the New York Times.
SEC Charges Polycom and former CEO With Hiding Perks From Investors
April 10, 2015
Recently, the SEC charged the former CEO of Polycom with using nearly $200,000 in corporate funds for personal perks that were not disclosed to investors. The SEC alleges that in doing so, the former CEO violated the antifraud, proxy solicitation, periodic reporting, books and records and internal controls provisions of the federal securities laws. The SEC separately charged Polycom in a related administrative action finding that the company had inadequate internal and disclosure controls. The company agreed to settle the charges; however, the charges against the former CEO are pending in federal court. According to Andrew J. Ceresney, Director of the SEC's Division of Enforcement, "[the SEC] will not hesitate to charge executives with fraud when they allegedly use a public company as a personal expense account and hide it from investors." Read the SEC press release.
Supreme Court Decides When Statements of Opinion Can Trigger Section 11 Liability
March 27, 2015
On Tuesday, the U.S. Supreme Court set the standards for when a company's statements of opinion (such as "we believe that...") in a registration statement are subject to liability under Section 11 of the Securities Act. In Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, the Court ruled that a company cannot be liable under Section 11 for a statement of opinion that it believed to be true when made, even if its opinion turns out to be incorrect. However, the Court held that a company could be liable for a statement of opinion if it is shown that a company omitted key information about whether the basis for its opinion was reasonable. According to the Court, Section 11 is not "an invitation to Monday morning quarterback an issuer's opinions." Read the Supreme Court's opinion.
SEC Chair White Criticizes "Gamesmanship" by Activists and Companies
March 27, 2015
In a speech at Tulane's Corporate Law Institute, SEC Chair Mary Jo White weighed in on the debate over shareholder activism. In particular, she criticized "gamesmanship" -- by activists and companies alike. Views are mixed on whether activist hedge funds create shareholder value or are merely disruptive, and the SEC declined to take sides. However, Chair White focused on some controversial activist tactics, such as those of William Ackman last year in his bid for Allergan. According to Chair White, "it is time to step away from gamesmanship and inflammatory rhetoric that can harm companies and shareholders alike." On the flip side, however, Chair White also raised concerns about companies that exclude shareholder access proposals on the grounds that a management proposal "directly conflicts," particularly if management's proposal sets access requirements that realistically cannot be met. In White's words, "Gamesmanship has no place in the process." Read Chair White's speech and coverage in Fortune.
Chair White Suggests SEC May Act to Limit Fee Shifting Bylaws
March 27, 2015
Also in her speech at the Corporate Law Institute, SEC Chair White addressed the debate over bylaw provisions that shift company litigation expenses to shareholders that bring and lose a claim against the company and its directors and officers, known as fee-shifting bylaws. Currently, the SEC has focused on whether a company's disclosure about the existence and implications of any such provision is adequate. However, Chair White expressed her ultimate concern about company actions that could "inappropriately stifle shareholders' ability to seek redress under the federal securities laws." According to Chair White, "If the [SEC] comes to believe that these provisions improperly hinder shareholders' exercise of their rights, it may need to weigh in more directly in this discussion."
SEC Advisory Committee Recommends Expanding Accredited Investor Status
March 27, 2015
Recently, the SEC's Advisory Committee on Small and Emerging Companies recommended that the "accredited investor" definition in Regulation D be expanded to include individuals who meet a "sophistication test, regardless of income or net worth." Rather than attempting to protect investors by raising net worth and income thresholds in the definition, the committee recommended that the SEC focus on enhanced enforcement efforts and increased investor education. Under the Dodd-Frank Act, the SEC is required to evaluate the definition of accredited investor every four years. Commissioner Gallagher previously noted that he was "extraordinarily skeptical" about such a new sophistication test. However, Commissioner Aguilar has indicated that he favors the change. Read the committee's recommendations and the remarks of Commissioner Gallagher and Commissioner Aguilar.
Senate Bill Would Allow Companies To Issue More Options Without Disclosure Under Rule 701
March 27, 2015
Senators Pat Toomey and Mark Warner recently introduced a bill to increase the amount of stock options and other equity compensation that a non-public company may issue to employees in unregistered offerings under Rule 701 without the enhanced disclosure required by the rule. The bill, ''Encouraging Employee Ownership Act,'' proposes to double the threshold for determining whether enhanced disclosure is required from $5 million to $10 million in aggregate sales price or amount of securities sold during any 12-month period. Senator Toomey noted that making it easier for companies to give employees an ownership stake was good for business, stating "As a former small business owner, I know that workers who really feel like part of the company can be the most efficient, effective and loyal employees." Read the bill and related press release.
M&A Integration Significant Key to Success
March 27, 2015
According to a new Deloitte report based on a survey of over 800 executives, poor planning and execution of post-deal integration is a key reason that some mergers and acquisitions do not realize anticipated benefits. While that conclusion is probably not surprising to companies engaged in M&A, the insights shared in the report will help many companies tackle their acquisitions more effectively. Respondents noted that, in the future, they would seek to better capture synergies through "a swifter and phased integration" as well as more effective communication and "a more rigorous process to select an integration team." They also noted they would allocate more budget to the integration process. Read the Deloitte report. Read our summary of success factors in cross-border M&A.
ISS Weighs in on Proxy Access Debate
March 6, 2015
Recently, ISS weighed in on the proxy access debate with its voting policy for proposals that allow shareholders to nominate directors on the company's ballot. Overall, ISS will recommend in favor of proposals that permit shareholders or a group of shareholders holding three percent of the voting power for three continuous years to nominate 25 percent of the board. ISS views with disfavor proposals that either limit the number of shareholders comprising a group or set ownership and duration thresholds higher than the three percent for three years standard. ISS notes that it will review competing shareholder and management proposals under the same policy. However, it will generally recommend voting against some or all directors if a company omits a shareholder proposal that hasn't been voluntarily withdrawn, unless the company has obtained either an SEC no-action letter or a U.S. District Court ruling that it can exclude the proposal from its ballot. Given the SEC's decision not to consider no-action requests under 14a-8(i)(9) for competing management and shareholder proposals and the cost and delay involved in obtaining a court ruling, companies may opt to negotiate a deal with a proponent to modify or withdraw a proxy access proposal in light of management's agreement to support a similar alternative proposal. Read ISS FAQs on its proxy access voting policy. Read news about Citigroup's support of a modified proxy access proposal.
Cybersecurity in the SEC's Crosshairs
March 6, 2015
At the annual "SEC Speaks" conference, SEC regional director David Glockner noted that bringing enforcement actions for poor cybersecurity risk disclosure was "high on [the SEC's] radar screen." Given the increasing frequency of cybersecurity incidents and the growing impact of those incidents on business, public companies should assess the adequacy of their disclosure in this area, including their cybersecurity measures and related liability protections and incident response plans. Read more in Reuters. Read our recommendations for actions public company boards should be taking now.
Goodyear's FCPA Violations
March 6, 2015
Recently, Goodyear agreed to pay $16 million to resolve SEC charges that it violated the Foreign Corrupt Practices Act and the books and records and internal control provisions of the federal securities laws. According to the SEC, Goodyear failed to prevent or detect more than $3.2 million in bribes during a four-year period and falsely recorded the improper payments as legitimate business expenses. As companies expand their businesses globally, they must assess the best way to minimize FCPA risks and develop appropriate FCPA compliance programs. Read the SEC press release and a summary of our insights on how to minimize FCPA risks.
PwC Reviews SEC Comments on Stock Compensation Disclosure
March 6, 2015
Public companies preparing stock compensation disclosure may wish to understand the areas of SEC focus and concern. PwC recently published an analysis of SEC staff comments related to employee stock compensation. According to PwC, 223 comments in this area were issued from September 2013 to September 2014 to a total of 101 companies. These comments focused primarily on MD&A and financial statement disclosure, and the most frequent comments related to disclosure of valuation considerations. The report includes specific SEC comments to consider. Read the PwC report.
SEC Proposes Rules for Disclosure of Hedging Policies
February 20, 2015
Last week, the SEC proposed rules to enhance corporate disclosure of company policies for hedging transactions engaged in by directors, officers and other employees. The proposed rules would require annual meeting proxy statement disclosure about whether directors, officers and other employees are permitted to hedge against any decrease in the market value of company equity securities owned by or granted to them. The proposed rules would require a company to disclose which categories of hedging transactions it permits and which categories of hedging transactions it prohibits. The proposed rules would apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies and business development companies. The proposed rules do not require a company to adopt a comprehensive hedging policy. However, under the proposed rules, a company would need to disclose more detail than is currently required about the scope and application of company hedging policies. As a result, public companies of all sizes should review their policies in this area. The proposal addresses one of several remaining rule-making mandates imposed on the SEC by the Dodd-Frank Act. According to SEC Chair Mary Jo White, "Increasing transparency into hedging policies will help investors better understand the alignment of the interests of employees and directors with their own." Read the SEC press release.
GE Adopts Proxy Access Bylaw
February 20, 2015
General Electric announced that it amended its bylaws to allow a shareholder or a group of up to 20 shareholders that has owned three percent or more of the company's stock for at least three years to nominate and include in the company's proxy materials directors constituting up to 20 percent of the board. The move by GE is the latest chapter in the ongoing proxy access saga and has been heralded as both a victory for activists and a demonstration of GE's leadership role in corporate governance. A company following GE's approach would be able to seek a no-action determination from the SEC for omitting a shareholder proxy access proposal on the basis that it has been "substantially implemented" by the company and therefore excludable under Rule 14a-8(i)(10). Thus, the approach would avoid the SEC's decision not to consider no-action requests under 14a-8(i)(9) for competing management and shareholder proposals as previously reported in The Ticker. Read GE's Form 8-K announcing the bylaw amendment and news coverage.
Chevedden Director Tenure Proposal Fails at Costco
February 20, 2015
A shareholder proposal sponsored by activist John Chevedden aimed at limiting long-tenured directors at Costco failed by a substantial margin at Costco's annual meeting this year. The proposal had asked the Costco board to amend the company's bylaws to require at least 67 percent of the board of directors to have less than 15 years of tenure on the Costco board. Costco's board had recommended against the proposal, noting that such a limit would "arbitrarily deprive Costco of qualified, experienced and effective directors." According to a recent publication by the Institute of Corporate Directors on the topic of director tenure, "Term limits are a blunt tool and, without flexibility, they eliminate effective as well as noneffective directors." Read Costco's Form 8-K announcing the results. Read Canada's Institute of Corporate Directors' position paper on the subject of director term limits.
Glass Lewis Shares Views on Proxy Access Proposals
February 6, 2015
Glass Lewis, a prominent proxy advisory firm, has now added its views to the proxy access battlefront. As readers may recall, activist shareholders have launched a national campaign to submit proxy access proposals to public companies, which would enable certain shareholders to nominate directors using the company's ballot. In January, the SEC announced that it will "express no views" this proxy season on whether a shareholder proposal, including a proxy access proposal, can be excluded because a management proposal on the same issue conflicts with it. As a result, companies must choose at their peril whether to exclude a proxy access shareholder proposal when management has an alternative proposal. Glass Lewis has blogged that it will treat proxy access proposals using a "case-by-case approach to evaluating management and board responsiveness to shareholders in general." In particular, Glass Lewis will review alternative management proxy access proposals submitted to shareholders in lieu of or in addition to a shareholder proposal "based on the specific facts and circumstances of the company and its actions" and "will analyze the reasonableness and proportionality of the company's response to the shareholder proposal." In some instances, Glass Lewis may recommend against certain directors if a management proposal varies materially from a shareholder proposal without sufficient rationale. Read the Glass Lewis blog.
SEC Okays Five-Day Period for Certain Tender Offers
February 6, 2015
Typically, a public offer to purchase a substantial amount of a company's debt or equity securities must remain open for 20 business days, in order to allow holders sufficient time to make an informed decision to participate. An exception has existed for certain tender offers for investment-grade debt securities, allowing an abbreviated period of 7-10 calendar days in some circumstances. Expanding the exception, the SEC recently granted no-action relief to allow a tender offer period of five business days for both investment grade and non-investment grade debt securities (i.e., high-yield debt). The shortened period, which would facilitate debt refinancings, is available so long as the offer meets certain criteria, including being made by the issuer (or a parent or subsidiary), being open to all of a series of non-convertible debt securities, being made in exchange for only cash or qualified debt securities, and not being made as part of a consent solicitation to amend or terminate the governing indenture or in conjunction with certain disqualifying circumstances. In addition, the issuer must disseminate its offer notice widely and provide investors with immediate access to the offering materials. Read the SEC no-action letter.
Company's 10-K Disclosure of Legal Proceedings Leads to Employee Retaliation Claim
February 6, 2015
A recent Seventh Circuit decision suggests public companies should take care when disclosing employment-related litigation by name in their Form 10-K. In Greengrass v. International Monetary Systems, the court held that a former employee could assert retaliation against a former employer when the company listed her discrimination case by name and described it as "meritless" in the company's annual report filed with the SEC. This may merit revisiting contingency and legal proceeding disclosures to ensure they say no more than required by law. Read the opinion and commentary.
Cybersecurity as a Board Priority
February 6, 2015
In the wake of headline-making cyber breaches and class action lawsuits for data losses, companies face growing scrutiny and evolving legal and regulatory standards. The SEC recently issued a risk alert summarizing observations from examinations of registered broker-dealers and investment advisers conducted under its cybersecurity examination initiative announced earlier this year. Given the increasing frequency of cybersecurity incidents and the growing impact of those incidents on business, directors' oversight activities should include understanding the adequacy of a company's cybersecurity measures and related liability protections and incident response plans. The issues are complicated, and there are no simple solutions. But there are actions that boards and management can take now to begin to quantify and mitigate cybersecurity risks. Read the SEC risk alert and our recommendations.
SEC Will Not Consider No-Action Requests To Omit Shareholder Proposals Under Rule 14a-8(i)(9)
January 23, 2015
The SEC recently announced that, pending a staff review of the scope and application of Exchange Act Rule 14a-8(i)(9), it will "express no views on the application of [that rule] during the current proxy season." Rule 14a-8(i)(9) allows a company to exclude a shareholder proposal that directly conflicts with a management proposal in the same proxy. The rule is the basis for the controversial exclusion of a proxy access shareholder proposal by Whole Foods for its annual meeting to be held in 2015. Lack of staff guidance in this area may present a predicament for companies hoping to exclude a proposal due to a management counterproposal. While companies are not required to seek no-action relief to exclude a shareholder proposal, obtaining a no-action letter reduces (but does not eliminate) a company's litigation risk. Companies that were considering a management counterproposal may now opt to include both the shareholder's and management's proposal in the same proxy statement, raising additional practical concerns on how best to do so. Read the SEC announcement, which includes Chair White's directive to the staff to review Rule 14a-8(i)(9).
Shareholder Activism Over Proxy Access Expected to Continue
January 23, 2015
The campaign by institutional investors to give shareholders the ability to nominate directors of U.S. public companies using the company's ballot shows no signs of slowing and continues to evolve. Recently, Vanguard updated its proxy voting guidelines to indicate a preference for proxy access by a shareholder or group holding five percent of the stock for three years. And the Council of Institutional Investors (CII) has endorsed a lower threshold at three percent for two years. These institutional investor preferences are at odds with management proposals at companies such as Whole Foods that (1) require nominating shareholders to meet an ownership threshold of five to eight percent for a period of three to five years and (2) specify ownership by a single shareholder and not a group. This gap between what institutional investors are demanding and what management is offering caused CII to ask the SEC to "alter its interpretation of the 'counterproposals' basis for exclusion under Rule 14a-8(i)(9)" as overly broad in application in Whole Foods. As noted above, the SEC is currently undertaking just such a review. Read Vanguard's Proxy Voting Guidelines and the CII letter to the SEC.
NYSE Proposes Related Party Approval Exemption for Early Stage Companies
January 23, 2015
The NYSE has proposed amending its listing standards to exempt early stage companies from the requirement to obtain shareholder approval before issuing shares to related parties and affiliates. The NYSE noted that early stage companies are hampered in their ability to obtain financing and "frequently need to raise capital via private placement share issuances to their founders or other significant existing shareholders or their executive officers or directors." According to the NYSE, this proposed change follows from its recent amendment to allow initial listing by early stage companies with a total global market cap of at least $200 million that do not otherwise meet the NYSE's assets and equity test. Read the NYSE Proposal.
Second Circuit Says Failure to Meet MD&A Requirements Can Lead to 10b-5 Liability
January 23, 2015
In Stratte-McClure v. Morgan Stanley, the Second Circuit held that the MD&A disclosure rules set forth in Item 303 of Regulation S-K can give rise to a Rule 10b-5 claim. According to the court, a violation of Item 303's disclosure requirements can only sustain a claim under Rule 10b‐5 if the allegedly omitted information would also satisfy the Basic v. Levinson test for a fraud claim, including the need to establish materiality and scienter. This ruling departs from the Ninth Circuit's ruling in In re NVIDIA Corp. that declined to find that the disclosure duty created by Item 303 can form the basis for an actionable securities fraud claim. Read the opinion and analysis.
