Early Lessons from the 2013 Proxy Season

As Skadden monitors the initial weeks of the 2013 proxy season, we are seeing the following preliminary trends:

Vote Results

Of the first 279 companies of the Russell 3000 to report the results of say-on-pay proposals, approximately:

• 72 percent have passed with over 90 percent support;
• 22 percent have passed with between 70.1 percent and 90 percent support;
• 4 percent have passed with between 50 percent and 70 percent support; and
• 2 percent (six companies) obtained less than 50 percent support.

…continue reading: Emerging Say-on-Pay Trends and Litigation Developments

About a year ago we restated Vanguard’s mission to read: “To take a stand for all investors, treat them fairly, and give them the best chance for investment success.” While the words were new, the ideals were not; they’ve been the consistent principles by which we’ve managed our enterprise since our founding.

As we stand on the cusp of “proxy season”—when investors in most U.S. companies will vote at shareholder meetings on matters including the election of directors and the approval of compensation plans—it strikes me that nothing better exemplifies our mission in action than our efforts to ensure that the companies in which our funds invest are subject to the highest standards of corporate governance.

…continue reading: Passive Investors, Not Passive Owners

With the proxy season just getting underway, we thought it might be useful to summarize some initial observations to aid those in the midst of the season’s challenges.

Results. According to Institutional Shareholder Services’ (ISS) 2013 Say on Pay Snapshot released April 8, 2013, ISS has recommended against 10 percent of issuers so far this proxy season. While ISS’s study represents a relatively small sample size (473 companies), a “no” recommendation from ISS against 10 percent of companies represents a decrease in “no” recommendations of over 20 percent from last year (12.2 percent).

Reasons for Failure. The single largest reason that companies have received “no” recommendations from ISS continues to be a so-called pay-for-performance disconnect. In addition, ISS has recommended against an increased number of companies on the basis of a so-called lack of compensation committee communications and effectiveness. A lack of effectiveness often arises where ISS has determined that the company has not provided disclosure about actions it has taken in light of a low say on pay vote for the previous year.

…continue reading: Say on Pay So Far – 2013

The 2013 annual meeting season may lack the drama of last year’s Occupy protests and impending presidential election but it will still have its share of challenges for issuers. Revisions to proxy advisors’ pay models and peer groups are already spawning another round of supplemental proxies on Say-on-Pay (SOP), while threats of compensation disclosure strike suits have become this year’s unwelcome sideshow.

This spring also promises another big wave of shareholder resolutions, with over 600 filed to date, though for the most part they will repeat the prevailing themes seen in past years. Public pension funds and other institutional proponents are methodically cleaning up S&P 500 and Russell 2000 firms that still have classified boards and plurality voting in director elections. Meanwhile, retail activists are boosting their share of proposals calling for independent board chairmen and compensation reforms, in addition to their perennial filings on supermajority voting, special meetings, and written consent.

Based on submissions to date, several unexpected trends stand out. The first is a renewed blitz of resolutions on corporate campaign finance, particularly indirect lobbying activities, following the record spending in the 2012 election cycle. Although not likely to gain ground in support levels, proponents are clearly keeping up the momentum on this issue in the hopes of eventual SEC rulemaking mandating disclosure of political spending. Filings of compensation-related proposals have also escalated this year, though many of these were part of a now-abandoned campaign by the United Brotherhood of Carpenters (UBC) to promote triennial SOP votes.

…continue reading: 2013 Proxy Season Preview: Key Shareholder Proposals

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. [1] We outline below the current trend and several suggested strategies for addressing this new proxy litigation.

…continue reading: Plaintiffs’ Lawyers Target “Say-on-Pay” Disclosures in Annual Proxy Statements

On February 22, 2013, the United States District Court for the Southern District of New York enjoined Apple, Inc. from proceeding with a planned vote at its annual shareholders’ meeting on amendments to certain provisions of its articles of incorporation on the grounds that the proposed amendments, which were presented as a single matter to be voted upon, likely violated SEC rules prohibiting the “bundling” of separate matters into a single vote.

In the same opinion, the court rejected a shareholder petition to enjoin Apple’s “say-on-pay” vote. In that regard, the shareholder made similar arguments as those in complaints received by numerous companies in recent months – namely, that the Compensation Discussion and Analysis section was not compliant with SEC rules because it gave insufficient detail on the compensation committee’s decision-making process and the information the committee had. The court disagreed, holding that Apple’s disclosure was “plainly sufficient under SEC rules.”

