It remains to be seen whether the new administration will actually drain the swamp or do away with political correctness, but one hope that some of us have – regardless of our views on the election – is that the SEC may finally get around to some issues that have been on the back burner for years.

One such issue is a long-overdue overhaul of the rules surrounding shareholder proposals, including the submission and resubmission thresholds for proposals under SEC Rule 14a-8.  Many organizations, including the Society for Corporate Governance, have repeatedly urged the SEC to update these rules, which have been in place for many years.  However, the SEC has been reluctant to plunge into the area due to the likely political firestorm that would result.

Now, another organization has jumped in.  At the end of October, the Business Roundtable published “Modernizing the Shareholder Proposal Process”, a rational and well thought-out series of suggestions for bringing shareholder proposals into the 21st Century.

Continue Reading A modest proposal about more modest proposals

The SEC has issued its much-anticipated Staff Legal Bulletin on two rules impacting shareholder proposals. You can find the SLB here. The SLB looks a bit more benign than some had feared; in other words, it’s got some bad news, but the good news is that it’s not as bad as some feared.

2162651915_df13af7594_zRule 14a-8(i)(9) – Conflicting Proposals

The SLB deals with two areas of SEC Rule 14a-8 – the Rule governing shareholder proposals. The first area relates to Rule 14a-8(i)(9), which addresses what happens when a shareholder proposal “directly conflicts” with a company proposal. This issue reared its head during the 2015 proxy season, when the SEC withdrew a no-action letter it had granted to Whole Foods permitting it to exclude a shareholder proposal on proxy access and, at the direction of SEC Chair White, declared a moratorium on issuing no-action letters under Rule 14a-8(i)(9).

Continue Reading Conflict management: the Staff Legal Bulletin on shareholder proposals

Last week I attended the National Conference of the Society of Corporate Secretaries and Governance Professionals in Chicago. It was a great conference – wonderful, substantive programs and a chance to catch up with many friends and colleagues.

With some exceptions.

One exception was the opening speech by SEC Chair Mary Jo White. Now don’t get me wrong – I’m a fan (particularly when Senator Warren and others go after her – as in my last post). Among other things, I love the fact that she speaks clearly; unlike so many others in Washington, whose statements make me think I know what it must have been like to visit the Delphic Oracle, she’s perfectly straightforward about her views.   It was her views – or at least most of them – that I didn’t like.

Chair White addressed four topics, and on all but one of them she basically told the corporate community to give up. Her topics and views can be summarized as follows:

Continue Reading A dispatch from the front lines (with SEC Chair White telling us to wave the white flag)…

Something shocking happened at the SEC yesterday.  SEC Chair Mary Jo White directed the SEC Staff to review its long-standing position on when a shareholder proposal conflicts with a company proposal and may be excluded from the proxy statement.  As a result, the SEC’s Division of Corporation Finance withdrew a no-action letter that had given Whole Foods the green light to exclude a shareholder proposal on proxy access by including its own (less shareholder-friendly) proposal on the subject.  Corp Fin also said that it would not be issuing any additional no-action letters under the rule in question. It’s worth noting that these actions were taken at a sensitive time, as calendar-year companies approach peak proxy season and a major investor campaign is under way to impose proxy access upon companies that have been resisting it.

The SEC’s shareholder proposal rules are very complex, and I won’t go into details here.  However, as a general matter, the rules lay out the process by which eligible shareholders can submit proposals for inclusion in a company’s proxy statement.  Relevant here is that (1) the rules provide certain conditions under which a company can exclude a proposal and (2) companies can avail themselves of a “no-action” process to get the SEC’s permission to exclude a proposal if the conditions are satisfied.  It’s worth noting that the no-action process isn’t dispositive; the proponent or the company can take the matter to court, and there are usually a couple of cases each year in which that happens.

Continue Reading Shock and awe at the SEC (and turning it into chicken salad)

SEC Staff provide insight as to SEC agendaOn Tuesday, the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals met with officials from the Divisions of Corporation Finance, Investment Management, and Trading and Markets and the Office of the Whistleblower.  While neither new Chair Mary Jo White (confirmed in April) nor new Director of Corporation Finance Keith Higgins (starts at the SEC in June) was present at the meeting, the Staff provided some important takeaways.  Although the two hour meeting covered a significant amount of issues, the most important discussions involved the following topics: 

  • The Staff’s focus will be on Congressional mandates.  Although the Staff couldn’t give timelines, the remaining provisions from Dodd-Frank and the JOBS Act appear to be the focus of upcoming rulemaking activity.   Agenda items such as mandatory disclosure of political contributions, while constantly popping up in the news as imminent, would not fit into the stated focus.  The Staff noted that no one was working on rule making requiring the disclosure of political contributions, which is consistent with Chair White’s Congressional testimony last week
  • Issuers continue to have problems with erroneous reports from the proxy advisory firms.  The Staff noted that they continue to receive complaints from issuers specifically regarding errors, difficulty speaking to the correct person at ISS and Glass Lewis, and overlooking key aspects such as an issuer changing its fiscal year.  The Staff has met with ISS and Glass Lewis over the past year and has requested that the advisory firms improve their transparency.  The Society repeated its concerns with the proxy advisory firms and noted that the issues are acute when dealing with smaller issuers.
  • The Office of the Whistleblower is now adequately staffed and deep in implementation mode.  While only one award has been made under the program, no imminent changes are expected, despite the musings of a recent New York Times article
  • The Staff did a terrific job in responding to no action requests regarding shareholder proposals.  All but 25 requests were responded to in less than 60 days.  The Staff is very cognizant of the costs of missing printing deadlines and therefore reminds issuers to alert the Staff of not only print deadlines, but also notice and access deadlines.
  • The timeline for the four remaining controversial executive pay provisions of Dodd-Frank remains Continue Reading Recent meeting between the Society of Corporate Secretaries and Governance Professionals and SEC Staff provides insight

