Current and former CorpFin Directors, Higgins, Cross and Beller to update Society attendees on "SEC Developments," and will tackle such issues as proxy access, pay ratio, compensation-related proposals and say on pay.
 

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Third Circuit Reverses District Court in Trinity Wall Street v. Wal-Mart Stores; Allows Wal-Mart to Exclude Shareholder Proposal

An order issued on Tuesday (opinion to come later), by Third Circuit Judge Ambro states:

The District Court order entered on December 8, 2014 granting Appellee's motion for summary judgment with respect to Count I of the Verified Amended Complaint is reversed and the permanent injunction it entered is vacated. Consequently, Wal-Mart may exclude Trinity's Proposal from its 2015 proxy materials.

Chair White Questioned on Universal Proxy Ballot and Pay Ratio Rulemaking by House Appropriations Committee

On Wednesday, Chair White gave testimony to the House Appropriations Subcommittee on Financial Service and General Government defending her request to fund the agency at a level of $1.722 billion, which would include a new headcount of 431 with 180 of those designated as examiners of investment advisers.

The questioning primarily focused on the agency's handling of the fiduciary standard, FSOC, market structure, the Volcker rule, and IT resources. However, near the end - at one hour and 16 minutes into the webcast - Ranking Member Serrano (D-NY 15th District) asked what was remaining to be done under the Dodd-Frank Act. Chair White responded that Title VII was a priority in 2015, and that compensation regulation also remained. 

At one hour and 25 minutes, Congressman Yoder (R-KS 3rd District) asked the Chair if she planned to do rulemaking on universal proxy ballots.  Chair White responded that a number of proxy issues were "under study and review."  Questioned by the Roundtable earlier this year, she offered her takeaway: there is concern that voters who are physically present at a meeting have the ability to vote for all candidates, while those voting by proxy do not. She noted that there are a number of issues and complexities, and gave specific examples, such as whether candidates should be listed alphabetically, and who drafts the supporting statement.  "The devil is in the details," she concluded.

Congressman Yoder asked again whether she was planning rulemaking, and she responded that there was nothing on the Reg Flex calendar, but that the staff was discussing it.

The very last question came at one hour, 30 minutes by Congresswoman Herrera Beutler (R-WA 3rd District) on pay ratio. The Congresswoman pressed Chair White on the purpose of the rule (merely to shame), the prospects for a final rule (could get overturned by a court), the time and expense to draft it (7,000 man hours already), and then said "Is this something you want help with not having to do?" Chair White responded that it was for Congress to decide and that she was given a mandate, indeed 100 mandates for writing rules, all of which together was a challenge for the agency. In response to further questioning, Chair White said that each of the mandated rules had been started, and that some period of time had been put into each.

Mark Wyatt Named Acting Director of SEC's OCIE 

The SEC announced last week the appointment of Marc Wyatt as Acting Director of the OCIE, succeeding Andrew Bowden who is departing at the end of April to rejoin the private sector. Mr. Wyatt has served as the Deputy Director of OCIE since October 2014, where he has led the Technology Controls Program and served as a member of the office's Operating and Executive Committees. He joined the SEC in December 2012 as a senior specialized examiner focused on examinations of advisers to hedge funds and private equity funds.  

Delaware Bar Corporation Law Section Approves Proposed Fee-Shifting and Forum Selection Amendments 

As discussed in Cydney Posner's blog, the Corporation Law Section of the Delaware Bar approved proposed amendments to the Delaware General Corporation Law concerning fee-shifting and forum selection provisions. As reported previously, the proposed legislation would prohibit adoption of fee-shifting provisions and validate forum selection provisions in corporate charters and bylaws.

See also Columbia University Law School Professor John Coffee Jr.'s recent post discussing the fee-shifting bylaws "debate" and critiquing the legislation: "Yet, even with a battle brewing, no one seems to have read the statute closely. Had these commentators focused on the actual language of the proposed legislation, they would have discovered that the legislation does not quite do what either side in this debate thinks it does."

FASB Defers Implementation of Converged Revenue Recognition Standard

Thanks to Dan Goelzer of Baker and McKenzie for another Audit Update covering the last two months. Goelzer reports that on April 1, FASB tentatively decided to defer the effective date of its new standard, adopted by both FASB and the IASB, on revenue recognition for one year. This would mean that, if approved:

the revenue recognition standard will be effective for public companies for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Private companies will be required to apply the new standard to annual reporting periods beginning after December 15, 2018. 

Goelzer further explains that the new revenue recognition framework "will be based on identifying contracts between the company and its customers and determining when the company has fulfilled its performance obligations under those contracts. The standard also contains new disclosure requirements designed to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers."

