The long-awaited U.S. Court of Appeals (3rd Cir.) Opinion for the Trinity v. Wal-Mart case, which affirmed Wal-Mart's ability to exclude Trinity's shareholder proposal (which we previously excerpted here) from its proxy materials under Rule 14a-8(i)(7)'s ordinary business provision, was finally filed this week. The Opinion engages from the outset with this opening:  

"[T]he secret of successful retailing is to give your customers what they want." Sam Walton, SAM WALTON: MADE IN AMERICA 173 (1993). This case involves one shareholder's attempt to affect how Wal-Mart goes about doing that.  

The Court first employed a two-part analysis to determine whether Trinity's proposal dealt with a matter relating to the company's ordinary business operations. Under the first prong of the analysis, the Court, distinguishing between the proposal's form vs. its substance, identified the proposal's subject matter as "how Wal-Mart approaches merchandising decisions involving products that (1) especially endanger public-safety and well-being, (2) have the potential to impair the reputation of the Company, and/or (3) would reasonably be considered by many offensive to the family and community values integral to the company's promotion of the brand." Among other things, the Court rejected the notion that merely requesting board - as opposed to management - oversight or review negates excludability under the Rule: "A contrary holding-that the proposal's subject matter is 'improved corporate governance'-would allow drafters to evade Rule 14a-8(i)(7)'s reach by styling their proposals as requesting board oversight or review. We decline to go in that direction."

Under the second prong, the Court, in assessing whether the subject matter relates to Wal-Mart's ordinary business operations, agreed with Wal-Mart that Trinity's proposal "'seeks to have a [B]oard committee address policies that could (and almost certainly would) shape what products are sold by Wal-Mart'" and thus "strikes at the core of Wal-Mart's business." The Court emphasized that it didn't matter that the proposal didn't dictate a particular outcome (e.g., doesn't direct or demand specific product offerings), as a proposal need only relate to a company's business operations to be excludable under the Rule.  

The Court then addressed the significant social policy exception to the ordinary business exclusion, i.e., whether Trinity's proposal raised a significant policy issue that transcended Wal-Mart's day-to-day business operations, with another two-step analysis: 1) Whether Trinity's proposal raises a "sufficiently significant" policy issue; and 2) If so, does that issue transcend Wal-Mart's ordinary business operations? On this, the Court concluded that even though the proposal arguably raised a matter of sufficiently significant policy ("Yet it is hard to counter that Trinity's proposal doesn't touch the bases of what are significant concerns in our society and corporations in that society"), in that the proposal "related to a policy issue that targets the retailer-consumer interaction, it doesn't raise an issue that transcends Wal- Mart's ordinary business operations, as product selection is the foundation of retail management." The Court noted that management weighs numerous factors - e.g., consumer safety, financial, competitive - in deciding what products to sell, and that although shareholders may inform management's views, they shouldn't usurp management's: "Although shareholders perform a valuable service by creating awareness of social issues, they are not well-positioned to opine on basic business choices made by management."

In concluding, the Court suggested that, particularly given the rise in social policy-framed proposals that implicate business operations, the SEC consider updating its guidance:

Although a core business of courts is to interpret statutes and rules, our job is made difficult where agencies, after notice and comment, have hard-to-define exclusions to their rules and exceptions to those exclusions. For those who labor with the ordinary business exclusion and a social-policy exception that requires not only significance but "transcendence," we empathize. Despite the substantial uptick in proposals attempting to raise social policy issues that bat down the business operations bar, the SEC's last word on the subject came in the 1990s, and we have no hint that any change from it or Congress is forthcoming. As one former SEC commissioner has opined, "it is neither fair nor reasonable to expect securities experts [like the Commission and its staff] to deduce the prevailing wind on public policy issues that have yet to be addressed by Congress in any decisive fashion." Commissioner Criticizes Subjectivity, Inconsistency in SEC Review of Proposals, BNA Corp. Couns. Wkly., 2-3 (Mar. 31, 1993) (quoting remarks of Comm. Richard Y. Roberts). That remains true today. We have no doubt that the Commission is equipped to collect "relevant data and views regarding the best direction for its regulatory policy." Nagy at 993. We thus suggest that it consider revising its regulation of proxy contests and issue fresh interpretive guidance. In the meantime, we hold here that Trinity's proposal is excludable from Wal-Mart's proxy materials under Rule 14a-8(i)(7).

Delaware Supreme Court Case: Reminder to Review Your Advance Notice Bylaws

In Hill International, Inc. v. Opportunity Partners, the Delaware Supreme Court affirmed the Chancery Court's ruling that the company's advance notice bylaw, which keyed the stockholder notice time frame off of the current year annual meeting date, did not require 60 days notice of a dissident stockholder's intent to nominate directors and submit proposals. This is because the only date for the current year's annual meeting that the company announced in advance that could potentially trigger the bylaw's 60-day notice period was an approximate date, i.e., "on or about" a date certain, in its prior year proxy statement. The company did not announce a definitive meeting date (which differed from the "on or about" date by one day) until it filed its current year proxy statement.