A Call for Relevant Proxy Redesign
January 23, 2015
The approaching proxy season presents an opportunity to update and refresh the proxy statement to meet evolving investor needs and expectations. The trend among companies of every size is to enhance user-friendly features to transform disclosures that are merely responsive to SEC rules into proactive messages for investors. Disclosure updates may be driven by say-on-pay votes, investor activism on a particular topic or revisions by peer companies. In addition, proxy statements have become a tool to enhance shareholder engagement, improve corporate branding, advocate management's position on past performance and introduce management's strategic vision for the future. Read our redesign suggestions.
ISS Issues FAQs on Two Voting Policies
January 9, 2015
ISS recently issued FAQs addressing two of its 2015 proxy season policy updates, namely its new equity plan scorecard approach and its policy on independent board chair proposals. These FAQs offer insight and additional detail on how these new polices will be applied. The equity plan scorecard FAQs set forth the complex point system that ISS will apply when analyzing an equity plan up for shareholder vote. In particular, ISS sets forth how points will be allocated amongst 13 distinct factors in three key areas (plan cost, plan features and grant practices). According to ISS, "a score of 53 or higher (out of a total 100 possible points) generally results in a positive recommendation for the proposal (absent any overriding factors)." The independent board chair FAQs offer additional detail on the holistic approach that ISS will use when assessing a shareholder proposal in this area, including a company's board leadership structure, governance practices and performance. Read the ISS Independent Board Chair FAQs.
Delaware Court Upholds Forum Use Restrictions in Books and Records Demand
January 9, 2015
A recent decision by the Delaware Supreme Court provides companies another tool to control the forum for costly stockholder derivative litigation. In United Technologies Corp. v. Treppel, the court affirmed the authority of Delaware courts to limit the litigation forum where information obtained in a books and records action can be used. Previously, Delaware courts have held that companies can enforce bylaws that require stockholder lawsuits to be brought in Delaware, even if those provisions were adopted without stockholder consent. In this case, United Technologies would permit a stockholder demand to inspect books and records, provided that the stockholder agreed that any claim arising out of or relating to the inspection be brought in a Delaware court. Under Section 220 of Delaware corporate law, stockholders have the right to inspect and copy corporate records, including board minutes, "for any proper purpose." Delaware courts encourage this procedure as an information-gathering tool, rebuking stockholders for failing to use it before filing a claim of corporate mismanagement. However, according to the court, "Delaware case law has consistently reflected the underlying principle that the stockholder's inspection right is a 'qualified' one." Accordingly, the Court of Chancery has wide discretion to shape the breadth and use of inspections under Section 220 to protect the legitimate interests of Delaware corporations. Read the Delaware Supreme Court's opinion.
SEC Proposes Amendments to Exchange Act Registration Requirements
January 9, 2015
As mandated by the JOBS Act, the SEC recently proposed changes to the thresholds for registration, termination of registration and suspension of reporting under Section 12(g) of the Exchange Act. The proposals would, among other things, amend applicable rules: (1) to reflect new thresholds established by the JOBS Act, (2) to apply the accredited investor definition in Rule 501(a) of the Securities Act to determinations of record holders under the Exchange Act, and (3) to exclude securities held by persons who received them in exempt transactions under an employee compensation plan when calculating holders of record for Exchange Act registration requirements. Read the SEC press release.
Vanguard Calls for Shareholder Liaison Committees at U.S. Public Companies
January 9, 2015
In an interview with the Financial Times, Vanguard CEO Bill McNabb revealed that Vanguard was asking the U.S. companies in which it invests to establish shareholder liaison committees in an effort to improve corporate governance. In the interview, McNabb said, "Directors are standing in on behalf of owners – that's an important concept – yet there are many independent directors who have never met an investor." Public companies should continue to assess their own shareholder engagement efforts in light of emerging best practices. Read about Vanguard's campaign in IR Magazine. Read a summary of our panel discussion addressing best practices for shareholder engagement.
Costco Shareholders to Vote on Limits to Director Tenure
December 19, 2014
A shareholder proposal of activist John Chevedden aimed at limiting long-tenured directors will be up for vote at the annual meeting of Costco to be held in January 2015. The proposal asks the board to amend its bylaws to require at least 67 percent of the board of directors to have less than 15 years of tenure on the Costco board. According to the proposal, more than half of Costco's current directors would exceed this limit. Costco's board opposes the proposal, noting that imposing such mandatory limits would "arbitrarily deprive Costco of qualified, experienced and effective directors." The board's response also notes that current board nomination processes consider tenure and that experienced directors are good for Costco's long-term approach to creating shareholder value. ISS does not currently have a voting policy relating to director tenure. However, its QuickScore governance rating system looks at the proportion of non-executive directors with greater than nine years tenure and states that "[l]imiting director tenure allows new directors to the board to bring fresh perspectives. A tenure of more than nine years is considered to potentially compromise a director's independence." Views on the value of limiting board tenure vary widely, and even ISS appears conflicted. In its 2014 voting guidelines (applicable to Costco's meeting), ISS states "Vote against management proposals to limit the tenure of outside directors through term limits. However, scrutinize boards where the average tenure of all directors exceeds 15 years for independence from management and for sufficient turnover to ensure that new perspectives are being added to the board." Read more in the Seattle Times and in this Harvard Law blog.
Insider Trading Convictions Overturned
December 19, 2014
In United States v. Newman, the U.S. Court of Appeals for the Second Circuit recently overturned the insider trading convictions of two former hedge fund managers. In doing so, the court set a new standard for the "personal benefit" element for tippee liability set in Dirks v. SEC. In particular, Newman held that "in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit." Previously, courts had used a low standard for showing the insider's personal benefit, allowing it to be inferred from circumstances such as mere friendship and not requiring the tippee's knowledge of the benefit. The more demanding standard set by the Second Circuit requires that the tipper receive "an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature." This new standard set by the Second Circuit will make it harder for the government to bring and win insider trading convictions and may affect other trading convictions and related civil actions. Read the decision and more about the resulting fallout arising from it.
U.S. House Takes on Disclosure Reform
December 19, 2014
Although the SEC previously launched its own "Disclosure Effectiveness" initiative under the JOBS Act, the U.S. House of Representatives recently passed the Disclosure Modernization and Simplification Act of 2014 aimed at similar reforms. The bill would require the SEC to revise Regulation S-K to "reduce the burden on emerging growth companies, accelerated filers, smaller reporting companies, and other smaller issuers, while still providing all material information to investors" and to eliminate duplicative, outdated or unnecessary provisions for all issuers. The bill would also permit public companies to include a summary page of all material information in Form 10-K. It is uncertain what action the Senate will take on the bill. In light of the ongoing attention to this issue, reporting companies should continue to evaluate their existing disclosure with an eye toward readability and usability for investors. Read a summary of the bill on Congress.gov.
SEC Adopts New Regulation SCI to Strengthen Securities Markets
November 26, 2014
Last week, the SEC approved new rules for Regulation Systems Compliance and Integrity (Regulation SCI) designed to strengthen the technology infrastructure of the U.S. securities markets. These rules require securities exchanges and self-regulatory organizations (SROs) to establish comprehensive policies and procedures to help ensure the robustness and resiliency of their technological systems. The SEC noted that "a seemingly minor systems problem at a single entity can quickly create losses and liability for market participants, and spread rapidly across the national market system, potentially creating widespread damage" and cited examples of such disruption in recent years, including system issues affecting the Facebook IPO. Under the rules, exchanges and SROs will be required to report system disruptions and intrusions within 24 hours and take prompt corrective action. Regulation SCI represents the first comprehensive regulatory effort aimed at automated trading systems in over two decades and replaces what was previously a voluntary program. Read the SEC's press release and more on Bloomberg.com.
ISS, Glass Lewis Publish Policy Updates for 2015 Proxy Season
November 26, 2014
Earlier this month, ISS and Glass Lewis each released policy updates for proxy voting recommendations for the 2015 proxy season. Notably, both ISS and Glass Lewis will recommend votes against directors responsible for adopting bylaw provisions materially limiting shareholder rights without shareholder approval. As previously released in its draft policies, ISS will take a new "scorecard" approach to evaluating equity compensation plan proposals. In a more holistic approach than previously proposed, however, ISS generally will recommend a vote in favor of independent board chair proposals after considering a variety of factors, such as a company's current governance structure and practices, board leadership and performance. In response to recent IPO trends, Glass Lewis will recommend voting against directors of companies adopting exclusive forum or fee-shifting bylaws before going public if those provisions are not put up for shareholder vote after the IPO. Read the 2015 policy updates for ISS and Glass Lewis. Read analysis.
ISS Launches Governance QuickScore 3.0
November 26, 2014
ISS also released updates to its governance rating system known as QuickScore. Ratings under the new "QuickScore 3.0" officially launched on November 24, 2014. The methodology for QuickScore 3.0 weighs several new factors, including: (1) whether a board has taken unilateral action that materially reduces shareholder rights, (2) whether there is a policy requiring annual board evaluations, (3) whether there are sunset provisions on any unequal voting structures, and (4) whether there is a controlling shareholder (this factor is considered but not weighted). QuickScore 3.0 gives weight to factors previously considered on an unweighted basis, including how many women serve on the board and how many financial experts serve on the audit committee. ISS has modified how it considers certain factors by specifying new shareholder support levels for say-on-pay and director approvals. ISS also expands the types of investigations and enforcement actions it will consider. Read an analysis by Frederic W. Cook of QuickScore 3.0.
Revisiting Risk Factors for Disclosure Reform
November 26, 2014
As the SEC considers how to improve disclosure effectiveness for public company periodic reports, numerous suggestions for reform have been presented. Recently, teams of grad students at The George Washington University School of Business offered their take after reviewing hundreds of Form 10-K filings. One award-winning team focused on how to improve risk factor disclosure. These students noted that the current approach to risk factors is not particularly useful to investors, noting that "for [an average] company across five fiscal years, only two risks ever changed, even if 20 or more were listed." They suggested either: (1) segregating company-specific risks from those applicable to the company's industry generally or (2) sorting risk factors based on their potential impact on company performance and probability of occurrence. Read more on CFO.com. Read SEC Director Keith Higgins' update on the disclosure effectiveness initiative and comments on disclosure effectiveness filed with the SEC to date.
Proxy Access Shareholder Proposals Are Coming!
November 14, 2014
Last week, the New York City Comptroller, on behalf of the $160 billion NYC Pension Funds, announced the launch of a national campaign to give shareholders the ability to nominate directors of U.S. public companies using the company's ballot. These shareholder proposals for proxy access have been submitted to 75 companies so far and are aimed at improving board responsiveness. According to the announcement: "The current election procedures for most corporations would make Boss Tweed blush. We are seeking to change the market by having more meaningful director elections through proxy access... With this right in place, we expect to see better long-term performance across our portfolio." Read more in the New York TImes. Read the NYC Comptroller's press release and a sample proposal.
SEC Enforcement Actions for Failure to Report Dilutive Unregistered Financings
November 14, 2014
The SEC settled administrative proceedings against 10 companies that failed to file a Form 8-K as required to report sales of common stock in unregistered transactions that constituted at least five percent of their outstanding shares. The Form 8-K requirements can be found in Items 1.01 (Entry into a Material Definitive Agreement) and 3.02 (Unregistered Sales of Equity Securities). A total of $350,000 in penalties were assessed against the noncompliant companies. According to the SEC, "These enforcement actions reinforce the ongoing need for full disclosure to shareholders concerning an issuer's entry into highly dilutive financing agreements." Read the SEC press release.
Debate Continues on Fee-Shifting Bylaws
November 14, 2014
Earlier this year, the Delaware Supreme Court endorsed the facial validity of a bylaw provision that shifts company litigation expenses to shareholders that bring and lose a claim against the company and its directors and officers. Since that decision, a number of companies have adopted a fee-shifting bylaw provision without shareholder approval or prior to going public. Legal commentators have debated the propriety of these provisions, with some urging the SEC to take action to prevent the practice as contrary to the federal Private Securities Litigation Reform Act. Others have argued that these provisions may benefit investors by discouraging frivolous suits and preserving company resources. It is unclear if the Delaware legislature will act to halt the practice or what other state courts or legislatures might do. Read John Coffee's blog urging the SEC to get involved.
Board Diversity: What Does it Mean?
November 14, 2014
Despite efforts by shareholder activists and the SEC to improve diversity on public company boards, there has been little change in recent years in the percentage of board seats held by women. According to a Yale Law School professor's analysis of proxy statement disclosures, that may be because most of the largest public companies are interpreting diversity as having generally varied backgrounds or experiences, rather than true gender or minority diversity. Numerous advocates, including SEC Chair Mary Jo White, have argued that that companies with gender-diverse boards make better decisions and have better financial performance than those that do not. Recently, the Thirty Percent Coalition, an institutional investor initiative led by CalSTRS, sent letters to 100 companies in the Russell 1000 Index that lack women on their boards of directors, urging them to embrace gender diversity. Read SEC Chair White's speech, an article about the Yale study and the Thirty Percent Coalition's press release.
SEC Approves New PCAOB Related Party Transaction Standards
October 31, 2014
The SEC approved as proposed the PCAOB's new auditing standards with respect to related party transactions, significant unusual transactions and a company's financial relationships and transactions with its executive officers. These standards address required audit procedures in these areas, including required management representations and auditor communications with the audit committee. The new standards will become effective for audits of financial statements for fiscal years beginning on and after December 15, 2014. To prepare, public companies should ensure that they have proper related party identification, authorization and approval processes and policies in place. Public companies should also inform audit committees of the additional communications with auditors that can be expected from the new standards. Read the SEC's order.
ISS Proposes Draft 2015 Policy Updates
October 31, 2014
ISS released draft voting policies for the 2015 proxy season for comment. The policy proposals offer details on the new "scorecard" approach to evaluating equity compensation plan proposals, as well as the voting policy on independent board chair proposals. According to ISS, the scorecard approach being considered "introduces a more nuanced approach around traditional cost evaluation by considering a range of plan features and grant practices that reflect growing investor awareness of aspects such as performance-conditioned awards, risk-mitigating mechanisms, and reasonable plan duration." In addition, ISS noted its proposed voting policy for independent board chair proposals would be to generally recommend voting for the proposal, unless the company satisfies all six criteria specified in the policy. Read ISS' proposed equity plan scorecard policy and independent board chair policy.
SEC Plans to Address Audit Committee Effectiveness
October 31, 2014
The SEC recently announced its plan to address the role of public company audit committees and the auditor-audit committee relationship. According to SEC Chair Mary Jo White, the SEC plans to issue a concept release in early 2015 in this area. In her remarks before the Investor Advisory Group of the Public Company Accounting Oversight Board, White noted that she "can't overstate the importance of the audit committee functioning at the highest possible level." Read more in Compliance Week.
Say on Pay: More Failures and Lower Approval Rates
October 31, 2014
According to a joint report of Broadridge and PwC on the 2014 proxy season, there was an increase in say-on-pay vote failures as well as "signs of weakening support levels [for pay] at mid-, small- and micro-cap companies" in 2014 as compared to 2013. The report reviewed shareholder meeting results from over 4,000 companies during the first six months of 2014. The report goes on to note that "nearly three-quarters of directors agree that "say-on-pay" has increased shareholder dialogue and prompted directors to change the way they communicate about compensation." Read Broadridge/PwC's ProxyPulse report and an article in CFO.com.
Whistleblowers and SEC Enforcement
October 31, 2014
The SEC released a report on the activities of its Division of Enforcement in 2014, noting that the division "filed a record 755 enforcement actions" and "obtained orders totaling $4.16 billion in disgorgement and penalties." Whistleblowers, and a failure by companies to adequately respond to them, have played an important role in the SEC's enforcement efforts. A recent study noted that whistleblower involvement accounts for 30 percent of total penalties assessed for financial misrepresentation. To stay out of trouble, companies need to ensure that they have solid internal reporting and compliance procedures in place. Read the SEC press release on enforcement activities or download the study assessing whistleblower involvement. Read Inside Counsel's take on strategies to minimize whistleblower risk.
Insider Sales in Advance of SEC Comment Letter Publications
October 17, 2014
A recent study conducted at Berkeley's Haas School of Business questioned the practice of insiders selling stock shortly before SEC comment letters reviewing their company's disclosure became public. The study reviewed issuers whose accounting practices had drawn comments in the regular SEC review of periodic reports and compared insider sales occurring after comments were received but before the letters were published on the SEC's website. The study found significantly increased insider stock sale activity during the five days leading up to comment letter publication. Importantly, most companies do not bar insider sales during the period when such SEC comment letters are not yet public, unless there is a determination that the comments would be material to investors. According to Gretchen Morgenson of the New York Times, "Corporate insiders already have a lot of advantages over outside investors. Eliminating this one - executives' ability to trade ahead of a potential accounting problem - seems like a no-brainer." Read more in the New York Times or download the study.
