Monthly Archives: June 2009

Forum Contributors among the American Lawyer’s Dealmakers of the Year

American Lawyer Magazine recently released its list of the 25 Dealmakers of the Year. Available here, the list identifies individual lawyers who played leading roles in seminal transactions in 2008 that have helped shape the financial regulatory landscape. The list includes four individuals who are contributors to our Forum on Corporate Governance and Financial Regulation. The list also includes an additional four individuals who are graduates of Harvard Law School.

The transactions include many headline-grabbing deals, most of which occurred during the height of the financial crisis. The transactions include the the restructurings and federal interventions in AIG and Citi, the JP Morgan / Bear Stearns and Bank of America / Merill Lynch business combinations, and the bankruptcy of Lehman Brothers.

The selected transaction attorneys worked across multiple practice areas, including M&A, capital markets and bankruptcy. According to the American Lawyer, “[t]ogether these dealmakers are an interesting mix. Some were busy getting deals that faced financing, regulatory, or litigation hurdles to the finish line. Others were even busier laying the foundation for the unprecedented run of bailouts, workouts, and rescue deals that have dominated the post-Lehman financial landscape.”

The list includes Harvard Law School graduate H. Rodgin Cohen, who was ranked first among the 25 dealmakers for his roles in multiple transactions. In addition, the list recognizes three graduates of the class of ’78: George Bason Jr., Michael Wiseman, and Jeffrey Rosen.

The four Forum contributors on the list are:

George Bason Jr., Davis Polk & Wardwell, HLS ’78 and Forum guest contributor, for his work on multiple Citi restructuring transactions

John Finley, Simpson Thacher & Barlett LLP, HLS ’81. Forum contributor and member of the Program on Corporate Governance Advisory Board, for his work on Mars’s acquisition of Wrigley

Edward Herlihy, Wachtell, Lipton, Rosen & Katz, Forum guest contributor, for his work on Bank of America’s acquisition of Merrill Lynch

Marshall Huebner, Davis Polk & Wardwell, Forum guest contributor, for his work on the AIG rescue deals

The additional representation of HLS on the list comes from the following four graduates:

H. Rodgin Cohen, Sullivan & Cromwell LLP, HLS ’68, for his work on bank rescues

Robert Joffe, Cravath, Swaine & Moore LLP, HLS ’67, for his various independent director representations

Jeffrey Rosen, Debevoise & Plimpton LLP, HLS ’78, for his work on Verizon Wireless’s acquisition of Alltel

Michael Wiseman, Sullivan & Cromwell LLP, HLS ’78, for his work on the AIG rescue deals

Does corporate governance matter in competitive industries?

This post comes from Xavier Giroud and Holger M. Mueller of New York University.

We examine whether corporate governance has a different effect on a firm’s operating performance in competitive and non-competitive industries in our forthcoming Journal of Financial Economics paper entitled Does corporate governance matter in competitive industries? We use exogenous variation in corporate governance in the form of 30 business combination (BC) laws passed between 1985 and 1991 on a state-by-state basis to address this question. By reducing the fear of a hostile takeover, these laws weaken corporate governance and increase the opportunity for managerial slack. Typically, BC laws impose a moratorium on certain kinds of transactions, including mergers and asset sales, between a large shareholder and the firm for a period ranging from three to five years after the shareholder’s stake has passed a prespecified threshold. This moratorium hinders corporate raiders from gaining access to the target firm’s assets for the purpose of paying down acquisition debt, thus making hostile takeovers more difficult and often impossible.

We obtain three main results. First, consistent with the notion that BC laws create more opportunity for managerial slack, we find that firms’ return on assets (ROA) drops by 0.6 percentage points on average after the laws’ passage. Second, the drop in ROA becomes increasingly stronger the less competitive the industry is. For example, ROA drops by only 0.1 percentage points in the lowest Herfindahl quintile but by 1.5 percentage points in the highest Herfindahl quintile. Third, the effect is close to zero and statistically insignificant in highly competitive industries. This last finding, in particular, is supportive of the view expressed by many economists, going back to Sir John Hicks in the 1930s and even Adam Smith, that competition in the product market mitigates managerial slack.

