The Society's 2015 National Conference will take place June 24-27 in Chicago, Illinois at the Sheraton Chicago Hotel and Towers. Come to Chicago to "Connect, Communicate, Collaborate" with 800 of your colleagues.  

Conference registration is now open online. Members need to log in to receive member rates.

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The conference agenda is posted here. Hotel reservation and other information is here.

SEC Chair White Speaks to Shareholder Activism, Shareholder Proposal Process & Fee-Shifting Bylaws

In a speech today at Tulane University Law School, SEC Chair White discussed her observations concerning shareholder activism, the shareholder proposal process and fee-shifting bylaws.

While acknowledging the evolving activism landscape and disparate views among investors, companies and others as to the implications, she emphasized the SEC's role in ensuring compliance by all parties with their disclosure and other obligations under the federal securities laws once an activist campaign becomes public: "No matter how contentious the relationship is between the activist and the company, or how high the stakes, all parties, including activists and management, are obligated under the federal securities laws to provide shareholders with timely, clear, complete and accurate disclosures about the subject matter and their interests. All parties should make their obligations under the federal securities laws a high priority." 

She also touted the benefits of increased shareholder-company engagement purportedly resulting from increased activism: 

Increasingly, companies are talking to their shareholders, including so-called activist ones. That, in my view, is generally a very good thing. Increased engagement is important and a growing necessity for many companies today....Fortunately, by some accounts, companies and activists are starting to make positive progress, as they increasingly engage with each other and negotiate outcomes that seem more mutually beneficial.

On the shareholder proposal process, Chair White addressed the controversy surrounding her decision to review the application of Rule 14a-8(i)(9) and Staff's associated suspension of no-action guidance in the interim. While noting that the Staff strives for "consistency and correctness in administration of the process," she reiterated that the no-action responses are informal and not precedential or binding, and that views may evolve over time - triggering guidance, interpretation or rule changes. 

She also acknowledged companies' frustrated expectations, but spoke to her more encompassing objective of ensuring that the process was being appropriately managed so as not to "produce an unintended or unfair result": "While any frustrated expectations are regrettable, my request was driven by a deeper concern that the application of (i)(9), as originally interpreted by the staff, could result in unintended consequences and potential misuse of our process. The purpose of the review is to think carefully about the application of the rule and a variety of related questions." She noted a number of questions that Staff would be expected to review and respond to, including those cited by Director of Corp. Fin. Keith Higgins in his speech, which we reported on last month.

Finally, she spoke briefly to the current debate over fee-shifting bylaws, emphasizing the importance of accurate and clear disclosures on the part of those companies that have adopted such provisions, as well as her overall concerns about any bylaw provisions that have the effect of stifling shareholders' ability to bring actions under the federal securities laws.

SEC Issues Policy on "Bad Actor" Disqualification Waivers

The SEC Division of Corporation Finance issued this policy statement on Friday about the factors it will consider in evaluating whether to grant waivers from Regulations A and D registration exemption disqualification provisions. Generally the guidance provides that, "A waiver, which could include conditions or limitations, may be granted if a review of all the facts and circumstances leads the Division to determine that the waiver applicant has met its burden to show good cause and that it is not necessary under the circumstances that the exemptions be denied. In making this determination, the Division will consider the nature of the violation or conviction and whether it involved the offer and sale of securities."
 

Additional factors considered in waiver requests include:

• Whether the conduct involved a criminal conviction or scienter-based violation
• Who was responsible for the misconduct and their role relative to the party seeking the waiver
• Duration of the misconduct
• Remedial measures the party seeking the waiver has taken to address the misconduct
• Impact if the waiver is denied

See also SEC Chair White's robust speech last week at the Corporate Counsel Institute where she discussed the Commission's position on waivers generally - including how the Commission has exercised and should exercise its waiver authority; distinguishing disqualifications and attendant exemptions or waivers from enforcement remedies; and the rigor of the waiver evaluation/grant process.  

SEC Charges 13D Filers with Disclosure Violations

On Friday, the SEC charged eight Schedule 13D filers for failing to update their beneficial ownership reports to reflect material changes, including steps to effect going private transactions. Plans or proposals that would result in certain transactions, such as a going private transaction, are among the changes that trigger an amendment filing requirement. Additional violations included failing to timely report ownership of, and transactions in, certain securities. See also this Wachtell Lipton memo.

