Yearly Archives: 2012

Twelve Shareholder Declassification Proposals Submitted by SRP-Represented Investors Win Approval with Average Support of 79%

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, May 8, 2012
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Editor’s Note: Professor Lucian Bebchuk is the Director of the Harvard Law School Shareholder Rights Project (SRP), and Scott Hirst is the SRP’s Associate Director. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University.

Although the current proxy season is still in its early stages, shareholders of twelve S&P 500 companies have already approved precatory declassification proposals that investors represented by the Harvard Law School Shareholder Rights Project (SRP) submitted. These early results, as well as the large number of such proposals expected to go to a vote at other S&P 500 companies, are described further below.

As described in detail on the SRP’s website, during the 2011-12 proxy season, the SRP has been representing and advising several institutional investors – Illinois State Board of Investment (ISBI), the Los Angeles County Employees Retirement Association (LACERA), the Nathan Cummings Foundation (NCF), the North Carolina State Treasurer (NCDST), and the Ohio Public Employees Retirement System (OPERS) – in connection with the submission of precatory shareholder proposals to more than eighty S&P 500 companies that have classified boards. The proposals urge repealing the classified board and moving to annual elections, which are widely viewed as corporate governance best practice.

Through active engagement with companies receiving declassification proposals, negotiated outcomes have been obtained with forty-four S&P 500 companies. These forty-four companies have entered into agreements committing them to bring management proposals to declassify their boards. Overall, the forty-four companies that have entered into such agreements represent about one-third of the S&P 500 companies that had staggered boards as of the beginning of this proxy season. At this stage of the proxy season, twelve agreed-upon management proposals to declassify have already been approved by shareholders.

In many of the companies receiving proposals, however, negotiated outcomes have not been obtained. In such cases, the shareholder proposals submitted by the SRP-represented investors are expected to go, or have already gone, to a vote at the 2012 annual meeting. In particular, such proposals have already gone to a vote at sixteen companies, and fourteen of them have already released voting results.

Of these fourteen proposals, twelve have already passed. The table below provides information concerning the precatory declassification proposals that passed. As the table indicates, these proposals obtained average support of 79.25% of votes cast.

Two shareholder proposals to declassify (detailed here) did not pass. Although these proposals failed to gain majority support, they received an average support of 48.55% of the votes cast.

Precatory proposals are expected to go to a vote at twenty-two other S&P 500 companies. A list of these companies is available here.

COMPANIES WHERE DECLASSIFICATION PROPOSALS WON APPROVAL
Company Proponent % of Votes
Cast in Favor
EQT Corporation  (EQT) OPERS 80.98%
F5 Networks, Inc. (FFIV) ISBI 77.20%
FLIR Systems, Inc. (FLIR) NCF 81.94%
FMC Corporation  (FMC) NCF 82.65%
Hess Corporation  (HES) NCDST 77.55%
Lexmark International, Inc.  (LXK)  NCDST 92.82%
Moody’s Corporation (MCO) NCF 76.94%
People’s United Financial, Inc. (PBCT) NCDST 90.61%
SCANA Corporation (SCG) NCDST 60.28%
Snap-On Incorporated (SNA) NCDST 84.87%
US Steel Corporation (X) NCDST 82.48%
V.F. Corporation (VFC) NCF 62.74%
  Average: 79.25%

Continuing Developments in the 2012 Proxy Season

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, May 8, 2012
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Editor’s Note: The following post comes to us from Stuart N. Alperin and Regina Olshan, partners in the Executive Compensation and Benefits group at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert. This alert is the second in a series; the prior alert is available here.

As we continue to monitor developments in the unfolding 2012 proxy season, here are some key themes that have emerged thus far:

What are the overall vote results?