Besides showing that competition mitigates managerial agency problems, we also examine which agency problem competition mitigates. We find no evidence for empire building: Capital expenditures are unaffected by the passage of the BC laws. By contrast, input costs, wages, and overhead costs all increase after the passage of the BC laws, and only so in non-competitive industries. Overall, our findings are consistent with a “quiet-life” hypothesis whereby managers insulated from hostile takeovers and competitive pressure seek to avoid cognitively difficult activities, such as haggling with input suppliers, labor unions, and organizational units demanding bigger overhead budgets. We also conduct event studies around the dates of the first newspaper reports about the BC laws and compute CARs separately for low- and high Herfindahl portfolios. We find that the average CAR for the low-Herfindahl portfolio is small and insignificant, whereas the average CAR for the high-Herfindahl portfolio is −0.54% and significant.

The full paper is available for download here.

The (Re)regulation of Financial Derivatives

Editor’s Note: This post is by Lynn A. Stout of the UCLA School of Law.

The US Congress is currently grappling with the issue of whether and how to regulate the market for financial derivatives. In my testimony before the Senate Committee on Agriculture yesterday (for historical reasons, the Agriculture Committee has jurisdiction over derivatives trading), I explored the theory and history of derivatives and derivatives trading. The full text of my testimony is available here.

My analysis leads to four conclusions. First, despite industry claims, derivatives contracts are not new and are not particularly “innovative.” Derivatives trading in the US dates back at least to the 1800s, and in other countries goes back much further. Second, healthy economies regulate derivatives trading. The only time a significant US derivatives market has been “deregulated” was during the eight years following passage of the Commodities Futures Modernization Act of 2000, which deregulated over-the-counter financial derivatives. Third, although the derivatives industry routinely claims that derivatives trading provides social benefits, virtually no empirical evidence supports this claim. At the same time, history and recent experience both confirm that unregulated derivatives trading is associated with pricing bubbles, added market risk, reduced investor returns, and increased fraud and manipulation.

Fourth and finally, as a historical matter derivatives regulation generally has not taken the form of either a heavy-handed ban on trading, or oversight by an omniscient regulator tasked with intervening on an ad hoc basis. Rather, derivatives markets have been successfully regulated through a web of ex ante procedural rules that include reporting requirements, listing requirements, margin requirements, position limits, insurable interest exceptions, and limits on enforceability. This traditional approach has a long track record of success.

Will the Bad Economy Lead to Bad Governance?

This post is by Theodore N. Mirvis, Andrew R. Brownstein, Steven A. Rosenblum, Eric S. Robinson, Adam O. Emmerich, Trevor S. Norwitz, and David C. Karp of Wachtell, Lipton, Rosen & Katz. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

A tidal wave of anger over the economic climate – what Delaware Chief Justice Myron Steele has called a “populist frenzy” – has created a fertile political environment for recent efforts by three of five SEC Commissioners and Senator Schumer to federalize corporate law under the cloak of shareholder empowerment. Unfortunately for long-term shareholders, and the companies in which they have invested, there is no evidence linking the one-size-fits-all broad proxy access currently under consideration at the SEC and on Capitol Hill to better corporate governance or long-term performance. To the contrary, these proposals, if adopted, will likely exacerbate, rather than mitigate, the emphasis on short-term results that played a significant role in the economic crisis.

First, the SEC’s proposal sets a minimum ownership threshold for shareholder eligibility to the corporate proxy entirely too low, at 1% of the shares of a company with a market capitalization greater than $700 million (with higher thresholds of 3% and 5% for smaller companies). Lowering the bar to 1% (and permitting even smaller shareholders to aggregate their stakes for purposes of achieving the 1% threshold), in contrast to the 5% threshold in our model access bylaw, gives activist and special interest holders a very low cost avenue to seek to influence board composition and corporate strategy. This low threshold will enable shareholder activists to create disruption at many companies each year, and reduce the willingness of qualified directors to serve.

Second, if there are more shareholder nominations than slots available, the SEC’s proposal would give priority to shareholders who submitted their nominations the earliest, regardless of the size of the nominating shareholders’ stakes. This contrasts with the approach of our model access bylaw which prioritizes nominations based upon the relative holdings of the nominating shareholders. Under the SEC’s proposal, a long-term institutional investor holding well in excess of 5% of the company’s equity for many years may have to suffer the negative effects of routine director election contests initiated by holders of 1% for only one year, and also lose the opportunity to avail itself of proxy access merely because the smaller holders beat a faster path to the corporate secretary’s office. As a result, the SEC’s proposal does not merely facilitate access for the occasional proxy access election contest, but rather creates incentives for routine election contests, as shareholders race to make access nominations in order to gain control over the process.

