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We heard you! Your business is moving fast. You need to assess new developments quickly, determine if they apply to your business, and act accordingly. The Ticker is designed to focus your attention on key developments in the areas of SEC compliance, capital markets, corporate governance, executive compensation and other matters important to public companies and their officers and directors. Below are summaries of recent developments in these areas.

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Will Investment Bankers Be Brushed Aside in Technology Deals?

August 22, 2014

According to the New York Times, Google’s CEO Larry Page suggests a “toothbrush test” for potential acquisitions: ”Is it something you will use once or twice a day, and does it make your life better.” As technology M&A booms, investment bankers are playing a declining role in advising buyers, particularly in Silicon Valley. According to the New York Times, “the acquiring company did not use an investment bank in 69 percent of American technology acquisitions worth more than $100 million this year, according to Dealogic. That number was 27 percent 10 years ago.” Recent mega-deal examples of unadvised buyers include Apple’s acquisition of Beats Electronics, Google’s acquisition of Waze and Oracle’s agreement to purchase Micros Systems. Read more in the New York Times.


Wal-Mart Required to Provide Privileged Documents in Shareholder Demand for Corporate Records

August 22, 2014

The Delaware Supreme Court recently upheld a decision requiring Wal-Mart to provide extensive records in response to a shareholder demand under Section 220 of Delaware corporate law, despite the privileged and confidential nature of the information. In Wal-Mart Stores, Inc. v. Indiana Electrical Workers Trust Fund IBEW, the court adopted the Garner doctrine, which allows “stockholders of a corporation to invade the corporation’s attorney-client privilege in order to prove fiduciary breaches by those in control of the corporation upon showing good cause.” The shareholder demand relates to an investigation of allegations of payments by Wal-Mart to Mexican officials in violation of the Foreign Corrupt Practices Act. Under Section 220 of Delaware corporate law, shareholders have the right to inspect and copy corporate records, including board minutes, “for any proper purpose.” Delaware courts encourage this procedure as an information-gathering tool, rebuking shareholders for failing to use it before filing a claim of corporate mismanagement. Read the decision and analysis. Also, read our summary of ways to minimize FCPA risks.


ISS Announces Equity Plan Data Verification Portal

August 22, 2014

ISS, noting its “commitment to advancing the level of transparency and engagement in its data collection process,” announced a new way for companies to verify information used by ISS for recommendations on shareholder votes involving equity-based compensation plans. Companies are encouraged to register for the portal, allowing them access to ISS data and the ability to request modifications. Companies will only have a two-day window after receiving notice to request any such modification. The portal officially launches on September 8, 2014. Data will be available for review approximately 12 days after a company files its definitive proxy statement with the SEC. ISS’ new Equity Plan Data Verification is separate and distinct from its Governance QuickScore Data Verification and the ISS S&P 500 Draft Review. Read ISS FAQs about the portal.


Disclosure Practice When a CEO Gets Sick

August 22, 2014

The announcement in July that JPMorgan Chase CEO and Chairman Jamie Dimon had throat cancer is an example of the difficult disclosure decisions public companies face when a CEO gets sick. Deciding what to say and when to say it involves a delicate balance between investors’ need for disclosure and the CEO’s right to privacy. The reviews suggest that JPMorgan Chase did this well, while Apple, when handling disclosures about Steve Jobs’ illness, did not. There are no specific SEC rules addressing disclosure of a CEO’s illness. However, both the NYSE and Nasdaq generally require listed companies to promptly and publicly disclose any material news or information that might affect the market for their securities, including management changes. Read more in the Washington Post.


2015 ISS Policy Survey and Upcoming Trends

July 25, 2014

ISS recently distributed its 2015 annual survey of institutional investors and corporate issuers. The survey covers a number of key issues for consideration for the 2015 proxy season, including how to evaluate equity plans, board diversity and pay for performance. For the 2015 proxy season, ISS is considering a scorecard approach to evaluating equity plans, rather than the current focus on shareholder value transfer (SVT) and specific provisions and practices that ISS views as problematic. If adopted, the scorecard will place a greater emphasis on governance features that are included in the plan itself (such as holding periods and change of control provisions) and the company’s historic administration practices. Thus, a plan that defers to award agreements for holding period requirements and other governance safeguards may receive a negative ISS recommendation despite a low SVT and an absence of problematic pay practices. ISS is also considering how to evaluate board accountability when a board adopts without shareholder approval a material bylaw amendment that diminishes shareholders' rights, such as an advance notice or exclusive forum provision. Read more and access the survey here.


