The Society's National Conference "Resilience in the New Reality" will take place on June 25 - 28, in Boston, MA at the Westin Copley Place Hotel. Registration is now open. The program covers critical topics for corporate secretaries and governance professionals, and includes sessions designed specifically for small-cap, mid-cap and private companies. Visit our website for additional information.

Supreme Court Considers Possible Compromise in Halliburton

This Reuters article indicates that, based on what transpired in the courtroom today, the US Supreme Court is unlikely to overrule Basic v. Levinson, but may tweak it to make it more difficult for plaintiffs to get past the preliminary class certification stage. Apparently, Justices Anthony Kennedy and Antonin Scalia supported a potential "compromise" position that would require plaintiffs to show that the company's misrepresentation in question had a significant effect on the stock price. Currently, the Basic fraud-on-the-market doctrine assumes that public information about a company is known to the market and reflected in the stock price, and plaintiffs don't need to show they relied on any specific misrepresentation.

We previously reported on Halliburton here.

SOX Whistleblower Protection Extends to Public Company Contractors & Subcontractors

Yesterday, the US Supreme Court ruled in Lawson v. FMR, LLC (in a 6 - 3 decision) that Sarbanes Oxley Section 806 whistleblower protection extends to employees of a public company's contractors and subcontractors. The case involved two former employees of FMR, a private company group that provides investment advising services to the Fidelity family of mutual funds (public companies with no employees), that sued FMR for unlawful retaliation under SOX 806. Both employees alleged that they were retaliated against by FMR for blowing the whistle on presumed fraud relating to the mutual funds. The Court noted:

Plaintiffs below, petitioners here, are former employees of private companies that contract to advise or manage mutual funds. The mutual funds themselves are public companies that have no employees. Hence, if the whistle is to be blown on fraud detrimental to mutual fund inves­tors, the whistleblowing employee must be on another company's payroll, most likely, the payroll of the mutual fund's investment adviser or manager. Taking the allegations of the complaint as true, both plaintiffs blew the whistle on putative fraud relating to the mutual funds and, as a consequence, suffered adverse action by their employers. Plaintiffs read §1514A to con­vey that "[n]o . . . contractor . . . may . . . discriminate against [its own] employee [for whistleblowing]." We find that reading consistent with the text of the statute and with common sense. Contractors are in control of their own employees, but are not ordinarily positioned to control someone else's workers.

As discussed in this Proskauer blog, the Court appears to not have considered the title and heading within SOX 806 - most notably, WHISTLEBLOWER "PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES." Further, the Court indicated that SOX 806 was designed by Congress "as one means to ward off another Enron debacle," which it describes as consistent with whistleblower protection extending to private contractor employees but, as the blog notes, it failed to give consideration to SOX's other provisions that separately and explicitly address contractors like attorneys and accountants.

Justice Kennedy and Justice Alito joined Justice Sotomayor's powerful dissent:

The Court's interpretation gives §1514A a stunning reach. As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer - a parent who happens to work at the local Walmart (a public company) - if the parent stops employ­ing the babysitter after he expresses concern that the parent's teenage son may have participated in an Internet purchase fraud. And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.

Congress was of course free to create this kind of sweep­ing regime that subjects a multitude of individuals and private businesses to litigation over fraud reports that have no connection to, or impact on, the interests of public company shareholders. But because nothing in the text, context, or purpose of the Sarbanes-Oxley Act suggests that Congress actually wanted to do so, I respectfully dissent.

As noted in Justice Sotomayor's dissent, the implications of the decision are significant - according to the blog, expanding the company universe governed by SOX 806 from approximately 5,000 public companies to potentially 6 million private ones.

PCAOB Announces Open Meeting on Proposal to Change Auditor's Reporting Model

The PCAOB announced that it will hold a public meeting on April 2 - 3 in Washington DC to obtain further input on its proposal to change the auditor's reporting model. The proposed new standard would require the auditor to report on "critical audit matters" and increase the auditor's responsibility for "other information" in the annual report outside the financial statements such as selected financial data, MD&A, exhibits and certain information incorporated by reference. Over 230 comment letters were submitted on the proposal, including this letter submitted by the Society. Specific topics and panelists - which will include investors, investor advocates, senior executives and audit committee chairs of major corporations, audit firms, academicians and others - will be announced at a later date.

House Bill Proposes Significant Changes to Federal Rulemaking Process

This bill, which passed the House on February 27, would appear to dramatically change the federal rulemaking process. Specifically, it would:

• Require federal agencies to report each month on new regulations they are planning (as opposed to every six months as is currently the case), and make such regulations open to court challenges if such notice is not given
• Require that federal agencies adopt the least costly method of implementing a law
• Require federal agencies to consider and reduce impacts on small businesses before issuing new regulations
• Address "sue and settle litigation," by reforming procedures for consent decrees and settlement agreements entered into by federal agencies that require them to take regulatory action

The bill is unlikely to be taken up by the Senate.

