The past year has been one of change and challenge for public companies and their boards, as companies have moved to implement “say-on-pay” and other provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). With the 2012 proxy season on the horizon, public companies and their directors will continue to feel the impact of Dodd-Frank as the Securities and Exchange Commission (“SEC”) proceeds with its ongoing efforts to implement the law. At the same time, public companies and their boards are operating in an environment where the balance of power between boards and shareholders continues to shift. The traditional, board-centric model of corporate governance continues to gravitate toward a paradigm that includes an increased role for shareholders. Activist shareholders are seeking greater participation in companies’ governance and operations, and they are exerting increased pressure on companies to adopt so-called corporate governance “best practices.”

…continue reading: Considerations for Public Company Directors in the 2012 Proxy Season

On October 9, 2011, California Governor Jerry Brown signed into law competing bills that create two new corporate forms in California — a “flexible purpose corporation” and a “benefit corporation” — intended to allow entrepreneurs and investors the choice of organizing companies that can pursue both economic and social objectives. The new corporate forms differ from traditional for-profit corporations that are organized to pursue profit (and not social purposes) and non-profit corporations that must be used solely to promote social benefits. These laws will take effect on January 1, 2012.

The flexible purpose corporation is created by California Senate Bill 201 (“SB 201″), which adds Division 1.5 to Title 1 of the California Corporations Code (the “Code”) and amends other related sections of the Code, and the benefit corporation is created by California Assembly Bill 361 (“AB 361″), which adds Part 13 to Division 3 of Title 1 of the Code. State Senator Mark DeSaulnier authored SB 201, and a full copy is available here. AB 361 was authored by Assemblyman Jared Huffman, and a full copy is available here. Both new laws take effect January 1, 2012.

…continue reading: Two New Corporate Forms to Advance Social Benefits in California

On June 13, 2011, the U.S. Supreme Court concluded that Janus Capital Management (JCM) cannot be held liable in a private suit under the Securities and Exchange Commission’s Rule 10b-5 for drafting allegedly misleading prospectuses for the mutual funds it advises. Reversing a contrary decision by the Fourth Circuit, the Court held in Janus Capital Group Inc. v. First Derivative Traders, No. 09-525, that the only proper defendant in a private Rule 10b-5 suit is the “maker” of a statement—”the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it,” slip op. at 6—and that “[t]he statements in the [mutual fund] prospectuses were made by [the mutual funds], not by JCM,” id. at 12.

JCM is a registered investment adviser that, among other things, advises the Janus family of mutual funds; the Janus Funds are governed by an independent Board of Trustees, and are not owned or controlled by JCM. First Derivative Traders invested in the stock of JCM’s parent company, Janus Capital Group Inc. (JCG). It alleged that the price of JCG’s stock was artificially inflated as a result of misleading statements in the Janus Funds’ prospectuses, and that JCM had drafted those statements. Although the district court dismissed the operative complaint for failure to state a claim, the Fourth Circuit reversed, holding that, “by participating in the writing and dissemination of the prospectuses,” JCM “made the misleading statements contained in [those] documents.” Slip op. at 4 (emphasis in original).

…continue reading: U.S. Supreme Court Clarifies the Scope of Private Liability Under Rule 10b-5

On February 25, my colleagues at Gibson Dunn, Gene Scalia, Amy Goodman and Dan Davis, representing petitioners Business Roundtable and the U.S. Chamber of Commerce, filed the petitioners’ reply brief in Business Roundtable v. SEC, a challenge to the Securities and Exchange Commission’s recently promulgated rules providing certain shareholders the right to place board-of-director nominees in company proxy materials.

According to the petitioners, in promulgating the rules the Commission failed to satisfy its statutory duty to assess the rules’ economic consequences. The Commission instead speculated about the rules’ costs, despite record evidence showing that the rules would likely cause expensive election campaigns. The petitioners contend further that the shareholders most likely to use the rules are union and government pension funds, which have a history of using shareholder activism to pursue non-investment-related objectives that depart from other shareholders’ interests. The petitioners fault the Commission for claiming that the rules further shareholder rights, when the mandatory rules instead disenfranchise the vast majority of shareholders, who may wish to avoid the tremendous costs that proxy access would impose on their company.

…continue reading: Petitioners File Reply Brief in Challenge to SEC Proxy Access Rules

Business Roundtable and the Chamber of Commerce have challenged SEC rules requiring public companies in certain circumstances to include shareholder nominees for director in the company’s proxy materials.  The final rules comprise two main rules: (1) Rule 14a-11, which would require a publicly-traded company to include in its proxy materials a candidate nominated by shareholders that have held shares representing at least 3 percent of the voting power of the company’s stock for the past 3 years; and (2) amendments to Rule 14a-8(i)(8), which would require companies in certain circumstances to include in their proxy materials shareholder proposals regarding director nomination procedures.  The Business Roundtable and Chamber of Commerce have challenged Rule 14a-11 and its related amendments, but not amended Rule 14a-8(i)(8).  The Summary of Argument from the Business Roundtable and Chamber of Commerce Opening Brief appears below.

…continue reading: Challenge to SEC Proxy Access Rules

On Friday, October 8, 2010, the SEC and the petitioners jointly filed a proposed briefing schedule for the case before the Court of Appeals. In the filing, the SEC confirmed that it does not expect proxy access to be available for the 2011 proxy season, and instead seeks a court ruling by the summer of 2011, so that if the rules are upheld, they may be used in the 2012 proxy season. The motion stated that the stay “necessarily means that the Commission’s rule changes will not be available for use by shareholders during the 2010-2011 proxy season.”A copy of the motion is available here.

