Monthly Archives: September 2013

When Do Shareholders Care About CEO Pay?

Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Ryan Krause, Kimberly A. Whitler, and Matthew Semadeni.

With recent legislation mandating that publicly traded corporations submit CEO compensation for a nonbinding shareholder vote, a systematic understanding of how shareholders vote under such circumstances has never been so important. Using simulated say-on-pay votes, this post investigates how different levels of CEO pay and company performance can interact to influence how shareholders vote.

In July of 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, among other things, mandated that all publicly traded U.S. corporations solicit a non-binding advisory vote from their shareholders to approve or reject the compensation of the most highly compensated executives, commonly referred to as “say-on-pay” (SOP) votes. In the short time since the passage of Dodd-Frank, these votes have already made waves. In 2011, the shareholders of Stanley Black and Decker issued a “no” vote, and the board subsequently lowered the CEO’s pay by 63 percent, raised the minimum officer stock requirements, altered its severance agreements to be less CEO friendly, and ended the practice of staggered board terms. [1]


Agencies Re-Propose Rule Implementing Risk Retention Requirements of Dodd-Frank Act

The following post comes to us from Eric R. Fischer, partner in the Business Law Department at Goodwin Procter LLP, and is based on a Goodwin Procter Financial Services Alert by William E. Stern, Brandon T. Thompson, and Brian M. Baum.

On August 28, 2013, the FDIC, OCC, FRB, SEC, Federal Housing Finance Agency, and Department of Housing and Urban Development (collectively, the “Agencies”) issued a second Notice of Proposed Rulemaking (the “revised proposal”) that would implement the risk retention requirements of Section 941 of the Dodd-Frank Act, which amended the Securities Exchange Act of 1934 (the “Exchange Act”) by adding a new Section 15G. Section 15G requires the Agencies to issue rules that would generally require that a securitizer of asset-backed securities (“ABS”) retain an economic interest in not less than 5% of the credit risk of the assets collateralizing such ABS. As discussed in the April 19, 2011 Financial Services Alert, the first Notice of Proposed Rulemaking (the “original proposal”) was jointly approved in April 2011 by the Agencies. In response to numerous comments received on the original proposal, the Agencies collectively developed the revised proposal, which includes significant modifications.


Facts Behind 2013 “Turnaround” Success for Say on Pay Votes

The following post comes to us from David Drake, President of Georgeson Inc, and is based on a Georgeson report by Mr. Drake, Rajeev Kumar, and Rhonda Brauer; the full report, including tables, is available here.

The 2013 proxy season marked the third year of Advisory Vote on Executive Compensation (a.k.a. Management Say on Pay, or MSOP proposals) as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. This post looks at some of the interesting facts relating to the 39 companies that received majority shareholder support for their MSOP vote in 2013 (for meetings held on or before July 31) after failing the vote in 2012 (turnaround companies [1]). The factors that contributed to turnaround success included improved total shareholder return, significant shareholder outreach, changes in compensation programs, support of proxy advisory firms, and utilization of compensation consultants and proxy solicitors.


Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions

The following post comes to us from S. Michael Sirkin, an attorney at Seitz Ross Aronstam & Moritz LLP. 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.

My article, Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions, examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. The settled rules of direct and derivative standing break down at the “singularity of the effective time” of a merger, yielding to conflicting principles of standing, corporation law and policy, and basic equity. The path-dependent network of rules and exceptions that has developed is an outgrowth of case-by-case adjudication that now begs for a one-time, wholesale reconfiguration.

The article takes on that task, proposing three straightforward rules that need no exceptions:


Adjusting to Shareholder Activism as the New Normal

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Joseph B. Frumkin, H. Rodgin Cohen, Francis J. Aquila, James C. Morphy and Glen T. Schleyer.

The results of the 2013 proxy season and other recent corporate governance developments have demonstrated that boards and management teams should thoughtfully assess their approach to dealing with hedge funds and other “long” investors that are considered “activist.” Responding effectively to these activist shareholders in today’s environment requires more continuous engagement with shareholders, a recognition of the broad support given to many activist campaigns by traditional investors and advance preparation.

