Come and meet your investors at the Society National Conference. We will have a representative of each of the following institutional investors:

• BlackRock
• CalPERS 
• CalSTRS
• Capital Research and Management Company
• Columbia Management
• Morgan Stanley Investment Management
• State Board of Administration of Florida
• TIAA-CREF
• Vanguard (expected)

First come, first served to small-cap and mid-cap registrants for this Investor Forum!

 

With 28 breakouts to choose from, you can customize your own conference experience. Come to Chicago to "Connect, Communicate, Collaborate" with colleagues and industry experts. 

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

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

If you are interested in making a contribution to the conference fund or other sponsorship opportunities click here.

SEC Chair White Discusses Whistleblower Program, Use of Confidentiality Agreements

In a speech last week at the Ray Garrett, Jr. Corporate and Securities Law Institute, SEC Chair White described the Dodd-Frank whistleblower award program as a "game changer" and the SEC, increasingly, as the "whistleblower's advocate." She touted the program's successes (e.g., increasing volume and quality of tips), and identified some of the challenges including "serial submitters" and the need to address case types of first impression.

Chair White also addressed the SEC's recent enforcement action against KBR for its use of confidentiality agreements with employees/former employees that were deemed by Enforcement to potentially stifle the whistleblowing process in violation of Rule 21F-17. She said that the confidentiality agreement violated the plain language of the Rule, but that the action doesn't signify that all confidentiality agreements violate the Rule:

Rule 21F-17 clearly states that no action may be taken to impede an individual from communicating directly with the Commission staff about possible securities law violations, including by enforcing or threatening to enforce confidentiality agreements that could be read to limit such communications.  The agreement in question ran afoul of the prohibition by, among other things, covering underlying facts and requiring pre-approval by the company's legal department before reporting information and threatening disciplinary action for violating this pre-approval requirement.  Requiring pre-approval before reporting may have, among other chilling effects, discouraged a potential whistleblower who wished to remain anonymous, which is an enormously important safeguard.  This confidentiality agreement, in our view, violated the plain language of Rule 21F-17.  And enforcing a rule for the first time does not mean that we are engaged in rulemaking by enforcement. 

 

The rule is not, however, a sweeping prohibition on the use of confidentiality agreements.  Companies conducting internal investigations can still give the standard Upjohn warnings that explain the scope of the attorney-client privilege in that setting.  Companies may continue to protect their trade secrets or other confidential information through the use of properly drawn confidentiality and severance agreements. 

 

The SEC is not trying to dictate the language of these agreements or warnings - that is the company's responsibility.  But a company needs to speak clearly in and about confidentiality provisions, so that employees, most of whom are not lawyers, understand that it is always permissible to report possible securities laws violations to the Commission.  

Issuers should also note another whistleblower protection-related concern identified by Chair White that the SEC is apparently exploring for potential enforcement - i.e., agreements mandating that employees forego any whistleblower award or represent that they haven't made a prior report of misconduct to the SEC as a precondition to obtaining a severance payment.

SEC May Develop Guidance on Cases Brought to ALJs vs. Federal District Court 

In a hearing yesterday before the Financial Services and General Government Subcommittee of the Senate Appropriations Committee to review the SEC's 2016 budget, SEC Chair White said the Commission was considering issuing public guidelines or staff guidance addressing which enforcement cases are brought to ALJs vs. federal district court. Her remarks are captured in this hearing summary.  

See also Chair White's written testimony and this Reuters article.

SEC Commissioner Stein Addresses Short-Termism and Board Diversity

In her remarks last week to the U.S. Treasury Department's Corporate Women in Finance Symposium, SEC Commissioner Stein discussed concerns about short-termism in the financial markets and the lack of sufficient board diversity. On short-termism, Commissioner Stein focused on the uptick in stock buybacks, which she indicated arguably demonstrate a short-term orientation potentially triggered by, e.g., tax incentives, quarterly earnings targets, at the expense of innovation and capital formation. On the flip side, she also noted recent research purportedly demonstrating no conflict between short-term investment horizons and companies' long-term performance.

Commissioner Stein identified a number of suggestions that have been raised to meaningfully move the needle on board diversity including: requiring independent, third party evaluations of directors to help identify potentially underperforming directors, requiring proxy disclosure of board skill & qualification matrices (which we reported on here), increased shareholder engagement and a universal proxy (the latter two topics having been discussed at the SEC's recent proxy voting roundtable).
 