In their joint motion, the parties proposed to the court that the case be briefed in November through February, with the petitioners’ brief due on November 30, 2010 and the SEC’s brief due on January 19, 2011. Oral argument would be expected in March or April under this schedule, with a decision by the summer. The schedule is subject to approval by the Court of Appeals.

…continue reading: Proxy Access Litigation and Next Steps

Today, the United States Supreme Court issued its opinion in Free Enterprise Fund v. Public Company Accounting Oversight Board, No. 08-861. The Public Company Accounting Oversight Board (“Board”) was created by the Sarbanes-Oxley Act of 2002 to regulate accounting firms that conduct audits of public companies. The five members of the Board are appointed by the Securities and Exchange Commission (“SEC”), and are removable by the SEC only “for good cause shown” and “in accordance with” certain procedures. This “dual for-cause” removal regime–wherein a Board member is only removable for good cause shown by the SEC, whose Commissioners the President may not remove at-will–was described by the Court as “novel” and “highly unusual.”

…continue reading: Restriction on Removing PCAOB Members Violates Separation of Powers

The current economic and regulatory landscape poses unprecedented challenges for public companies and their boards of directors. They are facing scrutiny from shareholders, Congress, regulators and the public, and new proposals to address the causes of the financial crisis have been emerging on almost a daily basis for over a year now.

Some of these proposals have been adopted and some remain under consideration at a time when calendar-year companies are preparing for the 2010 proxy season, complicating the planning process. Of particular note, in December, the Securities and Exchange Commission (“SEC”) adopted new proxy disclosure rules that likely will be a focal point for public company directors, as the new rules relate to disclosures regarding the composition and operation of boards of directors. [1] This memorandum is an update of our client alert covering considerations for public company directors in the current environment issued on October 15, 2009.

…continue reading: Considerations for Directors in the 2010 Proxy Season

On November 25, 2009, the Securities and Exchange Commission (“SEC”) approved amendments to the corporate governance listing standards of the New York Stock Exchange (“NYSE”). The changes will take effect on January 1, 2010.

As discussed in more detail below, the amendments, which the SEC approved in the form proposed in the NYSE’s original release: (1) codify certain staff interpretations, (2) clarify various disclosure requirements, and (3) incorporate applicable SEC disclosure requirements into the NYSE listing standards. Because most of the amendments conform the NYSE listing standards to existing SEC rules, or are of a clarifying or updating nature, they should necessitate only minimal changes to a listed company’s governance practices and disclosures. The most significant change is the new requirement that companies notify the NYSE in writing after any executive officer becomes aware of “any” non-compliance with the corporate governance listing standards, rather than any “material” non-compliance, as currently required.

The SEC release approving the NYSE amendments can be found here. The NYSE filing outlining the proposed amendments includes a mark-up showing the proposed changes to the text of the corporate governance listing standards.

…continue reading: SEC Approves Amendments to NYSE Corporate Governance Listing Standards

(Editor’s Note: This post from John F. Olson is based on a Gibson, Dunn & Crutcher LLP client memorandum by Michael Bopp and Aditi Prabhu.)

This update focuses on the launching of the Financial Crisis Inquiry Commission (“FCIC” or “Commission”), which was created by Congress as section 5 of the Fraud Enforcement and Recovery Act, which became law on May 20, 2009. The bipartisan Commission is charged with examining the domestic and global causes of the current U.S. financial and economic crisis. In addition to discussing the Commission’s first meeting, which took place today, this alert summarizes the Commission’s broad investigatory mandate, its subpoena and other coercive powers, and its charge to gather information from private and public entities.

FCIC Holds First Meeting; Sets Course for Rigorous Investigations

The FCIC held its first public meeting today in order to outline for the public its mission and approach.  The majority of the meeting consisted of prepared statements by the Commissioners and concluded with a timeline for the investigation.  The Commissioners highlighted the importance of the FCIC’s work and their commitment to the daunting task of determining the causes of the economic crisis.  While the remarks were mostly broad in nature, the Commissioners repeatedly pointed to failures on the part of both the financial system and government regulators as contributing to the crisis.

Chairman Phil Angelides

Chairman Angelides related that while this is the FCIC’s first public meeting, it has held several working sessions.  The Commission has adopted rules and procedures and, most notably, has created whistleblower protections for those who convey information to the Commission.

Angelides introduced Thomas Greene as the newly-appointed Executive Director the Commission.  Greene previously served as Chief Assistant Attorney General of the Public Rights Division in the Office of the Attorney General of California.

Angelides noted that the purpose of the Commission is to determine the causes of the crisis, not to offer “prescriptions for the future,” although the Commission is permitted to do so.  He compared the FCIC to the 9/11 Commission, which conducted over 1200 interviews, reviewed 2.5 million pages of documents, and held 12 days of public hearings.  Angelides expressed the view that the FCIC should be “similarly thorough” and should “leave no financial stone unturned.”  He also compared the FCIC’s work to the Pecora hearings in the 1930s in terms of its aspired impact.

He noted that the Commission’s final report is due in 15 months.  To carry out its mission, the Commission will seek records from government agencies and financial institutions, and hold hearings.  Angelides mentioned that the FCIC will use its subpoena power if necessary.

Vice Chairman Bill Thomas

Vice Chairman Thomas distinguished the FCIC from congressional committees which are also working on similar issues by stating that the Commission need not respect any boundaries.  Rather, its real constraint is time.

…continue reading: Financial Crisis Inquiry Commission to Begin Investigations