The universe of “activist” shareholders has expanded and their supporters more so. There is a broad spectrum of activist behavior that many traditional institutional investors—mutual funds, pension funds, sovereign wealth funds and others—increasingly see as essential to enhancing their returns. This trend is reflected both in the increasing investor inflow into funds managed by hedge fund activists, which has permitted them to initiate action at larger companies, and in the increased voting support traditional institutional investors give to activist campaigns. To a greater or lesser extent, today many institutional investors are activist investors. These developments have highlighted the importance of management preparedness, board awareness and active, regular investor engagement on issues of importance to investors.


Delaware Court of Chancery Upholds Trados Transaction as Entirely Fair

The following post comes to us from David J. Berger, partner focusing on corporate governance at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert memorandum. 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. Additional reading about In re Trados Inc. Shareholder Litigation is available here.

On August 16, 2013, the Delaware Court of Chancery issued a much-anticipated post-trial decision in In Re Trados Incorporated Shareholder Litigation, holding that the sale of Trados to SDL was entirely fair to the Trados common stockholders and that the Trados directors had not breached their fiduciary duties in approving the transaction. [1] The case involved a common fact pattern: the sale of a venture-backed company where (1) the holders of preferred stock, with designees on the board, receive all of the proceeds but less than their full liquidation preference, (2) the common stockholders receive nothing, and (3) members of management receive payments under a management incentive plan.


SEC Practice In Targeting and Penalizing Individual Defendants

The following post comes to us from Michael Klausner, Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School, and Jason Hegland, Project Manager for Stanford Securities Litigation Analytics.

The recent trial of Fabrice Tourre has raised again the issue of whether the SEC should prosecute individuals who engage in misconduct or the firms that employ them. In the case of Tourre, some complained that the SEC targeted a relatively low level employee of Goldman Sachs rather than Goldman Sachs itself. Some even described him as a scapegoat. Not long ago, in the Bank of America case, Judge Rakoff leveled the opposite criticism at the SEC. Why was the agency seeking to impose a monetary penalty on BofA rather than prosecuting and penalizing individuals within BofA who had engaged in misconduct?

Each time this issue has come up, it seems that commentators assume that the practice in question is the predominant practice of the SEC—for example, the SEC predominantly goes after the corporation rather than individuals, or the SEC predominantly goes after low level employees rather than the corporation. We have recently completed, and intend to maintain, a database of SEC enforcement practices, and in this post, we shed some factual light on what the SEC actually does with respect to prosecuting and penalizing individual and corporate defendants. Specifically, we answer three questions: First, who does the SEC name as defendants—high level executives, lower level employees, the corporation itself? Second, to what extent does the SEC impose penalties on individual defendants? Third, how often does the SEC impose a monetary penalty on corporate defendants? We address these questions within the universe of SEC enforcement actions involving nationally listed firms for violation of disclosure-related rules—fraud, books and records and internal control rules. Our dataset covers cases filed from 2000 to the present.


Delaware Court Supports Morton’s Sale Process and PE Exit Motives

The following post comes to us from Alfred O. Rose, partner and head of the Private Equity Transactions practice group at Ropes & Gray LLP, and is based on a Ropes & Gray publication. 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.

In a recent decision of note concerning the 2012 sale of Morton’s Restaurant Group to Landry’s, Inc., Chancellor Strine of the Delaware Court of Chancery found that a private equity firm with a 28 percent stake in Morton’s was not a controlling stockholder, applied the business judgment rule, and dismissed the stockholder plaintiffs’ challenge to the sale at the motion to dismiss stage of litigation. The Morton’s decision will provide comfort to PE sponsors who hold minority positions in public companies, as it acknowledges the economic reality that even with a finite investment horizon, PE sponsors are incentivized to maximize an exit price and, as a result, bestow a control premium on all stockholders.

In his ruling, Chancellor Strine emphasized the fact that Castle Harlan, the 28 percent stockholder and Morton’s former PE sponsor, had not exercised undue influence over the fulsome nine-month sale process, and that all of Morton’s stockholders received equal consideration in the transaction. The Chancellor explained that this equal treatment among Morton’s stockholders acted as a “safe harbor”; unless there were strong indications to the contrary, he would presume that Castle Harlan’s interest in obtaining the best price in the transaction was aligned with the interests of the other stockholders.


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