Letters of Intent: Not Binding Means Not Binding
October 17, 2014
In ev3, Inc. v. Lesh, M.D., et. al., the Delaware Supreme Court reversed a jury verdict that had looked to a non-binding letter of intent when interpreting buyer ev3's earnout obligations under its merger agreement with target Appriva Medical. While the letter of intent expressly survived the merger agreement, the court held that non-binding provisions in the LOI did not override contrary provisions in the merger agreement. The court remanded the case for further proceedings consistent with its opinion. The lower court had permitted the jury to consider the non-binding LOI when determining ev3's obligations. However, it had not allowed the jury to consider evidence that the parties had rejected those same LOI provisions when negotiating the final agreement. The case provides important reminders as to both the risks inherent in earnouts and the importance of including all relevant obligations in the final agreement. Read the Delaware Supreme Court's opinion.
More Companies Disclosing Their Political Spending
October 17, 2014
There has been increasing pressure on public companies to be more transparent about political contributions and related policies. The Center for Political Accountability published data on how the top 300 companies in the S&P 500 fared in this area. The report notes a national shift toward more comprehensive disclosure of political spending and related policies such that "more leading companies are establishing political disclosure as a mainstream corporate practice." The report also notes: "Voluntary disclosure is making inroads among even those public companies that have not been engaged by shareholders to disclose." The report rated the subject companies on their disclosure and practices, noting concrete progress towards improved disclosure and accountability as well as gaps needing improvement. Read the 2014 CPA-Zicklin Index of Corporate Political Disclosure and Accountability.
A Call for Alignment Between Global Business Presence and Board Experience
October 17, 2014
Directors with international experience should be in higher demand, according to Egon Zehnder's recently published 2014 Global Board Index. The study calls into question the disparity between the growth of U.S. companies' international revenue and the absence from boards of foreign nationals and directors with international work experience. As businesses, particularly those in the technology sector, continue to strive for global growth, it will become more and more important to continue to focus on board evaluation and succession, and to prioritize meaningful international business experience when recruiting candidates. Read a summary of the study in the Corporate Secretary or view the full 2014 Egon Zehnder Global Board Index.
ISS Releases Results of 2014 Policy Survey
October 2, 2014
ISS recently released the results of its annual global policy survey of institutional investors and corporate issuers. These results will be used by ISS in preparing its policy updates, expected later this year. The survey addressed a range of issues, including board accountability, boardroom diversity, equity plan evaluation, pay for performance and environmental and social issues. Not surprisingly, the survey revealed a difference of opinion among investors and issuers over whether unilateral board action is appropriate to amend bylaws affecting shareholder rights. The survey also revealed a diversity of investor and issuer views on how best to implement ISS new proposed "balanced scorecard" approach to evaluate equity plan proposals. However, it seems clear that ISS will implement this new more holistic approach in some form for the 2015 proxy season. Over 370 participants responded, including more than 100 institutional investors and 250 corporate issuers. Read the ISS report.
Equity Plan Approval - Reminder to Register for ISS Equity Plan Data Verification
October 2, 2014
Generally, ISS recommends against an equity plan up for shareholder vote if the plan has a high cost or Shareholder Value Transfer (SVT). ISS also recommends against plans with high burn rates, permissive option repricing or other problematic provisions. Despite ISS recommendations against, however, substantially all plans have received shareholder approval in recent years, although the approval margins are not always high. Last month, ISS launched a portal allowing companies to verify information used by ISS when formulating its recommendation. Companies are encouraged to register for the portal, giving them access to ISS data and the ability to request modifications. Data will be available for review approximately 12 days after a company files its definitive proxy statement with the SEC, and companies will then have a two-day window to request a modification. Read about the ISS verification portal.
SEC Awards Whistleblower $30 Million
October 2, 2014
The SEC announced an award of $30 million to a whistleblower living in a foreign country whose information led to a successful enforcement action. This is the largest award to date under the SEC's program implemented in 2011. According to the SEC, the whistleblower exposed an ongoing fraud that would have been hard to detect otherwise. As noted by the SEC, "Whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws." The whistleblower's identity and other details that could reveal it must be kept confidential by law. To qualify for an award under the SEC's Dodd-Frank whistleblower program, a whistleblower must voluntarily provide the SEC with original information that leads to successful enforcement. Read the SEC press release and related coverage. Read our summary of the SEC's whistleblower reward program and a 2013 SEC report on it.
SEC Charges Corporate Insiders with Late Beneficial Ownership Reporting
September 19, 2014
Last week, the SEC announced charges against 28 corporate insiders for violating requirements to promptly report their transactions and holdings in company securities on Form 4 and Schedules 13D and 13G. Six companies were also charged for contributing to their insiders' filing failures or failing to report their insiders' filing delinquencies as required. The SEC noted that it used quantitative analytics to identify individuals and companies with high rates of filing deficiencies. According to the SEC, "Officers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions." Read the SEC press release.
Delaware Judge Blesses Forum Selection Bylaw Selecting North Carolina Law to Limit M&A Suits
September 19, 2014
Applying Boilermakers Local 154 Retirement Fund v. Chevron Corp., the Delaware Chancery Court recently enforced a Delaware company's forum selection bylaw selecting North Carolina as the exclusive forum for shareholder derivative litigation. The provision was adopted by First Citizens Bancshares on the same day it agreed to a corporate merger that potentially could trigger litigation. According to Chancellor Bouchard, "If Delaware corporations are to expect, after Chevron, that foreign courts will enforce valid bylaws that designate Delaware as the exclusive forum for intra-corporate disputes, then, as a matter of comity, so too should this Court enforce a Delaware corporation's bylaw that does not designate Delaware as the exclusive forum." Read more in Bloomberg/BNA.
Pension Funds Have "No Comment" on Proposed Inversion Deals
September 19, 2014
When it comes to the controversial deals, known as inversions, in which U.S. companies propose to reincorporate abroad to achieve tax advantages, one group of interested parties is taking a decidedly "no comment" position: large public pension funds. According to the New York Times, these investors "may be so meek on the issue of inversions because they are conflicted. On one side, the funds say they care about the long term and the implications for their state...yet most pension funds are underfunded and, frankly, desperate to show investment returns." High profile inversion deals include AbbVie's proposed $54 billion acquisition of Shire and Burger King's announced talks to buy Tim Hortons. Read more in the New York Times.
Conflicts in the Boardroom
September 19, 2014
A board comprised of independent, thoughtful and outspoken directors is bound to disagree from time to time. However, discord among directors has the potential to affect adversely a board's effectiveness. In an effort to explore what causes boardroom disputes and how best to resolve them, the Centre for Effective Dispute Resolution and the Corporate Governance Group of the International Finance Corporation surveyed 191 directors about their experience. Read the joint CEDR/IFC survey.
Data Breaches Pose D&O Liability Risks
September 5, 2014
This week, Home Depot announced that it was investigating a reported theft of customer debit and credit card information from its systems. This may be just the latest in a series of high-profile data breaches for U.S. public companies. When a major breach occurs, shareholder derivative litigation may follow, as demonstrated by suits filed against Target and its directors and top executives related to the data breach last year. The Target suits claim that directors and executives breached their duties to shareholders when they failed to prevent the breach and also when they responded inadequately to the breach once identified. Insurance professionals have noted a recent uptick in inquiries from companies wondering if their D&O insurance covers the liability. What should directors be doing? Read a Business Insurance article and our Checklist for Corporate Directors on data privacy and security oversight. Read an article in Reuters with some best practices to consider.
Delaware Amends Statute of Limitations for Breach of Contract Claims
September 5, 2014
Effective August 1, 2014, Delaware amended the statute of limitations applicable to Delaware contracts. The amendment will be an important factor for M&A transactions governed by Delaware law that seek to extend indemnification claims beyond the statutory limitation period. Prior to the amendment, parties entering into an acquisition agreement governed by Delaware law were limited to a three-year period for indemnification claims under the statute, unless they entered into a contract "under seal." The amendment gives contracting parties the ability to extend the statute of limitations for a specified period of up to 20 years for claims arising out of Delaware contracts, as long as the contract is in writing and involves at least $100,000. Read more in this Harvard Law School blog.
SEC Awards Internal Audit Whistleblower $300,000
September 5, 2014
The SEC recently announced a whistleblower award of more than $300,000 to a company employee who performed audit and compliance functions. It was the first award under the SEC's award program for a whistleblower in such a role. The employee reported wrongdoing to the SEC after the company failed to take action within 120 days of the employee's first report to company personnel, including a supervisor. According to the SEC, the report led directly to an SEC enforcement action. Whistleblower complaints under the program have grown from 334 in 2011 to 3,238 in 2013. To qualify for an award under the SEC's Dodd-Frank whistleblower program, a whistleblower must voluntarily provide the SEC with original information that leads to successful enforcement. Read the SEC press release. Read our summary of the SEC's whistleblower reward program and the SEC report on the program from implementation in 2011 through the end of the 2013 fiscal year.
Will Investment Bankers Be Brushed Aside in Technology Deals?
August 22, 2014
According to the New York Times, Google's CEO Larry Page suggests a "toothbrush test" for potential acquisitions: "Is it something you will use once or twice a day, and does it make your life better?" As technology M&A booms, investment bankers are playing a declining role in advising buyers, particularly in Silicon Valley. According to the New York Times, "the acquiring company did not use an investment bank in 69 percent of American technology acquisitions worth more than $100 million this year, according to Dealogic. That number was 27 percent 10 years ago." Recent mega-deal examples of unadvised buyers include Apple's acquisition of Beats Electronics, Google's acquisition of Waze and Oracle's agreement to purchase Micros Systems. Read more in the New York Times.
Wal-Mart Required to Provide Privileged Documents in Shareholder Demand for Corporate Records
August 22, 2014
The Delaware Supreme Court recently upheld a decision requiring Wal-Mart to provide extensive records in response to a shareholder demand under Section 220 of Delaware corporate law, despite the privileged and confidential nature of the information. In Wal-Mart Stores, Inc. v. Indiana Electrical Workers Trust Fund IBEW, the court adopted the Garner doctrine, which allows "stockholders of a corporation to invade the corporation's attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause." The shareholder demand relates to an investigation of allegations of payments by Wal-Mart to Mexican officials in violation of the Foreign Corrupt Practices Act. Under Section 220 of Delaware corporate law, shareholders have the right to inspect and copy corporate records, including board minutes, "for any proper purpose." Delaware courts encourage this procedure as an information-gathering tool, rebuking shareholders for failing to use it before filing a claim of corporate mismanagement. Read the decision and analysis. Also, read our summary of ways to minimize FCPA risks.
ISS Announces Equity Plan Data Verification Portal
August 22, 2014
ISS, noting its "commitment to advancing the level of transparency and engagement in its data collection process," announced a new way for companies to verify information used by ISS for recommendations on shareholder votes involving equity-based compensation plans. Companies are encouraged to register for the portal, allowing them access to ISS data and the ability to request modifications. Companies will only have a two-day window after receiving notice to request any such modification. The portal officially launches on September 8, 2014. Data will be available for review approximately 12 days after a company files its definitive proxy statement with the SEC. ISS' new Equity Plan Data Verification is separate and distinct from its Governance QuickScore Data Verification and the ISS S&P 500 Draft Review. Read ISS FAQs about the portal.
Disclosure Practice When a CEO Gets Sick
August 22, 2014
The announcement in July that JPMorgan Chase CEO and Chairman Jamie Dimon had throat cancer is an example of the difficult disclosure decisions public companies face when a CEO gets sick. Deciding what to say and when to say it involves a delicate balance between investors' need for disclosure and the CEO's right to privacy. The reviews suggest that JPMorgan Chase did this well, while Apple, when handling disclosures about Steve Jobs' illness, did not. There are no specific SEC rules addressing disclosure of a CEO's illness. However, both the NYSE and Nasdaq generally require listed companies to promptly and publicly disclose any material news or information that might affect the market for their securities, including management changes. Read more in the Washington Post.
2015 ISS Policy Survey and Upcoming Trends
July 25, 2014
ISS recently distributed its 2015 annual survey of institutional investors and corporate issuers. The survey covers a number of key issues for consideration for the 2015 proxy season, including how to evaluate equity plans, board diversity and pay for performance. For the 2015 proxy season, ISS is considering a scorecard approach to evaluating equity plans, rather than the current focus on shareholder value transfer (SVT) and specific provisions and practices that ISS views as problematic. If adopted, the scorecard will place a greater emphasis on governance features that are included in the plan itself (such as holding periods and change of control provisions) and the company's historic administration practices. Thus, a plan that defers to award agreements for holding period requirements and other governance safeguards may receive a negative ISS recommendation despite a low SVT and an absence of problematic pay practices. ISS is also considering how to evaluate board accountability when a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders' rights, such as an advance notice or exclusive forum provision. Read more and access the survey here.
Will Congress Halt Inversion Deals?
July 25, 2014
In the wake of high-profile deals in which U.S. companies propose to reincorporate abroad to achieve tax advantages, Treasury Secretary Jacob Lew urged Congress to act quickly to prohibit the practice. These so-called inversion deals include Medtronic's proposed $43 billion acquisition of Covidien and AbbVie's proposed $54 billion acquisition of Shire. According to the New York Times, however, "the Obama administration and Congress appear unlikely to take any action to stem the tide of such deals anytime soon." Read more in the New York Times.
SEC Scrutinizes Cybersecurity Risk Disclosure
July 25, 2014
According to Bloomberg, the SEC is investigating several companies that were the victim of a data breach, including Target. Although there is no existing rule, requirement or regulation addressing cybersecurity risk disclosure, the SEC issued general guidance in 2011 and held a roundtable on the topic earlier this year. In a speech last month, SEC Commissioner Aguilar said that, in the event of a cyberattack, companies "should go beyond the impact on the company" and weigh the effect on others, including customers. Read Commissioner Aguilar's speech and more at Bloomberg.com.
SIFMA's Recommendations to Improve Market Structure
July 25, 2014
The Securities Industry and Financial Markets Association (SIFMA) recently proposed a series of changes to improve the fairness and effectiveness of the equity market trading system. SIFMA's recommendations were the result of a member task force charged with reviewing market structure. SIFMA focused on three areas that called for SEC rulemaking directed at the exchanges. First, SIFMA proposes to address market complexity and fragmentation by eliminating or reducing the access fees charged by exchanges and reducing the number of trading venues to which a broker-dealer must connect. Second, SIFMA proposes improved fairness in market data dissemination and seeks SEC rulemaking to ensure that all users of market data have access at the same time. Finally, SIFMA seeks more robust transparency and disclosure for investors and encourages the SEC to direct the exchanges to provide standardized public disclosure of their trading volumes. Read more in the New York Times.
SEC Provides Guidance on Investment Advisers' Use of Proxy Advisory Firms
July 11, 2014
The SEC recently issued guidance on investment advisers' responsibilities in voting client proxies and retaining proxy advisory firms. The guidance takes the form of 13 Q&As and addresses many of the concerns raised at the SEC roundtable in December 2013. The Q&As make clear that an investment adviser cannot satisfy its fiduciary duty to clients solely by relying on proxy advisory firms. Rather, investment advisers have an "ongoing duty to oversee" a proxy advisory firm upon which it relies, including assessing conflicts of interest and investigating material inaccuracies in a proxy advisory firm's reports. The Q&As also address when proxy advisory firms are subject to the federal proxy rules and set forth their conflict-of-interest disclosure obligations. Read SEC Staff Legal Bulletin No. 20. Read more about the call for transparency at proxy advisory firms discussed by our proxy season panel.
SEC and SIFMA Provide More Guidance for Verification of Accredited Investor Status
July 11, 2014
The SEC and the Securities Industry and Financial Markets Association (SIFMA) each issued additional guidance for Regulation D private placements relying on Rule 506(c). This rule permits general solicitation when an issuer takes reasonable steps to verify that all purchasers are accredited investors and sets forth four non-exclusive safe harbors under which the reasonable verification requirement may be satisfied. The SEC's latest guidance focuses on its narrow interpretation of these four safe harbors and reiterates the principles-based approach. The SIFMA's guidance is directed to registered broker-dealers and investment advisers that may be asked to provide written confirmation of accredited investor status, offering examples of reasonable verification methods. Read the SEC's most recent interpretations and the SIFMA guidance.
Conflict Minerals Rules: Is the Disliked Disclosure Effective?
July 11, 2014
According to the Enough Project, "Market changes spurred by the 2010 Dodd-Frank law on conflict minerals have helped significantly reduce the involvement of armed groups in eastern Democratic Republic of Congo...in the mines of three out of the four conflict minerals." Public companies began to file their first Form SD reports on June 2 of this year under final rules adopted by the SEC in August 2012. By requiring companies that use conflict minerals in their products to disclose the minerals' source, the law aims to dissuade companies from engaging in trade that supports regional conflicts. However, compliance with the SEC's rules is costly for public companies, and a portion of the rules was found to violate companies' First Amendment rights by a federal appeals court. Read the Enough Project's report. Read our summary of the SEC rules and the SEC's guidance following the court's ruling.