DOJ Issues Cybersecurity Guidance Geared Toward Smaller Organizations

The DOJ's Cybersecurity Unit released new cybersecurity guidance last week, which was characterized by Assistant Attorney General Leslie Caldwell as "best practices for victims and potential victims to address the risk of data breaches, before, during and after cyber attacks and intrusions."  It was reportedly prepared for smaller, less well-resourced organizations, but indicates that larger organizations with more experience in handling cyber incidents may also benefit from it. The guidance sets forth in a logical, user-friendly manner:

• Steps to take before a cyber intrusion or attack occurs
• How to respond to an intrusion, i.e., execute on the company's incident response plan
• What not to do following a cyber incident, and
• What to do after a cyber incident is addressed

In related news, the SEC's IM Division issued this guidance update last week recommending that investment funds and advisors conduct periodic cybersecurity assessments, and develop a cybersecurity strategy that is then implemented through written policies and procedures and training for officers and employees.  

Canadian Securities Administrators Issues Proxy Advisor Guidance 

Further to its previous Consultation (see this Summary of Comments/CSA Responses) and review of certain international initiatives, the Canadian Securities Administrators issued guidance last week for proxy advisors. The policy addresses these four areas:

• Identification, management and mitigation of actual or potential conflicts of interest;
• Transparency and accuracy of vote recommendations;
• Development of proxy voting guidelines; and
• Communications with clients, market participants, other stakeholders, the media and the public.

Noteworthy changes since the initial Consultation include recommendations for proxy advisors to:

• Take into account relevant characteristics of the issuers - such as size, industry and governance structure - when developing proxy voting guidelines (Section 2.3(2)(c)), and
• Generally describe on their websites practices concerning hiring, training and retaining of individuals to ensure that they have the appropriate experience, competencies, skills and knowledge to develop proxy voting guidelines (Sections 2.2(5), 2.3(5)).

Capital Formation & Regulatory Burden Reduction Addressed at House Committee Hearing 

The House Committee on Financial Services Capital Markets & Government Sponsored Enterprises Subcommittee held a hearing last week on "Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens." Witnesses (including CCMC's Tom Quaadman) discussed 12 legislative proposals addressing capital formation, particularly those aimed at smaller issuers and emerging growth companies, including the Disclosure Modernization and Simplification Act of 2015 (HR 1525) and the Small Company Disclosure Simplification Act (HR 1965). See SIFMA's Hearing Summary and NASAA's Written Statement.  

DGCL Fee-Shifting Bylaw and Forum Selection Amendments Introduced in Senate 

Proposed amendments concerning fee-shifting and forum selection provisions that were previously approved by Corporation Law Section of the Delaware Bar were introduced last week in the Senate with an August 1, 2015 effective date. As reported previously, the legislation would prohibit adoption of fee-shifting provisions and validate forum selection provisions in corporate charters and bylaws. 

NYSE Proposal Exempts New Companies From Shareholder Approval for Certain Share Issuances 

Last week, the NYSE filed a proposed rule change with the SEC to amend Sections 312.03(b) and 312.04 of the NYSE Listed Company Manual to exempt "Early Stage Companies" from having to obtain shareholder approval before issuing shares for cash to related parties, affiliates of related parties or entities in which a related party has a substantial interest. The proposal is prompted by the NYSE's recognition that early stage companies frequently have to rely on private placement share issuances to their founders or other significant existing shareholders or their executive officers or directors for capital-raising, and are generally not well-positioned to accommodate the time and expense associated with obtaining shareholder approval.

As defined in the rule text, "'Early Stage Company' means a company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation and any Early Stage Company will lose that designation at any time after listing on the Exchange that it files an annual report with the SEC in which it reports two consecutive fiscal years in which it has revenues greater than $20 million in each year."  

PCAOB Member Hanson Discusses Audit Committee Member Qualifications 

At the Citadel Directors' Institute last week, PCAOB Board Member Jay Hanson discussed the directors' "gatekeeper" role and the PCAOB's audit committee and issuer outreach efforts. While his remarks largely reiterated audit committee and issuer requests and concerns shared previously, he noted hearing concerns about some audit committee members' objectives and qualifications, including a call to make more rigorous the "audit committee financial expert" requirements:  

At the same time, we hear that there are still audit committee members whose primary focus is to support management and negotiate the lowest audit fee possible. Some audit committees, we hear, are not fully qualified to oversee the financial reporting process or external auditor, because of a lack of experience among committee members in accounting, auditing and financial reporting. While this is not within the PCAOB's jurisdiction, some have urged that qualifications for the so-called "financial expert" on the audit committee be made more rigorous, in order to enhance the audit committee's ability to provide effective oversight in these areas.

