ProxyPulse™ provides data and analysis on voting trends as the proxy season progresses. This first edition for the 2013 season covers the 549 annual meetings held between January 1, and April 23, 2013 and subsequent editions will incorporate May and June meetings. These reports are part of an ongoing commitment to provide valuable benchmarking data to the industry.

The analysis is based upon Broadridge’s processing of shares held in street name, which accounts for over 80% of all shares outstanding of U.S. publicly-listed companies. For purposes of this report, the term “institutional shareholders” refers to mutual funds, public and private pension funds, hedge funds, investment managers, managed accounts and voting by vote agents. The term “retail shareholders” refers to individuals whose shares are held beneficially in brokerage accounts.

…continue reading: How Well Do You Know Your Shareholders?

1. Shareholder activism is growing at an increasing rate. No company is too big to become the target of an activist, and even companies with sterling corporate governance practices and positive share price performance, including outperformance of peers, may be targeted.

2. “Activist Hedge Fund” has become an asset class in which institutional investors are making substantial investments. In addition, even where institutional investors are not themselves limited partners in the activist hedge fund, several now maintain open and regular lines of communication with activists, including sharing potential “hit lists” of possible targets.

3. Major investment banks, law firms, proxy solicitors, and public relations advisors are representing activists.

…continue reading: Lessons from the 2013 Proxy Season

After the horrifying collapse of a factory in Bangladesh killed over 1,100 workers, companies like H&M are moving to strengthen supplier standards and audits, as they should. We have seen similar responses to other compliance meltdowns in the past. Banks trumpet new checks and balances to help prevent excessive risk taking, massive trading losses and robo-foreclosures. Walmart points to changes in its compliance policies in response to front-page allegations of bribery and corruption in Mexico. Companies are quite happy to tell investors, employees, and the public how such changes will prevent the same problems from recurring.

This public disclosure about change for the future is commendable. But such reforms must be accompanied by measures to hold executives accountable for major compliance failures in the past. And here, beyond the occasional news report that a CEO volunteered to forego a bonus, companies tell us very little.

…continue reading: Demanding Transparency in Clawbacks

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).

…continue reading: Assessing Vague Shareholder Proposals Under Rule 14a 8(i)(3)

“Then you should say what you mean,” the March Hare went on.

“I do,” Alice hastily replied; “at least—at least I mean what I say—that’s the same thing, you know.”

“Not the same thing a bit!” said the Hatter. “You might just as well say that ‘I see what I eat’ is the same thing as ‘I eat what I see’!”

Alice in Wonderland, Lewis Carroll (1865)

The Preamble to SEC Disclosure Regulations (2006) [1] states: “We believe that plain English principles should apply to the disclosure requirements that we are adopting, so disclosure provided in response to those requirements is easier to read and understand. Clearer, more concise presentation of executive and director compensation…can facilitate more informed investing and voting decisions in the face of complex information about these important areas.”

To which the Mad Hatter might have responded: “You can assume plain English conveys clear thinking, but what happens if plain English is not fed by clear thinking?”

…continue reading: Assigning Value to Long-Term Incentive Pay

The 2012 proxy season in the United States, forecast by some to feature significant turmoil and change, has in fact been less tumultuous than expected. It’s been all quiet on the regulatory front, owing to the SEC’s highly deliberate approach to rulemaking and the D.C. Circuit’s interventionist reaction to the proxy access rules. With new rules, for once, not in motion, change is occurring incrementally, as activists continue old campaigns and launch new ones, institutional shareholders express their support on both the issues and the circumstances of particular companies, and the companies themselves decide when to resist and when to negotiate.

Continued Support for Say-on-Pay Votes

Obtaining say-on-pay support continues to be a nonissue for many companies. Of the 639 large accelerated filers to report results as of May 18th, only 2% failed their say-on-pay votes, the same percentage that we saw in 2011. Less than 16% of large accelerated filers reported say-on-pay results below the 80% approval level and less than 10% reported results below the 70% approval level. The continued high pass rates may reflect not only the tactical judgment of shareholders to force the issue at only a handful of companies, but also the retreat at many companies from practices that had drawn the most criticism, such as tax gross-ups and excessive severance. Many companies also increased their engagement with shareholders and have done a better job of explaining their pay practices.