Risk of Trade Secret Theft Increases for Companies with BYOD Policies
July 11, 2014
The ability to innovate and protect intellectual property drives business growth, development and investment. However, businesses face increasing threats to their critical business information, and recent estimates suggest that trade secret theft costs U.S. businesses billions of dollars each year. Business data is stored everywhere, including on employees' mobile devices. When companies have a "bring your own device" (BYOD) policy, the potential for the theft of critical business information can increase. Read InsideCounsel's article on how BYOD policies could facilitate corporate espionage and our Perspectives on Trade Secret Theft from Prevention to Enforcement.
U.S. Supreme Court Upholds Standard for Securities Fraud Lawsuits but Offers Defendants Some Relief
June 27, 2014
This week, the U.S. Supreme Court issued its decision in Halliburton v. Erica P. John Fund, Inc. In its decision, the Court upheld the "fraud on the market" standard for securities fraud lawsuits established in Basic v. Levinson. Under the Basic standard, shareholders can proceed with a fraud action even if they cannot prove they actually read and relied on a false or misleading statement, based on the theory their purchase or sale was made at an inaccurate share price that incorporated the misrepresentation. However, in Halliburton, the U.S. Supreme Court offered a new challenge to class certification, holding that defendants may rebut the presumption of market efficiency by introducing evidence that an alleged misrepresentation did not actually affect the market price of the stock. Defendants may introduce this evidence at the class certification stage. Thus, the Court's decision gives defendants a potentially powerful new tool for challenging the fraud-on-the-market presumption. Read the U.S. Supreme Court's opinion and analysis in Forbes.
Study Suggests Widespread Insider Trading Before M&A Transactions
June 27, 2014
The New York Times recently reported on a startling new study revealing that a substantial portion of public company M&A deals may involve some kind of insider trading. Both the SEC and DOJ have announced that prosecuting insider trading is a priority, and the SEC has hired a data analysis firm to help it uncover illegal trading activity. Read news about the study and our summary of SEC insider trading enforcement and what companies can do now to avoid trouble.
Best Practices for Minimizing FCPA Risk
June 27, 2014
Earlier this year, Hewlett-Packard agreed to pay $108 million to resolve claims that it violated the Foreign Corrupt Practices Act. The bribery case against H-P spanned Russia, Poland and Mexico and involved bags of cash, jewelry and free trips. As companies expand their businesses globally, they must assess the best way to minimize FCPA risks, particularly as they contract with third-party agents. Key steps involve identifying which third-party relationships are at risk and developing an appropriate FCPA compliance program. Read a summary of insights shared at our Practical Perspectives seminar on this topic.
ISS Urges Vote Against Seven Target Directors
June 6, 2014
ISS launched an unusual and broad "vote no" campaign against seven of 10 directors of Target, claiming that they failed adequately to oversee the company's cybersecurity risks leading to an extensive data breach last year. Target's board defended its actions, noting that cybercrime impacts many companies and the U.S. government and outlining Target's "significant action to address evolving cybercrime risks before the breach." Target's annual meeting will be held next week. According to ISS, the advisory firm rarely recommends that shareholders vote against the majority of board members. Since announcement of the data breach in 2014, Target's stock price has dropped over 10 percent. Read more in the New York Times and the Star Tribune. Read the Target board's letter to shareholders.
Cybersecurity Risk Disclosure
June 6, 2014
A cybersecurity breach at a public company may result in a significant business disruption and stock price drop. Thus, risk disclosure that addresses the impact that cybercrime threats and breaches may have on a company's operations, results and stock price should be considered carefully. Although the SEC issued general guidance in 2011 and held a roundtable on the topic earlier this year, there is no existing rule, requirement or regulation that addresses cybersecurity directly. Best practices continue to evolve, but some suggestions include: clearly disclosing material threats or breaches that have occurred and how the company addressed them, the probability of cybersecurity incidents occurring, the potential costs and consequences (quantitative and qualitative) of any incidents, and preventive actions taken to reduce risks. Read the SEC's 2011 guidance, materials from SEC's 2014 Roundtable and an article in BNA's Privacy & Security Law Report.
Hedge Fund Activists and M&A Appraisal Rights
June 6, 2014
In a twist on shareholder activism in the M&A context, hedge funds are exercising statutory appraisal rights as a matter of business strategy. According the New York Times, hedge funds have led to an upsurge in appraisal rights, with the value of total appraisal claims increasing tenfold from 2004 to $1.5 billion last year. Companies are challenging the ability of hedge funds to assert appraisal rights, however, claiming that such shareholders cannot establish that they meet state law requirements for the remedy. Read more in the New York Times. Read about shareholder activism in the M&A context in this Harvard Law School blog.
No Relief from June 2 Conflict Minerals Disclosure Deadline
May 23, 2014
In the latest courtroom drama involving the SEC's conflict minerals disclosure rules, a federal appeals court refused to stay the June 2, 2014, deadline for filings required under the rules. Although the court previously invalidated portions of the rules as violating companies' First Amendment rights, it rejected an emergency request by business groups to delay the due date for disclosure filings. As a result, companies must proceed to prepare and file their first Form SD in accordance with the SEC's guidance on the topic. Read news coverage and the SEC's guidance.
Ackman Claims Allergan Chair/CEO Has Conflict in Reviewing Bid
May 23, 2014
In connection with his effort to buy Botox-maker Allergan in a joint bid with Valeant Pharmaceuticals, activist investor William Ackman claimed that Allergan's chairman, David Pyott, has a conflict of interest in reviewing the deal because he is also Allergan's CEO. In a letter to the company, Ackman stated, "He will lose his leadership role at the company and likely his job as a result of the transaction. As such, he cannot independently represent the company in considering the Valeant merger." Allergan responded by noting Mr. Ackman's potential conflicts: "As a co-bidder...we believe that Mr. Ackman's views and interests are not aligned with those of other Allergan stockholders." Read Ackman's letter and coverage in the New York Times.
Shareholders Reject Chipotle's Executive Pay
May 23, 2014
In one of the most notable say-on-pay rejections this year, over 75 percent of shares voted against Chipotle's executive compensation package in the company's non-binding say-on-pay proposal at its annual meeting. CtW Investment Group, a relatively small investor, successfully lobbied big institutional investors to join them in its effort to rein in Chipotle's executive pay. Chipotle responded to the overwhelming rejection by stating that, "We take this very seriously"; but is this too little, too late? Read news about the Chipotle vote. Read practical perspectives on how best to align pay and performance from our recent seminar on Designing Executive Compensation Programs.
Former SAC Trader Sentenced for Insider Trading
May 23, 2014
Former SAC hedge fund trader Michael Steinberg was sentenced to over three years in prison for his conviction last year on insider trading charges. The sentence was coupled with a $2 million fine. Although the sentence was less than the minimum penalty suggested by the federal sentencing guidelines, it nonetheless sends a strong message that insider trading is a significant crime and will be punished accordingly. Read news and our summary of SEC insider trading enforcement and what companies can do now to avoid trouble.
SEC Moves Forward with Conflict Minerals Rules Despite Court Ruling
May 9, 2014
In response to a federal appeals court ruling that certain aspects of the SEC's conflict mineral disclosure rules violated companies' free speech rights under the First Amendment, the SEC issued guidance on and a partial stay of portions of those rules. The SEC stated that it expects companies to comply with all disclosure and filing requirements contained in the conflict minerals rules that are not otherwise affected by the court's ruling. As a result, companies must prepare and file their Form SD by the June 2 deadline. Companies that do not need to file a Form SD should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook. Companies required to file a Form SD should include a description of the due diligence undertaken. However, no company is required to describe its products as "DRC conflict free," having not been found to be "DRC conflict free," or "DRC conflict undeterminable." Read the SEC's press release and guidance.
SEC Scrutiny of Private Equity Firms Uncovers Violations
May 9, 2014
Private equity firms have operated with little regulatory scrutiny for many years. Since 2012, however, the SEC's Office of Compliance Inspections and Examinations began to examine these firms as part of a Dodd-Frank mandate giving the SEC greater oversight over private funds. This week, the director of the OCIE reported that their examinations so far have uncovered significant concerns. The most common issues identified by the SEC were improper fees and the allocation of expenses to investors that should be paid by the firm. According to the SEC, more than half of the firms inspected had "violations of law or material weaknesses" in one of those areas. Read the SEC speech and analysis.
SEC Charges NYSE with Violating Market Structure Rules
May 9, 2014
The SEC brought an enforcement action against the NYSE and affiliated exchanges for failing to conduct their business operations in accordance with the SEC's exchange rules and the federal securities laws. Several areas of misconduct were enumerated by the SEC, including the NYSE's disparate pricing practices, which permitted some trading firms to pay less money than others to place their computer servers inside the exchanges' data centers. The NYSE agreed to pay $4.5 million to settle the charges without admitting or denying them. In 2012, the NYSE settled SEC charges that it had given certain customers "an improper head start" on trading data. According to Andrew Ceresney of the Division of Enforcement, "We will hold exchanges accountable if they fail to have rules governing their operations or fail to follow them." Read the SEC's press release and analysis.
Broadridge Explains Its Policy for Disclosing Interim Vote Tallies
May 9, 2014
Who gets what proxy voting information and when? When it comes to shareholder vote tallies in advance of an annual meeting, there is both a lack of clarity and some controversy. Broadridge recently released a report to clarify its current policies and practices. In the report, Broadridge confirmed that in proxy contests (in which there is more than one proxy card) it will continue to provide all soliciting parties with interim vote information at the same time. However, Broadridge will give vote tallies to third parties conducting an exempt solicitation (e.g., a letter in a "vote no" campaign) only if both the issuer requests it and the third party signs a confidentiality agreement. Under this approach, issuers will need to consider whether to give vote information to someone who is opposing the issuer's position; something that has been done only once since Broadridge adopted this policy. There are currently no SEC or other rules addressing this issue, but the Council of Institutional Investors has asked the SEC to adopt rules either to prohibit disclosure to anyone (including issuers) or to provide the tallies to any soliciting party. Read the Broadridge report.
Significant Increases in Shareholder Engagement Noted
May 9, 2014
ISS recently released the results of a benchmarking study of engagement between investors and public companies in the United States. According to the study, almost half of issuers, and more than half of investors, initiated numerous engagement efforts, compared with around 30 percent of issuers and investors three years ago. According to ISS, "While engagement was already increasing in frequency and importance three years ago, a variety of factors, the most significant of them the advent in the U.S. of universal say-on-pay votes, has deepened the trend." Read the ISS Study.
No Reprieve From Conflict Minerals Rules Just Yet
April 25, 2014
Despite a recent federal appeals court ruling that certain aspects of the SEC's conflict mineral disclosure rules are unconstitutional, companies are still preparing for a June 2 disclosure deadline. The problem: while the court deemed the SEC's mandate that companies disclose whether their products are "DRC conflict free" to violate the First Amendment, the court also rejected a series of other challenges to the law. This means that affected companies are still required to file their Form SD; it's just not clear what they are required to say. Now, it's up to the lower courts or the SEC to help clear up the confusion. The best course for companies appears to be to continue to prepare their disclosures - and stay tuned. Read the ruling and analysis.
SEC Outlines Disclosure Effectiveness Reform
April 25, 2014
Keith Higgins, Director of the SEC's Division of Corporate Finance, recently outlined the SEC's disclosure reform efforts. He clarified that reducing the volume of disclosure is not the goal and that many investors have expressed an appetite for more information, not less. Rather, the SEC's focus is on the effectiveness of the overall disclosure scheme. Mr. Higgins suggested the Division's priorities, such as reviewing disclosure requirements that result in redundant disclosure and assessing whether a more principles-based approach would be an improvement. In addition, the SEC launched a spotlight page on its website to solicit public input. Read Keith Higgins' remarks. Visit the SEC's spotlight page on Disclosure Effectiveness.
Preemption in Regulation A Proposal Questioned
April 25, 2014
In December 2013, the SEC proposed rules to amend Regulation A of the Securities Act as mandated by the JOBS Act. The amendments would permit an offering of up to $50 million of securities within a 12-month period without going through a full-blown registration process. The proposed rule would preempt state securities regulatory review of these larger offerings, a provision that is key to the practical viability of Regulation A for issuers. However, a significant number of state securities regulators and NASAA have objected to this aspect of the proposal. SEC Commissioners Stein and Aguilar have also questioned whether the SEC has the authority to use preemption as proposed, opening a debate whether the preemption provision would withstand a legal challenge. Read SEC speeches by Stein and Aguilar.
Activist Investors Becoming More So
April 25, 2014
Activist investors increasingly have brought their complaints to the management and boards of a wide range of companies. Views are mixed on whether these investors create shareholder value or are merely disruptive. Activist investor William Ackman made headlines this week with a bold effort to buy Allergan (the maker of Botox) in a joint bid with Valeant. According to the New York Times, the bid, if successful, "could provide a new template for how deals are done in an era of increased activity by activist investors." Read more about the Ackman/Valeant bid for Allergan. Read opinion about how the dialogue between shareholders and companies needs to change and an article discussing the Poison Pill's Relevance in the Age of Shareholder Activism.
SEC Issues More Conflict Minerals FAQs
April 11, 2014
On April 7, 2014, the SEC provided additional guidance on its rules requiring public companies to disclose their use and sources of "conflict minerals." This guidance is timely as many companies scramble to complete their first Form SD due on June 2, 2014. The most recent nine FAQs focus on the requirements for an independent private sector audit (IPSA) of an issuer's conflict minerals report. Read the SEC's most recent guidance as well as our summary of the original 12 FAQs.
Broadridge's Essential Role in Corporate Governance
April 11, 2014
According to former NYSE Chair Dick Grasso, "Broadridge is the most important firm on Wall Street that you've never heard of." As reported in Fortune, Broadridge processes 85% of all outstanding shares voted in the United States and 72% of shares voted outside of the United States, thus distributing some 2 billion investor communications in print and electronically each year. Read more in Fortune about Broadridge's essential role in corporate governance and a report detailing Broadridge's 2013 Proxy Season Statistics.
Is the IPO Window Still Open?
April 11, 2014
The New York Times reports that, despite a recent surge in IPOs, there are signs that investor interest in new offerings is beginning to wane. Performance among recent new listings is mixed, with some issuers trading below their initial listing prices and other transactions pricing above expectations. Advance preparation and readiness are key to capitalizing on market opportunities. Read more about recent IPO performance and anticipated new listings in the New York Times.
SEMINAR: Practical Perspectives on Designing Executive Compensation Programs – April 24, 2014
April 11, 2014
Tax, employment and securities issues are often in conflict when trying to meet executives' goals and desires as companies design executive compensation programs. This program will bring together a panel featuring attorneys from Fredrikson & Byron's Executive Compensation & Benefits and Employment & Labor groups, a compensation consultant, board representative and in-house counsel to address the potential traps in creating these plans, as well as current and future trends in executive compensation. The panelists will also share first-hand experiences in balancing key executive compensation, compliance and investor-relations objectives. Read more and register here.
Disney Amends Governance Guidelines to Avoid Annual Meeting Showdown
March 28, 2014
Disney amended its governance guidelines to address the limited circumstances under which the company may not have an independent board chairman. As a result, a proxy access proposal was withdrawn by the proposing shareholders and not presented at the company's annual meeting. A group of investors had sought a shareholder vote on a measure to let owners of 3 percent or more of the stock nominate board candidates. That plan was withdrawn after talks with the company, according to Disney's SEC filing. Read more on Bloomberg.com.
Lawsuit to Exclude Confidential Voting Proposal is Dismissed
March 28, 2014
The U.S. District Court (SDNY) recently dismissed Omnicom's complaint to exclude John Chevedden's confidential voting proxy proposal without addressing the substance of the proposal. The court noted that the threat of injury was not "actual or imminent" as necessary to grant the company's declaratory judgment motion. Omnicom had decided to file suit rather than seek a no-action letter. The company must now decide whether or not to include the proposal, which seeks to prohibit the company from obtaining interim vote tallies during proxy solicitation, in its proxy. The SEC staff recently decided that a number of other companies may exclude the proposal on the grounds of vagueness. Read more at Reuters.com.
Best Practices for Engaging with Shareholders
March 28, 2014
Public companies are engaging more than ever with institutional investors and their advisory firms, even for routine annual meeting matters. This is not surprising given that institutional investors are now the dominant investors in U.S. public companies. But how do you start and develop a productive discussion? Read the recommendations of panelists at our recent program Perspectives on Key Issues for Proxy Season and The Conference Board's Guidelines For Engagement.
2014 Shareholder Activism Trends
March 28, 2014
The 2014 proxy season already has set new records for the number of shareholder proposals filed. Topics include governance matters, such as separation of CEO/Chair roles, board declassification and board diversity, as well as social and environmental issues, such as corporate political activity and climate change. An emerging new proposal area addresses cybersecurity and consumer data protection. Read about the top 10 most common shareholder proposals in this EY Report.