Congress Members Urge SEC to Finalize Pay Ratio Rules

Numerous members of Congress sent this letter earlier this week to SEC Chair White urging the agency to finalize the CEO/employee pay ratio rules in early 2015. The letter cites research that purportedly correlates higher pay ratios with CEO risk-taking, and suggests that lower ratios equate to long-term investment:

Research shows the higher the CEO to median worker pay ratio, the more likely that CEO is to pursue the kind of risky investments that brought on the global financial crisis. The Institute for Policy Studies found that nearly 40 percent of the highest-paid CEOs were fired, sought a bailout, or forced to pay fraud-related fines. Furthermore, a lower ratio of CFO to median worker pay implies more investment in human capital and a longer-term outlook. According to the Center for Audit Quality's annual investor survey, 46 percent of investors say they consider CEO compensation in their decision making.

Proposed Bills Would Expand Definition of Insider Trading

Two Democratic Senators introduced a bill last week that purportedly would expand the meaning of insider trading by broadly banning buying or selling securities based on material inside information and prohibiting communication of non-public information if trading on the information was reasonably foreseeable. The proposed legislation follows the December 2014 Newman decision by the Second Circuit Court of Appeals overturning the insider trading convictions of two portfolio managers and clarifying the government's burden of proof for establishing tippee liability. Reuters quotes Columbia Law School Prof. John Coffee as characterizing the bill as "an overreaction that would override not just the 2nd circuit ruling but years of precedent and create 'considerable uncertainty and chaos for the security analysts as a group.'"

Another bill - introduced in the House - would eliminate the "personal benefit" requirement entirely. See also this New York Times article.

Senate Banking Committee Seeks Dodd-Frank Reform, Financial Regulatory Burden Relief

Senate Banking Committee Chair Richard Shelby reportedly will hold the third of four hearings this week in his attempts to find areas of bipartisan agreement to reduce Dodd-Frank-imposed burdens on financial institutions. The Financial Times notes easing regulations imposed on community banks, reducing the number of medium-sized banks classified as "systemically important," and improving the transparency of the Federal Reserve as among the areas of potential bipartisan agreement. We previously reported SEC Commissioner Gallagher's recent unveiling of this revealing diagram depicting the rules applicable to U.S. services financial holding companies since Dodd-Frank's enactment in July 2010.

NASAA Questions Prudence of Venture Exchanges for Small, Emerging Companies

In this written statement submitted to the Senate Committee on Banking, Housing and Urban Affairs last week in connection with a subcommittee hearing on venture exchanges and small-cap companies, NASAA (North American Securities Administrators Association) President William Beatty outlined existing means available to small, emerging companies to access investment capital, and expressed concerns about risks associated with creating venture exchanges. Characterizing venture exchanges generally as lacking rigorous disclosure and listing standards, he indicated that there should be further discussion and diligence (including a potential SEC concept release) about the appropriate scope of regulatory relief for venture exchange securities and investors proposed to be served by such exchanges.

See also this Jim Hamilton's World of Securities Regulation blog.

Last week, a bill was introduced in the Delaware House proposing a streamlined arbitration process for businesses as an alternative to other means of dispute resolution. According to the FAQs, the Act is designed to address a growing need for sophisticated parties engaged in complex commercial transactions to have their disputes resolved promptly and cost-effectively through "old-style" arbitration where the parties forego costly and time-consuming, pre-hearing evidence-gathering in exchange for prompt dispute resolution.

Among other things, the Act generally requires all arbitrations to be completed within 120 days. The Act is available only to businesses, one of which must be a business organization formed in Delaware or with its principal place of business in the state.

New UK Banker "Fitness" Rules Will Mandate Annual Health Check-Ups

Earlier this week, the UK's Financial Conduct Authority and Prudential Regulation Authority (PRA) published near-final rules and further information about a new regulatory scheme covering UK banking institutions. Driven by the 2008-09 financial crisis, the new regulations propose changes to the way UK financial institution employees are held accountable. Notably, the new rules will require that covered bankers undergo an annual health check-up "to assess the 'fitness and propriety' of staff who are 'deemed capable of causing significant harm to the firm or any of its customers.'" In addition, a joint consultation paper was issued in anticipation of legislation that will extend the regulatory scheme to UK branches of overseas banks and PRA-designated investment firms.  Will there be a "say on blood pressure" vote?