Of the first 180 companies of the Russell 3000 to report the results of say-on-pay proposals, approximately:

  • 65 percent have passed with more than 90 percent support;
  • 25 percent have passed with between 70.1 percent and 90 percent support;
  • 8 percent have passed with between 50 percent and 70 percent support;
  • 2 percent (three companies) obtained less than 50 percent support — Actuant and International Game Technology were discussed in our prior mailing and KB Home is discussed below. In a vote result reported after the cutoff date for the calculations above, news reports indicated that Citigroup Inc.’s say-on-pay proposal received 45 percent of votes cast, making it the fourth company (and the largest company) whose say-on-pay proposal has received less than 50 percent support this year.

Thus far, these percentages are not materially different from the full-year results for the 2011 proxy season.

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Court Rejects Selective Waiver Doctrine for Privileged Materials

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 7, 2012
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The following post comes to us from Christopher J. Steskal, partner and chair of the White Collar/Regulatory Group at Fenwick & West LLP, and is based on a Fenwick Alert by Mr. Steskal, Susan S. Muck, Jennifer C. Bretan, and Alexis I. Caloza.

Corporations subject to criminal and civil regulatory investigations have long grappled with the highly charged decision over whether to provide the government with privileged communications and attorney work product or whether to maintain those materials as privileged despite a governmental inquiry. On the one hand, a corporation may hope to avoid criminal prosecution or civil regulatory action, as well as potential downstream effects of such actions on insurance rights and indemnification, by forthright disclosure of “relevant facts” to the government, including information that may be protected by attorney-client privilege or the attorney work product doctrine. See Principles of Federal Prosecution of Business Organizations, reprinted in United States Attorneys’ Manual, tit. 9 ch. 9-28.710, 9-28.720(a). On the other hand, in disclosing privileged materials and work product to the government, the corporation risks having waived the privilege over those very same materials as to third parties, including civil litigants seeking to recover monetary damages from the corporation.

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Proposals for Binding Shareholder Votes on Executive Pay in the UK

Posted by Amy L. Goodman, Gibson, Dunn & Crutcher LLP, on
Monday, May 7, 2012
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Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memo by Ms. Goodman, James A. Cox, Jeffery Roberts, and Daniel E. Pollard.

On March 14, 2012, the UK Government published a consultation paper on its proposals to give shareholders of quoted companies a greater influence over executive pay.

The Government proposes to introduce a binding shareholder vote on executive pay policy (possibly requiring a 65% or 75% super majority), a non-binding shareholder vote on the subsequent application of that pay policy and a binding shareholder vote on exit payments in excess of one year’s basic salary.

The new rules would apply to certain UK quoted companies. The new rules would apply to those companies with either a standard or a premium listing on the London Stock Exchange main market and UK incorporated companies listed on the NYSE, NASDAQ or officially listed in another EEA member state but would not apply to companies trading on AIM or the Plus Growth market. The rules would replace the existing requirement for a non-binding vote on the director’s remuneration report.

Existing Regulation of Executive Pay

Since 2003 UK company law has required that quoted companies produce a directors’ remuneration report (which forms part of their annual report and accounts) and seek an advisory vote on that remuneration report. These reports provide detailed disclosure of the pay and benefits for the financial year in question but contain limited information about the bonus and incentive targets for the following financial year.

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Defrauded Investors Deserve Their Day in Court

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Sunday, May 6, 2012
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement from Commissioner Aguilar; the full statement, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Commission has authorized that a Study be sent to Congress expressing the views of the Staff on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934. However, my conscience compels me to write separately to record my views on the Study. I write to convey my strong disappointment that the Study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted, and will continue to result, due to Morrison v. National Australia Bank, Ltd.

In the United States we have a strong belief that, whether rich or poor, we are all entitled to our day in court. Sadly, for many American investors this is no longer true.

If American investors are defrauded by a company that they have invested in – and that company is listed on a foreign exchange – investors may be unable to have their day in court and seek redress against this company for its lies and misrepresentations. Thus, investors have been stripped of a traditional American right.