The SEC’s proposal advances a mandatory proxy access regime that will not only weaken corporate boards, but also weaken the relative strength of long-term investors as compared to those investors that pursue short-term strategies often based on hollow financial engineering. The Delaware private-ordering approach to proxy access is more consistent with shareholder democracy in that it allows all the shareholders of each Delaware company to consider, debate and if appropriate adopt through shareholder action – rather than government fiat – shareholder access bylaws that suit the particular circumstances of each individual company and its shareholders. Accordingly, and as we have said before, we agree with the position taken by two of the SEC Commissioners, that a mandatory federal “one size fits all” rule is a serious policy error and the SEC should instead amend Rule 14a-8 to allow the issue to develop at the state law level.

Will proxy access enhance director accountability?

This post is by William Gleeson and Aaron Ostrovsky of K&L Gates LLP. Previous posts on this Forum concerning the SEC’s proposed proxy access rule are available here, here and here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The issue of allowing shareholders of public companies to include their nominees for director in the company’s proxy materials (“Proxy Access”) has been the subject of heated debate for years. In 2003, when there were no state law provisions addressing the issue, and in 2007 (when only the North Dakota statute addressed Proxy Access), the Securities and Exchange Commission proposed rules that would facilitate such inclusion, only to abandon the proposals. In March 2009, Delaware added Section 112 to its General Corporation Law, effective August 1, 2009, to allow for bylaws that permit Proxy Access. It has been widely expected that many other states would follow Delaware’s lead and adopt similar statutes. In May 2009, the SEC announced that it would propose a new rule, Rule 14a-11, dealing with Proxy Access that would preempt key parts (but not all) of Delaware Section 112. Proposed Rule 14a-11 would differ in three important respects from the Delaware provision:

In its release announcing that it would propose Rule 14a-11, the Commission focused on enhancing director accountability. According to the Commission, the current economic crisis has created widespread concern about “whether boards are exercising appropriate oversight of management, whether boards are appropriately focused on shareholder interests, and whether boards need to be held more responsible for their decisions regarding such issues as compensation structures and risk management.” The Commission’s solution to the above problems is Proxy Access:

Because of these concerns, the Commission has decided to revisit whether and how the federal proxy rules may be impeding the ability of shareholders to exercise their fundamental right under state law to nominate and elect members to company boards of directors.

But the connection between effective director accountability and Proxy Access for shareholders is not obvious and depends on the validity of several implicit and intermediate premises. We believe that the SEC should address and make a strong case on each of the following premises.

Proxy Access, as a component of corporate governance, is a matter more properly dealt with under state law. We believe that the SEC, as a federal agency, should make a strong case before regulating in an area traditionally regulated by states. This is especially true with respect to Proxy Access, where state legislation is only in its infancy. It is likely that the states will develop a significant body of experience in a relatively short time and it will not be long before more resolving evidence emerges whether or not Proxy Access initiatives at the state level are or are not an effective means of dealing with the issue of director accountability. (We do not address in this alert the issue of whether the SEC has the power to enact Rule 14a-11, an issue that others have dealt with.)

Accordingly, we believe that it would be appropriate for the SEC to adopt a rule consistent with Rule 14a-11, if, but only if, it can make a strong case that the proposed rule is likely to enhance director accountability; that state initiatives such as Delaware’s Section 112 are not likely to increase director accountability; and that the current problems with director accountability are severe enough that we cannot afford to wait to see whether state-level regulation proves out. In making that case, it should address each of the premises discussed below.


PIPEs: Raising Equity Capital in Uncertain Times

In the midst of what we have come to know as the “global economic crisis,” credit markets continue to be frozen and, in understatement, equity markets continue to be volatile. Failing a substantial near-term recovery, any meaningful window for underwritten public offerings will remain closed. The question that many public companies are asking is what, if any, alternatives are there to raise cash?