Will Congress Halt Inversion Deals?

July 25, 2014

In the wake of high-profile deals in which U.S. companies propose to reincorporate abroad to achieve tax advantages, Treasury Secretary Jacob Lew urged Congress to act quickly to prohibit the practice. These so-called inversion deals include Medtronic’s proposed $43 billion acquisition of Covidien and AbbVie’s proposed $54 billion acquisition of Shire. According to the New York Times, however, "the Obama administration and Congress appear unlikely to take any action to stem the tide of such deals anytime soon." Read more in the New York Times.


SEC Scrutinizes Cybersecurity Risk Disclosure

July 25, 2014

According to Bloomberg, the SEC is investigating several companies that were the victim of a data breach, including Target. Although there is no existing rule, requirement or regulation addressing cybersecurity risk disclosure, the SEC issued general guidance in 2011 and held a roundtable on the topic earlier this year. In a speech last month, SEC Commissioner Aguilar said that, in the event of a cyberattack, companies “should go beyond the impact on the company” and weigh the effect on others, including customers. Read Commissioner Aguilar's speech and more at Bloomberg.com.


SIFMA's Recommendations to Improve Market Structure

July 25, 2014

The Securities Industry and Financial Markets Association (SIFMA) recently proposed a series of changes to improve the fairness and effectiveness of the equity market trading system. SIFMA's recommendations were the result of a member task force charged with reviewing market structure. SIFMA focused on three areas that called for SEC rulemaking directed at the exchanges. First, SIFMA proposes to address market complexity and fragmentation by eliminating or reducing the access fees charged by exchanges and reducing the number of trading venues to which a broker-dealer must connect. Second, SIFMA proposes improved fairness in market data dissemination and seeks SEC rulemaking to ensure that all users of market data have access at the same time. Finally, SIFMA seeks more robust transparency and disclosure for investors and encourages the SEC to direct the exchanges to provide standardized public disclosure of their trading volumes. Read more in the New York Times.


SEC Provides Guidance on Investment Advisers’ Use of Proxy Advisory Firms

July 11, 2014

The SEC recently issued guidance on investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms. The guidance takes the form of 13 Q&As and addresses many of the concerns raised at the SEC roundtable in December 2013. The Q&As make clear that an investment adviser cannot satisfy its fiduciary duty to clients solely by relying on proxy advisory firms. Rather, investment advisers have an “ongoing duty to oversee” a proxy advisory firm upon which it relies, including assessing conflicts of interest and investigating material inaccuracies in a proxy advisory firm’s reports. The Q&As also address when proxy advisory firms are subject to the federal proxy rules and set forth their conflict-of-interest disclosure obligations. Read SEC Staff Legal Bulletin No. 20. Read more about the call for transparency at proxy advisory firms discussed by our proxy season panel.


SEC and SIFMA Provide More Guidance for Verification of Accredited Investor Status

July 11, 2014

The SEC and the Securities Industry and Financial Markets Association (SIFMA) each issued additional guidance for Regulation D private placements relying on Rule 506(c). This rule permits general solicitation when an issuer takes reasonable steps to verify that all purchasers are accredited investors and sets forth four non-exclusive safe harbors under which the reasonable verification requirement may be satisfied. The SEC’s latest guidance focuses on its narrow interpretation of these four safe harbors and reiterates the principles-based approach. The SIFMA’s guidance is directed to registered broker-dealers and investment advisers that may be asked to provide written confirmation of accredited investor status, offering examples of reasonable verification methods. Read the SEC’s most recent interpretations and the SIFMA guidance.


Conflict Minerals Rules: Is the Disliked Disclosure Effective?