California AG Issues Cybersecurity Guidance for Small & Mid-Sized Companies

The California Attorney General's office released this cybersecurity guide with recommendations for small and mid-sized California businesses to reduce their cyber-related risks and respond to security breaches. The guide cites this Symantec 2013 Internet Security Threat Report, which shows that 50% of all targeted cyber attacks in 2012 were aimed at businesses with fewer than 2,500 employees - and 31% of cyber attacks targeted businesses with fewer than 250 employees. Recommendations include data mapping and encryption, identifying comprehensive security solutions, and development of a disaster recovery plan.

EU Proposes Conflict Minerals Legislation for EU Importers

The EU announced today proposed legislation establishing a system of self-certification for EU importers of tin, tantalum, tungsten and gold originating in conflict-affected and high-risk areas. "Self-certification" requires EU importers of these metals and their ores to exercise 'due diligence' by monitoring and administering their purchases and sales in line with OECD standards. The objective of the legislation is to ensure that the importers don't contribute to the financing of armed conflicts. Disclosure requirements exceed OECD guidance, obligating EU importers to pass on due diligence information to downstream purchasers.

Although the regulation is voluntary, EU importers opting for self-certification as responsible importers are advised to (i) set up a management system to, inter alia, track the origin of the minerals purchased, (ii) apply supply chain risk management procedures to address and mitigate adverse impact in related to the financing of armed groups, and (iii) carry out a third-part audit and disclose relevant supply chain related information to downstream purchasers and the public.

Among the differences described in these FAQs between the EU's proposal and Section 1502 of the Dodd-Frank Act are:

• Dodd-Frank is mandatory and targets US-listed companies using tin, tantalum, tungsten and gold in their supply chain to disclose their activities related to 'conflict minerals'. The EU self-certification scheme is voluntary and targets EU importers of minerals and metals of tin, tantalum, tungsten and gold and is designed to assist downstream companies to carry out supply chain due diligence.
• Unlike the draft EU Regulation, Dodd-Frank is region-specific targeting the Democratic Republic of Congo and neighbouring countries, which has triggered risk-adverse behaviour with companies disengaging their sourcing activities from this region: this major draw-back is well documented in UN Panel of Expert reports and other literature. The proposed EU legislation is global in scope designed to be non-discriminatory vis-à-vis any conflict zone and based on the international consensus achieved in the OECD.
• The EU will provide public procurement incentives to encourage companies producing end-products such as mobile phones, computers and printers are conflict-free to seek to work with a responsible EU importer.

The next step is for the European Parliament and Council to address the matter.

European Parliament & Council Propose Board Diversity and Other ESG Information Disclosure Requirements for "Large" Companies

The European Commission announced last week that the European Parliament and Council had reached agreement on proposed legislation that will require certain large companies (i.e., companies with more than 500 employees) to disclose their board diversity policies and other non-financial information - including environmental, social and employee information. The new disclosure requirements will apply to large EU listed companies and other designated public interest entities such as financial institutions. The determination to limit the requirements to "large" companies was based on a cost/benefit analysis that revealed that the costs of compliance for smaller companies could outweigh the benefits.

Specifically, large listed companies will be required to disclose information about their board diversity policy (e.g., age, gender, educational & professional background), as well as policy objectives, implementation and results - or explain why they don't have a policy. In order to become law, the proposed legislation needs to be adopted jointly by the European Parliament and EU Member States in the Council, which is expected to happen this Spring.

Reform of Unclaimed Property Act Underway - Society Input Sought

The Unclaimed Property Act of 1995 is in the process of being redrafted, and the Society has been asked to be part of that process. Among the 76 issues identified (and interlineated in the Act here) for consideration in the revision are:

• Jurisdictional issues, definition of domicile for non-incorporated entities, definition of last known address, etc.
• Refined presumptions of abandonment; adding new property types such as non-qualified retirement vehicles, college savings, employee stock purchase, etc.
• Dormancy triggers and the notion of contact, i.e., does it include death of an owner
• Early reporting
• Estimations, record retention, statute of limitations and an administrative appeals process
• Guidelines for third party audits and compensation

Drafting participants include the Securities Transfer Association, ABA, Unclaimed Property Professionals Organization, Securities Industry and Financial Markets Association and others. If you are interested in working on this project, please contact Darla at dstuckey@governanceprofessionals.org. Comments are due April 22.

Canadian Companies Increasingly, Voluntarily Adopting Say-on-Pay

According to this release from the Shareholder Association for Research & Education (SHARE), Canadian companies are increasingly providing shareholders with an advisory say-on-pay vote, even though not required by law. The number of Canadian companies adopting say-on-pay (see list here) increased from 30 in 2010 to 126 in 2013, and includes a majority of the TSX 60. For those companies offering say-on-pay, votes against the proposals have also been increasing over the past several years. In 2013, 10% of companies experienced "against" votes of greater than 25% - compared to 2% of companies in 2011.