Private investments in public equity, commonly referred to as PIPEs, are one option. Once used almost exclusively by small cap issuers or issuers who historically had not been able to sell securities to the public, today large, well-seasoned issuers are turning to the PIPEs market. Indeed, both General Electric Company and the Goldman Sachs Group issued a combined total of $8.0 billion to Berkshire Hathaway Inc. in the fourth quarter of 2008 in PIPEs transactions.[1] Mainstream hedge funds and private equity funds are now opportunistically looking at PIPE investments in distressed companies. Competition in these markets is increasing. Depressed valuations are offering investors attractive opportunities to invest in companies with the potential for future growth.

PIPEs, Deconstructed
What is a PIPE? A typical PIPE is a transaction where one or more investors purchase securities directly from a public company in a private placement rather than in a transaction registered with the Securities and Exchange Commission (SEC). Often, these transactions are conducted through an investment bank or other placement agent, but more recently a greater volume of PIPEs are being sold without an intermediary to one or few large investors. Since PIPE securities are purchased in a private transaction, they are considered “restricted securities” and cannot be immediately resold into the public market. In the transaction, the issuer agrees to file a resale registration statement with the SEC promptly after the closing of the financing. In this way, illiquidity is mitigated—once the resale registration statement becomes effective, the investor may immediately sell the securities purchased in the transaction (or issuable upon conversion in the case of convertible preferred stock or debt) in the public markets. This structure allows for speedy access to capital, a key attraction of a PIPEs transaction to issuers. PIPEs also provide issuers with lower transaction costs as compared to a traditional public offering.

Specifically, in a PIPE transaction, an issuer is contractually required to prepare and file a resale registration statement with the SEC promptly following the completion of the private placement. Typically, a registration rights agreement requires that the issuer use it best efforts to have the registration statement filed with the SEC within 30 to 45 days of closing and declared effective within 90 to 120 days of filing. Registration rights agreements typically contain penalty payments of 1% to 2% of the principal amount of proceeds per month if the issuer fails to meet the filing deadlines. Once the SEC declares the resale registration statement effective, investors may sell the PIPE securities in the public market. The registration statement must remain effective, and the issuer is required to update the registration statement for any material changes, during the period in which the investors are reselling the securities.

Registered Direct PIPEs
Issuers with existing effective shelf registration statements may find PIPEs transactions even more attractive. In a “registered direct” PIPE, an issuer sells securities directly from its shelf registration statement to one or more private investors in a transaction not involving a public offering. As in typical PIPEs, the time to closing may be quick. However, in a registered direct PIPE, investors do not receive “restricted securities” as they are purchasing the PIPE securities in a registered transaction. Unless the investor would be deemed an affiliate of the issuer, there is no need to file a resale registration statement with the SEC following the closing of the transaction. Indeed, this is an attractive option for issuers as not only are transaction costs even lower, the elimination of liquidity risk allows for more attractive pricing. Note, however, that the existing shelf registration statement must already cover the PIPE securities being offered (including any warrants) and the plan of distribution in the base prospectus must contemplate such private sales. In addition, as in all PIPE transactions that utilize the resources of an investment bank to place the securities, the investment bank does not act as an underwriter in an offering. Even though the PIPE securities are offered and sold from an issuer’s existing shelf registration statement, the investment bank acts merely as a placement agent and the transaction is not a firm underwriting.

PIPE Terms
The terms of PIPEs deals vary widely from deal to deal and can involve the offering of a number of different types of securities such as common stock, preferred stock, convertible preferred stock, convertible debt and warrants or any combination of these securities. Typically, PIPE securities are sold at a discount to the trailing average market price for some period prior to closing. However, this is highly negotiated and convertible PIPEs have been priced higher than current market value, especially if there is a conversion premium attached to a convertible security or the security includes warrant coverage.


Implications of the sale of Chrysler

This post is based on a client memo from Donald S. Bernstein and Marshall S. Huebner of Davis Polk & Wardwell.

In an important ruling issued on Sunday, May 31, 2009, Bankruptcy Judge Arthur J. Gonzalez in the Southern District of New York approved the sale of Chrysler in exchange for two billion dollars in cash and the assumption of certain liabilities.[1]

In connection with approval of this sale transaction, Judge Gonzalez opined on sub rosa challenges, the ability of a secured lender to object to a transaction if the administrative agent has consented, and the survival of tort claims after assets have been sold pursuant to section 363 of the Bankruptcy Code. The ruling makes it yet easier for debtors to consummate sales under section 363.