July 11, 2014

According to the Enough Project, “Market changes spurred by the 2010 Dodd-Frank law on conflict minerals have helped significantly reduce the involvement of armed groups in eastern Democratic Republic of Congo...in the mines of three out of the four conflict minerals.” Public companies began to file their first Form SD reports on June 2 of this year under final rules adopted by the SEC in August 2012. By requiring companies that use conflict minerals in their products to disclose the minerals’ source, the law aims to dissuade companies from engaging in trade that supports regional conflicts. However, compliance with the SEC’s rules is costly for public companies, and a portion of the rules was found to violate companies’ First Amendment rights by a federal appeals court. Read the Enough Project’s report. Read our summary of the SEC rules and the SEC’s guidance following the court’s ruling.


Risk of Trade Secret Theft Increases for Companies with BYOD Policies

July 11, 2014

The ability to innovate and protect intellectual property drives business growth, development and investment. However, businesses face increasing threats to their critical business information, and recent estimates suggest that trade secret theft costs U.S. businesses billions of dollars each year. Business data is stored everywhere, including on employees’ mobile devices. When companies have a “bring your own device” (BYOD) policy, the potential for the theft of critical business information can increase. Read InsideCounsel’s article on how BYOD policies could facilitate corporate espionage and our Perspectives on Trade Secret Theft from Prevention to Enforcement.


U.S. Supreme Court Upholds Standard for Securities Fraud Lawsuits but Offers Defendants Some Relief

June 27, 2014

This week, the U.S. Supreme Court issued its decision in Halliburton v. Erica P. John Fund, Inc. In its decision, the Court upheld the “fraud on the market” standard for securities fraud lawsuits established in Basic v. Levinson. Under the Basic standard, shareholders can proceed with a fraud action even if they cannot prove they actually read and relied on a false or misleading statement, based on the theory their purchase or sale was made at an inaccurate share price that incorporated the misrepresentation. However, in Halliburton, the U.S. Supreme Court offered a new challenge to class certification, holding that defendants may rebut the presumption of market efficiency by introducing evidence that an alleged misrepresentation did not actually affect the market price of the stock. Defendants may introduce this evidence at the class certification stage. Thus, the Court’s decision gives defendants a potentially powerful new tool for challenging the fraud-on-the-market presumption. Read the U.S. Supreme Court’s opinion and analysis in Forbes.


Study Suggests Widespread Insider Trading Before M&A Transactions

June 27, 2014

The New York Times recently reported on a startling new study revealing that a substantial portion of public company M&A deals may involve some kind of insider trading. Both the SEC and DOJ have announced that prosecuting insider trading is a priority, and the SEC has hired a data analysis firm to help it uncover illegal trading activity. Read news about the study and our summary of SEC insider trading enforcement and what companies can do now to avoid trouble.


Best Practices for Minimizing FCPA Risk

June 27, 2014

Earlier this year, Hewlett-Packard agreed to pay $108 million to resolve claims that it violated the Foreign Corrupt Practices Act. The bribery case against H-P spanned Russia, Poland and Mexico and involved bags of cash, jewelry and free trips. As companies expand their businesses globally, they must assess the best way to minimize FCPA risks, particularly as they contract with third-party agents. Key steps involve identifying which third-party relationships are at risk and developing an appropriate FCPA compliance program. Read a summary of insights shared at our Practical Perspectives seminar on this topic.


The Problem of How to Count Abstentions in Shareholder Votes

June 27, 2014

Cheniere Energy recently postponed until September its annual meeting originally scheduled for June. The problem: shareholders filed a lawsuit alleging that shares were improperly awarded because of a failure to count abstentions properly in an equity plan approval by shareholders. Vote-counting methodologies can be surprisingly controversial, with reports suggesting that companies often take an inconsistent approach. Proxy rules require disclosure of the impact of abstentions and broker non-votes, but some companies are silent as to what approach they follow. Read news about the Cheniere Energy suit and the CalPERS study of vote calculation methodologies.


ISS Urges Vote Against Seven Target Directors

June 6, 2014

ISS launched an unusual and broad “vote no” campaign against seven of 10 directors of Target, claiming that they failed adequately to oversee the company’s cybersecurity risks leading to an extensive data breach last year. Target’s board defended its actions, noting that cybercrime impacts many companies and the U.S. government and outlining Target’s “significant action to address evolving cybercrime risks before the breach.” Target’s annual meeting will be held next week. According to ISS, the advisory firm rarely recommends that shareholders vote against the majority of board members. Since announcement of the data breach in 2014, Target’s stock price has dropped over 10 percent. Read more in the New York Times and the Star Tribune. Read the Target board’s letter to shareholders.