Business Roundtable Expresses Concerns to SEC About Rule 14a-8(i)(9) Action

The Business Roundtable sent this letter to SEC Chair White last week expressing its concerns about Staff's recent Rule 14a-8 decisions reversing its prior positions on the excludability of independent board chair proposals (which we reported on here) and 14a-8(i)(9) conflicting proposals specifically, and the no-action process more generally:

Unanticipated and delayed changes of course by the Staff creates significant disruption for companies, their boards and shareholders, and undermines the predictability and appearance of impartiality of the shareholder proposal no-action letter process. The costs of shareholder proposals to companies and their shareholders are already significant and the recent developments have significantly increased costs of compliance with Rule 14a-8 to companies. These costs include board, management and outside advisor time and other significant resources that, in our opinion, simply do not enhance shareholder value. To make matters worse, the Staff's recent reversals occurred late in the proxy season, at a time when many companies are on the verge of filing their proxy materials for upcoming annual meetings. Boards of directors take shareholder engagement seriously, including responding to shareholder proposals and in many instances have been considering these shareholder proposals for several months. In light of their fiduciary duty to act in the best interests of all shareholders, boards often need time to consult with advisors, discuss possible responses with shareholders, receive recommendations from the governance committee and discuss next steps at board meetings that were scheduled months in advance. However, the Staff's sudden decision to reverse course so late in the proxy preparation process creates a situation where alternatives for responding to shareholder proposals may no longer be feasible for many companies and their boards.

The letter encourages Chair White to consider ways to increase the "reliability, appearance of impartiality and responsiveness" of the no-action letter process. Watch for a Society comment letter on Rule 14a-8(i)(9) next week.
 

SEC Denies No-Action Relief for Shareholder Proposal to Break Up Bank of America

Earlier this week, SEC Staff declined Bank of America's request for no-action under Rule 14a-8(i)(2), (i)(3) and (i)(7) in response to shareholder proponent (consumer rights advocate) Public Citizen's proposal to break up the bank. The proposal urges the board to promptly appoint a committee to develop a plan for divesting all non-core banking business segments. This is reportedly the first time the SEC has supported a shareholder proposal to split up a major bank.

Proactive Proxy Disclosure Suggested to Address Change in Pension Value Assumptions

Earlier this week, Winston & Strawn Mike Melbinger's compensation blog touted GE's recently filed proxy statement accrued pension benefits disclosure, which proactively addresses measurable increases in executive pension values due to assumption changes that will impact many companies' 2015 proxy disclosures. Specifically, updated mortality tables projecting longer life expectancies and changes in interest or discount rates directly increase the change in pension values reported in the proxy statement's Summary Compensation Table and Pension Benefits Table. The blog includes relevant excerpts from GE's proxy that Mike suggests other companies consider to proactively counter the negative optics of the disclosure. See also this Towers Watson bulletin.

ISS Releases 2015 Board Practices Study

Earlier this week, ISS released its 2015 Board Practices Study for S&P 1,500 companies. Key findings include:

• Prevalence of independent chairs continues to rise, while combined chair/CEO positions are declining. However, the majority of independent board leaders are still lead directors.
• Over half of all S&P 1,500 companies now have a majority vote standard for director elections for the first time. Nearly 90% of S&P 500 companies have a majority vote standard.
• Number of female directorships increased by 2% to 16% of all board seats. 81% of companies have at least one female director - a new high.
• Board refreshment and director turnover increased in 2014, as evidenced by both a decline in average director tenure and average director age.
• New director profiles reflect directors who are younger, serve on fewer (if any) boards, are still employed and more likely to be female or an ethnic minority.

ISS Burn Rate Caps: 2009 to 2015 

Exequity Executive Compensation Consultant Edward Hauder's blog includes this presentation detailing the ISS burn rate caps for the period 2009 - 2014 and industry benchmarks for 2015, and discussing the changes made to the burn rate for 2015.

Norges Bank just issued this position paper discussing arguments in favor of and against proxy access, and indicating its preference for a 3/3/20% formula - i.e., 3% ownership for 3 years for 20% of the board seats.

Citigroup was able to obtain proxy access proposal proponent Jim McRitchie's agreement to amend his 3%/3 years/25% (of the board) proposal, and will now support the amended proposal 
(≤20 shareholders owning 3%/3 years/20%) at its upcoming meeting.

SEC Staff granted no-action relief to GE to omit a shareholder's proxy access proposal on "subtantially implemented" grounds (Rule 14a-8(i)(10)) after the company amended its bylaws to include a proxy access right for ≤ 20 shareholders owning 3% for 3 years to nominate 20% of the board. Although the proponent's proxy access proposal had no aggregation limitations, Staff concurred that "the board has adopted a proxy access bylaw that addresses the proposal's essential objective." GE had previously sought and been denied no-action relief for that proposal on other grounds.