OECD Launches Review of Corporate Governance Principles

The OECD has launched a review of its Principles of Corporate Governance, which were last revised in 2004. According to the OECD release, the basis for the anticipated one year review is "to ensure the continuing high quality, relevance and usefulness of the Principles taking into account recent developments in the corporate sector and capital markets. The outcome should provide policy makers, regulators and other rule-making bodies with a sound benchmark for establishing an effective corporate governance framework."

The Financial Stability Board (FSB) notes that the OECD's Corporate Governance Principles are "broadly accepted as representing minimum requirements for good practice that countries are encouraged to meet or exceed." Corporate governance is one of the 12 policy areas designated by the FSB as crucial for sound financial systems. All OECD members and FSB member jurisdictions are invited to participate in the review.

Survey Reveals Adverse Effects of Dodd-Frank on Small Banks & Their Customers

A survey of approximately 200 small banks in 41 states with less than $10 billion in assets conducted by the Mercatus Center at George Mason University reveals these principal findings, among others:

• Approximately 83% of respondents experienced increased compliance costs of more than 5% since Dodd-Frank
• The median number of compliance staff increased from one to two, and more than 25% of respondents plan to add another compliance person
• 71% of respondents indicate that their business activities have been affected by the Consumer Financial Protection Bureau (CFPB) (required to be created by Dodd-Frank)
• More than 50% of respondents report that the CFPB and the Qualified Mortgages Rule have had a "significant negative impact" on their mortgage offerings
• Over 60 percent say that changes in mortgage regulations will have a "significant negative impact" on their earnings
• Over 15 percent either have eliminated or plan to eliminate residential mortgage services
• Almost 95% of respondents anticipate consolidation in the banking industry over the next five years, and 26% of respondents anticipate that they will be part of that consolidation activity

The full report is here.

Buffett's Annual Letter Out; Berkshire Aims to Own Entire Fortune 500

In case you missed it, Warren Buffett's annual letter to shareholders of Berkshire Hathaway is out. Some of our members might want to call their advisors as Berkshire may have its sights on your company - "With [the] Heinz [transaction], Berkshire now owns 8 1/2 companies that, were they stand-alone businesses, would be in the Fortune 500. Only 491 1/2 to go." Surely Warren is speaking in jest. Not surprisingly, Warren continues to bet on the United States, writing "America's best days lie ahead." We certainly hope he continues to be correct.

"Confidential Voting" Shareholder Proposals From Chevedden Excluded

We understand that the SEC has granted no-action relief to several companies that have received a confidential voting proposal submitted by John Chevedden.  That proposal, as we reported earlier, requested that companies adopt a bylaw or policy that "prior to the annual meeting, the outcome of votes cast by proxy on uncontested matters, including a running tally of votes for and against, shall not be available to management or the board and shall not be used to solicit votes."  The SEC has granted relief to companies under Rule 14a-8(i)(3), noting that the proposal was "vague and indefinite" on the basis that the proposal did not sufficiently explain when the requested bylaw or policy would apply.  Specifically, the staff noted that the proposal provided that preliminary voting results would not be available for solicitations made for "other purposes," but that they would be available for solicitations made for "other proper purposes.

Bebchuk Questions Validity of State Law Poison Pill Rules Due to Pre-emption By Williams Act

In a newly published paper, Harvard Law School Professor Lucian A. Bebchuk and Columbia Law School Associate Professor Robert Jackson, Jr. argue that state law rules authorizing poison pills may be subject to invalidation due to federal pre-emption by the Williams Act. Profs. Bebchuk's and Jackson's position is based on the fact that the federal courts (including the Supreme Court) have previously invalidated state-imposed impediments to unsolicited tender offers that were less restrictive than state law rules governing poison pills based on Williams Act pre-emption. The authors indicate that poison pill rules provide incumbents (board, management) with an even more powerful antitakeover defense and impose an even lengthier delay on tender offers than the state statutes that the federal courts previously invalidated.

Based on their analysis of those federal pre-emption cases, they conclude that federal pre-emption challenges to poison pill rules would likely result in their invalidation. Assuming that scenario, the authors suggest how states could modify their poison pill rules to better withstand federal pre-emption challenges - including substantially limiting the length of time poison pills can be used to block tender offers.

Board Leadership Academy 

On This Week in the Boardroom, TK Kerstetter, Chairman, NYSE Governance Services - Corporate Board Member, discusses with Keith Meyer, Vice Chairman & Global Head, the CEO and Board Practice, CT Partners, the near-term launch of the Board Leadership Academy, which is a new board leadership program led by current Fortune 100 company board chairs, future board chairs and prominent Harvard corporate governance experts.

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