As discussed in our previous memo, in January 2013, the SEC approved amendments to the NYSE and Nasdaq listing standards relating to compensation committees and their advisers. Unless they have already done so, companies should begin implementing the new requirements with respect to compensation committees and their advisers that take effect on July 1, 2013. Compensation committee action is required in order to comply with these requirements.

Companies should note that, while the new rules require compensation committees to consider the independence of their advisers, the rules do not require that such advisers be independent, nor is any aspect of the mandated independence review required to be disclosed publicly (other than proxy disclosure concerning compensation consultants to a company or its compensation committee).

Companies should also note that this independent assessment applies only to advisers; there will be a separate independence assessment of directors required later, as noted below.

…continue reading: Compensation Committee and Adviser Implementation Begins July 1, 2013

Regulation FD, adopted by the SEC in 2000, prohibits “selective disclosure” by requiring public companies to disclose material information through broadly accessible channels. Thirteen years ago, this meant EDGAR filings, press releases and quarterly earnings calls.

The SEC recently issued a report of investigation under Section 21(a) of the Securities Exchange Act of 1934 regarding its inquiry into a post by Netflix’s CEO on his personal Facebook page. In the report, the SEC affirmed that a company may use social media to communicate with investors without violating Regulation FD – as long as the company had adequately informed the market that material information would be disclosed in this manner. The report states that whether a company’s social media disclosure satisfies Regulation FD will depend upon the principles outlined in the SEC’s 2008 guidance, Commission Guidance on the Use of Company Web Sites, while recapping that guidance in a way that should make these principles more workable for companies that want to use websites, social media and other evolving communication methods to disclose important information to the market.

…continue reading: How to Use Social Media for Regulation FD Compliance

I. Introduction

In the current environment and in the wake of Dodd-Frank (and, before that, TARP) mandated rules requiring shareholder advisory votes on executive compensation, shareholder-plaintiffs have more aggressively challenged executive compensation decisions. In recent months, an active plaintiffs’ bar has filed a series of cases, which generally fall into three broad categories:

• “say-on-pay” litigation;
• litigation relating to annual proxy disclosure, particularly with respect to equity compensation plans and say-on-pay proposals; and
• litigation relating to Section 162(m) of the Internal Revenue Code.

While most of these challenges have failed on substantive or procedural grounds or both, some have been more successful, and the plaintiffs’ strategies continue to evolve. Notably, even unsuccessful claims can result in costly disruptions and/or reputational harm, especially where injunctions against annual shareholder meetings are threatened.

In this memorandum, we:

…continue reading: Recent Developments in Executive Compensation Litigation

On Tuesday, October 16, Institutional Shareholder Services (ISS) proposed updates to its proxy voting guidelines for the 2013 proxy season.

ISS’s proposed policy would:

• Recommend voting against boards of directors who do not act on shareholder proposals that were approved by the vote of a majority of shares cast in the prior year;
• Revise ISS’s say-on-pay criteria by refining the peer group selection methodology, incorporating “realizable pay” analysis into the qualitative evaluation of pay-for-performance and designating pledging shares as a problematic pay practice;
• Extend the analysis of golden parachute arrangements to existing and legacy arrangements rather than just new or renewed arrangements; and
• Provide for a case-by-case assessment of shareholder proposals to link executive compensation to environmental and social “sustainability metrics.”

The proposed updates were open to public comment until October 31, and the final policies are expected to be released in November. While these new policies have not yet been finalized and are subject to revision, it’s not too early for public companies to consider how these changes could affect their ISS profile in the upcoming proxy season.

…continue reading: ISS Proposes 2013 Voting Policy Updates

The SEC recently issued Staff Legal Bulletin No. 14G providing additional guidance on shareholder proposals submitted to companies pursuant to Rule 14a-8. The guidance is in response to several issues that came up during the 2012 proxy season.

Proof of ownership

In a prior bulletin, SLB No.14F, the SEC had reconsidered its view as to who constitutes a “record holder” for purposes of Rule 14a-8 and indicated that only DTC participants may provide adequate proof of ownership for shareholder proponents. Consistent with its no-action letter decisions during 2012, the Staff indicated in this bulletin that it would also view ownership letters from affiliates of DTC participants as satisfying the proof of ownership requirement.