On April 30, 2009, the date Chrysler filed for bankruptcy protection, Chrysler, Fiat S.p.A (“Fiat”) and New CarCo Acquisition LLC (“New Chrysler”), an acquisition vehicle formed by Fiat, entered into a Master Transaction Agreement (the “MTA”) in accordance with section 363 of title 11 of the U.S. Code (the “Bankruptcy Code”). Under the MTA, Chrysler would transfer substantially all of its operating assets to New Chrysler, in exchange for two billion dollars in cash and the assumption of certain liabilities (the “Sale Transaction”). Upon consummation of the Sale Transaction, New Chrysler agreed, pursuant to the MTA, to issue stock to certain interested parties: 67.69% to an independent Voluntary Employee Beneficiary Organization (the “VEBA”) for the benefit of certain Chrysler employees and retirees, 9.85% to the U.S. Treasury, 2.46% to Export Development Canada (“EDC”) and 20% to Fiat.[3]

Among the objecting parties were: a group of pension funds from the State of Indiana (the “Indiana Funds”) objecting, inter alia, on the grounds that the Sale Transaction amounted to a sub rosa plan; certain Chrysler dealers objecting to the attempted rejection of their dealership agreements and arguing that state dealer protection laws are not preempted by the Bankruptcy Code; and various tort and consumer claimants objecting that their claims were not “interests in property” and that Chrysler’s assets could not, therefore, be sold free and clear of them pursuant to section 363(f)(5) of the Bankruptcy Code. Judge Gonzalez (i) distinguished a valid sale transaction under section 363 of the Bankruptcy Code (a “363 sale”) from a sub rosa plan, (ii) enforced contractual provisions that restrict a minority secured lender’s standing to object and (iii) ruled that tort claims are extinguished in a 363 sale.[4]

Court Denies that the Sale Transaction is a Sub Rosa Plan
The Indiana Funds argued that the Sale Transaction was an attempt to circumvent chapter 11 requirements for plan confirmation and, thus, was a sub rosa plan of reorganization. Judge Gonzalez, expanding on and clarifying prior case law,[5] ruled that it is not a sub rosa plan for “a debtor [to] sell substantially all of its assets as a going concern and later submit a plan of liquidation providing for the distribution of the proceeds of the sale,” if such proceeds both (i) exceed the value that could be received in a liquidation and (ii) go directly to the first priority lenders. Judge Gonzalez went on to state that the receipt of equity interests in New Chrysler by the VEBA, the U.S. Treasury, EDC and Fiat are the result of separately negotiated agreements with New Chrysler – including the unprecedented modifications to the collective bargaining agreement between the United Auto Workers and New Chrysler for the VEBA, the financing that the U.S. Treasury and EDC will provide to New Chrysler and the provision of small car technology by Fiat – and are not on account of any prepetition claims. As such, he ruled that there had not been an inappropriate attempt to divert sale proceeds away from the Indiana Funds or to affect anything other than a pro rata distribution of the proceeds to all first priority claimants.


Corporate Transparency and Resource Allocation

This post comes from Jere R. Francis, Inder K. Khurana, Raynolde Pereira and Shawn Huang of the University of Missouri-Columbia.

In our paper Does Corporate Transparency Contribute to Efficient Resource Allocation? which was recently accepted for publication in the Journal of Accounting Research, we examine whether the country-level information environment positively affects the timely reallocation of resources in response to growth shocks (or changes in growth opportunities) by improving the transfer of resources from industries which experience negative growth shocks to those that experience positive growth shocks.

We hypothesize that if a pair of countries has a high level of corporate transparency in each country, then investors are better able to recognize and direct resources towards industries which experience positive growth shocks and away from industries which experience negative growth shocks, irrespective of financial development. Our sample consists of calculated correlations in industry growth rates for 666 country pairs based on 37 unique countries and 37 manufacturing industries for the period 1980-1990 using industry-level data from a United Nations Industrial Development Organization (2000) database. We merge these correlations with country-level measures of corporate transparency that capture the quality of the financial reporting regime, the intensity of private information collection, the quality of information dissemination structures, the level of earnings opacity and stock price synchronicity.

