LAST CHANCE to Register to join 700+ (and counting!) of your peers at the Society's 68th National Conference from June 25-28, 2014 at the Westin Copley Place Hotel in Boston, MA. Rooms at the Westin are sold out, but an alternate list of hotels is here. 

Stop Corporate Inversions Act of 2014  

Bills to prevent U.S. companies from effecting tax "inversions" have been in the news this week most recently as a result of the Covidian-Medtronic deal. Companion bills in both the Senate, sponsored by Sen. Carl Levin (D-MI), S. 2360, and the House, sponsored by Rep. Sander Levin (D-MI) H.R. 4679, titled "The Stop Corporate Inversions Act of 2014," were introduced on May 20. They would preclude U.S. companies that merge with foreign companies from reincorporating offshore in lower-tax jurisdictions - known as an "inversion" - to avoid being subject to U.S. tax on their overseas earnings.  See more here. 

See also The New York Times Dealbook Deal Professor Stephen M. Davidoff's column which looks at the language in the Covidian - Medtronic offering prospectus that conditions closing on Medtronic receiving inversion tax treatment:

[L]ike Pfizer's bid for Astra Zeneca, this deal is built on the inversion tax loophole. Indeed, the deal will collapse if Congress chooses to do something about inversions. The reason is that Medtronic and Covidien carefully negotiated that Medtronic would obtain the inversion tax treatment it wanted as part of moving abroad. If the inversion rules are changed, the deal can be terminated by either party. The exact wording in the offer document follows and is phrased as a condition. . . (links omitted) 

Bill to Place Moratorium on FSOC Introduced 

Rep. Randy Neugebauer (R-TX) introduced H.R. 4881 yesterday, a bill that would "place a 6-month moratorium on the authority of the Financial Stability Oversight Council to make financial stability determinations." The bill has 5 co-sponsors and was referred to the House Committee on Financial Services. The text is not yet available. 

Bill Seeking Disclosure of Supply Chain Trafficking Introduced

Rep. Carolyn Maloney (D-NY) introduced H.R. 4842, titled "Business Supply Chain Transparency on Trafficking and Slavery Act of 2014" last week. The bill, co-sponsored by Rep. Chris Smith (R-NJ), would amend Section 13 of the '34 Act by adding subsection (s) to require companies with global revenues above $100,000,000 to disclose information describing any measures the company has taken to identify and address conditions of forced labor, slavery, human trafficking, and the worst forms of child labor within the company's supply chains. Companies would be required to disclose annually on their websites. The information also will be made available to the Department of Labor which--rather than "name and shame"-- will post the reports in searchable format on their website with a list of the "best" 100 companies each year:

The Secretary of Labor . . . shall annually develop and publish on the Internet website of the Department of Labor a list of top 100 companies adhering to supply chain labor standards, as established under relevant Federal and international guidelines.

PCAOB Adopts Related Party Auditing Standard 

On June 10, the PCAOB adopted Auditing Standard No. 18, "Related Parties and Amendments on Significant Unusual Transactions and a Company's Financial Relationships and Transactions with its Executive Officers." The Board adopted the amendments substantially as re-proposed, although it acknowledged that it had considered the comments. [The Society's comment letter is here.]

Thanks to Gibson Dunn for this memo for further explanation as to the specifics of the amended standards: 

The Public Company Accounting Oversight Board ("PCAOB") yesterday adopted new and amended auditing standards that expand audit procedures required to be performed with respect to three important areas:  (1) related party transactions; (2) significant unusual transactions; and (3) a company's financial relationships and transactions with its executive officers.  The standards also expand the required communications that an auditor must make to the audit committee related to these three areas.  They also amend the standard governing representations that the auditor is required to periodically obtain from management.

SEC Fines Hedge Fund Over Whistle-Blower Retaliation 

The SEC announced Monday that it had charged a hedge fund "with engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC." The hedge fund paid a fine of $2.2 million to settle the charges and neither the firm nor owner admitted nor denied wrongdoing. The head trader at the firm had reported the innapropriate trades to the SEC, and was subsequently stripped of his title and resigned. This is the first case the SEC has filed under its new authority to bring anti-retaliation enforcement actions.   

