In our paper, Audit Committee Elections, which was recently made publicly available on SSRN, we examine whether and in what ways shareholder votes in the elections of directors who sit on the audit committee (AC) are associated with the effectiveness of the audit committee. Within the board, the audit committee is responsible for monitoring the financial reporting process. This process involves oversight over the external auditor, internal controls and overall quality of the financial reports. Aside from voting in director elections, shareholders can do very little to influence or signal their satisfaction to the AC. Yet, research examining director elections does not generally focus on the AC. In this study we aim to fill this void.

…continue reading: Audit Committee Elections

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

A record date, often viewed in the merger context as a mere mechanic to be quickly checked off a “to do” list, creates a frozen list of stockholders as of a specified date who are entitled to receive notice of, and to vote at, a stockholders’ meeting. A tactical approach to the timing of the record date can have strategic implications on the prospects for a deal’s success, while the failure to comply with the rules relating to setting a record date could cause a significant delay in holding the vote, leaving the door open for a topping bidder or dissident stockholder to emerge or gather support. As a result, it is important that dealmakers understand the basic mechanics and rules of setting a record date and the tactical repercussions of the record date construct.

Starting first with the legal requirements, there are several key inputs that inform the mechanics of setting a record date, including laws of the company’s state of incorporation, the company’s organizational documents, federal securities laws, rules of the applicable securities exchange and the relevant merger agreement. Taken together, these requirements dictate the necessary procedural and governance steps for setting the record date and establish the minimum and maximum time periods between the record date and the meeting, as well as between the board action setting the record date and the record date itself.

…continue reading: Setting the Record (Date) Straight

“One-share, one-vote,” a bedrock principle of Anglo-Saxon corporate governance, is back in the spotlight. Except this time the aim is to diminish its application rather than to extend its global footprint. Rising short-termism among investors — which threatens to destabilize both companies and the wider economy — is prompting a reconsideration of the principle that all shareholders should have equal say.

Prominent commentators such as former U.S. Vice President Al Gore, McKinsey Managing Director Dominic Barton and blog, and Vanguard Group founder John Bogle have advocated bolstering the voting rights of long-term shareholders or, conversely, withholding them from short-term investors. Significantly, the Financial Times reported last week that the European Commission was preparing a proposal to give “loyal” shareholders extra voting influence.

Seeking insulation from near-term pressures, Facebook, LinkedIn, Groupon, and other Silicon Valley outfits went public in recent years with dual-class shares that gave their founders — believed to be the most committed to their long-term success — voting power of up to 150 times greater than those accorded outside investors. Google, which adopted a similar share structure at the time of its initial public offering in 2004, has gone further with its decision last spring to issue non-voting stock.

…continue reading: Rethinking “One Share, One Vote”

Say on Pay Continues to Shape the Executive Pay Landscape

An overwhelming 97% of Russell 3000 companies that conducted a Say on Pay (SOP) vote in 2012 received majority shareholder support. [1] While support levels rival those for management proposals to ratify auditors, companies do not take SOP vote outcomes for granted. Rather, the prospects for low shareholder support for SOP proposals have caused most companies to devote a tremendous amount of time, resources, and consideration to the administration and disclosure of executive compensation programs. This paper serves to highlight the key issues compensation committees faced in 2012 and the implications for action in 2013 and beyond.

…continue reading: Executive Compensation 2012 Year in Review and Implications

In our paper, Should Shareholders Have a Say on Executive Compensation? Evidence from Say-on-Pay in the United States, which was recently made publicly available on SSRN, we examine the SEC 2011 regulation requiring an advisory (non-binding) shareholder vote on the compensation of the top five highest paid executives – “say-on-pay” (SOP). In July of 2010, Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law requiring all public companies to give their shareholders the opportunity to cast a “non-binding” advisory vote to approve or disapprove the compensation of the 5 highest paid executives at least once every 3-years. The Securities and Exchange Commission (SEC) implemented “say-on-pay” (SOP) in January of 2011, and since then, shareholders in the US have “had their say” on executive compensation packages for two years: 2011 and 2012. To date, the SOP shareholders’ votes overwhelmingly approved the executive compensation proposals by a majority of votes (>than 50 percent) giving broad support to management pay packages (Cotter et al., 2012). Only 1.2 percent of the Russell 3000 failed the SOP proposal in 2011 and 2.5 percent failed in 2012 obtaining less than 50 percent approval. However, around 10 percent of firms received more than 30 percent opposition or “rejection” votes.

…continue reading: Should Shareholders Have a Say on Executive Compensation?

The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals. The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding shares, unless the company’s charter provides a higher threshold).

…continue reading: Proposed Amendments to Delaware Law Would Facilitate Tender Offer Structures

Reaffirming that the advisory “say-on-pay” vote required by the Dodd-Frank Act cannot be used to attack directors’ executive compensation decisions, the United States District Court for the District of Delaware recently dismissed a derivative complaint brought after a negative say-on-pay vote. The court, applying Delaware law, found that the plaintiff had not pleaded facts sufficient to show that demand would have been futile, or to state a claim upon which relief could be granted. Raul v. Rynd, C.A. No. 11-560-LPS (D. Del. March 14, 2013).

The complaint was filed in 2011, and was one of a number of similar lawsuits filed after Dodd-Frank’s requirement for advisory votes on compensation came into effect. The plaintiff challenged the board’s compensation decisions, alleging that increased compensation in a year when the company posted a net operating loss and negative shareholder return violated the company’s pay-for-performance philosophy and rendered the company’s compensation disclosures in its proxy statement misleading. The plaintiff asserted that the negative shareholder advisory vote rebutted the presumption of business judgment surrounding the board’s compensation decisions.

…continue reading: Delaware Federal Court Dismisses Say-on-Pay Case

In a recent case that arose in the context of a consent solicitation seeking a change of control of a public company, the Delaware Court of Chancery found the target board in breach of its fiduciary duties for not approving a dissident slate for the purposes of preventing a change-of-control-triggered put right in the company’s debt agreements. Kallick v. SandRidge Energy, Inc., C.A. No. 8182-CS (Del. Ch. Mar. 8, 2013). Chancellor Strine’s ruling extends prior Delaware law on the topic and provides cautionary guidance about the future effectiveness of such clauses, which are common features of debt documents and other commercial arrangements.

The case arose out of a hedge fund’s efforts to destagger and replace a majority of the board of directors of SandRidge Energy via a consent solicitation. In opposing the consent solicitation, the company initially warned shareholders that a change in the majority of the board that was not approved by the company’s directors would obligate the company to offer to repurchase $4.3 billion of debt at 101% of par pursuant to certain provisions in its debt instruments—provisions sometimes called “poison puts” or “proxy puts.” The company subsequently changed its public posture and noted that the put was “unlikely” to be harmful, because the debt was then trading above par, making it doubtful that the put would be exercised. However, the board failed to decide whether to “approve” the dissident nominees for purposes of the debt documents, thus leaving a cloud of uncertainty regarding the put and drawing a legal challenge from a shareholder.

…continue reading: Delaware Court Raises Bar for Use of “Poison Put” Provisions

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