This was not always the case. For decades, federal courts applied the same standard to determine whether U.S. federal securities law applied to frauds that took place, in whole or in part, outside of the United States. Under that standard, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and other antifraud provisions applied “when there was ‘significant U.S. fraudulent conduct that directly caused the plaintiffs losses’ (the conduct test) or when there were ‘significant effects’ on the U.S. securities markets (the effects test).”

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Court Rules on Short-swing Liability Rules

Posted by Richard J. Sandler, Davis Polk & Wardwell LLP, on
Saturday, May 5, 2012
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Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

On March 26, 2012, in Credit Suisse Securities (USA) LLC v. Simmonds, the U.S. Supreme Court held 8-0 that the two-year statute of limitations for suits under the short-swing liability rules of Section 16(b) of the Securities Exchange Act of 1934 is not tolled (i.e., suspended) until an insider files a Section 16(a) disclosure statement; the limitations period can begin running even if the disclosure statement is filed at a later date or never filed at all. The Court’s decision provides insiders of U.S. public companies with better protection and more certainty against time-barred claims.

The Supreme Court reversed the Ninth Circuit, which had held, citing to its precedent, that the limitations period is tolled until an insider files the Section 16(a) disclosure statement “regardless of whether the plaintiff knew or should have known of the conduct at issue”. In dicta, the Supreme Court also rejected the Second Circuit’s rule that the limitations period is tolled until the plaintiff “gets actual notice that a person subject to Section 16(a) has realized specific short-swing profits that are worth pursuing”.

The Supreme Court did indicate some willingness to permit equitable tolling of the Section 16(b) limitations period, but under circumstances more limited than the “disclosure” rule of the Ninth Circuit or the “actual notice” rule of the Second Circuit.

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An Update on the Forum Selection Bylaw Cases

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 4, 2012
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The following post comes to us from Bradley W. Voss, partner in the Commercial Litigation Practice Group of Pepper Hamilton LLP, and is based on a Pepper Hamilton publication. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In February 2012, several purported class action lawsuits were filed in the Delaware Court of Chancery challenging corporate bylaw amendments adopted by companies pursuant to 8 Del. C. § 109. Generally speaking, the challenged bylaw amendments would require that certain types of corporate law claims by shareholders be brought and resolved in the Delaware Court of Chancery, and not elsewhere. [1] In the Delaware class actions, the shareholder plaintiffs sued a dozen companies, as well as members of their respective boards of directors. Each of the cases was assigned to Chancellor Leo E. Strine, Jr.

The complaints in the various actions are similar. Plaintiffs allege that the forum selection bylaw amendments are invalid under Delaware and other law, that they violate shareholder rights because they were adopted by boards of directors without the consent of the shareholders, and that the directors who adopted the bylaw amendments violated their fiduciary duties.

Of the 12 companies that were sued, the majority repealed the challenged bylaw prior to the deadline for responding to the complaint. In those cases, the parties stipulated that the claims were moot, and the actions were dismissed.

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Management Quality, Venture Capital Backing, and Initial Public Offerings

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 4, 2012
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The following post comes to us from Thomas Chemmanur, Professor of Finance at Boston College; Karen Simonyan of the Department of Finance at Suffolk University; and Hassan Tehranian, Professor of Finance at Boston College.

In the paper, Management Quality, Venture Capital Backing, and Initial Public Offerings, which was recently made publicly available on SSRN, we use hand-collected data on the quality and reputation of the management teams of a large sample of 3,240 entrepreneurial firms going public during 1993-2004 to conduct the first large-sample study of the relationship between VC-backing and management quality and the effect of these two variables on a firm’s IPO characteristics and valuation, post-IPO financial policies, and post-IPO operating performance. We hypothesize that VC-backing positively affects the quality of a firm’s management team, and that both management quality and VC-backing play a certifying role in conveying a firm’s intrinsic value to the financial market, reducing the information asymmetry faced by it.