…continue reading: Mid-Season Update on the 2012 Proxy Season

The compensation discussion and analysis (CD&A) portion of the corporate proxy statement has been a point of frustration for both issuers and investors since its adoption by the U.S. Securities and Exchange Commission (SEC) in 2006. The compensation disclosure regime was intended to help both shareowners and boards of directors make more informed decisions concerning appropriate executive compensation practices. However, the CD&A report, in its current format, has often resulted in frustration due to its length and complexity and because such reports often focus on regulatory compliance to the detriment of conveying the company’s compensation story in a concise and understandable manner.

…continue reading: CD&A Template Will Help Issuers Improve Compensation Disclosure

(Editor’s Note: This post is based on a Sullivan & Cromwell LLP client memorandum.)

The SEC has proposed to amend the Internet proxy delivery rules in order to increase retail shareholder participation in the proxy voting process and to improve the notice and access model. The proposed amendments would:

• provide flexibility regarding the format and content of the Notice of Internet Availability of Proxy Materials;
• permit issuers and other soliciting persons to accompany the Notice of Internet Availability of Proxy Materials with an explanation of the process of receiving and reviewing proxy materials and voting; and
• permit a soliciting person other than the issuer to use the notice and access model and send its Notice of Internet Availability for Proxy Materials by the later of
  • 40 days before the shareholders meeting, or
  • the date on which the soliciting person files its definitive proxy statement if the soliciting person’s preliminary proxy statement is filed within 10 days of the issuer’s filing of its definitive proxy statement.

The SEC is providing an abbreviated comment period with comments due by November 20, 2009.

…continue reading: Proxy Solicitation Through the Internet

I. E-Proxy Update

In 2007, the Securities and Exchange Commission (the “SEC”) adopted rules providing for proxy materials (including the proxy statement, a proxy card, the “glossy” annual report and any other soliciting materials) to be made available to shareholders via a publicly accessible Internet website other than the SEC’s EDGAR website (the “E-Proxy Rules“).[1] Starting January 1, 2009, all public companies must comply with the E-Proxy Rules.[2] As a result, all companies conducting proxy solicitations will have to post materials on the Internet and can choose among the delivery options for proxy materials available under the E-Proxy Rules: the “notice and access option,” the “full set delivery option,” or a hybrid of these options.

A. Notice and Access
Under the notice and access option, a company can satisfy the proxy delivery requirements by delivering a Notice of Internet Availability of Proxy Materials (a “Notice of Internet Availability”) to shareholders at least 40 calendar days before the annual meeting date and posting proxy materials on an Internet website.[3] The information that can be included in the Notice of Internet Availability is limited and must conform to specified criteria set forth in the SEC rules.[4] The Notice of Internet Availability may not be accompanied by a proxy card or other information. Even though proxy materials are electronically delivered under this option, issuers must deliver proxy materials to any shareholder upon request.[5]

An intermediary (such as a broker or a bank who holds the shares on behalf of beneficial owners) may not independently elect to use the notice and access option, but is required to do so if requested by the issuer. To facilitate this process, an issuer must provide required information to intermediaries sufficiently in advance for the intermediary to prepare and send a Notice of Internet Availability at least 40 days before the date of the annual meeting.[6]

According to Broadridge Financial Services, Inc., as of June 30, 2008, 653 issuers used the notice and access model for distribution of their proxy materials.[7]

…continue reading: E-Proxy Rules Take Effect for All Public Companies

I filed earlier this week an amici curiae brief — on behalf of forty-six corporate and securities law professors from twenty-eight law schools around the country — in the case of Lucian Bebchuk vs. Electronic Arts, Inc.. The case is pending before the United States District Court for the Southern District of New York. The professors’ amici curiae brief is available here.

The case focuses on a shareholder proposal that was submitted by Lucian Bebchuk to Electronic Arts (EA). The proposal is precatory and recommends that the board submit to a shareholder vote a charter or bylaw amendment that, if adopted, would require the company (to the extent permitted by law) to include in the company’s proxy materials qualified proposals for a bylaw amendment. For a proposal to be qualified, the proposal would have to meet certain significant requirements, including being submitted by a shareholder(s) with more than 5% of the company’s stock. The proposal is available here.