SEC Updates Edgar Filer Manual

The SEC updated the Edgar Filer Manual on June 16. As part of this, Volume I of the Filer Manual was updated to support the U.S. GAAP Taxonomy.

Canadian Securities Administrators Extends Consultation Period on Guidance for Proxy Advisory Firms

Earlier this spring (See this Alert)the Canadian Securities Administrators published for comment proposed National Policy 25-201 Guidance for Proxy Advisory Firms. The comment period was scheduled to close on June 23, 2014 but the CSA has extended it a month to July 23 based on feedback from stakeholders. The proposed guidance is the result of its 2012 consultation paper on the shareholder voting research industry. The CSA says that its proposed policy is intended to "address concerns raised in the consultation process by certain market participants related to conflicts of interest, transparency and accuracy."
 

Proxy Mosaic Announces New Hires

Upstart proxy advisory firm Proxy Mosaic announced Monday that it had made four new hires, including one new hire from each of Glass Lewis and Broadridge. Proxy Mosaic, which was founded last summer, provides investors with customized proxy research and voting recommendations, helps with corporate engagement, and facilitates communication between shareholders.

Meeting Results

Shareholders voted on three shareholder proposals at the Caterpillar meeting, two of which were related to human rights. A proposal to amend and monitor a policy on human rights received 22% of shares voted, and a proposal requesting the company not sell products to Sudan received 18% of shares voted. A cumulative voting proposal received 23% of shares voted.

General Motors also had a cumulative voting proposal on its agenda; it received 36% of shares voted. A proposal requesting the company adopt a policy to have an independent board chair received 39% of votes cast. The 12 management directors up for election received an average of 95%, including the nominee designated by the UAW Retiree Medical Benefits Trust, who is retiring as VP from the UAW in July (see this Alert for more). Two individuals apparently nominated themselves from the floor at the meeting, each received 1 vote (presumably their own) and 1,197,102,412 votes against. GM's say on pay proposal received support of 97% of votes cast. GM also had a referendum on the frequency of future say on pay votes: 83.1% of votes cast favored every year, 0.4% voted for every two years, and 16.5% voted for every three years.

Jarden Corporation, after being targeted by the Harvard Law School Shareholders Rights Project ("SRP"), put a management proposal to declassify the board on its annual meeting agenda. The proposal needed at least three-fourths of the voting power of all outstanding shares of common stock entitled to vote and easily received that, with 90% of outstanding shares voting in favor of declassification.

Just as we published last week the press was reporting that Target's directors had been re-elected and its pay plan approved despite opposition from ISS and Glass Lewis. The 10 directors up for election received an average of 81%. The four audit committee members that ISS recommended against received an average of 75% support, and the three directors from the corporate responsibility committee that ISS opposed received an average of 74% support. Say-on-pay received 78% of votes cast, and an independent chair proposal received 46% support. A shareholder proposal requesting the company eliminate perquisites to named executive officers starting in fiscal year 2014 received 4%, while a proposal requesting the company adopt a policy prohibiting discrimination based on race, religion, gender, or sexual orientation received support of 3% of votes cast.

Supplemental Proxies: Airgas Defends its Classified Board; Sallie Mae its Cumulative Voting

Airgas' supplemental proxy takes aim at the Harvard Law School SRP to eliminate all classified boards and asks voters to "hit the pause button" to consider Airgas without a staggered board.  It also laments that "governance committees of more institutions [should have] been willing to evaluate Airgas and this proposal through the same lens as their portfolio managers who know our company best. . ."

Had Air Products obtained a majority of the Airgas Board seats at the 2010 Annual Meeting, they might well have been able to steal Airgas for $65.50 per share - the then-current bid. The staggered board made all the difference. In a deal-pressure situation, even though acquirer-nominated directors are fiduciaries of the target company shareholders, such newly-elected directors may well have believed that accepting a deal at $65.50 would have been a proper or necessary discharge of their fiduciary duties. Yet, with time and thanks to the staggered board, we have seen how wrong they would have been.

 

The purpose of this letter is to urge our shareholders to hit the "pause button"; think about this issue in the context of Airgas and our very real experience with the value our classified board has helped create; and resist the impulse to follow the one-size-fits-all approach urged by those that will not devote the time or thought to make case-by-case determinations, even on critically important issues like this.

