Photo by Stuart Rankin
How to stop frivolous plaintiff lawsuits? Since 2010, when Vice Chancellor Laster of the Delaware Court of Chancery noted that “if boards of directors and stockholders believe that a particular forum would prove an efficient and value promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes,” many public companies have adopted bylaws provisions restricting frivolous derivative lawsuits. As the ABA notes, these so called “forum selection bylaws” are extensions of the forum selection clauses that have long been upheld in contracts.
As anyone who has ever worked on a public merger well knows, within hours after a merger is announced, several plaintiff firms will announce an “investigation” and then file a derivative lawsuit (presumably based on the findings of their thorough “investigation”). Of course, frivolous lawsuits aren’t limited to M&A transactions, but many of these lawsuits follow the same pattern. As a result, public companies have had continued interest in restricting such lawsuits. Forcing plaintiffs to sue in Delaware with a forum selection bylaw is one way to help restrict lawsuits. But, more recently, some companies have become even more creative. Here is a quick chronological summary of the movement to adopt restrictive bylaws:
- March 2010 – Vice Chancellor Laster of the Delaware Court of Chancery suggests Continue Reading
Connecticut Senator Richard Blumenthal has written to SEC Chair White urging that the SEC label so-called “fee-shifting” bylaws major risk factors and require companies to disclose them before any initial public offering. Moreover, Blumenthal believes the SEC should take the position that fee-shifting provisions are inconsistent with the federal securities laws and should refuse to permit registration statements to move forward for any company that has adopted these provisions.
I believe that Senator Blumenthal is a good and decent man, and I base this in part on some indirect personal knowledge of him. I also think that there are legitimate concerns with fee-shifting bylaws and that a debate on those and other provisions is perfectly appropriate. However, I find it seriously troubling that our legislators feel obliged to tell the SEC how to do its job, particularly at such a granular level. Are they trying to do away with the SEC? Do our senators and congressmen believe that they can do a better job regulating our capital markets and disclosure directly rather than through the SEC?
I happen to think that, in general, the SEC has done a superlative job in both areas. Of course, there have been errors of commission (no puns intended) and omission (e.g., can you say “Madoff”?), but over the 80+ years of its existence, the SEC has generally been an apolitical beacon of serious and legitimate regulation. And I suspect there’s a strong correlation between the SEC’s screw-ups and congressional interference (or lack of funding).
I don’t think for a nanosecond that Senator Blumenthal wants to do away with the SEC. So why is he trying to do so by more subtle means?
What do you think?
Institutional Shareholder Services and Glass Lewis have issued their voting policies for the 2015 annual meeting season. For the most part, both proxy advisory firms’ 2015 policies are refinements of those already in place. However, companies should carefully review their 2015 annual meeting agendas against the updated policies to anticipate possible issues. A summary of the new policies and some issues they raise follows. You can find the ISS policies here and the Glass Lewis policies here.
Unilateral Bylaw/Charter Amendments: Under its current policy, ISS treats the following as “governance failures”: material failures of governance, stewardship, risk oversight or fiduciary responsibilities; failure to replace management; and “egregious” actions relating to a director’s service on another board. In what ISS refers to as “extraordinary circumstances,” the occurrence of one or more of these failures will generally result in withhold or negative votes for individual directors, committee members or the full board.
Beginning in 2015, ISS will create a separate category of “governance failures” consisting of bylaw or charter amendments, adopted without shareholder approval, that “materially diminish shareholder rights” or that “could adversely impact shareholders.” ISS regards the creation of a separate category as little more than a codification of current policy. As is typical, these standards leave ISS lots of wiggle room in determining voting recommendations.
Last week I posted an UpTick about the rollout of ISS’s voting policies for 2015. This week saw what appears to be the completion of that rollout, and we were also blessed with the publication of Glass Lewis’s 2015 voting policies.
On a quick read, neither set of voting policies seems to contain anything shocking, but both sets continue the march towards what the proxy advisors see as shareholder democracy. To paraphrase Jules Feiffer, I sympathize with their aspirations, but in some ways it looks like shareholder tyranny. Both ISS and GL are adamant about two types of by-law amendments: those that make the loser pay in meritless lawsuits and those that arguably impact shareholder rights without getting shareholder approval. ISS also tinkers with shareholder proposals on CEO/board chair separation. GL is also concerned about by-law amendments and continues to rail against companies that don’t satisfactorily implement majority-approved shareholder proposals. GL also continues to focus “material” transactions with directors.
I really do sympathize with at least some of the aspirations of ISS and GL. However, their policies reinforce the notion – with which I’m not at all sympathetic – that shareholders have the right to second-guess each and every decision that the board makes. For example, why does ISS think that shareholders are in a better position than the board to determine the board’s leadership structure? And if the board has no business deciding on its own leadership structure, why give it the power to do anything at all?
We’ll be posting a more detailed analysis of the 2015 voting policies on The Securities Edge within the next few days. For the time being, let us know what you think of them (or of my views).
Britney Spears has nothing on Institutional Shareholder Services, better known as ISS. ISS is rolling out proposed new voting policies for the 2015 proxy season. ISS often uses more words to tout how transparent it is than to explain its voting policies clearly, and the draft policies being considered for 2015 are no different.
One new proposed policy addresses voting on shareholder proposals on independent board chairs. ISS proposes to expand the list of factors that will be considered in developing a voting recommendation and to look at these factors in a more “holistic” manner. (The current policy is to support the proposals unless the company meets all of the criteria.) So this seems like a good thing. However, ISS indicates that the new policy is not expected to change the percentage of independent chair proposals that it will support. The obvious question is, then, how will the new policy really work? Your guess is as good as mine (which frankly isn’t very good).