EA excluded the proposal from the company’s ballot, and the case focuses on whether the SEC’s shareholder proposal rule (Rule 14a-8) allows the company to do so. The U.S. Chamber of Commerce weighed in, filing an amicus curiae brief in support of EA. The Chamber’s amicus brief is available here and EA’s brief is available here. The response brief filed by Bebchuk’s counsel is available here.

The professors’ amici curiae brief, filed in support of Bebchuk’s position, focuses on two central arguments made in defense of excluding the proposal whose acceptance could have significant implications far beyond the current case:

(1) Preemption Argument: EA and the Chamber argue that Rule 14a-8 preempts the field in determining access to the issuer’s proxy statement and thus would invalidate an internal corporate governance arrangement otherwise permissible under state law that would require a company to include some proposals that the Rule permits the company to include or exclude.

Acceptance of the preemption argument would have far-reaching consequences, invalidating any charter or by-law provisions that provide shareholders with access to the company’s proxy materials. As the professors’ brief points out, this argument is directly opposite to the Chamber’s position in its submission to the SEC last year that “state law defines the rights of shareholders, including…the extent to which they have access to the company’s proxy…” This argument is also directly opposite to the view expressed by the Second Circuit in AFSCME vs. AIG. In this case, taking as settled law that a bylaw expanding shareholder access to the company’s proxy beyond Rule 14a-8’s minimum requirements is permissible, the Court stated that such bylaws “are certainly allowed … under the federal securities laws.”

The professors’ brief explains that Rule 14a-8 sets minimum requirements as to which proposals must be included, leaving companies with discretion whether to include other proposals, and that state law arrangements may regulate how companies use this discretion. Furthermore, the brief explains that, rather than preempt state law in this area, Rule 14a-8 in fact co-exists with and critically relies on state law to regulate how issuers operate within the zone of discretion the Rule leaves them.

(2) Indirect Consequences Argument: EA argues that the proposal may be excluded under the election exclusion provision of Rule 14a-8(i)(8) because the recommended charter or by-law provision, if adopted, could one day, after a sequence of steps which may or may not occur, lead to the inclusion of a bylaw related to director nomination or election.

Acceptance of the indirect consequences argument would lead to substantial expansion in companies’ ability to exclude shareholder proposals. EA essentially asks the Court to rewrite the election exclusion to apply not only to proposals that relate to director election and nomination procedures but also to proposals related to by-law amendment procedures. The professors’ brief explains that the Court should not accept this invitation to expand considerably companies’ power to exclude proposals.

The corporate and securities law professors joining this brief as amici, listed alphabetically, are:

Robert Ashford
Professor of Law
Syracuse University College of Law

Ian Ayres
William K. Townsend Professor
Yale Law School

Laura N. Beny
Assistant Professor of Law
University of Michigan Law School

Lisa E. Bernstein
Wilson-Dickinson Professor of Law and
Co-Director, Institute for Civil Justice
University of Chicago Law School

Bernard S. Black
Professor of Law
University of Texas Law School
Professor of Finance
McCombs School of Business

Stephen Choi
Murray and Kathleen Bring Professor of Law
New York University School of Law

John C. Coffee
Adolf A. Berle Professor of Law
Columbia Law School

James D. Cox
Brainerd Currie Professor of Law
Duke University School of Law

George W. Dent, Jr.
Schott-van den Eynden Professor of Business Organizations Law
Case Western Reserve University School of Law

John J. Donohue
Leighton Homer Surbeck Professor of Law
Yale Law School

Melvin A. Eisenberg
Koret Professor of Law
Boalt Hall
University of California at Berkeley

Charles M. Elson
Edgar S. Woolard, Jr., Chair
Professor of Law
Director of the John L. Weinberg Center for Corporate Governance
Lerner College of Business & Economics
University of Delaware

…continue reading: The Corporate and Securities Professors’ Brief in Bebchuk vs. Electronic Arts