Seven major law firms — Cravath, Swaine & Moore LLP, Davis Polk & Wardwell LLP, Latham & Watkins, LLP, Simpson Thacher & Bartlett LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Sullivan & Cromwell LLP and Wachtell, Lipton, Rosen & Katz — collaborated on a 17-page comment letter  in response to a request by the SEC last December for additional comments on its proposed proxy access rules.  These seven firms previously submitted a comment letter  last August on the proxy access proposal, which was described on the Forum here.  In light of the additional data and analyses cited in the SEC’s request for additional comment, as well as the recent comments by some of the Commissioners regarding the possibility of permitting shareholders to approve a more restrictive proxy access standard, the comment letter elaborated on the seven firm’s earlier recommendation that shareholders should have the opportunity to modify or opt-out entirely from the SEC’s proxy access regime if Rule 14a-11 were adopted.  As currently proposed, Rule 14a-11 only permits shareholders to adopt less restrictive provisions (a one-way opt-out) to facilitate proxy access.  The most recent seven firm letter recommended that shareholders should be permitted to adopt either more or less restrictive provisions (a two-way opt-out), including a complete exemption or an alternative regime, for the following reasons:

…continue reading: Seven Law Firms Comment on “Opt-Out” Under SEC’s Proposed Proxy Access Rules

“Street name registration” largely took root under emergency conditions stemming from a paperwork crisis during the 1960s, before networked computers were ubiquitous in trading markets. Immobilizing stock and registering it in the name Cede &Co., which was presumed by many to a temporary measure, now undermines our ownership culture.

Just as poker chips allow us to play under rules that often favor the house, those holding “security entitlements,” instead of registered stock, do not acquire the rights of real shareowners.

Street name registration, and the costs associated with shareowners learning each other’s identity, escalates the cost of proxy solicitations to hundreds of thousands of dollars—and that exorbitant cost is why entrenched boards routinely run unopposed. Eliminating street name registration, in favor of a direct registration system (DRS), could bring the cost of proxy solicitation down to a few thousand dollars. That could have a bigger impact on shareowner rights than the SEC’s proposed proxy access initiative.

…continue reading: Street Name Registration: An Antiquated Idea

The Harvard Law School Program on Corporate Governance recently released as a working paper the transcript of the Program’s Proxy Access Roundtable, which was held late last year.  The working paper containing the transcript is available here. The editors, Lucian Bebchuk and Scott Hirst, have also submitted the transcript to the Securities and Exchange Commission as a comment on the Commission’s proposed rule on proxy access, Facilitating Shareholder Director Nominations, and hope that it will be a useful contribution as the Commission considers rulemaking on the subject.

The Roundtable brought together prominent participants in the debate – representing a range of perspectives and experiences – for a day of discussion on the subject.  The day’s first two sessions focused on the question of whether the Securities and Exchange Commission should provide an access regime, or whether it should leave the adoption of access arrangements, if any, to private ordering on a company-by-company basis. The third session focused on how a proxy access regime should be designed, assuming the Securities and Exchange Commission were to adopt such an access regime. The final session went beyond proxy access and focused on whether there are any further changes to the arrangements governing corporate elections that should be considered. Further information about the Roundtable is available here.  The transcript was edited by the participants and the editors, with the aim of retaining the spirit of the Roundtable while ensuring that the message of each participant is clearly and accurately conveyed to readers.

…continue reading: The Harvard Law School Proxy Access Roundtable: The Transcript

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. – Sir Winston Spencer Churchill

Don’t look back. Something might be gaining on you. – Leroy (Satchel) Paige

As 2009 comes to a close and we prepare for the 2010 proxy season, it is time to contemplate the changes that have occurred, and what they might portend for 2010. The two quotes above seem to best encapsulate both the mood and the reality of those involved in corporate governance.

As 2009 started, advisors and observers hunkered down to weather all of the dramatic changes that appeared to be certainties: Proxy Access, ‘Say on Pay’ (SOP), and separation of the role of Chairman from that of Chief Executive would altered by legislative fiat or regulatory order. Yet despite all of the motion and noise, only one major governance change took place in 2009, that of the Securities and Exchange Commission amending the broker discretionary vote, NYSE Rule 452, relating to director elections. 2009 might have been an even more dramatic year for corporate governance had it not been for the Obama administration focus on health care. This shift in attention on the part of the White House has been cited by numerous commentators as a key reason for the decrease in momentum of financial and governance-related regulation and legislation.

…continue reading: Looking Ahead at 2010 By Looking Back at 2009

Although many things about proxy access remain uncertain, it is clear the SEC remains committed to adopting a final rule in early 2010. The new rule will likely be effective for the 2011 proxy season.

In our previous Proxy Access Analysis No. 4 we observed that:

• A critical question for companies and investors alike is whether the final rule will permit shareholders to adopt bylaws that impose greater limitations on proxy access than the SEC rule (for example, by raising the minimum number of shares that a nominating shareholder must own or increasing the holding period).
• If the final rule does permit shareholders to adopt such a bylaw (commonly called an opt-out bylaw), it seems safe to assume many companies will propose opt-out bylaws to their shareholders in order to tailor proxy access better to the particular circumstances of each company.
• It would make sense for companies to consider over the next several months whether they would prefer to propose an opt-out bylaw at their 2010 annual meetings, rather than waiting until their 2011 meetings or later.