Based on the express terms of the company's advance notice bylaw, its announcement of a definitive date less than 70 days before the meeting entitled stockholders to deliver notice of nominations and proposals within ten days thereafter, which is precisely what the dissident stockholder did. Most advance notice bylaws key the current year notice timeframe off of the prior year's proxy statement. However, this case serves as a good reminder to review your advance notice bylaws and ensure that the company takes the necessary actions to receive to anticipated benefits of the notice provision. See also this Hunton & Williams memo.

Society P4P Comment Letter Advocates Flexibility, Principles-Based Approach

The Society filed its comment letter today on the SEC's proposed Pay Versus Performance rule. The letter urges the Commission to amend the proposal to effect a principles-based approach and provide companies with flexibility to define and disclose the relationship between pay and performance in a manner that is tailored to their unique facts and circumstances. Specifically, the letter makes these recommendations: 

1. Recognize that meaningful comparability among compensation programs and performance measures for all registrants, including in disclosure documents, is not possible or desirable;
2. Adopt a principles-based approach to defining "executive compensation actually paid";
3. Replace total shareholder return ("TSR") as the sole measure of financial performance with a principles-based approach;
4. Eliminate any required disclosure regarding peer groups;
5. Modify the aggregation requirement for multiple Principle Executive Officer ("PEO") compensation during a transition year;
6. Eliminate the XBRL tagging requirement; and
7. Clarify that "no greater prominence" refers only to size of the pay versus performance table and not to supplemental disclosures.

BlackRock's P4P Letter Also Expresses Concerns, Seeks Principles-Based Approach

In related news, BlackRock's P4P comment letter submitted last week (i) asserts that investors already have sufficient information to make informed decisions on pay and performance; (ii) advocates a principles-based approach; and (iii) expresses concerns about the potential for a focus on TSR to encourage investor and company short-termism. Here is an excerpt:

To summarize our views related to the Proposal, we believe company-specific data is most meaningful to help shareholders understand incentive structures and related compensation committee decisions. In our experience, the appropriate metrics and timeframes by which to measure performance vary across companies and industries. We therefore favor a principles-based disclosure regime that sets forth a consistent framework for issuers to communicate the link between pay and performance. A principles-based framework should provide flexibility for issuers to report how incentive plans reflect company strategy and incorporate long-term shareholder value drivers, including through disclosure of the commensurate metrics and timeframes by which shareholders should assess performance. We observe that the Proposal is not principles-based, and we are concerned that the prescriptive nature of the Proposal may lead to unintended and negative consequences.

Additional comment letters are available here.

PCAOB Posts Concept Release on AQIs and Updated Standard-Setting Agenda

As previously reported, the PCAOB announced last week the issuance of a concept release on audit quality indicators. Here is the release, which was not yet posted when last week's Alert was published. See also this detailed Fact Sheet and this PwC memo summarizing the release. Comments are due September 29, 2015.  

The PCAOB also posted this updated standard-setting agenda. In addition to noting last week's issuance of a Supplemental Request for Comment on disclosure of the audit engagement partner (discussed here), the agenda slates the reproposal on the auditor's reporting model for the July - December, 2015 time frame. The Society commented on the initial proposal in January 2014. 

SEC Charges Deloitte With Auditor Independence Violations  

Last week, the SEC charged Deloitte with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited. Deloitte agreed to settle for over $1 million. The SEC also charged the trustee and funds' administrator with related compliance violations. According to the SEC's order, Deloitte failed to conduct a required independence consultation before entering a new business relationship with the trustee, and failed to discover that the independence consultation wasn't performed until five years after the fact, during which time it represented its independence in its audit reports.

Congress Members Request SEC Mandate Specific Cyber Disclosures in Form 10-K

Congressmen James Langevin (D-RI) and James Himes (D-CT) recently submitted this comment letter in response to the SEC Division of Corporation Finance Disclosure Effectiveness review. The letter seeks Chair White's response to specific questions about the SEC's current approach toward cybersecurity challenges and recommends that the SEC update its 2011 cybersecurity disclosure guidance to require these specific Form 10-K disclosures:

• How the registrant determines the best cybersecurity practices for its industry;
• Registrant's present state of conformity to those practices;
• Registrant's plan and schedule for achieving full conformity;
• How the registrant is ensuring that its best practices are improved and updated in response to evolving threats; and,
• Frequency with which the registrant's CEO, CFO, and Board of Directors are briefed on cyber/information security incidents.