Independent ChairmanAre the CEO and the Chairman of the Board the same executive at your company?  While there can be very good reasons to have these positions held by the same person, the separation of these posts continues to be a hotly debated topic.  Since the early 1980s, much attention has been paid to corporate boards of directors and how their structures improve (or undermine) organizational performance. In the wake of the recent financial crisis, public corporations have come under scrutiny from activist shareholders, institutional investors, advisory firms and regulators alike.  So naturally, this is the source of the debate over the separation of the CEO and Chairman positions. 

According to the ISS Governance Exchange, in 2012, investors filed 49 independent chair proposals, with more than three-quarters coming to a vote, including three that received majority support.  As of February 1, 2013, this year’s volume of filings now exceeds last year’s total with 53 firms targeted by shareholders seeking a split of the top posts, with additional filings likely at companies meeting later in the year.  Notably, the record for such proposals was set in 2010, with a total of 66. 

Proponents of CEO and Chair independence base their view on the inherent system of checks and balances that the Board, and particularly the Board’s Chairman, is supposed to impose on management.  Essentially, a firm’s Board and Chairman of the Board serves to hire, fire, evaluate and compensate management (including the CEO) based on performance.  Clearly then, these proponents argue, a single CEO and Chairman cannot perform these tasks apart from his or her personal interests, making it more difficult for the Board to perform its critical functions, if and when the CEO is its Chairman.  Accordingly, separation of the Chairman and CEO roles, can lead to better management and oversight because an independent Chairman is able to ensure that the board is fully engaged with strategy and to evaluate how well that strategy is being implemented by management. Importantly, appointment of an independent Chairman can also signal to all stakeholders that the CEO is accountable to a unified Board with a visible leader. 

But while largely helpful from a corporate governance standpoint, one must note that the separation of CEO and Chair positions can impose several costs on a firm.  First, while appointing an outside Chairman can reduce the agency costs of controlling a CEO’s behavior, such an appointment introduces Continue Reading Separating the positions of CEO and Chairman: The debate rages on

Late last week, a shareholder activist filed, what is believed to be, the first proxy access resolution for this proxy season.  The target of the proposal, MEMC Electronic Materials, Inc., is an S&P 500 company that manufactures and sells wafers and related products to the semiconductor and solar industries.  As discussed in a previous blog post, while the U.S. Court of Appeals for the D.C. Circuit vacated the SEC proxy access rules, the Business Round Table and the U.S. Chamber of Commerce did not challenge the amendment to Rule 14a-8, which will allow shareholders to propose a process for the nomination of directors by shareholders. 

Beginning this proxy season, issuers will begin to receive proxy access proposals, which if passed by the shareholders, would allow for a shareholder nominating process beginning in 2013.  Unlike the process access rules proposed by the SEC, which would have limited nominations to shareholders who have held at least 3% of the issuer’s stock for at least three years, Rule 14a-8, as recently revised, allows activist shareholders to determine the requirements and the nominating process to be voted upon.  A nonprofit organization called the U.S. Proxy Exchange has published a model proxy access proposal to make it easier for activist shareholders to propose the required bylaw changes to allow for proxy access.  The MEMC shareholder proposal is based on that model proposal.  The model proposal urges an issuer’s board to adopt a proxy access bylaw that would permit director nominees from: any party of one or more shareholders that has held continuously, for two years, 1% of the issuer’s securities eligible to vote for the election of directors, and/or any party of shareholders of whom 100 or more satisfy SEC Rule 14a-8(b) eligibility requirements (i.e., those who have held at least a $2,000 stake for at least one year). The model proposal would also allow any such party to make one nomination or, if greater, a number of nominations equal to 12% of the current number of board members, rounding down.

While other issuers will likely receive proxy access proposals for this proxy season, we expect the over all number to be relatively low this year.  We would, however, expect the number of proxy access proposals to increase for the 2013 proxy season once the few “test cases” in this proxy season are resolved.

Despite the SEC’s decision not to appeal the recent decision by the U.S. Court of Appeals for the D.C. Circuit to vacate the proxy access rules, proxy access is still alive and well. 

In Tuesday’s release by the SEC, the SEC noted that the amendment to Rule 14a-8, which had been stayed pending the litigation over Rule 14a-11, will go into effect.  As discussed in our previous blog, the Business Round Table and the U.S. Chamber of Commerce had challenged Rule 14a-11, which would have permitted shareholders to more easily and more cheaply nominate a minority slate of director candidates for election on an issuer’s board if they held at least 3% of the issuer’s stock for at least three years.  The amendment to Rule 14a-8, which was a companion rule adopted by the SEC in conjunction with Rule 14a-11, narrowed the previously broad exclusion available to issuers to preclude shareholder proposals relating to director elections.  The new exclusion in Rule 14a-8 is much narrower and will allow shareholders to propose a process for the nomination of directors by shareholders.  Starting in 2012, issuers will likely be faced with shareholder proposals to allow for proxy access beginning in 2013.  Amended Rule 14a-8 essentially leaves proxy access for particular companies in the hands of activist shareholders and issuers’ Board of Directors.