The Audit Update also includes articles on audit deficiencies found by international audit regulators, the PCAOB's release of the 2013 Grant Thornton Inspection Report, and pressures on internal audit departments.

IAC Discusses Interim Voting Reports

The IAC webcast of the meeting on April 9 has not yet been archived, but one listener reported the following on the discussion of interim vote results being provided to investors on their proposals. One panelist expressed the view that it was unfair for issuers to have information that the investors do not have. A Commission staff person noted that the impartiality rule "hook" investors were trying to use required Broadridge to share the interim vote reports and does not provide a general "impartiality" rule for the entire proxy process. The staff person then noted that the SEC is considering internally what it should do on this issue.

Anne Sheehan then noted that the Society/CII have been discussing this and trying to come to an agreed-upon solution. She also stressed that Broadridge should give the vote results to investors in a "timely fashion." Sheehan also stated that the IAC would ask the SEC to get involved changing the rules or perhaps in other ways. Ann Yerger also weighed in, stating that there was "quite a gulf" on "very basic issues" between CII's position and that of the Society. She noted that CII's strongly held view is that the Commission ultimately needs to be involved and that the market solution appears to be "inadequate."

Shareholder Annual Meeting Questions Predicted by PWC and BDO

Goelzer's Audit Update also includes a list of expected questions from shareholders attending annual meetings this year, on the following topics:

• Foreign Corrupt Practices Act
• Executive Compensation, including Pay Disparity
• Dodd-Frank Whistleblower Program
• Conflict Minerals
• Revenue Recognition
• Income Taxes
• Cybersecurity
• Director Elections: Board Declassification and Majority Voting
• Proxy Access
• Risk Committees
• Succession Planning
• Related Parties & Significant Unusual Transactions
• Internal Controls
• Global Economic Concerns
• M&A Opportunities/Takeover Defenses and Spinoffs
• Mid-Year Federal Reserve Interest Rate Hike
• Disaster Planning

Yum! Brands Files Supplemental Proxy on ISS Mistakes in Compensation Analysis

Yum! Brands filed supplemental materials this week seeking support for its say on pay vote and noting concerns with the ISS report which it claims, "made several observations that are incorrect or incomplete and, therefore, deserve direct response." Yum! notes that its new CEO pay is set below the 50th percentile compared to the peer group in this role - a change from the previous CEO's pay which was set at the 75th percentile. "We believe this change should be taken into consideration when deciding whether to support compensation for our Named Executive Officers."

Yum! Also defends its PSP as follows:

Our plan design compares very favorably with and in several respects is more rigorous than the predominant practice, for example:

• 52% of the companies set the maximum payout at the 85th percentile or lower, whereas our maximum is set at the 90th percentile.
• 92% of the companies set threshold payout at the 35th percentile or lower, whereas our threshold is set at the 40th percentile.
• Only 27% of companies use an absolute TSR requirement in order to trigger any payout-and we believe such a provision would be contrary to the purpose of the plan and shareholder interests of motivating superior results under any market conditions.
• However, our plan, unlike most, does cap potential payouts at no more than target if absolute TSR is less than zero-even if the relative ranking were to otherwise indicate a higher earned award.

Yum! also notes that the shareholder proposal to eliminate accelerated vesting on a change of control would undermine management's incentives to complete a transaction, noting that:

[A]ccelerated vesting provides a strong incentive to maximize shareholder value and acts as a retention mechanism for our executives during the uncertain times associated with a change in control. In contrast, if full acceleration is not provided, the incentive structure will be undercut as management's incentives will not be aligned with shareholders to enhance value by completing a transaction. It is essential in so critical a situation that management be focused on shareholder interests and not their personal situation.

SEC Grants Issuer No-Action Relief Based on False & Misleading Supporting Statement

In this post, Ning Chiu of Davis Polk discusses the SEC's recent and exceedingly rare grant of no-action relief to Ferro Corporation based on Rule 14a-8(i)(3)'s "false and misleading" grounds. The proposal, submitted by Ken Steiner, urged the board to take the necessary steps to reincorporate in Delaware rather than Ohio, its current state of incorporation. The SEC staff concluded that the proposal could be excluded because the company had "demonstrated objectively that certain factual statements in the supporting statement are materially false and misleading such that the proposal as a whole is materially false and misleading."

Blackrock CEO Fink Tells Companies To Focus on Long Term; Suggests Three Year Cap Gains Tax Treatment

In a letter made public this week, Blackrock CEO Larry Fink tells CEOs to stand firm against the short term pressures of activists and earnings cycles, and to focus on the long term sustainability of their enterprises:

This pressure originates from a number of sources-the proliferation of activist shareholders seeking immediate returns, the ever-increasing velocity of capital, a media landscape defined by the 24/7 news cycle and a shrinking attention span, and public policy that fails to encourage truly long-term investment.

