July 2011

In a resounding victory for public companies Friday, the United States Court of Appeals for the District of Columbia Circuit struck down the Securities and Exchange Commission’s rule on proxy access.  The controversial proxy access rule 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.  Without reaching the merits of the actual rule, the appeals court struck down the rule because the panel (all three of which were Republican appointees) determined that the SEC had acted “arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects of a new rule.” 

While we do not believe proxy access is dead, particularly since it was authorized by Congress in the Dodd-Frank Act, we expect that the rule is dead for at least the 2012 proxy season.  Regardless of whether the SEC chooses to appeal to the entire appeals court or the U.S. Supreme Court or rewrite the rule to comply with the decision, it is highly unlikely that any of the choices will lead to the enactment of proxy access by the 2012 proxy season.  Because the SEC is currently inundated with rulemaking from Dodd-Frank, we don’t believe a new rule (with a more thoroughly weighed cost/benefit analysis) will come back until late 2012, at the earliest.

The court did not address the merits of the Business Round Table/ U.S. Chamber of Commerce’s First Amendment argument or their argument that shareholders themselves should vote to determine whether proxy access should be adopted for each issuer.  Thus, even if the SEC did propose a new rule and provided a plausible cost/benefit analysis that passes the court’s muster, the new rule could still be struck down on other grounds.

To read the court decision, click here.

 Recently, a 5-4 United States Supreme Court held, in Janus Capital Group Inc. et al. v. First Derivative Traders, No. 09-525, 2011 WL 2297762 (U.S. June 13, 2011), that an investment advisor was not liable for fraud in the prospectus of a sponsored mutual fund because the investment advisor was not the “maker” of the fraudulent statements – even though the fund’s officers were all also employees of the advisor and even though the advisor prepared, filed, and distributed the prospectus.  Janus draws a bright line to protect public companies’ service providers, such as bankers, lawyers, accountants, investment advisors and financial advisors, who will not be liable to private plaintiffs for statements made by their client issuer, no matter how significant a role they played in advising or drafting such statements. The high court found that the only persons who can have direct liability in private lawsuits are those who have “ultimate authority over the statement, including its content and whether and how to communicate it.”  Only such persons are the “makers” of “statements” for purposes of direct liability in private Rule 10b-5 suits.  “Without control,” according to the Court, “a person or entity can merely suggest what to say, not ‘make’ a statement in its own right,” and therefore “[o]ne who prepares or publishes a statement on behalf of another is not its maker.”

The majority opinion was written by Justice Thomas and joined by Chief Justice John Roberts and Justices Antonin Scalia, Anthony Kennedy and Samuel Alito.  Justice Stephen Breyer wrote the dissent, in which Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined, and argued that, instead of a bright line rule, the Court should adopt a more flexible approach and determine whether a person is a “maker” of a statement based on the circumstances of each case. 

For more information about the author, Curtis Alva, click here.

The IRS recently issued proposed regulations under Internal Revenue Code Section 162(m) relating to the deduction limitation for certain employee remuneration in excess of $1,000,000, which if passed, will have a significant impact on the design of equity based compensation plans for existing public companies and privately-held companies that ultimately become publicly held. Under Code Section 162(m), a publicly held corporation is restricted from taking a deduction for compensation paid to a covered employee in excess of $1,000,000. However, the deduction limit does not apply to “qualified” performance-based compensation.

Grants of stock options and stock appreciation rights (SARs) are considered qualified performance-based compensation if, among other things, the plan under which the option or right is granted states the maximum number of shares that may be granted during a specified period to any employee (currently the aggregate number of shares is stated in the plan document). The proposed regulations clarify that qualified performance-based compensation attributable to stock options and stock appreciation rights must specify the maximum number of shares with respect to which the options or rights may be granted to each individual employee. The IRS and the Treasury believe that the individual employee limit is consistent with the broader requirement that a performance goal include an objective formula for determining the maximum amount of compensation that an individual employee could receive if the performance goal were satisfied, and that a third party attempting to make this determination would need to know both the exercise price and the number of options that could be granted.

The proposed regulations apply to taxable years ending on or after the date the rules become final.

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