We find transparency is positively associated with the correlation in industry-specific growth rates across country pairs. This positive association is consistent with the notion that corporate transparency helps to channel resources to those particular industries with good growth opportunities and hence contributes to more effective inter-sector allocation of resources. These results generally hold across alternative measures of transparency. In addition, we find that the impact of corporate transparency on the co-movement in growth rates is greater for country pairs with similar levels of economic development. Third, we find that the residual transparency metrics positively explain co-movements in industry-specific growth rates among country pairs, which indicates that transparency over and above that predicted by the underlying institutions facilitates resource allocation. Finally, we measure a country’s level of ex ante growth opportunities using the price-earnings ratio of global industry portfolios weighted by a country’s industrial mix and find that it is only countries with high transparency where there is an association between ex ante global growth opportunities of firms (within a country) and the country’s realized ex post growth in real GDP per capita. This result is consistent with the argument that firms in more transparent settings are better able to exploit global growth shocks and thus achieve higher realized growth rates.

The full paper is available for download here.

SPE Assets Invaded to Benefit Affiliated Entities

In an important ruling recently issued, Bankruptcy Judge Allan L. Gropper in the Southern District of New York approved a $400 million debtor-in-possession facility for General Growth Properties, Inc., which filed the largest real-estate Chapter 11 case in U.S. history. In connection with approving the financing, Judge Gropper permitted affiliated debtors to use excess cash collateral from bankruptcy-remote special purpose entities which, to the surprise of many market participants, were included in the Chapter 11 proceedings.

General Growth Properties, Inc. (the “Company”) is a publicly held shopping mall operator headquartered in Chicago. By the time of its bankruptcy filing on April 16, 2009, it was the second largest shopping mall operator in the U.S., owning more than 200 malls in 44 states, with approximately $27 billion in debt outstanding. Approximately $15 billion of its debt is in the form of collateralized mortgaged-backed securities (“CMBS”), making the Company the largest borrower in the CMBS market.[1]

In connection with seeking approval of the Company’s proposed debtor-in-possession facility (the “DIP Facility”), the Company also sought use of cash collateral from separately organized subsidiary bankruptcy-remote special purpose entities (“SPEs”), which were, to the surprise of many market participants, included in the Company’s Chapter 11 proceedings. The property owned by each of these SPEs was intended to secure only the obligations of the pre-petition lenders to the SPE owning the property (the “SPE Lenders”). Arguing that the value of the collateral in certain of the SPEs is sufficient to protect the interests of the SPE Lenders, the Company proposed that excess cash collateral from rents be made available to support the DIP Facility. In exchange, as adequate protection, the Company and the SPE Lenders consensually agreed, among other things, that (i) each of the SPE Lenders would receive a perfected first-priority post-petition lien on (a) the respective SPE’s claims against the Company resulting from the consolidation of their cash collateral in the Company’s centralized cash management system and (b) the cash in the centralized cash management system itself; (ii) each of the SPE Lenders would receive a perfected post-petition lien on properties securing a separate pre-petition facility with Goldman Sachs Mortgage Company (the “Goldman Facility”) junior to the liens securing the DIP Facility and the Goldman Facility; and (iii) the Company would continue to pay interest at the applicable non-default rates and to maintain the properties, including the payment of taxes and other operating expenses, in accordance with their pre-petition agreements.

Several pre-petition agents for the SPE Lenders (the “Pre-Petition SPE Agents”) filed objections to the Company’s proposed DIP Facility on behalf of the SPE Lenders. The Commercial Mortgage Securities Association and the Mortgage Bankers Association also filed an amici curiae brief (the “Amici Brief”) with the court addressing the implications of the proposed use of cash collateral on commercial real estate finance.


Don’t Let Companies Change Shareholders’ Blank Votes

This post comes to us from James McRitchie, Publisher of

Please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden, long-time shareowner activist. See petition File 4-583 here. Send comments to [email protected] with File 4-583 in the subject line.

The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company’s soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.

This problem is not the same as “broker voting,” which has already been repealed on “non-routine” matters and, we hope, will soon be repealed for so-called “routine” matters, such as the election of directors. For example, even though “broker voting” has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company’s soliciting committee.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can seeProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to “broker voting.”

Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVoteplatform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don’t want it to be voted as recommended.


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