He notes that companies are "underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth" in favor of buybacks and dividend increases. Fink pledges support for boards that resist this pressure:

It is critical, however, to understand that corporate leaders' duty of care and loyalty is not to every investor or trader who owns their companies' shares at any moment in time, but to the company and its long-term owners. Successfully fulfilling that duty requires that corporate leaders engage with a company's long term providers of capital; that they resist the pressure of short-term shareholders to extract value from the company if it would compromise value creation for long-term owners; and, most importantly, that they clearly and effectively articulate their strategy for sustainable long-term growth. Corporate leaders and their companies who follow this model can expect our support .

Finally, he suggests that this is a public policy issue that could be addressed through tax reform, particularly giving long-term capital gains treatment only after three years:

See also this New York Times article from Andrew Ross Sorkin.

Ackman Touts Benefits of Activist Investors; Expresses Concerns About Calls to Shorten 13(d) Reporting Deadline 

As reported by Bloomberg, Pershing Square Capital's Bill Ackman spoke at CII's recent Spring Conference about investor activism:
 

Activist investing is giving the "power back to the owners," said Bill Ackman, founder and CEO of the frequently activist hedge fund Pershing Square Capital. Speaking at the Council of Institutional Investors' spring 2015 conference March 30, Ackman said that shareholder activists provide options, but it's the shareholders who decide. "We will never do anything that's not in the best interest of the owners of the company," said the man whose fund has been behind recent high-profile campaigns with Herbalife Ltd. and Valeant Pharmaceuticals International Inc. 

Ackman noted that there isn't a chief executive officer "in the country who's not afraid that an activist won't buy a stake" in their company. According to Ackman, many CEO want to make changes to their companies, but they don't because the boards are "skittish." He believes the "phenomenon of activism has given boards more backbone in dealing with the CEO." Still, Ackman said it makes sense that CEOs don't love activists. "It's hard to go to the CEO of the company and say, 'look, you're the problem.'" Accordingly, sometimes activism is inherently contentious. However, Ackman argues that although activists are prepared to do things that are openly hostile, it is always in pursuit of the best interest of the shareholders.

Ackman also expressed his concerns about calls (see also Wachtell's more recent post) to amend the Exchange Act Schedule 13(d) beneficial ownership reporting requirements to shorten the 10-day reporting deadline and expand the "beneficial ownership" definition. 

AICD Launches 30% Women on Boards Target for Australian Companies

The Australian Institute of Company Directors (AICD) launched a 30% female directorship target last week - calling on all boards to ensure that at least 30% of their directors are female. Although the initiative is intended to apply to all of the AICD's company members, including small ASX entitites, private businesses and not-for-profits, S&P/ASX200 companies are being asked to meet the new target by the end of 2018. The AICD indicates that it will urge all boards to adopt the target and regularly report on their progress. See also this Fact Sheet.

Study: Women's "Economic Power" Drives Lasting Board Diversity

In related news, a new global University of Cambridge study commissioned by BNY Mellon and Newton Investment Management finds that women's economic power, as defined by expected years of education and percentage participation in the workforce, along with inclusion of a requirement for gender diversity in a corporate governance code, were key drivers of getting and retaining women on boards. Quotas were deemed to be of limited value, i.e., succeeding in getting women on boards, but not in retaining them. Other relevant factors include maternity provisions, female political power and cultural dimensions. The study identified the top performing countries for female economic power as Australia, Norway and Denmark, with the U.S. coming in at #6. See also BNY Mellon's release.

This week's highlighted question from the Huddle is:

I am currently building out a comprehensive electronic database for a company including setting up files for the minutes and consents of the board and stockholders. As I go through the company's historic electronic records for those meetings I'm coming across the agendas, word versions of the minutes and the power point presentations circulated prior to the meetings. It's always been my practice to delete those and keep only the final signed board minutes in the company's record books. Is there a reason I should be keeping any of agendas or PPTs?

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

I received several responses via email. I wanted to thank everyone for taking the time. The consensus seems to be to keep the agendas and presentations.

Check out the Society Huddle.

U.S. Chamber: Fighting Businesses' Regulatory Battle

On Inside America's Boardroom, host TK Kerstetter and Tom Quaadman, Vice President, Center for Capital Markets Competitiveness for the U.S. Chamber of Commerce, discuss what issues, currently pending in various forms, were perceived as either frivolous or potentially harmful to the competitive environment for America's businesses.