Our empirical findings are as follows. First, we find that overall VC-backed firms have higher quality management teams compared to non-VC-backed firms. In particular, VC-backed firms have a greater percentage of management team members with MBA degrees, a greater percentage of managers with prior managerial experience, a greater percentage of managers in core functional areas (operations and production, sales and marketing, R&D, and finance), and larger management teams compared to non-VC-backed firms. At the same time, VC-backed firms have lower percentages of management team members who are CPAs and who have prior managerial experience at law and accounting firms; further, their managers have shorter average tenures and smaller heterogeneity in these tenures.

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The Clearing House Association Issues Draft Governance Principles

Posted by Michael M. Wiseman, Sullivan & Cromwell LLP, on
Thursday, May 3, 2012
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Michael M. Wiseman is managing partner of the Financial Institutions Group at Sullivan & Cromwell LLP. This post discusses the Guiding Principles for Banking Organization Corporate Governance, developed by the Clearing House, available here (with an introductory memorandum from Sullivan & Cromwell). Mr. Wiseman and Sullivan & Cromwell acted as advisers to the Clearing House, but the views expressed here are his and do not necessarily represent those of the Clearing House or the drafters.

The corporate governance of banking organizations has become the focus of intense examination in the wake of the financial crisis. Because of the complexity that surrounds both the causes of the financial crisis and the weaknesses and vulnerabilities it exposed in the banking system and financial markets, it is manifestly unreasonable to suggest that better corporate governance practices at banking organizations alone could have prevented, or even substantially ameliorated, the crisis. That said, good corporate governance, including a well-functioning board of directors, is critical to a financial institution’s ability to manage its risks prudently, while operating profitably and contributing to economic growth.

In recognition of the importance of good corporate governance in the banking system, the Clearing House, an association comprised of some of the world’s largest commercial banks, has developed and submitted for public comment its Guiding Principles for Banking Organization Corporate Governance (the “Guidelines”). These principles focus on the role of the board of directors, as a cornerstone of the governance structure.

The U.S. banking system is unusual in that banking organizations in the United States, especially larger ones, are typically organized in a bank holding company structure. There is a holding company, organized as an ordinary business corporation, as the top-tier entity, which in turn owns one or more commercial banks and other operating subsidiaries. The Guidelines address governance at both the top-tier entity and bank subsidiary levels, but recognize that many risk management and governance issues may be best addressed on an organization-wide basis at the top-tier entity level.

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Unique Issues Facing Companies Under the STOCK Act

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, May 3, 2012
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The following post comes to us from Kenneth A. Gross, leader of the Political Law Practice at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden, Arps memorandum.

On April 4, 2012, President Obama signed the Stop Trading on Congressional Knowledge Act (the “STOCK Act”), and the House Committee on Ethics issued the first set of guidance under the STOCK Act (see memorandum). Among other things, the STOCK Act confirms that Congressional Members and staff, and federal executive and judicial branch officials, owe a duty with respect to material, nonpublic information derived from the person’s position with the federal government under the insider trading provisions in Section 10(b) of the ’34 Act and related SEC Rule 10b-5. In other words, information held by such federal officials qualifies as inside information upon which an insider trading case can be based if it is shared. Although much has been said as to when a federal official can be liable as a “tipper” in an insider trading case, the following focuses on the “tippee” liability that can accrue to the company with which the official shares such information.

A company’s tippee liability is derivative of the tipper’s liability; that is, a tippee will not be found liable unless the tipper is found to be liable. For a tipper to be liable, he or she must (1) disclose material, nonpublic information to the tippee in breach of his or her fiduciary duty and (2) receive a personal benefit as a result of the disclosure. While the interpretation by the courts of “personal benefit” has not been consistent, it is important to note that a number of courts have broadly interpreted this requirement, for example finding the passing of information to maintain goodwill with the tippee sufficient to meet the test. If the elements of tipper liability are satisfied, tippees can be held liable if the tippee (1) acts on the information, and (2) knows, or reasonably should know, that the tipper’s disclosure is in breach of his or her fiduciary duty.

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