Hanson also noted that the Board has begun collecting cost/benefit information of any new requirements under consideration in recent standard-setting projects to help ensure that the PCAOB's regulatory activities are well-balanced.

Lead Petitioner in Dell Appraisal Case, T. Rowe Price, Voted in Favor of Merger

USA Today reported on Sunday that T. Rowe Price, who is among the lead petitioners in the Dell appraisal case and publicly vocalized its opposition to the merger, actually voted in favor of the it. In the article, T. Rowe Price notes the discrepancy between its stated opposition and its voting instructions, but characterizes that as "irrelevant" for purposes of its ability to pursue the appraisal. A securities lawyer with Lowenstein Sandler and other experts apparently disagree, indicating that an investor's vote in favor effectively relinquishes their appraisal rights. 

Debt Acceleration Provisions Triggered by Board Turnover Challenged as Discouraging Activists

MFM Resorts International and HSN Inc. are reportedly among a number of companies (and their lenders) that have been targeted recently by shareholder derivative suits opposing debt agreement provisions that provide for the company's acceleration of repayment upon a change in composition of the majority of the board. The suits purportedly allege that these provisions "discourage would-be activists by threatening a forced refinancing of the company's borrowings." By the board's permitting the company's entry into an agreement that contains such a provision, directors allegedly violate their fiduciary duties.

Lenders, however, generally favor these provisions because they provide protection against potential adverse implications associated with a change in company leadership (whether activism-prompted or otherwise), including actions that may result in credit rating downgrades. With the uptick in activism and related concerns about potential disruption of board composition, apparently nearly 200 companies have included this type of provision in their loan agreements since the beginning of 2014.

See also Kevin LaCroix's blog discussing these suits in greater detail and the associated D&O insurance implications.

What Does it Take to Ensure ISS's Approval Under its New Equity Plan Scorecard?

In this new opinion piece, Latham & Watkins' Jim Barrall analyzes each of the three pillars - Plan Cost, Grant Practices and Plan Features - that ISS uses to evaluate equity plans under its new Equity Plan Scorecard (see ISS FAQs & Voting Guidelines (p.41)), and guides companies against taking certain actions simply to pass the ISS "test." Each pillar is separately scored based on numerous factors, and then totaled to yield one score. Absent any overriding factors, a total score of 53 or higher purportedly generally results in a favorable recommendation from ISS.

The number of points assigned to each factor is not disclosed, and some points are assigned on a sliding scale, which Jim observes makes it very difficult for companies to ensure they have an adequate number of points to "pass" ISS's test without either engaging ISS's consulting group or making certain plan adjustments based on Plan Features that ISS deems undesirable:

Plan Features Pillar:

• Automatic single-triggered award vesting upon a change in control (CIC);
• Discretionary vesting authority;
• Liberal share recycling on various award types;
• Lack of minimum vesting period for grants made under the plan.

Jim explains that, contrary to ISS's list of objectionable Plan Feature factors, well-designed plans shouldn't require minimum vesting periods or impede directors' business judgment by prohibiting their discretionary vesting authority, and that companies should "strongly resist" taking these actions simply to ensure they have the requisite points for a favorable ISS recommendation. He notes that despite ISS's annual negative recommendation rates of between 25% - 30%, only approximately 0.5% of the approximately 4,000 equity plans brought to a vote between 2011 and 2014 failed to obtain shareholder approval.

Verizon Issues 2015 Data Breach Investigations Report

Verizon's latest Data Breach Investigations Report analyzes over 2,000 confirmed data breaches worldwide impacting both large and small companies across multiple industries. The Report aims to provide useful information about the type/quality/quantity of data breaches and insights on security trends and issues, as well as thoughts on how to respond to threats through the creation of an effective information security program.

Bank of America to Bring Board Chair/CEO Combination to a Shareholder Vote 

On Monday, responding to shareholder input, Bank of America's Lead Director and Chair/CEO sent this letter to the company's stockholders announcing the company's intent to seek shareholder ratification of the board's 2014 bylaw amendment that eliminated the requirement for an independent chair and allowed the board chair and CEO roles to be recombined. The vote will occur no later than the 2016 annual meeting. In 2009, following the financial crisis, shareholders had voted in favor of separation of the roles by 50.3%. The board amended the bylaws without shareholder approval in October 2014 to accommodate CEO Brian Moynihan's appointment as board chair concurrent with its appointment of a lead independent director, a newly established role.  