Signed by Executive Chairman Peter McCausland, the filing cites several studies in opposition to those by the Harvard SRP, and notes that Airgas' 27 year annual return has been 19%: "In our more than 27 years as a public company, Airgas has delivered compounded annual returns to shareholders of 19%, ranking us among the highest in the S&P 500 over that time - a remarkable track record." Definitely worth a read.

Sallie Mae filed an interesting supplemental proxy rebutting ISS's recommendation against management's proposal to eliminate cumulative voting. The filing notes that Sallie Mae already has an annual election of all directors by majority vote and gives shareholders the ability to call special meetings. Cumulative voting, they say, is inconsistent with majority voting. With respect to the proxy access proposal on the ballot last year and this year, the company made no recommendation on the proposal but vowed to adopt access if the proposal is approved this year:

The Sallie Mae Board strives to be attentive and responsive to its stockholders. While our Board of Directors chose not to make a recommendation in regards to the proxy access proposal, the Board is not against adoption of proxy access. The Board does however believe that the coexistence of cumulative voting, proxy access and majority voting (which would occur if ISS recommendations are followed) would cause confusion and less than transparent corporate governance. Finally, we note that if the Company stockholders approve the proxy access stockholder proposal also on the ballot, the Nominations, Governance and Compensation Committee of our Board of Directors will propose and recommend proxy access for adoption at our annual meeting in 2015. Any such proposal will include the elimination or suspension of cumulative voting. The Board believes that any implementation of proxy access would further reduce, if not eliminate, any need for or benefit of having cumulative voting since stockholders could obtain access to the nomination process for directors.

Interestingly, the supplemental filing also notes that Glass Lewis takes the opposite position on cumulative voting.

Hercules Technology Growth Capital, an internally managed business development company (BDC) governed by the 1940 Act, filed to explain that the Act "prohibits us from implementing a performance-based cash incentive compensation plan that restricts compensation committee discretion in the sizing of cash bonuses given that we also maintain an equity incentive plan for our NEOs and other employees." The company also touts its pay for performance alignment and its below average compensation expense as compared to other BDC peers, in seeking approval of its say on pay proposal.   

Celgene's filing notes a shareholder lobbying proposal.

GP Strategies Corp filed to explain one director's failure to meet the 75% attendance threshold and subsequent recommendation against his election from ISS. The reason the director missed one of the Board meetings: "an unexpected medical emergency of a close friend."

Ares Commercial Real Estate Co also filed to explain one director's attendance and also to seek support for a director challenged by ISS because ISS asserts that the company "has not established a formal separate compensation committee." This, the company claims, is "based on factual and legal inaccuracies." It notes that as an externally managed company, the compensation committee's duties are limited. In fact, the company does not employ any of its executive officers and they "are not expected to receive any direct compensation from" Ares:

We chose to combine the functions of the compensation committee with the audit committee because we are an externally managed company. We do not employ any of our executive officers and our executive officers are not currently expected to receive any direct compensation from us, other than certain grants made to our Chief Financial Officer, in connection with his appointment in July 2012, under our 2012 Equity Incentive Plan. Accordingly, the role of a compensation committee is extremely limited compared to an internally managed public company.

United Therapeutics's proxy "strongly disagrees" with both ISS and GL on its CEO pay. The company notes there were no changes to its program and further that the large grant of options was done pursuant to a strict formula in place since 1999:

The size of this option grant did not result from any discretion on behalf of our Compensation Committee, but rather from the strict application of a performance-based formula (based on the increase in our market capitalization during the year) that has been in place in our CEO's employment agreement since 1999. Under this formula, our stock price must increase in order for our CEO to receive any stock options; then, the stock price must increase further for our CEO to realize any economic benefit from those stock options. As a result of this formula, [the CEO] has received no performance-based stock option awards in three of the past ten years.

United Therapeutics also challenges ISS's treatment of the company's peers and Glass Lewis' treatment of market capitalization as the sole performance measure, calling it a "pure" pay-for-performance metric:

Glass Lewis's criticism of market capitalization as the single performance criteria (especially when measured year over year) for our CEO option grant is unfounded. We believe that market capitalization is a pure pay-for-performance metric, which ties our CEO's compensation directly to the growth in our stock price. As a high-technology, high-growth company, we could not envisage a more appropriate criteria.