TIAA-CREF reportedly sent a letter last week to its top 100 portfolio companies seeking their adoption of proxy access bylaws with a 3% ownership level. Generally, TIAA-CREF's supplemental policies provide that it will consider shareholder proxy access proposals on a case-by-case basis and, in making its voting decision, "will consider several factors including but not limited to: current performance of the company, minimum filing thresholds, existing governance issues and board/management responsiveness to material shareholder concerns."

Davis Polk & Wardwell outlines a sensible, user-friendly proxy access decision framework for companies that aren't facing the immediate pressure of a proxy access shareholder proposal in this recent post.

Consumer Group Requests SEC Focus on Retail Investor Protection Measures

A consumer group coalition including the AFL-CIO and the Consumer Federation of America sent this letter to SEC Chair White last week expressing its concerns about the SEC's inadequate focus on retail investor protections as evidenced by the SEC's alleged attention to cost-saving initiatives and associated lack of progress on other issues like universal proxy, executive compensation and swap rules, and market structure issues.

Noting retail investors' heavy reliance on the recommendations of financial advisers, the letter outlines a number of areas believed to be in need of action/reform including adoption and enforcement of a uniform fiduciary duty standard, pre-engagement disclosure, conflicts of interest, compensation disclosure and forced arbitration. In addition, the coalition recommends specific areas of investment product disclosure in need of improvement and suggests the Commission even consider whether certain types of investments should simply be off-limits to unsophisticated retail investors. See also this Investment News article.

In related news, SEC Chair White was quoted at a Securities Industry and Financial Markets Association meeting this week as saying that the agency "should implement a uniform fiduciary duty for broker-dealers and investment advisers where the standard is to act in the best interest of the investor."

Investor & Executive Group Focuses on Promoting Long-Term Enterprise Value

A group of high-level executives and institutional investors calling itself "Focusing Capital on the Long Term" reportedly discussed strategies last week for enabling company executives to comfortably make decisions supporting long-term growth despite (or ideally, without) short-term thinking pressures from investors. The forum follows a 2013 McKinsey/CPPIB (Canadian Pension Plan Investment Board) study that revealed perceptions that short-term result pressures were intensifying. Specifically, based on an early 2013 survey of over 1,000 directors and executives:

• 63% of respondents said the pressure to generate strong short-term results had increased over the previous five years.
• 79% felt especially pressured to demonstrate strong financial performance over a period of just two years or less.
• 44% said they use a time horizon of less than three years in setting strategy.
• 73% said they should use a time horizon of more than three years.
• 86% declared that using a longer time horizon to make business decisions would positively affect corporate performance in a number of ways, including strengthening financial returns and increasing innovation.

According to the study, the disconnect between what executives believed they should do and what they actually do stemmed from board pressure to deliver on short-term performance, which, in turn, was exerted on boards by institutional and other investors. The study concluded that the best way to reverse the short-termism trend was to change the investment strategies and approaches of the major asset owners such as pension funds, insurance firms and mutual funds. 

In related news, see this new essay from Spencer Stuart on the role of long-term planning in board creation and effectiveness - part of a more comprehensive essay collection reflecting the views of CEOs, directors, investors and regulators about what it will take to change the current (short-termism) system.

Federal Court Ruling Threatens Delaware Unclaimed Property Law

A suit by International Paper subsidiary Temple-Inland will proceed against the state of Delaware based on an alleged "unfair" $1.4 million assessment of uncashed acounts payable and payroll checks from 1986, under its unclaimed property law. Temple-Inland claims that, among other things, the state violated the company's constitutional rights and took company property without just compensation. The action takes aim at Delaware's controversial unclaimed property law, which requires Delaware companies to relinquish to the state unclaimed property or its equivalent value if they can't locate the owner. See also this delawareonline article.

Denial of Whistleblower Award for Information Submitted Pre Dodd-Frank Upheld

Last week, in Stryker v. SEC , the Second Circuit upheld the SEC's denial of an award to a whistleblower who had submitted information to the SEC prior to Dodd-Frank's July 21, 2010 enactment date, which the SEC relied upon in a successful enforcement action. The court denied the whistleblower's petiton for review based on the fact that his information (i) didn't conform to the SEC's rules, which disqualify information submitted prior to the enactment date [Rule 21F-4(b)(1)(iv)], and (ii) didn't fall within Congress's safe harbor, which excluded from protection information submitted prior to Dodd-Frank's enactment date, but protected information provided to the SEC after Dodd-Frank was enacted but prior to the effective date of regulations the SEC was expected to promulgate pursuant to its rulemaking authority.