The other new proposed policy provides additional information regarding the “scorecard” that ISS will use to evaluate equity plans. Like the independent chair policy above, some more criteria are laid out, but it’s impossible to tell how the factors – or, indeed, the new scorecard, will be weighed or will work – thus assuring that companies seeking shareholder approval of equity plans will have to continue to use ISS’s consulting service to find out whether a new plan will pass muster.
I could just as easily have referred to Yogi Berra as to Britney Spears, because if this isn’t déjá vu all over again, I don’t know what is.
The SEC has approved new PCAOB auditing standards relating to related party transactions, significant unusual transactions, and financial relationships and transactions between a company and its executives, including executive compensation. You can find the SEC’s release on the new standards here.
When the PCAOB first proposed these standards, a number of us were concerned that the auditing profession might be getting into the business of second-guessing not only disclosures on related party transactions and executive compensation, but also the substance of transactions and compensation. For one thing, the proposal stated that auditors would need to assess the risks associated with these areas, which led the Society of Corporate Secretaries and Governance Professionals and others to politely suggest that the PCAOB should stay away from the area (you can find the Society’s comment letter here).
In response to these comments, the PCAOB tweaked its language a bit and gave some mild assurances that its intent was misunderstood and that it didn’t want to get into the weeds as feared. However, references to executive compensation stayed in the standards, and their wording doesn’t rule out the possibility that those weeds might be gotten into after all.
So when your auditors offer you this new piece of candy for Halloween, maybe you should ask for some reassurances before you bite into it.
What do you think?
Photo by Austin Kleon
To our readers:
As you may have noticed, this week we launched a new feature for The Securities Edge. We call our new feature “Bob’s Upticks,” which will be authored by our very own Bob Lamm. We are excited to add this new “blog within a blog” and to share Bob’s extensive and deep securities and corporate governance knowledge with you!
While The Securities Edge has always strived to provide deeper analysis on some of the most important issues of the day, Bob’s Upticks will use shorter posts and will focus on keeping you up to speed on the weekly changes in the securities and corporate governance world. When Bob was the Chairman of the Securities Law Committee for the Society of Corporate Secretaries and Governance Professionals, we all looked forward to receiving Bob’s weekly updates. With Bob’s Upticks, our readers get the same opportunity! You can even subscribe separately to the RSS feed for Bob’s Upticks.
Please drop us a note to let us know what you think.
I have read several reports quoting Mary Jo White, Chair of the SEC, as saying that the remaining Dodd-Frank corporate governance rulemakings will be out by year-end. Admittedly, the reports aren’t clear as to what Chair White means. Does she mean that the so-called pay ratio rule will be adopted in final form by year-end (in which case the disclosures wouldn’t be required until 2016)? Or that by year-end the Commission will have proposed rules on hedging, clawbacks and pay-for-performance? All of the above? It’s anyone’s guess.
I have also read the daily emails I receive from the SEC entitled “Upcoming Events Update.” (I get several of these “Updates” every day, even though they are identical and don’t seem to have been updated at all. For those of you who don’t get these emails, they purport to announce things like every meeting of the SEC and every speech to be given by Commissioners and Staff members.) For the last month or two, no open meetings of the SEC have been scheduled (and it’s virtually impossible for these rules to be proposed or adopted otherwise than at an open meeting). So when I saw today that Continue Reading
Photo by St. Murse
As we blogged about in May, the Bank Secrecy Act (“BSA”), which requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering, applies to entities that we may not traditionally think of as “financial institutions,” including securities broker or dealers. Compliance with the BSA is no easy task. And if a recent notice of new proposed rule by the U.S. Treasury’s Financial Crimes Enforcement Network (also known as FinCEN) becomes law, it’s not about to get any easier.
FinCEN’s stated intent with the proposed rule is to clarify and strengthen customer due diligence requirements for banks, brokers or dealers in securities, mutual funds and futures commission merchants and introducing brokers in commodities. Under current regulations, each of these institutions must establish, document and maintain a Customer Identification Program (or “CIP”) appropriate for its size and business that meets certain minimum requirements, including, among others, the adoption of certain identity verification procedures, and the collection of certain customer information and the maintenance of certain records. The proposed rule adds two (2) new elements to the CIP requirements.
First, the proposed rule Continue Reading
Photo by Eric Roy/ Golden Nugget Casino, Las Vegas, late 80′s.
On September 30, Bob Lamm moderated a panel at a “Say-on-Pay Workshop” held during the 11th Annual Executive Compensation Conference in Las Vegas, Nevada. The Conference is an annual event sponsored by TheCorporateCounsel.net and CompensationStandards.com – and emceed by our good friend, Broc Romanek – and features many of the pre-eminent practitioners in corporate governance and securities law.
The panel, entitled “50 Nuggets in 75 Minutes,” may just be the CLE equivalent of speed dating – each of five panelists covers 10 “nuggets” – practical and other takeaways to help them do their jobs better – in a 75-minute panel.
Here are Bob’s 10 “nuggets,” reprinted courtesy of the Conference sponsors and Broc.
1. Engagement is a Two-Way Street – At this stage of the game, shareholder engagement is – or should be – a given, and one of a company’s normal responsibilities. Along with that is the mantra “engage early and often”; in other words, don’t wait until you are faced with a negative vote recommendation to start reaching out to your major holders.
What may not be part of the mantra is that engagement is a two-way street. Your job (and that of your colleagues and even some directors) is to Continue Reading