Best Practices for Trade Secrets Protection
March 28, 2014
The ability to innovate and protect intellectual property drives business growth, development and investment. However, businesses face increasing threats to their valuable trade secrets and other critical business information. Recent trade secret cases demonstrate that a simple trade secret policy or nondisclosure agreement with employees may not be enough. Companies should take proactive steps to secure trade secrets against theft and consistent action to protect and recover data from departing employees. Read what panelists had to say at our recent program Perspectives on Trade Secret Theft from Prevention to Enforcement.
Stay Tuned for Ruling on Standard for Securities Fraud Lawsuits
March 14, 2014
The U.S. Supreme Court recently heard oral arguments in the Halliburton case, in which the Basic v. Levinson "fraud on the market" standard for securities fraud lawsuits is at issue. According to Sam Hananel of the Associated Press, the Court "seemed open to the possibility of making it harder for investors to join together to sue corporations for securities fraud - but maybe not as hard as companies that have to defend such lawsuits would like." Read an analysis in U.S. News and our summary.
SEC Speaks - Expect a Focus on Data
March 14, 2014
At this year's "SEC Speaks" conference in Washington D.C., SEC leadership said they will use sophisticated analytics on the vast stores of data they collect to enhance examinations, investigations and enforcement. "We are using powerful new data analytics and technology tools in our National Exam Program to conduct more effective and efficient risk-based examinations of our registrants." Chairman Mary Jo White said. "This expanded data collection and analysis not only enhances our ability to identify risks more efficiently, it helps our examiners better understand the contours of a firm's business activities prior to conducting an examination." Read more in Compliance Week.
Supreme Court Extends SOX Whistleblower Protections to Private Company Employees
March 14, 2014
In a recent ruling, the U.S. Supreme Court expanded the reach of Sarbanes-Oxley whistleblower protections to apply not only to employees of publicly traded companies but also to employees of contractors that do business with them. In Lawson v. FMR, LLC, the Court ruled that two whistleblowers were legally protected against retaliation after they raised concerns to their employer FMR, the parent company of Fidelity Investments, about how some mutual funds were being managed. While the mutual funds are public companies, the employer FMR is privately held. While some argue that the ruling may make sense in the mutual fund industry, where public company funds have few employees and rely on contracted advisers, the ruling is not limited to mutual fund advisers and covers a broad range of businesses, including law and accounting firms. Read more in Compliance Week.
Enlisting Powerful Long-Term Shareholders to Fight Activists
March 14, 2014
When Apple faced off this year with activist investor Carl Icahn over his demands for a repurchase program, it benefited from CalPERS' public opposition to the proposal. Even ISS sided with Apple, stating "the board's latitude should not be constricted by a shareholder resolution that would micromanage the company's capital allocation process." In the face of this strong opposition, Icahn dropped his proposal. How did Apple and CalPERS end up on the same side? Did Apple's decision to adopt CalPERS majority voting standard have any impact? Read more about Apple's victory over Icahn in Compliance Week.
Are Risk Factors Losing Their Meaning?
March 14, 2014
Chipotle's latest annual report caught media attention when it disclosed risks related to the raw ingredients for guacamole and salsas in light of climate change. At the same time, Chipotle reassured customers not to panic, guacamole was safe for now, and customers shouldn't "read too much" into such "routine" risk factor disclosure. This give-and-take is interesting in light of SEC Chair Mary Jo White's comment regarding detailed and lengthy SEC disclosures stating that, "It is fair to ask whether there is more there than is really needed." Read more about Chipotle's warnings followed by reassurance and Chair White's remarks.
PCAOB Drops Mandatory Auditor Rotation Concept
February 14, 2014
After pursuing the concept of mandatory auditor rotation for several years, PCOAB Chair James Doty told the SEC that "we don't have an active project or work going on within the board to move forward on a term limit for auditors." The PCAOB's concept release for rules that would have required public companies to switch auditors ever few years had met with fierce opposition from audit firms, their clients and the AICPA. Supporters of the proposal touted its impact on increased audit firm independence while critics argued it would erode audit quality and that its costs far outweighed any benefits. Read more in CFO.com.
SEC Issues Whistleblower Report
February 14, 2014
The SEC issued a report on the Dodd-Frank whistleblower program, noting that 2013 was "historic," with the SEC's Office of the Whistleblower paying over $14 million to whistleblowers for their roles in successful enforcement actions. The report details the growth in whistleblower complaints (from 334 in 2011 to 3,238 in 2013) and the types of SEC violations that resulted in the most whistleblower activity (with corporate financial statement and other disclosure issues, offering fraud and market manipulation leading the list). Read the SEC report.
Reducing "Effectiveness Gaps" for Boards
February 14, 2014
Boards need current and relevant information to be effective in their oversight role. As a result, companies need to assess whether gaps exist between what management communicates and what the board needs to know. McGladrey recommends opening a dialogue between directors and the C-suite to do so. To this end, McGladrey and the NACD co-hosted several such discussions to find ways to improve communications, and the results are informative. Read McGladrey's white paper.
SEC Issues Guidance on Unbundling Requirements
January 31, 2014
The SEC's unbundling rules, which effectively require a distinct shareholder vote on "each separate matter" in a company's proxy, generally have received little attention. However, last year in a dispute between David Einhorn's Greenlight Capital and Apple, these rules took center stage when a judge issued a preliminary injunction to a shareholder vote because Apple had bundled several voting items. The SEC has now offered additional interpretations of their rules, providing three circumstances where bundling is permitted: (1) charter amendments that are "inextricably intertwined," (2) "bundling of any number of immaterial matters with a single material matter" and (3) the "presentation of multiple changes to an equity incentive plan in a single proposal." Companies should carefully consider the application of these rules when preparing their proxy materials, especially those that may come under attack by shareholder activists. See the most recent SEC interpretations, and a detailed interpretation from 2004. Read about the Einhorn/Apple dispute in The Economist.
SEC Issues Report on Auditor Independence
January 31, 2014
The SEC issued a report of investigation that addresses the scope of the auditor independence rules in connection with a recently settled case involving KPMG. In its report, the SEC cautions auditors not to loan their staff to audit clients such that auditor staff are acting as employees of those companies. In the case of KPMG, the auditor had prohibited most loaned staff engagements with SEC audit clients, but had permitted loaned staff engagements for certain tax services. Read the SEC's Section 21(a) report.
Observations on the Current Corporate Governance Environment
January 31, 2014
Corporate governance remains a key topic for corporations and their boards of directors, with board composition, shareholder activism and director accountability topping the list of issues. Read John Stout's take on these matters.
Strong M&A Market Forecasted for 2014
January 31, 2014
Local dealmakers expressed their belief in a strong market for M&A deals in 2014. As reported in the Star Tribune, Fredrikson's Jamie Snelson notes, "There was a steady stream of deals after the first quarter of 2013...We think 2014 will be another good year." Read more in the Star Tribune.
Asymmetric Information Risk: What is it? And What Can Be Done?
January 31, 2014
The National Association of Corporate Directors identifies "asymmetric information risk" as the inherent imbalance in the information known by senior management and that known by the board of directors. According to the NACD, these "gaps in critical knowledge sharing...can create pitfalls and missed opportunities." For example, the JPMorgan Chase "London Whale" debacle demonstrates the damage that asymmetric information risk can cause. Clear lines of communication are crucial, but how best to recognize a problem and achieve this goal? McGladrey has issued a white paper identifying "six warning signs that gaps in the flow of information have become too large and preventative measures a board could take to address the issue." Read McGladrey's white paper "Mitigating Board Information Risk."
Top Priorities for Shareholder Activists in 2014
January 10, 2014
During the 2014 proxy season, institutional investors and activists are expected to continue to focus on executive compensation, board composition and diversity, and social policies. In addition, proxy access remains an ongoing topic of interest and certain activists have expressed a desire for confidential proxy tallying in advance of meetings. Read more about confidential proxy tallying here.
Join the Public Companies Group for a panel discussion, "Anticipating Key Shareholder Issues and Handling Activist and Advisory Firms This Proxy Season" on January 16, 2014, from 7:30-9:30 am at the Minneapolis Club. Read more and register here.
Say-On-Pay Vote Failures - Don't Let This Happen to You!
January 10, 2014
Since Dodd-Frank gave shareholders the right to vote on executive pay, most companies have received 90 percent or more shareholder approval for their compensation packages. Yet, according to TheCorporateCounsel.net, say-on-pay votes failed at 74 companies in 2013. When a company fails to achieve majority support, the company's image and potentially its value can sustain damage. As suggested by these Facts Behind 2013 Failed Say-On-Pay Votes, all companies should consider total shareholder return when setting executive compensation and informing shareholders of the rationale behind pay decisions. Shareholder engagement is also key, particularly following a low say-on-pay vote.
Aetna Sued Over Statement in Opposition of Shareholder Proposal
January 10, 2014
In an unusual move, a shareholder of Aetna has filed a complaint against the company, its board and its CEO for misleading disclosure in its proxy statements opposing shareholder demands for enhanced disclosure of political contributions. The shareholder seeks to have the votes rejecting the 2012 and 2013 shareholder resolutions voided, the resolutions resubmitted at the 2014 shareholders meeting, and Aetna's board of directors ordered to amend its political contribution reports for 2006 through 2012 "to provide full and accurate information regarding all of the company's political contributions." Whether the suit represents an oddity or signals a new, more aggressive shareholder trend is yet to be seen. Read the complaint and related news.
SEC Issues Regulation S-K Study
January 10, 2014
The SEC has issued its report on Regulation S-K disclosure requirements as required by the JOBS Act. The report's contents are further evidence of the SEC's desire to modernize and simplify requirements and reduce compliance costs for emerging growth companies. After providing an overview of current rules and their evolution, the report suggests a comprehensive, wholesale review of disclosure requirements, including form and substance. "This report provides a framework for disclosure reform," said SEC Chair Mary Jo White. "As a next step, I have directed the staff to develop specific recommendations for updating the rules that dictate what a company must disclose in its filings. We will seek input from companies about how we can make our disclosure rules work better for them and will solicit the views of investors about what type of information they want and how it can be best presented. The ultimate objective is for the Commission to improve the disclosure regime for both companies and investors." Read the SEC Press Release with a link to the full staff report.
SEC Proposes Regulation A Amendments
January 10, 2014
As mandated by the JOBS Act, the SEC proposed rules to amend Regulation A to permit an offering of up to $50 million of securities within a 12-month period without going through a full-blown registration process. The much-awaited proposal builds on existing Regulation A, which has been rarely used due to an outdated limitation on the dollar amount that can be raised. Importantly, the proposal provides that state law registration requirements will be preempted in a Regulation A offering, making this rule a much more viable alternative than it has been historically. "This proposal is intended to help increase access of smaller companies to capital," said SEC Chair Mary Jo White. The proposal is subject to a 60-day public comment period. Read the SEC Proposing Release.
SEC Issues Rule 506 Interpretations for "Bad Actor" Disqualifications
December 20, 2013
The SEC recently issued additional guidance for Regulation D private placements, addressing the "bad actor" disqualification rules under Rule 506(d), which became effective on September 23, 2013. Although the interpretations clarified some questions raised by the rule, they also left some areas murky, making it difficult for offering participants to certify compliance. Under the rule, an offering is disqualified from relying on Rules 506(b) and 506(c) if the issuer or any other covered person has a specified criminal conviction, suspension or other disqualifying event. The interpretations help clarify what offering participants are covered by the rule, what constitutes a disqualifying event and when an issuer is required to determine whether bad actor disqualification applies. See questions 260.14 through 260.27 here. Read our summary of Rule 506(d).
More on Disclosure Reform from the SEC
December 20, 2013
The SEC continues to hint at the possibility of streamlining public company disclosure requirements. Most recently, Commissioner Gallagher addressed concerns previously raised by Chair White about "information overload." Commissioner Gallagher criticized new disclosure mandated by Dodd-Frank Act (such as pay-ratio calculations) as "a type of disclosure that needlessly clutters disclosure documents, making what is material to investors harder to find." He further noted that the upcoming Regulation S-K study called for under the JOBS Act will be an important step to possible reform. Commissioner Gallagher made several specific recommendations in his remarks, including that proxy statements move some compensation tables to an appendix and that basic corporate information should be updated as necessary in an online disclosure system, rather than disclosed annually in proxy statements and annual reports. See Commissioner Gallagher's remarks here.
Engaging With Activist Shareholders More Common Than Ever
December 20, 2013
Activist hedge fund ValueAct made headlines in September 2013 when it signed a "cooperation agreement" with Microsoft resulting in a board seat for ValueAct's president after threatening a proxy battle. Recently, the Wall Street Journal reported that more companies are deciding to settle with activist shareholders, rather than wage a battle that may cause significant distraction and take an unfortunate toll on both parties. The trend towards more "shareholder engagement" is expected to continue. While some companies fight back successfully against activist shareholders, companies are best advised to avoid disruption in the first place by anticipating and responding to shareholder concerns before they reach the point of a proxy battle. See this CFO.com article on "How to Prevent a Shareholder Blowup." Join the Public Companies Group for a panel discussion, "Anticipating Key Shareholder Issues and Handling Activist and Advisory Firms This Proxy Season" on January 16, 2014, from 7:30-9:30 am at the Minneapolis Club. Read more and register here.
Activist-Appointed Directors Receive Activist-Paid Compensation
December 20, 2013
Some activist funds are paying their director nominees to corporate boards in addition to the board fees that director receives from the company. Hedge fund payments to directors in the form of performance bonuses, while not unlawful or fraudulent if they are disclosed, raise issues about conflicts of interest and adherence to fiduciary duties. Read more in the New York Times. In addition, corporate governance guru John Coffee asks "Are shareholder bonuses incentives or bribes?"
Emerging Trends in Corporate Governance
December 20, 2013
As companies look ahead to the 2014 proxy season, it is an ideal time for them to examine their governance policies and practices. After all, a realistic assessment of how a company stacks up against critical governance benchmarks can help it best address hot-button issues for ISS and other proxy advisors and potentially avoid trouble down the road. Recent proxy analysis by Spencer Stuart offers timely benchmarking data for board composition, practices and compensation. In addition, PwC recently summarized the results of two surveys, one of public company directors and the other of investors, which spotlight some diverging views on key director attributes, shareholder communication practices and the role of proxy advisors. Read the full recently released 2014 ISS Proxy Voting Guidelines here.
ISS Releases 2014 U.S. Policy Updates
December 6, 2013
ISS recently released its 2014 voting policy updates for U.S. companies. The new policies will be effective for shareholder meetings held on or after February 1, 2014. The updates relate to board responsiveness and pay for performance. On board responsiveness, ISS has clarified that recommendations on director elections following the board's failure to act on a majority-supported shareholder proposal will be made on a "fact-specific, case-by-case basis." Among other factors, ISS will consider "the subject matter of the proposal" and "the board's rationale as provided in the proxy statement" for any action less than the full implementation of the majority-supported proposal. On pay for performance, ISS will simplify its methodology for calculating the relative degree of alignment (RDA) when evaluating say-on-pay votes. The new methodology will calculate the difference between the company's total shareholder return (TSR) rank and the CEO's total pay rank within a peer group, as measured over a three-year period (if available). Read the 2014 ISS U.S. Policy Updates.
Are Boards Becoming Too Independent?
December 6, 2013
Independent directors are required under listing standards, and having a majority of independent directors is believed to improve significantly board oversight. However, no studies have been able to link director independence to better shareholder returns. According to the New York Times, new studies have found that "the good effects from majority independent boards disappear with 'super independent' boards." According to these studies, such companies are often less profitable. Read more in the New York Times.
SEC Issues Interpretations Under Rule 506(c)
December 6, 2013
The SEC issued guidance for Regulation D private placements relying on Rule 506(c), which permits general solicitations when the issuer takes reasonable steps to verify that all purchasers are accredited investors. These additional interpretations generally address issuer efforts to verify accredited investor status, as well as offerings that switch between Rule 506(b) and Rule 506(c) offerings. The SEC also clarified that an offering involving general solicitation, even to the limited extent permitted in Rule 506(c), cannot be exempt under Section 4(a)(2) for issuer transactions "not involving any public offering." See questions 260.05 through 260.13 here.
U.S. Supreme Court to Consider Standard for Securities Fraud Lawsuits
December 6, 2013
The U.S. Supreme Court has granted certiorari in Halliburton v. Erica P. John Fund, Inc. The Supreme Court is being asked to overturn its Basic v. Levinson decision. That case established the "fraud on the market" standard for securities fraud lawsuits, allowing shareholders to proceed with an action even if they cannot prove they actually read and relied on a false or misleading statement. Under the Basic standard, actual reliance is not required under the theory that a shareholder's purchase or sale was based on an inaccurate share price, one that incorporated the false or misleading information. If the Supreme Court overturns Basic and requires shareholders to establish actual reliance on the false or misleading statements, it will become considerably more difficult to bring a securities fraud action. Read more in Bloomberg Businessweek.