Del. Senate Confirms Collins Seitz to Delaware Supreme Court
 

The Delaware Senate unanimously confirmed yesterday the nomination of Collins J. (C.J.) Seitz, Jr., to serve on the Delaware Supreme Court, replacing recently retired Justice Henry duPont Ridgely. The Senate also unanimously confirmed the nominations of Judge Calvin L. Scott, Jr. for reappointment and Jeffrey J. Clark for appointment to the Delaware Superior Court. As previously reported, Gov. Markell announced the nominations in February.

Chief Justice Strine on the Reality of Delaware Corporate Law

In this newly posted research paper titled "The Dangers of Denial: The Need for a Clear-Eyed Understanding of the Power and Accountability Structure Established by Delaware General Corporation Law," from the University of Pennsylvania Law School Institute for Law and Economics, Delaware Supreme Court Chief Justice Strine admonishes those who argue that directors may subordinate what they believe to be best for stockholder welfare to other interests such as company employees and/or customers, the environment, charitable causes, the community and society generally, to be "clear-eyed" and understand "how things are" - not how one wishes them to be. He claims that such a view ignores certain structural features of Delaware corporation law such as stockholder welfare-focused voting, approval and enforcement rights, as well as judge-made Delaware common law.

If we wish to make the corporation more socially responsible, therefore, we must do it the proper way. We must address the duties and the incentives of the stockholders themselves.... In so doing, we must recognize that directors are increasingly vulnerable to pressure from activist investors and shareholder groups with short-term objectives, and that this pressure may logically lead to strategies that sacrifice long-term performance for short-term shareholder wealth. The real world power of the direct stockholders of public companies has rendered their boards more directly subject to the immediate whims of stockholders, as breaking mechanisms like classified boards, poison pills, and other checks on stockholder direct democracy have rapidly eroded.

If we believe that other constituencies should be given more protection within corporation law itself, then statutes should be adopted giving them enforceable rights that they can wield. The benefit corporation is a modest, but genuine, example of that kind of step forward. Even more, if interests such as the environment, workers, and consumers are to be protected, then what is required is a revival of effective externality regulation that gives these interests more effective and timely protection. Critically, this externality regulation must be undertaken on a more global scale to match the regulatory structure to the scope of corporate conduct's impact in a globalizing economy. (footnotes omitted)

Study: Good Performance on Material Sustainability Issues Linked to Better Performance

This new SSRN paper titled "Corporate Sustainability: First Evidence on Materiality" by Harvard Profs. Khan, Serafeim and Yoon discusses a study that distinguished material from immaterial sustainability issues and purportedly found that companies with good performance on material sustainability issues significantly financially outperform companies with poor performance on those issues. Companies with good performance on immaterial sustainability issues allegedly don't out- or underperform companies with poor performance on those same issues. However, the authors state that companies with good performance on material issues and concurrently poor performance on immaterial issues perform even better, suggesting that - while investments in material sustainability issues may be value-enhancing for shareholders - companies' investment in immaterial sustainability may be, at a minimum, inefficient. The study used materiality guidance from SASB.

This week's highlighted question from the Huddle is:

We are assessing the size of Corporate Secretary Office. Would you share the number of corporate secretaries and assistant corporate secretaries you have and the number of board and board committee meetings they handle each year?

This question generated a lot of activity and many excellent answers (too many to note here) including:

This really depends on the size of the company. Where I worked previously, there was the Corporate Secretary, the Administrator to the Corporate Secretary's Office, and two Executive Legal Assistants that assisted the Administrator. There were a total of 23-25 entities that they were responsible for coordinating all of the meetings for, but three of the larger entities had quarterly Board Meetings and several Committee meetings throughout the year (that was just three of the entities). I think even more staff could be utilized for this example due to the amount of entities that the Corporate Secretary's office supported.

At my current company, there is myself (Corporate Secretary) and my assistant. We have monthly public Committee and Board Meetings, as well as monthly pre-meetings. We are trying to go full digital for all documents to cut down on some of the busy work.

I think going digital has assisted in cutting down staff at many companies, but you need to ensure items do not slip through the cracks and there are enough of the appropriate eyes reviewing details and documents.
 

Check out the Society Huddle.