As we begin 2014, calendar-year companies are immersed in preparing for what promises to be another busy proxy season. We continue to see shareholder proposals on many of the same subjects addressed during last proxy season, as discussed in our post recapping shareholder proposal developments in 2013. To help public companies and their boards of directors prepare for the coming year’s annual meeting and plan ahead for other corporate governance developments in 2014, we discuss below several key topics to consider.
Posts Tagged ‘John Olson’
I. Overview of the First Half of 2013
The first six months of 2013 represented a time of transition for the SEC’s enforcement program, with a new Chairman and new Co-Directors for the Division of Enforcement at the helm. It is too soon to predict exactly how they may reshape the program—in contrast with this period four years ago, when Chairman Mary Schapiro and Enforcement Director Robert Khuzami assumed their positions in the wake of Madoff and the financial crisis and with a mandate for major reform, the new team is moving more incrementally. However, there can be little doubt that, when it comes to enforcement, the new leadership will be striking an aggressive tone. For the first time in the Commission’s history, the Chairman and the Enforcement Division leadership are all former criminal prosecutors. As Chair Mary Jo White recently emphasized: “The SEC is a law-enforcement agency. You have to be tough. You have to try to send as strong a message as you can, across as broad a swath of the market as you regulate.”
Having transformed U.S. bank regulation, Dodd-Frank implementation is now reshaping bank corporate governance. Recent rulemakings and proposals by the Board of Governors of the Federal Reserve System (Federal Reserve) point to a far more prescriptive approach to corporate governance for significant bank holding companies and significant foreign banking organizations with U.S. operations (FBOs) than traditionally has been the case. This approach should also be expected to apply to systemically significant nonbank financial companies (Nonbank SIFIs) designated by the Financial Stability Oversight Council.
In addition, Dodd-Frank has allowed regulators to expand their toolkit for dealing with perceived corporate governance failings, and so non-compliance with the new governance requirements may lead to greater supervisory consequences.
Below, we describe the principal new responsibilities that boards of directors and senior management should expect under the Federal Reserve’s new supervisory regime, as well as the increased penalties that may be imposed if those responsibilities are not met.
During the 2012 proxy season, the SEC staff concurred that a number of high profile shareholder proposals could be excluded from company proxy statements because various key terms in the proposals were not adequately defined or explained within the text of the proposal and supporting statement. See e.g., WellPoint, Inc. (SEIU Master Trust) (avail. Feb. 24, 2012, recon. denied Mar. 27, 2012) (concurring with exclusion of an independent chair proposal that referred to the New York Stock Exchange standard of independence without defining it because “neither shareholders nor the company would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires”); Textron Inc. (avail. Mar. 7, 2012) (arguing that a reference to the Rule 14a-8 eligibility requirements in a proxy access shareholder proposal was vague and indefinite, although the staff ultimately concurred with the exclusion of the shareholder proposal on other grounds); Dell Inc. (avail. Mar. 30, 2012) (concurring with the exclusion of a similar proxy access shareholder proposal because the proposal’s reference to the Rule 14a-8 eligibility requirements was vague and indefinite). While these no-action letters reflected long-standing SEC staff precedent, in the current proxy season, there has continued to be a large number of no-action requests arguing that various terms in shareholder proposals are undefined or vague and therefore excludable under Rule 14a-8(i)(3).
This post addresses an emerging litigation trend that entails a higher degree of litigation risk than in past years. Companies familiar with shareholder litigation in the context of mergers and acquisitions transactions know that virtually all material corporate transactions attract plaintiffs’ lawyers who, suing on behalf of shareholders, allege that proxy materials published ahead of a shareholder vote are, for one reason or another, false or misleading. These plaintiffs’ lawyers typically seek a quick settlement in which the issuer avoids a possible injunction delaying the shareholder vote on the proposed transaction by publishing “corrected” disclosure. In return, the plaintiffs’ lawyers demand a fee for the purported “benefit” to the shareholder class.
This proxy season, there has been an uptick in the number of cases in which plaintiffs’ lawyers assert similar claims in connection with “say-on-pay” proxy disclosures and approval of equity incentive plans. Although many of these cases have been dismissed, or motions for preliminary injunctive relief have been denied by the courts, some issuers are electing to settle such claims to avoid even a remote possibility of a delayed annual shareholder meeting and the burden and expense associated with litigation. Recent press reports highlight this growing trend.  We outline below the current trend and several suggested strategies for addressing this new proxy litigation.
Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co., Inc. (“Glass Lewis”), the two major proxy advisory firms, recently released updates to their proxy voting policies for the 2013 proxy season. The ISS U.S. Corporate Governance Policy 2013 Updates (the “ISS Policy Updates”), which are available at http://issgovernance.com/policy/2013/policy_information, apply to shareholder meetings held on or after February 1, 2013. ISS also has released updated Frequently Asked Questions (the “ISS FAQs”), available at the link above, relating to its 2013 policies. The Glass Lewis Proxy Paper Guidelines for the 2013 Proxy Season (the “Glass Lewis Guidelines”) will be effective for annual meetings held on or after January 1, 2013. A summary of the updates to the Glass Lewis Guidelines is available here. This alert reviews the most significant ISS and Glass Lewis updates and suggested steps for companies to consider in light of these updated proxy voting policies.
We promised to keep you updated on the legal and regulatory developments which we identified as pending developments in our Alert “From the Shareholders’ Spring to the Autumn of Activism . . . Power without Accountability — A look at the latest developments in activism and related regulations in the UK and EU” dated 10 August 2012.  Since that time there have been a few new developments as summarised below:
1. Institute of Chartered Secretaries and Administrators (ICSA): New Guidance for Shareholder Engagement — Issue of Consultation Paper (October 2012) 
In July 2012, ICSA announced that it would partner with the Investor Stewardship Working Party to develop a good practice guide to supplement (not replace) the guidance in the UK Stewardship Code (see 3 below).
Together the groups concluded that in addition to improving the process of holding engagement meetings with shareholders, the very tone of conversation between companies and their investors should change.
ICSA published its consultation paper on 12 October seeking views on:
With the arrival of fall, calendar-year companies are gearing up for what promises to be another busy proxy season, preparing for new rules that will impact their disclosures and governance practices, and planning their 2013 board and committee calendars. To assist public companies in these endeavors, we discuss below ten key items for corporate secretaries and in-house counsel to consider.
At an open meeting held on August 15, 2012, the Public Company Accounting Oversight Board (“PCAOB”) voted to approve new Auditing Standard No. 16, Communications with Audit Committees. Although the new standard retains most of the preexisting communication requirements, there are a number of new areas that the auditor must discuss with the audit committee, and there are some areas where the auditor must seek specific responses from the audit committee. The new standard, available at http://pcaobus.org/Rules/Rulemaking/Docket030/Release_2012-004.pdf, is intended to benefit investors by enhancing the relevance and quality of communications between the auditor and audit committee, facilitating audit committee oversight of financial reporting and fostering improved financial reporting.
Background and Effective Dates
The PCAOB initially proposed Auditing Standard No. 16 for comment in March 2010 and issued a revised proposal in December 2011 following an initial comment period and feedback received at a September 2010 roundtable. Auditing Standard No. 16 expands on and supersedes existing standards on communications with audit committees (interim standards AU sec. 380, Communication With Audit Committees, and AU sec. 310, Appointment of the Independent Auditor), and makes conforming changes to related standards. The new standard requires SEC approval and, if approved, will apply to audits of public company financial statements for fiscal years beginning on or after December 15, 2012.
Auditing Standard No. 16 is the first standard that the PCAOB has adopted following enactment of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, a new PCAOB standard will not apply to audits of “emerging growth companies” (“EGCs”) unless the SEC determines that the application of the standard is “necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation.” At its August 15 meeting, the PCAOB expressed its view that the SEC should approve the application of the new standard to EGCs.
This alert discusses some of the recent regulatory developments and debate in the UK and at EU level which may have an impact on institutional investors (asset managers and asset owners) and public companies and takes a look at some examples of investor activism in these jurisdictions.
I. Shareholder Spring — Recent Examples of Activism
The UK press has had a field day over the past 12 months with news of shareholder challenges or activism. In the run up to the AGM season in the spring, barely a day went by without report of shareholders flexing their muscles by taking on the boards of listed companies — the discussions and debates which typically had gone on behind closed boardroom doors had escaped into the public arena.
The issues that boards have been called up on have varied from corporate governance (with a particular focus on the highly emotive board remuneration issues), to influencing corporate events (acquisitions, disposals, takeovers) to more fundamental challenges on corporate and business strategy with a view to unlocking value for shareholders.