Illinois House Passes Resolution Promoting Board Gender Diversity

Illinois became the second state after California to pass a resolution encouraging equitable and diverse gender representation on public company boards. Illinois House Resolution 439 urges that, within the next 3 years, every Illinois public company:

• With 9 or more director seats, have a minimum of 3 women on the board
• With at least 5 but fewer than 9 seats, have a minimum of 2 women
• With fewer than 5 seats, have at least one woman

In related news, see Deloitte's recent global board gender diversity report, which - although reflecting increasing gender diversity, also reveals the dearth of women in board leadership positions.

Failed SoP Results in 14% Vote Decline for Compensation Committee Chairs

Semler Brossy's recent analysis of the implications of say-on-pay vote outcomes on ISS recommendations and director election voting results in subsequent years reveals these key findings:

• In the year following a failed (<50%) say-on-pay vote, Compensation Committee members are 4x as likely, and Compensation Committee chairs are over 5x as likely, to receive an ISS "withhold" or "against" recommendation.
• Say-on-pay failures result in declines in voting support the following year of 5% for non-Compensation Committee members, 10% for Compensation Committee members, and 14% for Compensation Committee chairs.
• Say-on-pay voting results in the 50% - 70% range result in declines in voting support the following year of 2% for non-Compensation Committee members and 6% for Compensation Committee members and chairs.
• Shareholder support for say-on-pay was 32% lower at companies with an ISS "against" recommendation in 2015.

New Clawback Rule Proposal Poses Potential IRC Section 409A Pitfalls

As discussed in this law firm memo, companies should be mindful of the IRC Section 409A provisions that may be impacted by incentive compensation recovery prompted by the SEC's proposed clawback rule when developing their clawback policies and pursuing actual recovery. Specifically, Section 409A prohibits settlement of a current employee debt over $5,000 by reducing the amount of deferred compensation the employee is scheduled to be paid in the future, as this would constitute an impermissible acceleration of the deferred amount. So companies shouldn't contemplate satisfying clawback requirements by deducting amounts to be recovered from a covered officer's nonqualified plan account. Society member Winston & Strawn's Mike Melbinger provides these examples of compliant and non-compliant recovery and offset schemes.

Equilar Launches Board Composition Assessment Tool

Last week, Equilar launched BoardEdge, a board composition assessment platform that purportedly aims to help companies more effectively evaluate their board's composition and identify relevant director candidates. The tool reportedly provides directors, management, investors and others the ability to: (i) objectively evaluate and compare board composition among companies by factors such as diversity, board tenure and industry experience; (ii) search Equilar's database of more than 150,000 directors and executives based on a range of criteria; and (iii) identify directors' current and historical connections to those individuals. You may request a demo here.

Study: Sustainability Drives Revenue Growth

This new joint IRRC Institute/Conference Board report quantifies the impact of a subset of the S&P Global 100's sustainability practices by revenue and R&D spending attributable to sustainable products and services. Subject to limitations (e.g., sample size) associated with the fact that this aspect of sustainability is relatively new, the findings reportedly undermine the widely held belief that sustainability entails a tradeoff of business growth and revenue. Key findings include:

• Revenues from sustainable products and services grew at 6x the rate of overall company revenues.
• Sustainable products represent a growing share of revenues - 21% of total revenues on average.
• A few companies have published measurable sustainable product revenue goals.
• Not all companies track revenues from sustainable products separately, and very few companies track sustainability-specific R&D spending.
• Among the few companies that track sustainability-specific R&D, about 2/5 of R&D spending is allocated to sustainability.

In addition to the quantitative data, the report includes 12 company profiles that illustrate specific examples of company initiatives related to sustainable product innovation.  

Chamber & Others Form Coalition to Promote Long-Term Value Creation

A group of business associations including the US Chamber of Commerce, SIFMA and The Center on Executive Compensation sent this letter to SEC Chair White last week announcing their formation of the Corporate Governance Coalition for Investor Value. The formation of the Coalition is purportedly responsive to a rise in special-interest activism (and related erosion of the board's traditional role) and regulation in the context of an evolving regulatory environment. The Coalition's stated mission is:

• To ensure that long-term value creation remains the foundation for managerial decision-making at American companies.
• To foster a constructive environment for the dialogue among American public companies, their shareholders and other stakeholders.
• To assist policy makers and regulators, including the SEC, in developing balanced, thoughtful laws and regulations impacting corporate governance.