The Society To Hold Annual Meeting June 27; Doug Chia and Dannette Smith Nominated as Chair and Chair-Elect

The Notice of the 2014 Annual Meeting, Proxy Statement and Proxy, and 2014 Audited Financial Statements have been posted on our website:

http://main.governanceprofessionals.org/AnnualMeeting 

Members entitled to vote have received an email containing a link and your membership ID. Please vote online if you haven't done so.

Two Papers Receive IRRC Research Competition Awards

Two academic research papers won the Investor Responsibility Research Center Institute (IRRCi) annual investor research competition and were recognized at last week's Millstein Governance Forum in New York City. Informed Options Trading prior to M&A Announcements: Insider Trading? by Patrick Augustin of McGill University, and Menachem Brenner and Marti G. Subrahmanyam of New York University "documents that informed trading of equity options prior to takeover announcements is more pervasive than would be expected." Playing it Safe? Managerial Preferences, Risk, and Agency Conflicts by Todd A. Gormley, of the University of Pennsylvania and David Matsa of Northwestern University examines managers' incentives to "play it safe" with actions such as buying "cash cow" companies in diversifying industries.

Columbia Law School Blog Post Makes Argument For Compliance-Based Incentive Compensation

In a blog post on the CLS [Columbia Law School] Blue Sky Blog, Michael Peregrine and Andrew C. Liazos of McDermott Will & Emery, and Timothy Cotter of Sullivan, Cotter, and Associates, Inc. argue that boards should consider adding an element of compliance-based incentive compensation to executive compensation packages as a supplement to any clawback provisions that are adopted in advance of the Dodd-Frank rulemaking.  The authors believe that "incorporating achievement of compliance related goals in the executive incentive compensation plan" would "round[] out" the board's portfolio of accountability measures."

The authors give examples of compliance-based incentive compensation, including "goals related to the effectiveness of "hotline" mechanisms; assuring proper funding and staffing of compliance programs; adopting enhancements in the way risk and compliance concerns are reported "up the organizational ladder"; achievement of specific targets in terms of compliance-based training and monitoring, and other similar operational goals and objectives."   The authors further note that "meaningful compliance-based incentive compensation would be helpful in many cases to demonstrate that incentive compensation is being used as part of a holistic approach to discourage excessive inappropriate risk-taking within the company related to unlawful activities."

Delaware Supreme Court Justice Jacobs to Join Sidley Austin LLP

Sidley Austin announced this week that Justice Jack B. Jacobs of the Delaware Supreme Court will join the firm as Senior Counsel, effective October 1, 2014. He will be a member of the Mergers and Acquisitions transactional and litigation practices, as well as the Corporate Governance practice.

Facebook Sued Over Director Pay

A Facebook shareholder has filed a derivative complaint against the company and its Board for breach of fiduciary duty, waste of corporate assets and unjust enrichment related to director compensation.  The plaintiff argues that "Facebook's Board of Directors (the "Board") has unfettered ability to grant its members an unlimited amount of stock as part of their annual "compensation" and that "the defendants have abused this power by giving themselves excessive stock awards that when combined with their other forms of compensation gives the non-executive members of the Board a yearly take beyond what could be considered reasonable."

Facebook directors are paid in stock via the 2012 Equity Incentive Plan ("EIP"), which limits the amount of equity the directors can grant themselves to twenty-five million shares total and 2.5 million shares per director in a single year.  The plaintiff considers this limitation to be "in name only", noting that "at current trading price, 2.5 million Facebook shares are worth approximately $145 million."  The complaint notes that five of the six non-executive directors received 7,742 shares apiece in 2013, and the sixth received 27,742 shares.

The suit seeks damages as well as requests that the Facebook Board "reform the 2012 EIP so that it contains meaningful limits on the amount of stock that it is able to pay itself and then present such a change to the shareholders for a vote."

See also this memo from Davis Polk.

This week's highlighted question from the Huddle is:

There were several answers, including:

In our organization the Office of the Secretary also handles general corporate work (including finance and securities) so we have two attorneys who report to me along with two governance specialists (former paralegals who moved into management roles).

Check out the Society Huddle.

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