Annual Meeting Results

Independent Board Chair Proposals Rejected - Several annual meetings with shareholder proposals seeking an independent chair were held this past week.

• AGL Resources reported that a shareholder proposal for an independent chair policy was not approved: 31,717,886 votes For; 51,001,437 votes Against; 751,856 Abstentions; and 20,787,148 Broker Non-Votes.
• Praxair reported that its shareholders rejected a shareholder proposal regarding an independent Board Chairman with 30.04% votes "For" and 69.52% votes "Against."
• A shareholder proposal regarding the adoption of a policy to require an independent chair reportedly did not pass at Wells Fargo: 654,142,627 votes For; 3,335,676,609 votes Against; 20,586,352 Abstentions; and 492,189,750 Broker Non-Votes.
  

Proxy Access Round-Up - Several meetings with proxy access proposals seeking proxy access were held this past week.

• Exelon, which included both management and shareholder advisory proxy access proposals on its ballot, reported approval of its management proposal (For: 325,715,650; Against: 293,786,500; Abstain: 6,179,059; Broker Non-Vote: 101,633,786), and rejection of its shareholder (NYC Comptroller) proposal (For: 270,056,108; Against: 349,307,165; Abstain: 6,317,936; Broker Non-Vote: 101,633,786). The management proposal allows any shareholder or group of up to 20 shareholders owning 5% of the stock for 3 years to nominate up to 20% of the board. As previously reported, Exelon stated in its proxy that abstentions would count as votes "against," and that it intended to bring to a vote at its 2016 annual meeting a binding proposal for proxy access if a majority of shares voted in favor of either proxy access proposal.
• Coca-Cola reported that its proxy access shareholder proposal failed, receiving the support of 40.58% of votes cast vs. 59.42% votes against.
• Marathon Oil's shareholder proxy access proposal was reportedly approved with For: 321,394,551; Against: 191,118,775; Abstain: 5,336,428; Broker Non-Votes: 71,465,754.
• TCF Financial reported approval of its shareholder proxy access proposal: For: 85,542,583; Against: 57,179,413; Abstain: 199,151; Broker Non-Votes 9,630,570.
  

Political Spending & Lobbying Disclosure Proposals Defeated - Meetings with proposals seeking political spending/lobbying-related disclosure fared as follows:

• A shareholder proposal to provide a report on the company's lobbying policies and practices reportedly did not pass at Wells Fargo.
• A stockholder proposal for disclosure of lobbying policies and practices reportedly did not pass at IBM.
• Flour reported that a stockholder proposal seeking reporting on political spending and related policies and procedures was not approved.
• At Spectra Energy, shareholder proposals seeking political contribution and trade association expenditure reporting and related policies and procedures, and lobbying contributions, policies and procedures reporting were reportedly not approved.

Select Other Proposals - Voting Results

• Coca-Cola reported 80.39% support in its say-on-pay vote. ISS had recommended against the executive pay program due to concerns about misalignment of pay and performance, but Glass Lewis and Egan-Jones recommended votes in favor.
• At Marathon Oil, a stockholder proposal seeking a report regarding climate change risk was reportedly not approved.
• AGL Resources reported that a shareholder proposal regarding goals for reducing greenhouse gas emissions did not pass.
• YUM! Brands reported that a shareholder proposal seeking board adoption of a policy concerning accelerated vesting upon a change in control was not approved.
• A stockholder proposal to limit accelerated executive pay reportedly did not pass at IBM.

Online and Virtual-Only Meetings Trending Up, Broadridge Reports

According to Broadridge, about 90 companies held online meetings last year, and more than half of those were virtual-only, NPR reports. Although still relatively rare compared to the number of annual meetings, this represents a significant uptick since 2001, when small company Inforte became the first company to conduct its annual meeting solely online, according to Society member Broc Romanek.

ISS "Cautiously" Supports Incentive Compensation for Activist Director Nominees

ISS has reportedly given "cautious support" to two of Dow Chemical's sitting directors whose contracts provide for stock performance-based "golden leash" payments from activist investor Third Point. The directors were nominated by Third Point last year in settlement of a proxy fight. According to Willkie Farr & Gallagher, which represented Third Point in its activist campaign, the compensation arrangements gave Third Point's nominees the right to receive two cash payments based upon the appreciation of Dow's stock over three and five years.