The unbundling decision serves as a reminder that companies preparing their proxy statements for upcoming annual meetings should ensure that all material, separate matters are presented for separate votes. The mere fact that multiple matters are included in a single charter amendment, or that the matters are all broadly “shareholder-friendly,” is not, based on the Apple decision, sufficient to avoid a violation of the unbundling rules.

…continue reading: Unbundling Rules and Say-on-Pay Decisions in Apple Shareholder Case

The effects of say on pay on shareholder engagement, the introduction of proxy access proposals, and the resurgence of board declassification resolutions were the principal themes of the last proxy season and are expected to continue to take center stage in 2013, according to a report issued today by The Conference Board in collaboration with FactSet Research Systems Inc.

Proxy Voting Analytics (2008-2012) analyzes data on voting by shareholders of U.S. companies that held their annual general meetings (AGMs) in the January 1-June 30 period during the last five years. Aggregate data on shareholder proposals, management proposals, and proxy contests is examined and segmented based on market index (whether the Russell 3000 or the S&P 500) and 20 business industry groups.

The report is supplemented with an appendix offering detailed recommendations from Conference Board experts for companies facing situations of shareholder activism.

Data analyzed in the report includes:

…continue reading: Proxy Voting Analytics (2008-2012)

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.

…continue reading: ISS, Glass Lewis, and the 2013 Proxy Season

As the 2013 proxy season is now underway, companies should be aware of the recent wave of lawsuits alleging breaches of fiduciary duties by management and directors in connection with compensation-related decisions. These suits allege deficient disclosure with respect to compensation-related proxy proposals and seek to enjoin the company’s annual meeting until supplemental disclosures are made. They primarily target proposals to increase the amount of shares reserved for equity compensation plans and advisory votes on executive compensation (say-on-pay). There also have been a handful of suits relating to proposals seeking to amend certificates of incorporation to increase the total number of authorized shares.

More than 20 such cases were filed in 2012, and the plaintiffs’ law firm predominantly initiating these suits has announced that it is investigating nearly 40 additional companies. These cases are typically filed shortly after a company files its definitive proxy statement and make generic accusations of inadequate disclosure. Some companies concerned about potential disruption to their annual meetings have been willing to settle these claims. There have been at least six reported settlements, all involving proposals to increase the number of shares authorized under equity plans. These settlements have generally involved supplemental disclosure and payment of up to $625,000 of plaintiffs’ attorneys’ fees. Other companies have settled prior to the filing of a formal lawsuit. Although a preliminary injunction has been granted in only one of these cases, Knee v. Brocade Communications Systems, Inc., many cases in which preliminary injunctions were denied are still pending resolution regarding other relief requested by the plaintiffs, such as damages. An analysis of the claims made in filed cases to date may help companies decide whether to increase disclosure in their 2013 annual meeting proxy statements.

…continue reading: How to Prepare for Annual Meeting Litigation

The say-on-pay advisory vote requirements of the Dodd-Frank Act of 2010 have turned out to be a fertile source of nuisance litigation filed by aggressive plaintiffs’ lawyers. The first wave of lawsuits generally consisted of after-the-fact actions targeting companies that experienced failed say-on-pay advisory votes. These initial cases, which appeared primarily to be attempts to extort settlements, were nearly all dismissed on procedural grounds. The current wave, embodied by a recent spate of lawsuits filed primarily by a single plaintiffs’ law firm, is potentially more problematic from a practical perspective for targeted companies, even though the claims involved appear to have even less basis in law or fact. The pattern of these recent actions is for a lawsuit to be filed in state court sometime between the filing of the definitive proxy statement and the date of the annual meeting, alleging that the proxy disclosure is inadequate with respect to executive compensation (or relating to the authorization or issuance of additional common shares for equity incentive plans), claiming breach of fiduciary duty by directors, and calling for the shareholder meeting to be enjoined until additional disclosure is made.

Directors and corporate managers need to be prepared for this type of proxy disclosure litigation, particularly since it appears that little can be done to prevent such lawsuits from being brought. Boards of companies that are targeted in this manner may feel significant pressure to settle because they do not want to postpone the annual meeting or, worse, face the possibility that the required say-on-pay advisory vote or other needed votes could be enjoined. However, it is worth noting that the earlier wave of lawsuits that targeted companies with failed say-on-pay votes has subsided, undoubtedly due to the discouraging results obtained by the plaintiffs in court. The same fate is likely to befall the current wave, but only if companies are willing to fight these lawsuits in court so that the plaintiffs and their attorneys encounter judicial skepticism and dismissal rather than the rewards of a quick and lucrative settlement.

…continue reading: The New Wave of Proxy Disclosure Litigation