…continue reading: Pros and Cons of Voluntarily Implementing Proxy Access

Although there can be legitimate debate over whether there should be a federally-mandated proxy access rule, if we assume that the Securities and Exchange Commission does adopt a final proxy access rule in 2010, two critical issues are whether the rule will allow for shareholder choice and, if so, what paradigm will be used. This paper first addresses the cases for and against shareholder choice and concludes that shareholder choice should be permitted on proxy access. It then explores the two principal paradigms the Commission’s final proxy access rules could utilize to provide shareholder choice and makes recommendations on key implementation issues under each paradigm.

The debate at the Commission’s open meeting in May 2009, preceding its divided vote to propose proxy access rules, centered on issues of shareholder choice and private ordering. As proposed, the proxy access rules would give shareholders only a right to liberalize proxy access, but no right to make the terms of proxy access more restrictive or to opt-out completely. Many commentators have criticized the asymmetrical, “one way street” aspect of this version of shareholder choice and argued for a broader version that would allow greater freedom to shareholders to vary the SEC prescribed access regime in either direction.

…continue reading: Shareholder Choice in a World of Proxy Access

On November 19, 2009, RiskMetrics Group issued updates to its proxy voting policy that will be applicable to shareholder meetings held on or after February 1, 2010. The policy updates that are applicable to US companies are available at here. This briefing summarizes those policy updates that affect US companies and discusses implications for voting recommendations and results in uncontested elections of directors. [1] Notably, RiskMetrics’ updated policy expands the circumstances that will lead it to recommend that its clients vote against or withhold votes for directors who are up for re-election in 2010. As outlined in Appendix A, there will now be more than 40 categories of practices that could lead to a negative vote recommendation.

RiskMetrics voting recommendations are influential: The voting results at Russell 3000 companies for the 2009 proxy season indicate that the vast majority of directors who received a majority “against” or “withhold” vote also received an adverse RiskMetrics vote recommendation. The impact of negative vote recommendations is likely to be even greater for the 2010 proxy season because of the increase in companies adopting majority voting for the election of directors and/or director resignation policies, coupled with the elimination of brokers’ ability to vote in director elections in the absence of customer instructions.

In preparing for their companies’ 2010 annual meetings, corporate counsel, corporate secretaries and directors (particularly those serving on compensation or nominating and governance committees) should review the updated policy and consider areas of potential vulnerability.

…continue reading: RiskMetrics Issues Policy Updates for 2010 Proxy Season

The Harvard Law School Program on Corporate Governance recently issued our paper, Private Ordering and the Proxy Access Debate. The paper can be downloaded here.

The paper addresses key objections raised against the SEC’s proposal to provide shareholders with rights to include shareholder nominees for election as directors on the company’s proxy statement. Opponents have argued that a preference for private ordering and a recognition that “one size does not fit all” support retention of the current default rule that prevents shareholder nominees from being included on the company’s proxy. We show that this is not the case.

First, opponents argue that, even assuming proxy access is desirable in many circumstances, the existing no-access default should be retained and the adoption of proxy access arrangements should be left to opting-out of this default on a company-by-company basis. Our article identifies strong reasons against retaining no-access as the default. There is substantial empirical evidence indicating that insulating directors from removal is associated with lower firm value and inferior performance. Furthermore, when opting-out from a default arrangement serves shareholder interests, a switch is more likely to occur when it is favored by the board than when disfavored by the board. We analyze the impediments to shareholders’ obtaining opt-outs that are favored by shareholders but not the board, and we present empirical evidence indicating that such impediments are substantial. The asymmetry in the reversibility of defaults highlighted in this article should play an important role in default selection.

…continue reading: Private Ordering and the Proxy Access Debate

Foreign acquisitions extend the boundaries of the firm across national borders. In the context of emerging markets, these boundaries are extended across countries with vast asymmetries in institutions and property rights protection. If developed-market firms can extend the benefits associated with superior institutions to their operations in emerging markets by acquiring control, the stock price of the acquiring firms should reflect these value gains. In our forthcoming Review of Financial Studies paper, The Value of Control in Emerging Markets, we examine the returns to shareholders of developed-market firms that undertook acquisitions in emerging markets.

We find that when developed-market acquirers gain control of emerging-market targets, they experience positive and significant abnormal returns of 1.16%, on average, over a three-day event window. In the context of the well-documented underperformance of acquiring firms in U.S. mergers and acquisitions (M&A) transactions, this return is somewhat anomalous. It is also fairly substantial when viewed in relation to the size of acquiring firms in these transactions. The acquirer stock price reaction suggests a median (mean) dollar value gain of $4.07 ($30.15) million for the acquirer. In comparison, the median (mean) transaction value in an emerging-market acquisition where control is acquired is $42.41 ($308.57) million. In contrast, acquisitions of minority stakes do not deliver significant acquirer returns.

…continue reading: The Value of Control in Emerging Markets

Editor’s Note: David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on an article by Mr. Katz and Laura A. McIntosh, consulting attorney for Wachtell, Lipton, Rosen & Katz. The article first appeared in the New York Law Journal.

Although 2009 was more notable for legislative and regulatory corporate governance initiatives than for shareholder activism, the recently concluded proxy season produced several potentially significant results. As might be expected, executive compensation issues attracted a large number of shareholder proposals and a significant degree of shareholder support. In the general category of corporate governance, a few topics appeared to be increasingly popular with shareholders: the right to call special meetings, the majority election of directors and independent board chairmanship. Overall, shareholders focused on many of the same issues as did Congress and the Securities and Exchange Commission (SEC) over the last year. In light of the fact that the majority of legislative and regulatory initiatives proposed in 2009 will be pending through the beginning of 2010, a number of important variables remain unknown for next year’s proxy season.

…continue reading: Reviewing the 2009 Proxy Season And Looking Ahead to 2010