ISS purportedly will review these types of compensation arrangements on a case-by-case basis. In this case, Willkie Farr notes that ISS's support was based on how these particular arrangements were structured:

ISS noted that Third Point structured the incentive compensation, including the long vesting periods associated with the payments, in a manner designed to address concerns that nominees' interests might conflict with the interests of stockholders. ISS also noted that the arrangements were included in a binding agreement in which Third Point established the payments as one-time grants and relinquished the ability to modify the economic terms of the stock appreciation rights. ISS also noted the lack of direct influence by Third Point over its independent nominees (who constituted a minority of the board), or special communication rights benefiting Third Point. It is also critical to note that the compensation arrangements were not tied to Third Point's returns, or indeed whether Third Point remained an investor in Dow.

As previously reported, these types of incentive compensation arrangements for activist investor nominees have repeatedly raised numerous concerns among the corporate and corporate governance communities, including the potential for conflicts of interest and loyalty and for skewing the director's risk appetite, and the propensity to think and act short-term.

Del. Chancery Weighs in Procedurally on Director Equity Grant-Based Fiduciary Duty Claim

As discussed in this Skadden memo, the Delaware Chancery Court last week in Calma v. Templeton denied defandant's motion to dismiss a claim that the directors breached their fiduciary duties and were unjustly enriched when they granted themselves equity (RSUs) under a shareholder-approved omnibus equity plan where the only limit on compensation imposed by the Plan was that no participant could receive an award covering more than 1 million shares in a calendar year (valued at $55 million at the time of the action). The plaintiff asserted that the defendants had the burden of proof to establish the entire fairness of the awards, as the directors were conflicted in awarding their own compensation and because the Plan lacked meaningful limits. The defendants argued that the stockholders had ratified the awards by approving the overall Plan.

The court held that stockholder ratification of a compensation plan that doesn't specify the actual compensation or set meaningful limits on the amount to be received by directors will be subjected to the entire standard fairness of review, which precludes granting of a motion to dismiss for failure to state a claim, rather than the waste standard of review typically applied to director compensation decisions that involve stockholder ratification.

Utica College Launching Online MPS in Cyber Policy and Risk Analyis

For those interested in all things cyber, Utica College will soon be launching an online Master of Professional Studies program in Cyber Policy (including public policy and cyberspace law) and Cyber Data Fusion & Analysis. The program will be accepting applications shortly and will be launched in August.

Study Examines Link Between Corporate Political Activity & Shareholder Activism

In this new paper, "Active Firms and Active Shareholders: Corporate Political Activity and Shareholder Proposals," Research Assistant Professor, University of Virginia School of Law Geeyoung Min and Assistant Professor, Vanderbilt University Hye Young You, examine the link between corporate political activity and shareholder activism using data regarding market performance, corporate governance and social shareholder proposals, governance structure, ownership structure and political activity for S&P 500 companies over a six-year period. They find, among other things, that:

• Companies that spend more in campaign contributions and lobbying are more likely to be targeted by both governance and social proposals.
• Public pension fund and union sponsors disproportionately target Republican-leaning companies. According to the authors, this finding suggests that increasing corporate political activity can intensify tension between management and public pension fund and labor union shareholders and lead to more activism by these shareholders.

This week's highlighted question from the Huddle is:

I am interested in knowing whether nominees to your Board of Directors receive an "offer letter" prior to the Nominating Committee's recommendation to the full Board and, if so, who authors the letter and what provisions it contains.

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

Under our Corporate Governance Guidelines, the offer to join the board is to be extended jointly by the board's chairman and the chairman of the Nominating and Governance Committee, who also serves as presiding director. The offer is extended on behalf of the entire board, but only after the board has decided to appoint the candidate, subject to his or her acceptance. 

 

As a practical matter, the candidate has already indicated his or her willingness to join the board and all of the interviews with other directors, due diligence, and background checks have been completed. In short, the letter to the candidate merely confirms that the board has appointed the director, subject to confirmation of his or her willingness to serve. The letter itself is brief and just confirms the effective date of the appointment, the first meeting the director is expected to attend, and an undertaking to provide a draft of the 8-K to the director for review. My office follows up with all of the necessary information a new director needs, prepares the Form 3 and schedules the orientation sessions.  

Check out the Society Huddle.