Also, the Staff indicated that a shareholder who holds securities through a securities intermediary that is not a broker or a bank can satisfy Rule 14a-8’s documentation requirement by submitting a proof of ownership letter from that securities intermediary. If the securities intermediary is not a DTC participant or an affiliate of a DTC participant, then the shareholder will also need to obtain a proof of ownership letter from the DTC participant, or an affiliate of the DTC participant, that can verify the holdings of the securities intermediary.

…continue reading: SEC Legal Bulletin on Shareholder Proposals

Many companies voluntarily impose a “blackout period” beginning around the time a quarter ends and continuing through the quarter’s earnings announcement or subsequent 10-Q or 10-K filing. Although the company’s directors and officers are therefore barred by company policy from trading during this period, it may nevertheless be possible for the company or its major stockholders to complete a securities offering on a public or private basis. The existence of a company-imposed blackout period does not, as a legal matter, prevent the company or a major stockholder from selling securities as long as the company is able to meet its duty of disclosure.

This post discusses what factors company management and their underwriters should consider when contemplating a securities offering during a blackout period. We focus particularly on US companies that are already subject to SEC reporting requirements and that are up-to-date with their filings — IPO companies, companies not subject to SEC reporting and companies that are behind in their SEC filings will have additional matters to consider.

A note of caution is appropriate — this post offers a blinking-yellow light, not a green light. In many cases the best course of action will be to schedule the offering after the 10-Q or 10-K is filed. Nevertheless, in a period of rapidly shifting investor receptivity to new issues, a company and its underwriters may decide that the balance of considerations favors moving more quickly to market.

…continue reading: Securities Offerings During Blackout Periods and Following a Quarter-End

The SEC voted to implement the Dodd-Frank Act’s reporting requirements relating to “conflict minerals” — cassiterite, columbite-tantalite, gold, wolframite and other minerals determined by the U.S. government to be financing conflict in the Democratic Republic of Congo or adjoining countries, referred to as the “DRC countries” or “covered countries.” Companies must comply with the final rules for the calendar year beginning January 1, 2013 with the first reports due May 31, 2014.

The final rules adopted contain substantial changes from the SEC’s original proposal in December 2010. Below is a summary of the changes. We will provide a more in-depth analysis of the rules once we have fully analyzed the adopting release.

…continue reading: SEC Adopts Final Conflict Minerals Rules

On July 5, 2012, the Code Committee of the U.K. Takeover Panel (the “Panel”) published three Public Consultation Papers (“PCPs”) setting out proposed amendments to the U.K. Takeover Code (the “Code”). The Code sets out binding rules for proposed takeovers of companies and is focused on ensuring a non-coerced choice by shareholders without input by the incumbent board, unlike the typical U.S. approach that permits the incumbent board to act in a manner it believes can best protect shareholders.

Of particular interest are proposals to amend the rules for determining companies that are subject to the Code.  If implemented as proposed, the changes contemplated will have the effect of bringing companies that are not currently subject to the Code within its jurisdiction.

The U.K. government recently announced plans to introduce a binding, three-yearly shareholder vote on the compensation policy of U.K. incorporated, quoted (publicly traded) companies, which include companies listed on the NYSE and NASDAQ, even if not listed in the U.K. (read a recent Davis Polk blog post on this topic here). These latest proposals provide a further reminder that the U.K. applies some, and may be about to apply more, corporate governance and shareholder protection measures which resonate most in the context of publicly traded companies on the basis of location of incorporation rather than location of listing.  This approach is different from that adopted in the U.S., which focuses on the listing location and does not impose its rules on U.S.-domiciled companies not listed on a U.S. exchange, and could lead some U.K. incorporated companies to consider re-domiciling.

…continue reading: UK Takeover Panel Consultations

Yesterday, the SEC adopted final rules to implement the Dodd-Frank Act’s requirements regarding the independence of compensation committees and their advisers. For the most part, the SEC made few changes from the proposed rules, which in turn hewed very closely to the requirements of the statute.

The national securities exchanges will have 90 days from the publication of the final rules in the Federal Register to propose listing standards implementing the rules and one year from that date of publication to finalize their standards. New disclosure requirements regarding compensation consultants are not subject to this exchange rulemaking process and will be effective beginning with any proxy or information statement for an annual shareholders meeting (or a special meeting in lieu of an annual meeting) at which directors will be elected occurring on or after January 1, 2013.

…continue reading: Independence Rules for Compensation Committees and Advisers

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