SEC to Hold Public Roundtable on Proxy Advisory Services
November 15, 2013
On December 5, 2013, the SEC will hold a public roundtable to discuss the use of proxy advisory firm services by institutional investors and investment advisers. The move signals the possibility of clearer SEC guidance as well as reform in this area. SEC Commissioner Gallagher had previously criticized institutional investors and investment advisers for their over-reliance on proxy advisory firms, such as ISS and Glass Lewis. The SEC previously explored the role of proxy advisory firms in a 2010 concept release on the proxy voting system. That release sought public comment on the need for transparency in the proxy advisory industry. See the SEC Press Release (including a link to the 2010 concept release), the U.S. Chamber of Commerce's Best Practices and Core Principles for the Development, Dispensation and Receipt of Proxy Advice and the Mercatus Center report recommending limitations be imposed on the role of proxy advisory firms.
SAC Capital Pleads Guilty to Insider Trading
November 15, 2013
SAC Capital settled criminal charges of insider trading, pleading guilty to securities fraud, agreeing to fines totaling $1.8 billion and agreeing to close its investment advisory operations. The deal, which is being reviewed by a federal judge, is the biggest insider trading penalty to date and reflects the aggressive approach taken by the Justice Department and the SEC to pursue such wrongdoing. According to James Stewart of the New York Times, the government's action is "a textbook case" of criminal prosecution of a corporation, rather than an individual. The deal does not resolve a separate SEC civil action against SAC's founder, Steve Cohen. Read Mr. Stewart's article and a Bloomberg analysis of the plea agreement. Read a New York Times article discussing the more unusual civil lawsuits against SAC by "victims" of its insider trading.
Delaware Corporations Should Adopt a Forum Selection Bylaw
November 15, 2013
Last month, plaintiffs challenging the forum selection bylaw provisions of Chevron and Fed Ex voluntarily withdrew their appeal of the Delaware Court of Chancery's decision earlier this year. That decision held that companies can enforce bylaws that require shareholder lawsuits to be brought in Delaware, even if those provisions were adopted without shareholder consent. Although the withdrawal means there will be no "final word" by the Delaware Supreme Court at this time, a significant number of Delaware companies have moved forward with unilaterally-adopted forum selection bylaws based on the Chancery Court decision. With the increase in derivative litigation surrounding company sales and other corporate decisions, forum selection bylaws are one important way for companies to make litigation more predictable and therefore less expensive. Companies incorporated outside of Delaware are also considering whether to implement these provisions, in hopes that their home state will defer to the Delaware decision and their shareholders will appreciate the value of predictable litigation. Read Chancellor Strine's opinion and a discussion of the enforceability of these provisions.
The Twitter Effect: On IPOs and Activist Tweets
November 15, 2013
Twitter made headlines as its IPO debuted last week. Breaking the "Facebook curse," Twitter's shares performed well during the first week of trading. This initial success has caused speculation about whether technology IPOs will see a resurgence and what consumer technology companies may be next. In the meantime, Twitter is shaking up the way activists communicate with other shareholders in the 24/7 public forum. Read Time.com's After Twitter: 5 Potentially Blockbuster IPOs Coming Next and When Facing Activist Investors, Fight Has Gone 24/7 in the New York Times.
SEC Proposes Crowdfunding Rules
November 1, 2013
Last week, the SEC proposed rules to regulate equity crowdfunding, or raising small amounts of capital online from many investors to fund a business venture. The proposed rules track the basic parameters previously laid out in the JOBS Act and limit the amount an issuer can raise through crowdfunding transactions to $1 million in any 12-month period. Investors are also limited in the total amount they can invest in such transactions. While the JOBS Act mandated that the SEC make crowdfunding rules, the SEC is clearly concerned that the practice could weaken important investor protections. The proposed rules permit crowdfunding only through a registered broker-dealer or a registered "funding portal." These broker-dealers and funding portals may not solicit investments, offer investment advice or compensate employees based on sales, nor may the issuer advertise the investment opportunity. The proposals also require disclosure documents to be filed with the SEC prior to any sale and require financial disclosures that are scaled to the size of the offering. Read the SEC press release (including a link to the 585-page proposing release) and this New York Times article.
Revisit Risk Factors to Improve Disclosure
November 1, 2013
SEC Chair Mary Jo White's recent comments before the National Association of Corporate Directors suggest that efforts to streamline public company disclosure may be needed. One area identified as having become overly detailed and lengthy is the risk factor disclosure required by Regulation S-K. Over time, risk factor disclosure has expanded considerably. According to Chair White, "It is fair to ask whether there is more there than is really needed." As new risks are identified and added, old disclosures are seldom edited or removed. Companies can enhance their overall risk disclosures through regular thoughtful review and editing and by avoiding a boilerplate approach. Read more about Chair White's remarks in this Compliance Week article.
Efforts Continue to Get More Women on Corporate Boards
November 1, 2013
When Twitter's IPO filing document became available, the company was criticized for its lack of women board members. "The fact that they went to the IPO without a single woman on the board, how dare they?" asked Standford Professor Vivek Wadhwa. However, Twitter is not alone. According to the New York Times, "the dearth of women on corporate boards has been a persistent issue for decades." A new effort by George Washington University's business school called "On the Board" hopes to change this. The initiative takes a two-pronged approach: (1) getting women on "the short list" to fill open board seats and (2) training women to be ready to step into those posts. Read more in this New York Times article.
Lessons from the JPMorgan Chase Settlement
November 1, 2013
JPMorgan Chase announced that it reached a tentative $13 billion settlement with the Justice Department over a number of investigations related to its mortgage-backed securities business. What transpired and what does this mean for the company? Read "everything you need to know" in the Washington Post.
SEC Expresses Concern Over "Information Overload" in Company Disclosure
October 18, 2013
In a recent speech before the National Association of Corporate Directors, SEC Chair Mary Jo White expressed concern over the "detailed and lengthy disclosures" companies currently provide under SEC rules. Although Chair White was not specific about any reform measures, she indicated that the SEC would soon release a study suggesting that some disclosures should be streamlined. "We must continuously consider whether information overload is occurring as rules proliferate and as we contemplate what should and should not be required to be disclosed going forward." Read more.
ISS Releases Results of Investor Survey
October 18, 2013
ISS released the results of its most recent annual survey of institutional investors and corporate issuers. Results of the survey will be used to formulate ISS' policy update for the 2014 proxy season. This year, the survey focused on themes of board responsiveness, director tenure and assessment, boardroom decision-making and other governance-related matters. The survey revealed investor concerns over lengthy director tenure. However, investors seemed less concerned about a lack of board responsiveness to non‐binding shareholder mandates. Investors also indicated that a company's governance structure was very important when voting on share authorization requests. Review a summary of the ISS policy outreach process.
Effort to Overturn Standard for Securities Fraud Lawsuits
October 18, 2013
In connection with a securities fraud lawsuit originating in 2002, Halliburton has petitioned the Supreme Court to overturn its 1986 Basic v. Levinson decision. That case established the "fraud on the market" standard for such lawsuits, allowing shareholders to proceed with an action even if they can't prove they actually read and relied on a false or misleading statement. Under the Basic standard, actual reliance isn't required under the theory that a shareholder's purchase or sale was based on an inaccurate share price, one that incorporated the false or misleading information. It's uncertain if the Supreme Court will take the case, but there may be four justices willing to overturn Basic, based on their 2012 dissent in a case involving Amgen. If the Supreme Court agrees to hear the case and a fifth justice is persuaded to overturn Basic, it would be considerably more difficult to bring a securities fraud action. Read more in the New York Times.
Mark Cuban Found Not Guilty of Insider Trading
October 18, 2013
A Texas jury found Mark Cuban, the owner of the Dallas Mavericks, not guilty of civil charges of insider trading brought by the SEC. In a blow to its enforcement efforts, the SEC failed to prove that Cuban traded on non-public information. The SEC had sought to recoup gains, impose civil fines and obtain a permanent injunction to bar Cuban from similar alleged misconduct. The trial culminated a lengthy battle over Cuban's sale of Mamma.com stock in June 2004. In a statement, the SEC said, "While the verdict in this particular case is not the one we sought, it will not deter us from bringing and trying cases where we believe defendants have violated the federal securities laws." Read our summary of SEC insider trading enforcement and what companies can do now to avoid trouble.
SEC Stays Open...For Now
October 4, 2013
The SEC posted about its operating status on its website saying, "The SEC will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1. Any changes to the SEC's operational status after October 1 will be announced on [our] website." If the SEC determines to shut down at a later date, its operational plan notes that EDGAR filings would continue to be accepted; however, review and approval of applications for registration would be discontinued. Check for announcements by the SEC on its website. Review an SEC shutdown plan here.
Mark Cuban's Insider Trading Trial Begins
October 4, 2013
The SEC's civil insider trading trial against Mark Cuban, the owner of the Dallas Mavericks, opened in a federal courtroom in Dallas on Monday. The SEC is seeking to recoup gains, impose civil fines and obtain a permanent injunction to bar Cuban from similar alleged misconduct. The trial demonstrates the SEC's aggressive pursuit of illegal insider trading and culminates a five-year battle with Mr. Cuban. Read our summary of SEC insider trading enforcement and what companies can do now to avoid trouble. Read the New York Times account of the Mark Cuban case.
Can a Better Peer Group Analysis Improve CEO Pay Disclosure?
October 4, 2013
Critics of the SEC's recent pay ratio disclosure proposal note that the new rule, if adopted, will do little to help investors assess whether CEO pay is appropriate. A more meaningful comparison may lie in the peer groups that public companies choose as benchmarks when setting their pay packages. While over 80 percent of companies disclose the use of peer groups to set executive compensation, these peer groups are often comprised of much larger companies, thereby skewing pay higher. In response, many institutional investors look to Equilar to generate an alternative peer group for a particular company that uses much more comparably sized peers. Read a New York Times article to learn more about Equilar's approach. Read our summary of the SEC's proposed pay ratio disclosure rule.
Debate Continues in Regulation D Reform
October 4, 2013
In July, the SEC proposed rules to impose additional safeguards in offerings that rely on Rule 506 of Regulation D and require issuers to provide additional information about these offerings. The proposal has been the subject of much comment and concern, and the SEC has extended the comment period. In a September 20 letter, the SEC's Advisory Committee on Small and Emerging Companies expressed its concern that "the proposed amendments, if adopted, could have a significant negative impact on the 506 market by discouraging some investors from participating in Rule 506 offerings, adversely affecting capital raising and job creation." The committee further suggested key aspects of the proposal meriting additional review. Read the committee's letter and the SEC release re-opening the comment period. Read our summary of the SEC proposals here.
SEC Promotes Voluntary Submissions for Rule 506(c) Offerings
October 4, 2013
In a puzzling move, the SEC created a portal on its website for voluntary submission of general solicitation materials used in Rule 506(c) offerings. While SEC proposals had contemplated the possibility of such filings, there is no such filing requirement in final Rule 506(c) that became effective on September 23, 2013. Meanwhile, the SEC issued investor alerts relating to advertising and accredited investors in 506 offerings. The SEC's page announcing the voluntary submission portal also notes, "If you have information about possible violations of the U.S. securities laws, please submit the information using the Tips, Complaints and Referrals portal." Read more on the SEC's website here. Read our summary of new Rule 506(c) permitting general solicitation.
Companies Beef Up Disclosure of Political Contributions
October 4, 2013
Activist demand for greater transparency about corporate political activity is increasing, and shareholder proposals requiring companies to adopt contribution policies are becoming more prevalent. The SEC staff has said it's considering a rule proposal requiring public companies to disclose their political donations in SEC filings. Some companies are getting in front of the issue by beefing up their disclosure in this area. The Center for Political Accountability (CPA) found that 78 percent of the 195 corporations it tracks have improved their political spending disclosures in 2013. Read more in this Washington Post article.
SEC Proposes Pay Ratio Disclosure Rule
September 20, 2013
As expected, on September 18, the SEC proposed a rule to implement a Dodd-Frank mandate that companies disclose the ratio of median pay of all employees to a CEO's total compensation. The proposal was approved over strong objection by two of the five SEC commissioners. The SEC's proposed rule purports to offer companies a flexible approach to compliance, allowing them to select their own method for calculating median pay, including statistical sampling. The SEC noted that its proposal attempts to address concerns about the cost of compliance. Additional concerns raised by dissenting commissioners were that median pay calculations included seasonal, part-time and off-shore employees and that the politically-motivated rule did not serve to protect investors.
Read our summary and the SEC press release, including a fact sheet and a link to the proposed rule.
Twitter Tweets News of Confidential IPO
September 20, 2013
Last week, Twitter tweeted, "We've confidentially submitted an S-1 to the SEC for a planned IPO," and further noted that, "This Tweet does not constitute an offer of any securities for sale." Thus evolves the permitted Rule 135 press release in a post-JOBS Act/140-character-limit world. Since first permitted by the JOBS Act in 2012, many emerging growth companies (EGCs) have submitted their IPO filings on a confidential basis with the SEC. This is an attractive option because the EGC can keep their financial and compensation information confidential until they are sure the IPO will launch. The SEC's comments and the company's responses also remain confidential until the filing is made public. An EGC is generally an issuer that has less than $1 billion in total annual gross revenues. Read the SEC's guidance on how to file IPO documents confidentially here. Read more about the Twitter announcement here.
Will Twitter Ignite Technology IPOs and What Will They Look Like?
September 20, 2013
According to the New York Times, technology deals represent about 17 percent of all IPOs so far this year, the lowest share since 2008, despite growing IPO activity in other sectors. This could be fallout from the botched Facebook IPO, or perhaps the use of confidential SEC filings (like Twitter's) is keeping a potential wave of technology IPOs under wraps. However, many hope that Twitter's IPO announcement will lead to more. Although the structure of a Twitter deal is not yet known, it may follow the Silicon Valley pattern of dual-class ownership structures that keep founders in total control and public shareholders on the sidelines. According to the New York Times, "studies have shown that in general, this type of dual-class structure does not perform as well as traditional arrangements." Read about the potential for a technology IPO uptick and the dual class stock structures often used.
SEC Brings Rare Regulation FD Case Against IR Professional
September 20, 2013
Earlier this month, the SEC brought an enforcement action against the former head of investor relations at First Solar, Lawrence Polizzotto, for his selective disclosure about the loss of a loan guarantee from the Department of Energy. Broad disclosure of this information in a company press release the next morning resulted in a stock price drop of six percent. The SEC did not bring an enforcement action against First Solar, however, due to the company's "extraordinary cooperation with the investigation" and because First Solar "cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Regulation FD." Read the SEC press release and an article in Compliance Week.
Lessons From the Dell Transaction
September 20, 2013
The shareholders of Dell finally approved the buyout by CEO Michael Dell and Silver Lake Partners after the parties renegotiated the voting standard. The transaction provides important lessons for boards that walk a fine line between protecting a company from deal-related litigation and getting a deal done for the benefit of shareholders. The deal ultimately was approved by a majority of disinterested shares actually voting in the matter. The original voting standard, essentially a majority-of-the-minority requirement, was deemed too stringent for a transaction that did not involve a controlling shareholder. Read more "Lessons from the Dell Deal" in the New York Times.
SEC's "Pay Gap" Disclosure Rule Expected in September
September 6, 2013
According to the Wall Street Journal, the SEC is expected this month to propose a controversial rule requiring public companies to disclose how much more their CEOs are paid than their rank-and-file workers. However, the SEC's rule proposal is expected to be somewhat less onerous than previously expected, allowing companies to compare CEO pay to the median pay of a specified sample group rather than all employees. Any proposed rule is likely to receive significant comments from public companies, their counsel, labor unions and the public. Read more in Forbes and at CNBC.com. The Wall Street Journal report available here requires a subscription.
Nasdaq Trading Halt Reignites Criticism
September 6, 2013
The SEC has summoned stock exchange executives to a private meeting on September 12 to discuss the adequacy of their technology and procedures. In August, Nasdaq trading was interrupted for several hours due to a systems glitch of disputed origin. The incident is described in more detail here. According to Nasdaq's explanation, the August shutdown related to "a sequence of events [that] combined to create an unprecedented volume of message traffic...well beyond the system's tested capacity." The incident follows Nasdaq's $10 million SEC settlement relating to disruption of the Facebook IPO, and occurred at a time when competition for issuers' listings is as fierce as ever. Last week, the New York Times reported that rival exchanges BATS and Direct Edge proposed a merger that could further decrease Nasdaq's market share.
Activist Investors with Vast Resources Wield Significant Power
September 6, 2013
Activist hedge fund investors with significant assets may wield influence much greater than their relatively small stakes in large public companies would suggest. Case-in-point: ValueAct's one percent stake in Microsoft resulted in significant company concessions, including allowing ValueAct representatives to meet regularly with Microsoft directors and a potential board seat. As previously noted in The Ticker, activist hedge funds appear to be pursuing more than a quick stock price increase, looking instead to long-term fixes like new strategies or board overhauls. Read a New York Times article exploring this phenomenon.