Six Companies File Conflict Minerals Independent Private Sector Audits (IPSAs)

Elm Sustainability Partners reported these conflict minerals reporting statistics for fiscal 2014:

• 1,272 total conflict minerals filers, compared to 1,328 total for 2013.
• At least 55 filers seem as though they should have filed for 2013, but did not.
• 6 total IPSAs were submitted up from 4 last year.
• 3 IPSAs were conducted by CPAs and 3 by non-CPAs (same ratio as last year).
• These companies reportedly submitted an IPSA: Advanced Semiconductor Engineering, AVX, Intel, Kemet, Philips, Signet Jewelers

See also this IPSA trigger guidance.  

U.S. Chamber Launches Cybersecurity Leadership Council

The Chamber of Commerce announced yesterday its launch of a Cybersecurity Leadership Council to promote cybersecurity policy that advances adoption of best practices and market-based solutions. The release notes: "By creating a forum for businesses to have an open dialogue about what is effective, missing or needed in regard to cybersecurity policy or practices, the council will direct Chamber advocacy and education efforts and serve as a key voice of industry for dialogue with policy makers." The Council is composed of businesses and associations including the Alliance of Automobile Manufacturers, American Petroleum Institute, National Cable & Telecommunications Association, Retail Industry Leaders Association, Duke Energy, Boeing and JPMorgan Chase.

Whole Foods Adopts Proxy Access Bylaw

Whole Foods reported its adoption of a 3% (up to 20 shareholders)/3 years/20% proxy access bylaw and purportedly requested that Jim McRitchie withdraw his proposal.

CalSTRS Issues Board Composition Best Practice Guidelines

Yesterday, CalSTRS issued these Best Practices in Board Composition, which it characterized as a "blueprint of investors' ideal high-performing corporate board of directors." The guidance specifically advocates: (1) independent leadership in the form of a separation of the CEO/Chair roles, (2) diversity (in its broadest sense), (3) board refreshment/succession planning processes and disclosure, (4) varying director tenure that includes a mix of short and long-termed directors, and (5) director accountability, including annual board elections and a majority voting standard.

Large Investor Group Advocates Narrow Interpretation of Rule 14a-8(i)(9)

A group of 65 investors including As You Sow, Calvert Investments, Investor Voice, Trinity Health and Walden Asset Management sent a letter earlier this week to the SEC's Division of Corporation Finance in conjunction with its review of Rule 14a-8(i)(9). The letter offers these four recommendations to "return the Rule to its original intent" and "preclude the kind of gamesmanship that has been evident in recent years":

1. A "direct conflict" could be found if a company's and a shareholder's proposals are both legally binding and there is a direct conflict between the terms of each proposal.
2. The potential for exclusion under Rule 14a-8(i)(9) should not apply to shareholder proposals that were submitted prior to the public announcement of an allegedly conflicting management proposal.
3. In the event that a binding shareholder proposal is found to directly conflict with a binding management proposal, the shareholder should be granted an opportunity to resolve the conflict by revising the proposal so as to make it advisory.
4. In conjunction with a Rule 14a-8(i)(9) no-action request, a company should be required to provide the text of its proposal, and demonstrate in what manner specific elements "directly conflict" with the shareholder proposal.

Additional comment letters are available here.

CII Thanks Chair White for Addressing Proxy-Related Priorities at Society Conference

CII sent this letter to SEC Chair White last week expressing appreciation for her remarks at the Society's conference concerning four of CII's proxy-related priorities including: (i) preliminary vote tallies, (ii) universal proxies, (iii) so-called "unelected directors," and (iv) shareholder proposals. Among other things, CII refutes the notion that better disclosure (which Chair White suggested) will adequately resolve the "unelected" or "zombie" director issue, believing that the only viable solution is to require that companies adopt a majority voting scheme. We previously reported on Chair White's remarks in our Conference Huddle.

SEC Office of Investor Advocate 2016 Objectives Include Rule 14a-8(i)(9) Application

As required by Dodd-Frank, the SEC's Office of the Investor Advocate filed this report last week with the Senate Committee on Banking, Housing, and Urban Affairs and House Committee on Financial Services identifying its fiscal 2016 objectives. Priorities reportedly include disclosure effectiveness (particularly advocating for layered disclosure) and shareholder proposal (e.g., interpretation and application of Rule 14a-8(i)(9)) and proxy voting (e.g., universal ballot) issues. The report also includes a summary of Investor Advisory Committee recommendations and SEC responses since the IAC's inception.

This week's highlighted question from the Huddle is:

We have a combined Chairman/CEO and a Lead Director and would like to know who approves the Chairman/CEO's expense reports at similarly situated companies.

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

At one Fortune 100 company where I was in-house with the same leadership structure, the CFO approved the CEO's expense reports up to a specified level and for ordinary expenses such as travel for company business. Outside of those limits, the Audit Committee chair approved the CEO's expense reports. In addition, copies of all of the CEO's expense reports were included in the Audit Committee and Compensation Committee reading materials on a quarterly basis.

Check out the Society Huddle.