How Maximizing Shareholder Value Changed Corporate America
September 6, 2013
According to the Washington Post, the now-accepted mantra of maximizing shareholder value is "the goal that changed corporate America." When companies focus on shareholders, the interests of employees and communities may suffer. Read more about how efforts to maximize shareholder value at IBM had an impact on its employees and communities over the last several decades.
What Proxy Access Might Look Like
September 6, 2013
Since the U.S. Court of Appeals for the D.C. Circuit vacated SEC Rule 14a-11 in 2011, proxy access has not been a factor for U.S. public companies. However, the concept is alive and well in Israel, which affects some U.S.-listed companies and could prove informative if proxy access concepts re-emerged in the United States. The recent experience of Israeli company Taro Pharmaceuticals provides some insight into the impact such a rule has in a proxy fight. Read this New York Times article for a glimpse into the specifics.
Director Disagreements - When Things Get Really Ugly
August 23, 2013
J.C. Penney has received its share of unflattering press as it struggles through leadership changes, failed strategies and poor financial results. Recently, things got even uglier when one of its directors, hedge fund activist Bill Ackman, made public his disagreements with the board and resigned, triggering a rarely seen Form 8-K filing highlighting the disagreement that gave rise to Ackman's departure. The company previously had considered taking action against Ackman for his release of confidential boardroom deliberations. Case law regarding a director's duty of confidentiality is sparse. However, courts, including the Delaware Court of Chancery, have recognized the general principle that directors owe a duty of confidentiality as part of their duty of loyalty. Read more about Penney's claims, Ackman's resignation and an agreement ultimately reached by the parties. Read a New Yorker article suggesting that the Penney-Ackman saga illustrates the negative impacts that can occur "when [hedge fund] shareholder activism goes to far." Read more about a director's duty of confidentiality in this Harvard Law School blog.
PCAOB Proposals Could Substantially Change Auditor's Reports
August 23, 2013
Last week, the PCAOB proposed two new audit standards that dramatically expand an auditor's responsibilities. The first proposed standard would require auditors to include a discussion of "critical audit matters" specific to the audit. The second proposed standard would require auditors to provide their evaluation of "other information" (such as the MD&A and selected financial information) that is in a company's annual report filed with the SEC. PCAOB Chairman James Doty said these proposed standards are a "watershed moment" for U.S. financial audits. The proposals are expected to generate significant comments before final standards are adopted. "Critical audit matters" are those that (1) involved the most difficult, subjective or complex auditor judgments, or (2) posed the most difficulty to the auditor in obtaining appropriate evidence or forming an opinion on the financial statements. The new standard is expected to result in the disclosure of information about the audit "that could enable investors to analyze more closely any related financial statement accounts and disclosures." Auditor reports on "other information" would need to include a statement as to whether the auditor identified a material inconsistency or a material misstatement of fact in the other information. The PCAOB proposals could result in significant increases to the timing and costs associated with an audit. Read the PCAOB Fact Sheet on the proposals.
Is the Wall Between Analysts and Investment Bankers Beginning to Crumble?
August 23, 2013
The New York Times reported that Wall Street's self-regulator, FINRA, is investigating whether research analysts are participating in pitches to win investment banking business underwriting IPOs, despite rules barring such activity. According to the report, "Wall Street is slipping back into its old ways." Since 2003, investment bankers have been restricted from arranging communications between the analysts who provide recommendations to investors and the companies from which the bankers are seeking business. The JOBS Act loosened those regulations somewhat with respect to companies with less than $1 billion in annual revenue. Read more in the New York Times.
Cybersecurity and the Board
August 23, 2013
Serious data breaches at U.S. companies are reported almost daily. What responsibilities does a director have to assess whether a company's cybersecurity measures are adequate? Good governance practices suggest that managing cyber risks requires directors to understand their company's cybersecurity risk profile and the options available for mitigating the risk. Read an article discussing some best practices to consider.
What Constitutes Material Nonpublic Information for Purposes of Insider Trading?
August 9, 2013
Illegal insider trading involves buying or selling a security while in possession of material nonpublic information about the security or tipping such information to another who trades on the basis of it. The recent insider trading charges against Sandeep Aggarwal for tipping off an SAC portfolio manager raise the question of when information is sufficiently material and nonpublic that its use constitutes insider trading. Information is nonpublic if it has yet to be disclosed to the general marketplace. Generally, information that has been selectively disclosed to a few remains nonpublic. In the case of Mr. Aggarwal, the information tipped involved insight into the revival of deal talks between Microsoft and Yahoo, information that Mr. Aggarwal had shared with at least 14 other traders and portfolio managers before sharing it with SAC. Whether Aggarwal's tip constituted insider trading will likely be determined under standards set in United States v. Contorinis. The Contornis court stated that "information is not necessarily nonpublic simply because there has been no formal announcement." However, the court also noted that information that "is sufficiently more detailed and/or reliable than publicly available information" may be material and nonpublic. Read more in the New York Times.
Compensation Clawbacks Rarely Used
August 9, 2013
According to Equilar, over 85 percent of Fortune 100 companies have disclosed clawback policies to recoup incentive compensation erroneously awarded to executives. Despite the widespread disclosure of clawbacks, however, use of them to recover pay is rare. A Wal-Mart shareholder proposal demanded that the company disclose whether any clawbacks have occurred under its policy, and a McKesson shareholder proposal asked for both a stronger policy and disclosure of use. Clawbacks may be a policy or a contractual provision and generally allow a company to recover compensation in the case of a financial restatement, an executive's ethical misconduct, or a combination of both. Dodd-Frank requires the SEC to direct the exchanges to prohibit listing securities of issuers that have not developed and implemented clawback policies, but no rules have been proposed or become effective. Any proposed rules would go beyond the current requirements under Sarbanes-Oxley, which require a CEO or CFO to return incentive-based compensation to an issuer when a financial restatement occurs as a result of misconduct. Read a New York Times article discussing the limited use of clawbacks to date and other press about the results of the proposals at Wal-Mart and McKesson.
Board Tenure - How Long is Too Long?
August 9, 2013
In a recent Directors & Boards article, the author asked, "Shouldn't we be fostering a freshening up of a board of directors, not a locking up of board seats?" The question of how long is too long to serve as a director has not been much discussed, but it becomes an important issue as companies evaluate the independence and diversity of their boards. In addition, when ISS recently launched its annual survey seeking feedback from institutional investors and issuers, it specifically asked whether long director tenure is problematic. Read the Wall Street Journal on the problem of directors serving too long.
Dell Special Committee Agrees to Voting Standard Change for Buyout
August 9, 2013
In the continuing saga of the proposed buyout of Dell by CEO Michael Dell and Silver Lake Partners, Dell's special committee agreed to a higher purchase price in exchange for a revised shareholder voting standard. Before the change, the buyout needed the favorable vote from a majority of outstanding shares. Given that Michael Dell could not vote his 15 percent stake, strong opposition by Carl Icahn and others, and the reportedly 23 percent of shares not voted, the deal has been unable to secure shareholder approval. The previous voting standard was considered too stringent under Delaware standards, however, since it essentially invoked a majority-of-the-minority vote standard used as a procedural safeguard in controlling shareholder transactions. However, Michael Dell's 15 percent stake fell well below controlling shareholder levels. Under the new standard, the deal requires "approval by the majority of disinterested shares actually voting on the matter." Read the Dell press release of new deal terms and this New York Times analysis.
The Continuing Evolution of the Earnings Call
July 26, 2013
Netflix abandoned the traditional earnings conference call this week and instead hosted a live video chat moderated by BTIG analyst Rich Greenfield and CNBC reporter Julia Boorstin. This follows a similar approach taken by Yahoo earlier this month. Although the format is a logical innovation for two internet companies, the end result got mixed reviews. Read analysis in Forbes, BuzzFeed and IR Magazine.
No Reprieve From Conflict Minerals Rules - Yet Slow Progress on Compliance Noted
July 26, 2013
On July 23, the U.S. District Court for the District of Columbia rejected a lawsuit seeking to invalidate the SEC's conflict minerals rules under a variety of theories. The court concluded the claims brought by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable lack merit. As a result, the rules are most likely here to stay. However, two-thirds of respondents to a new PwC survey say their companies have not yet started or are early in the process of compiling information they will need to meet the SEC's conflict minerals rules. A significant number of executives surveyed said they still are trying to figure out if the reporting requirements apply to their businesses. As the May 2014 reporting deadline looms, companies should not delay conducting an internal analysis to determine if any of their products fall within the scope of the rules and would trigger a reporting obligation. Read the PwC Report here and the court's opinion here.
Force-the-Vote Provision Combined with Voting Agreement Used to Lock Up M&A Deal
July 26, 2013
Over the years, M&A deal protections have gotten stronger and more intricate. In AT&T's acquisition of Leap Wireless, the parties used two key deal protections that combine effectively to preclude a successful competing bid. The parties agreed to a "force-the-vote" provision, used infrequently in M&A transactions, that requires Leap to bring the deal to its shareholders even if a better one emerges. This provision, combined with a voting agreement from a 30% shareholder of Leap, should effectively lock up the AT&T deal by deterring any other bidder from making an offer. Read more about the AT&T/Leap deal protections here.
SEC May Issue a "Pay Gap" Disclosure Rule in August
July 26, 2013
According to Bloomberg BusinessWeek, the SEC may propose a rule in the next month that would require public companies to disclose how much more their CEOs are paid than rank-and-file workers. This is one of the more controversial provisions mandated by the Dodd-Frank overhaul, and the House Financial Services Committee has voted to repeal it. Any proposed rule will receive significant comments from public companies, their counsel, labor unions and the public. Chief among the criticisms are that the costs involved in complying with any such requirement would outweigh any benefit. Read the Bloomberg article.
SEC Lifts Ban on General Solicitation in Private Placements
July 19, 2013
In a move that will significantly change offering practices, the SEC approved final rules allowing general solicitation or advertising in private securities offerings to accredited investors, as previously mandated by the JOBS Act. The SEC also adopted final rules that disqualify felons and other bad actors from participating in these private offerings, as required by the Dodd-Frank Act. In addition, the SEC proposed rules requiring issuers to provide additional information about these offerings and to impose additional safeguards. Issuers relying on Rule 506 of Regulation D must "take reasonable steps to verify" that purchasers are accredited investors. Although issuers should take a principles-based approach when verifying the accredited investor status of a purchaser, the final rules provide a nonexclusive list of methods that may be used. Although an effective date is not yet certain, the final rules lifting the advertising ban from Rule 506 and disqualifying bad actors should become effective in September 2013. Read our summary of the new rules. Also read the SEC's press release (including links to fact sheets and final and proposed rules) and this New York Times analysis.
SEC Commissioner Shares His Concerns About the Influence of Proxy Advisory Firms
July 19, 2013
At a recent meeting of the Society of Corporate Secretaries & Governance Professionals, SEC Commissioner Daniel Gallagher criticized institutional shareholders for their over-reliance on proxy advisory firms. He noted that these shareholders must exercise their fiduciary duties and must not blindly rely on recommendations from advisory firms, such as ISS and Glass Lewis. Commissioner Gallagher noted the "remarkable transformation" in shareholder voting in recent decades and called for clearer SEC guidance as well as reform. He noted, "The rise of institutional shareholders as the majority owners of public company shares as well as the increased desire of some policy makers to give shareholders greater influence and power in corporate governance has led to the current dynamic." Read Mr. Gallagher's full remarks here.
Shareholders' Say on Pay - Is It Effective?
July 19, 2013
According to the New York Times, "the 'say on pay' experiment is a bust." Since Dodd-Frank gave shareholders the right to vote on executive pay, a growing number of companies have received 90 percent or more shareholder approval for their compensation packages. Yet some companies have engaged shareholders to reform their executive compensation programs in response to low say-on-pay votes. Read the New York Times article. This Forbes article notes how Johnson & Johnson revamped its executive pay practices with shareholder input.
Are Staggered Boards a Thing of the Past?
July 19, 2013
Shareholder efforts at corporate governance reform have met with mixed results. However, the effort to eliminate classified or staggered boards has been a resounding success. Spurred by numerous shareholder proposals each year to require annual election of all directors, a gradual move toward eliminating staggered boards began roughly a decade ago. According to ISS, as of 2012 less than half of S&P 1500 companies had staggered boards, while more than half of the MidCap and SmallCap companies did. Most recently, the Harvard Law School's Shareholder Rights Project has focused on requiring annual election for all directors. So far this year, 35 companies targeted by the group have agreed to eliminate classified boards. Read more.
Activist Shareholders and the Long Term
July 19, 2013
When a hedge fund takes an activist role against a company in which it's invested, the assumption is that it is looking for a quick stock price increase. The traditional company response is that the hedge fund is not interested in the company's long-term success. However, recent reports suggest that activist strategies by hedge funds appear to create long-term value. In one study of 2,000 hedge fund activist events from 1994 to 2007, the authors found that hedge fund interventions produced a 6 percent rise in stock prices that held for a five-year period without underperforming peers. Read this New York Times article.
SEC to Require Admission of Wrongdoing in Some Settlements
June 28, 2013
SEC Chair Mary Jo White stated that the Commission plans to change existing policy and require some defendants in enforcement actions to admit wrongdoing as a condition of settlement, rather than permitting a defendant to "neither admit nor deny" the allegations. When applied, this new policy will significantly increase the cost of settling with the SEC and may result in additional litigation. Read articles in the New York Times and the Washington Post.
Forum Selection Bylaws Upheld in Delaware
June 28, 2013
Companies can enforce bylaws that require shareholder lawsuits to be brought in Delaware, according to a decision by the Delaware Court of Chancery on June 25. Delaware's Chancellor Strine held that the forum selection bylaws adopted by Chevron and Fed Ex are contractually valid even though adopted without shareholder consent. With the increase in derivative litigation surrounding company sales and other corporate decisions, forum selection bylaws are one important way for companies to make litigation more predictable and therefore less expensive. Read the decision, which is likely to be appealed to the Delaware Supreme Court.
Proxy Voting by Retail Shareholders Remains Low
June 28, 2013
According to a recent joint report from Broadridge and PwC, there remain challenges in turning out the retail shareholder vote at annual meetings. Yet retail votes, if obtained, generally support management's voting recommendations at high rates. As noted in this ProxyPulse report, only 30 percent of retail shares were voted in meetings this year through April 23, 2013. The report cites Notice & Access - the SEC's rule addressing internet availability of proxy materials - as a factor in the drop. The Notice & Access option gives companies the ability to publish proxy materials on a public website and then mail shareholders a notice of where they can access these materials. While companies realize printing and postage cost savings through Notice & Access, the approach has resulted in reduced retail voting participation. According to Broadridge, only about 17 percent of the retail shares receiving a notice of internet availability were voted over the last six years (compared to 36 percent of shares who received full paper packages). As a result, companies should evaluate and understand the costs and benefits of using a notice-only approach if they are concerned about shareholder participation.
Reminder: July 1 Deadline for New Compensation Committee Requirements
June 28, 2013
Under NYSE and Nasdaq rules approved by the SEC in January, listed companies must comply by July 1, 2013 with new requirements for compensation committees. In general, compensation committees must have the authority and sole discretion to retain and pay (with company funds) outside consultants, legal counsel and other advisers, and compensation committees have the responsibility to consider the independence of an adviser before retaining it or soliciting its advice. Compensation committees of NYSE-listed companies must amend their charters to provide for this authority and responsibility by the deadline. Companies listed on Nasdaq also are required to give their compensation committees this authority and responsibility by the deadline, but charter amendments can wait until 2014. In evaluating the independence of advisers selected or giving advice going forward, compensation committees should consider the various factors affecting independence specified by the applicable exchange. Exemptions are available for certain foreign issuers and smaller reporting companies. See this Nasdaq Rule Update and the NYSE Rule Change.
Revlon Settles Charges That It Misled Investors When Going Private
June 21, 2013
On June 13, the SEC announced its charges against and settlement with Revlon for the company's misleading disclosure in a going private transaction. The charges stem from Revlon's failure to tell independent directors and shareholders that a third party financial adviser to its 401(k) plan found the consideration offered in the transaction to be inadequate. Revlon had restructured its 401(k) plan to prevent the trustee from disclosing the financial adviser's determination. The SEC is wary of going private transactions, which can be coercive to minority shareholders, and takes a close look at related filings. Shareholder litigation is also common in such transactions. This SEC action, however, may signal greater SEC scrutiny and future plans by the SEC to use Rule 13e-3(b)(1) to prosecute fraud. See the SEC press release and this New York Times analysis.
SEC Orders Whistleblower Award and Suggests More to Come
June 21, 2013
On June 12, the SEC issued its second-ever whistleblower award to three unnamed individuals for their role in reporting an alleged fraud by hedge fund manager Locust Offshore Management LLC and its CEO, Andrey Hicks. So far, the SEC's whistleblower program has yielded only one other award in 2012, in connection with a Ponzi-scheme in Texas. Each of the whistleblowers in the recent case will receive 5 percent of the monetary sanctions ultimately collected in the action case against Locust and Hicks, together ordered to pay $7.5 million in disgorgement and penalties. The SEC's Division of Enforcement recently has indicated that more whistleblower cases and significant awards are on the way. Read the SEC press release and a related Compliance Week article.
JOBS Act Assessment: Limited Impact on Jump-Starting IPOs
June 21, 2013
The JOBS Act, enacted just over a year ago, was intended to help spur the market for smaller IPOs, but there have been fewer small offerings (less than $100 million) following enactment. According to Dealogic, there were an average of 15 IPOs under $100 million per quarter in the year before the new law versus an average of 13 per quarter in the year after. Many IPO companies qualify for the disclosure advantages of being an "emerging growth company" under the law, including confidential filings, limited executive compensation disclosure, delay in holding a "say on pay" vote, and two years of financials vs. three. Read this New York Times article critiquing the effectiveness of the JOBS Act and suggesting that it may be bad for investors.
When Companies Go Dark
June 21, 2013
Many companies have left the world of public reporting. Some have accomplished this through a buyout of public shareholders in a going private transaction. Others are able to simply "go dark" because they have a small enough number of shareholders to exit the SEC's reporting requirements. Not surprisingly, investors may not view going dark with favor. Read this New York Times article about how going dark has affected investors of the former Equity Inns.
Will Google's Purchase of Waze Draw Regulatory Review?
June 21, 2013
Last week, Google announced its acquisition of Waze, an Israeli company with headquarters in Silicon Valley that offers a crowd-sourced, mobile-oriented navigation application. Google didn't offer details, but the rumored price tag is over $1 billion. So, it is surprising that Google did not file a Hart-Scott-Rodino notification for the transaction. HSR filings provide the Justice Department or Federal Trade Commission an opportunity to review the transaction for antitrust issues during a required waiting period prior to closing. Google's decision not to file an HSR notification appears to be an aggressive approach to an exemption available for acquisitions of foreign companies with minimal assets in the United States. Speculation, however, is that the transaction will nonetheless draw post-closing regulatory review. Read more in this New York Times article.
More on Whether to Split the CEO and Board Chair Roles
June 14, 2013
To split or not to split? That is the question. While shareholders continue frequently to demand that the CEO and board chair roles be separated, a report from The Conference Board says, "if it ain't broke, don't fix it." The recent Conference Board Report suggests that it is not necessarily a "best practice" to separate the CEO and board chair positions. It examines three possible types of CEO/board chair separation arrangements and their performance consequences.
Governance Practices of Small- and Mid-Cap Companies
June 14, 2013
Ernst & Young recently released its report on the governance and compensation practices of small- and mid-cap companies. As noted in E&Y's report, "Often, companies of all sizes are held to the governance standards and practices of the largest companies. These standards...may not always be appropriate."
Another Risk to Manage: Anticipating Shareholder Concerns
June 14, 2013
Activist shareholders increasingly are bringing their complaints to the boards of a wide range of companies. But can a disruption be prevented by anticipating and responding to those concerns before they get ugly? This CFO.com article suggests ways a company can keep shareholder activism from turning into an all-out war. The best defense appears to be a good offense. If a company takes care to assess vulnerabilities and consider a response, "that same rationale should also be an effective defense against shareholder activists."
Board Evaluation of Managers Found Lacking
June 14, 2013
Are boards effective in evaluating CEOs? New research suggests that boards are not very good at assessing the non-financial skills of their managers, such as conflict management, innovation, customer service, workplace safety, and listening. Most companies would benefit from better assessing these skills, but this requires thoughtful board analysis. Read here for research and tips on improving the CEO evaluation process. When a company is troubled, however, most CEOs are given little time to fix results, as reported in this article.
Getting the Long Term into Pay-for-Performance
June 14, 2013
Executive pay has been in the cross-hairs, as say-on-pay votes at shareholder meetings this year have shown. Critics argue that most compensation practices still focus on the short term, with increases to shareholder value over time getting too little attention. The key is finding the right performance measures. Read here for tips on using pay structure to encourage long-term performance. Getting it right is increasingly important, as smaller companies are seeing more say-on-pay failures, as noted here.
Activist Hedge Funds Set Sites on Big Companies
May 31, 2013
Hedge funds have played an activist role with smaller companies for many years, using a variety of shareholder campaigns against management in the hope of achieving a stock price bump. Now, some of the largest global companies are getting hit too. The latest examples include Sony, Apple, UBS, PepsiCo, Netflix, Dell and Microsoft. Read an analysis in the Economist.
ISS Settles With SEC on Charge of Voting Data Leak
May 31, 2013
The SEC disclosed an investigation of and settlement with ISS, relating to a charge that an ISS employee sold confidential information on how more than 100 clients voted from 2007-2012. According to the SEC, "The internal controls at ISS did not adequately address the potential misuse of confidential proxy voting information by firm employees." ISS will pay a $300,000 fine, engage an independent compliance consultant, and refrain from future violations, without admitting any wrongdoing. Read a New York Times article and the SEC release.
SEC Fines Nasdaq $10 Million for Facebook Blunders
May 31, 2013
Nasdaq's "poorly designed systems and hasty decision-making" during the Facebook IPO and subsequent secondary market trading have resulted in charges of securities laws violations and a $10 million settlement with the SEC. The penalty, which is the largest ever assessed against an exchange, follows Nasdaq's previously-announced $62 million settlement with affected brokers. The SEC's report asserts that technical "glitches" are not the most concerning component of recent market disruptions, and reveals that Nasdaq executives committed a number of previously-unknown errors that prevented prompt execution of trades during the Facebook IPO. Read a New York Times article and the SEC release.
SAC Won't Cooperate with SEC's Aggressive Approach to Insider Trading Investigations
May 31, 2013
The SEC has made it clear that insider trading continues to be a high enforcement priority and that it will pursue criminal trading aggressively. Its investigation of executives at hedge fund SAC Capital Advisors is no exception. But in a rare move, SAC signaled its lack of cooperation in the SEC's inquiry. Over the last three years, the SEC has filed more insider trading actions than in any three-year period in its history. Yet it's unusual for a targeted company to decide not to cooperate with the SEC. See this New York Times article.
Nasdaq Withdraws Proposal to Require Internal Audit Function
May 31, 2013
Nasdaq has withdrawn a proposed rule that would have required listed companies to establish and maintain an internal audit function. Read the terse Nasdaq release and a Compliance Week article.
SEC Clarifies Rule 144 Requirements for Donees of Control Stock
May 31, 2013
The SEC clarified a rule quirk that had previously triggered Rule 144 resale restrictions for the recipient of an affiliate's gift of securities that were otherwise not restricted by Rule 144 ("control stock"). This was among several tweaks to the SEC's Compliance and Disclosure Interpretations in mid-May. According to the SEC, "If the donee [of non-restricted securities by an affiliate donor] is a non-affiliate and has not been an affiliate during the preceding three months, then the donee may resell the securities pursuant to Rule 144(b)(1) subject only to the current public information requirement in Rule 144(c)(1)." See the SEC's new Q&A 129.03 here. Check out other mid-May revisions here.
Directors Under Fire This Proxy Season
May 17, 2013
Hewlett-Packard, JPMorgan Chase and J.C. Penney are just a few examples where proxy advisory firms waged campaigns against director re-election. Investor concerns run the gamut from poor financial or risk oversight to CEO succession planning and executive pay practices. The gripes are many, but the question remains: will these "vote no" campaigns succeed? See this New York Times article.
IPOs Rebound in 2013
May 17, 2013
According to a Dealogic report, U.S. companies are in for the best year in initial public offerings since 2007. And PitchBook's survey of 130 respondents in the private equity and venture capital industries predicted a bright outlook for VC and PE-backed IPOs in 2013. So far this year, 64 companies have raised a total of $16.8 billion in IPOs in the United States. The potential boon for the economy signaled by this IPO recovery remains uncertain, however. According to MarketWatch, "A return of stock-market volatility could quickly slam shut the IPO window, as could a crisis or unexpected event." Read the 2013 Private Equity & Venture Capital IPO Sentiment Survey (download required) and the MarketWatch Report.
Credit Ratings Reform Appears Stalled
May 17, 2013
On May 14, the SEC held a Credit Ratings Roundtable to follow up on reforms proposed by Senators Al Franken and Roger Wicker. Despite mandates in the Dodd-Frank Act for the SEC to adopt rules applicable to nationally recognized statistical rating organizations (NRSROs), efforts to reform the rating agency system appear stalled. Discussion Tuesday focused on whether and how to change the ratings agency assignment system and reviewed alternatives to the compensation models now in use. The roundtable followed on the SEC's 105-page report issued in December 2012 suggesting a number of problems inherent in the Franken-Wicker proposal. Read the SEC's opening remarks and Star Tribune coverage of the roundtable.
Still Hoping for a Medical Device Tax Repeal
May 17, 2013
At a recent medical device industry conference, Senator Amy Klobuchar expressed continued confidence that Congress will repeal the 2.3 percent tax on medical devices. She noted that the best prospect for repeal lies in tying it to tax reform or other legislation unlikely to trigger a presidential veto and referenced Senator Max Baucus' tax reform efforts as a possible catalyst. Read more.
SEC's White Wants a Bigger Budget to Grow Staff
May 17, 2013
Signaling her goal to step up SEC enforcement and investor protection, SEC Chair Mary Jo White recently testified before Congress on the need for greater funding to continue the SEC's overhaul of financial regulation and to police fraud. Under President Obama's budget plan, the SEC's 2014 budget would grow by $1.67 billion or about 26 percent. The SEC's goal is to add 676 staff members, including 131 to the enforcement division. The increased funds would come from higher fees. Read more.
Social Media is Here to Stay, But Risks and Rewards Must be Evaluated Carefully
May 3, 2013
The SEC has OK'd using social media for Regulation FD disclosures, and some companies have designated Facebook and Twitter accounts for future disclosures. However, the New York Times quotes noted securities law commentator Broc Romanek describing the current social media terrain as "the Wild West." This environment means that public companies should proceed carefully when using Facebook and Twitter, even as they embrace these tools to reach a broader audience. The biggest issue for many companies and investors: monitoring the wide variety of potential blogs, feeds and pages that may be a source of information. As a result, most companies will proceed with caution when using social media to disseminate material information. Read the New York Times article.
Will the SEC Propose a Rule Requiring Disclosure of Corporate Political Contributions?
May 3, 2013
A request asking the SEC to propose rules requiring public companies to disclose their political donations in SEC filings has been the most commented-upon petition in SEC history. The SEC staff has said it's considering a rule proposal this year. Despite widespread public outcry for such disclosure requirements, however, there is plenty of political pressure on the SEC to refrain from doing so. House Republicans introduced legislation that would make it illegal for the SEC to issue any political disclosure regulations. The only certainty is that any rule proposal will be hotly debated. Read this New York Times article.
Boardroom Briefing: Top Director Concerns
May 3, 2013
Directors are working harder than ever but spending less time on crisis management. Topping the list of director worries are shareholder proposals for proxy access and proposed rules on CEO/median worker pay ratio disclosure. These are among the results of the recently-released PwC annual directors survey, which surveyed 860 public company directors. One interesting finding: "Dissatisfaction with the performance of an individual fellow board member is fairly common and presents an ongoing challenge—with aging and lack of expertise cited as the key reasons." Read the PwC Survey Results and Jack Welch's analysis of "5 Types of Directors Who Don't Deliver."
The Dark Side of Shareholder Activism - Activists Pay Bonuses to Dissident Directors
May 3, 2013
Some activist funds are offering performance-based bonuses to director nominees on their dissident slates, which creates conflict and independence issues. This article by corporate governance guru John Coffee asks "Are shareholder bonuses incentives or bribes?"
Can Tweets Improve Liquidity?
April 26, 2013
A Stanford Business School study suggests that tweeting investor information may improve market liquidity, particularly for smaller company stocks. In light of this and SEC guidance that social media releases can satisfy Regulation FD, Twitter may become an effective way for public companies to share information with investors. The study considered companies tweeting information linking to a more detailed press release over 40 times per month. The impact was most noticeable among smaller and lesser-known companies more likely to benefit from an increase in visibility. Read the Stanford study and the SEC's guidance on social media.
Shareholders Demand Separate CEO and Chairman Roles
April 26, 2013
Boeing is giving more authority to its lead independent director in advance of vote on a shareholder proposal to split the role of chairman and CEO. Meanwhile, JPMorgan Chase defends its decision to keep CEO Jamie Dimon in a dual role despite shareholder demands for an independent chairman again this year. While shareholder proposals calling for independent board chairs have become increasingly common, it is not clear that the separation of these roles improves governance or adds value to shareholders. However, this Business Week study showed that "CEO-chairman separation tends to reverse a company's performance: Low-performing firms benefit from a separation event, while high-performing firms suffer." For a review of the issues, see this Deloitte study and the ISS policy (at page 19). Read the change to Boeing's governance policies here.
Calls for Transparency at Proxy Advisory Firms
April 26, 2013
Proxy advisory firms like ISS and Glass Lewis play an increasingly significant role in shaping corporate governance. Yet these firms' voting guidelines are often opaque and inflexible, forcing public companies to engage in costly analysis and negotiation with them to assess or resolve investor dissatisfaction. The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness recently released its Best Practices and Core Principles for the Development, Dispensation and Receipt of Proxy Advice. The report calls for greater transparency in how these firms develop and recommend voting policies. In addition, the Mercatus Center published its own report suggesting that shareholders and companies will be better off if limitations are imposed on the role of proxy advisory firms. The New York TImes notes studies finding that ISS and Glass Lewis can sway 10 percent or more of the vote.
Rethinking Bonuses in Executive Compensation
April 26, 2013
Compensation committees (with the help of their consultants) are busy setting annual compensation for executives. But what best practices are emerging? Read CFO.com's query "Are Bonuses an Obstacle to Shareholder Value?" contending that many annual bonus plans do not encourage long-term value growth.
Compliance Best Practices
April 26, 2013
JP Morgan Chase appointed a chief compliance officer, removing the compliance function from the general counsel's office. Companies continue to struggle to determine how best to manage risk internally and where to house compliance responsibility. Read this Harvard Law School article arguing that compliance belongs in the general counsel's office and suggesting the key is a culture of compliance.
Emerging Growth Companies Take Advantage of Confidential SEC Submission Process for IPOs
April 17, 2013
According to the Wall Street Journal, 63 percent of emerging growth companies submitted their IPO filings on a confidential basis with the SEC since first permitted by the JOBS Act one year ago. The confidential filing process allows qualifying emerging growth companies (EGCs) to submit IPO registration statements and subsequent amendments to the SEC on a confidential basis. This is an attractive option because it permits EGCs to keep their financial and compensation information confidential until they are sure the IPO will launch. The SEC's comments and the company's responses also remain confidential until the filing is made public. An EGC is generally an issuer that has less than $1 billion in total annual gross revenues. Read the SEC's guidance on how to file IPO documents confidentially here.
Annual Meetings Elicit Governance Commentary
April 17, 2013
Shareholders disgruntled by poor performance at Hewlett-Packard spurred a shake-up in the HP board. Meanwhile CalPERS identified 52 "zombie" directors targeted for withhold campaigns. Read commentary on the difficulty of ousting bad directors here, and CalPERS campaign here.
Time to Revisit Risk Disclosures
April 17, 2013
Correspondence between the SEC and JPMorgan Chase reveals SEC concerns about whether risk disclosures are adequate. The back-and-forth serves as a reminder that all companies should review their risk disclosures regularly and avoid a boilerplate approach. Read more.
Executive Compensation Sees Growth in Perks and CEO Pay
April 17, 2013
A stronger economy may have made boards more generous with perquisites last year. Fewer than 50 percent of Oracle's stockholders voted "yes" on say-on-pay, and it will be interesting to see whether there are any changes this year. Read more.
In addition, compensation committees find it difficult to rein in pay when the CEO has been with the company for several years. Read more. And ISS provides its analysis on how director tenure may play a role.
Companies Respond to Top Shareholder Concerns
April 17, 2013
In the face of ever-increasing shareholder proposals, companies are seeking SEC no-action relief, negotiating with proponents and proactively changing policies and compensation arrangements. Some top issues for shareholders: putting an end to staggered boards, naming an independent chairman and eliminating supermajority votes. Read more.
Time to Consider a Political Contributions Policy
April 17, 2013
Activist demand for greater transparency about corporate political activity is increasing, and shareholder proposals requiring companies to adopt contribution policies are becoming more prevalent. Companies should consider whether to adopt a policy and discuss this with the board. Read recent news and opinion, or see this 2010 Conference Board Report.