Cybersecurity Risk Disclosure

June 6, 2014

A cybersecurity breach at a public company may result in a significant business disruption and stock price drop. Thus, risk disclosure that addresses the impact that cybercrime threats and breaches may have on a company’s operations, results and stock price should be considered carefully. Although the SEC issued general guidance in 2011 and held a roundtable on the topic earlier this year, there is no existing rule, requirement or regulation that addresses cybersecurity directly. Best practices continue to evolve, but some suggestions include: clearly disclosing material threats or breaches that have occurred and how the company addressed them, the probability of cybersecurity incidents occurring, the potential costs and consequences (quantitative and qualitative) of any incidents, and preventive actions taken to reduce risks. Read the SEC’s 2011 guidance, materials from SEC’s 2014 Roundtable and an article in BNA’s Privacy & Security Law Report.


Hedge Fund Activists and M&A Appraisal Rights

June 6, 2014

In a twist on shareholder activism in the M&A context, hedge funds are exercising statutory appraisal rights as a matter of business strategy. According the New York Times, hedge funds have led to an upsurge in appraisal rights, with the value of total appraisal claims increasing tenfold from 2004 to $1.5 billion last year. Companies are challenging the ability of hedge funds to assert appraisal rights, however, claiming that such shareholders cannot establish that they meet state law requirements for the remedy. Read more in the New York Times. Read about shareholder activism in the M&A context in this Harvard Law School blog.


No Relief from June 2 Conflict Minerals Disclosure Deadline

May 23, 2014

In the latest courtroom drama involving the SEC’s conflict minerals disclosure rules, a federal appeals court refused to stay the June 2, 2014, deadline for filings required under the rules. Although the court previously invalidated portions of the rules as violating companies’ First Amendment rights, it rejected an emergency request by business groups to delay the due date for disclosure filings. As a result, companies must proceed to prepare and file their first Form SD in accordance with the SEC’s guidance on the topic. Read news coverage and the SEC’s guidance.


Ackman Claims Allergan Chair/CEO Has Conflict in Reviewing Bid

May 23, 2014

In connection with his effort to buy Botox-maker Allergan in a joint bid with Valeant Pharmaceuticals, activist investor William Ackman claimed that Allergan’s chairman, David Pyott, has a conflict of interest in reviewing the deal because he is also Allergan’s CEO. In a letter to the company, Ackman stated, ”He will lose his leadership role at the company and likely his job as a result of the transaction. As such, he cannot independently represent the company in considering the Valeant merger.” Allergan responded by noting Mr. Ackman’s potential conflicts: “As a co-bidder...we believe that Mr. Ackman’s views and interests are not aligned with those of other Allergan stockholders.” Read Ackman’s letter and coverage in the New York Times.


Shareholders Reject Chipotle’s Executive Pay

May 23, 2014

In one of the most notable say-on-pay rejections this year, over 75 percent of shares voted against Chipotle’s executive compensation package in the company’s non-binding say-on-pay proposal at its annual meeting. CtW Investment Group, a relatively small investor, successfully lobbied big institutional investors to join them in its effort to rein in Chipotle’s executive pay. Chipotle responded to the overwhelming rejection by stating that, “We take this very seriously”; but is this too little, too late? Read news about the Chipotle vote. Read practical perspectives on how best to align pay and performance from our recent seminar on Designing Executive Compensation Programs.


Former SAC Trader Sentenced for Insider Trading

May 23, 2014

Former SAC hedge fund trader Michael Steinberg was sentenced to over three years in prison for his conviction last year on insider trading charges. The sentence was coupled with a $2 million fine. Although the sentence was less than the minimum penalty suggested by the federal sentencing guidelines, it nonetheless sends a strong message that insider trading is a significant crime and will be punished accordingly. Read news and our summary of SEC insider trading enforcement and what companies can do now to avoid trouble.


SEC Moves Forward with Conflict Minerals Rules Despite Court Ruling

May 9, 2014

In response to a federal appeals court ruling that certain aspects of the SEC’s conflict mineral disclosure rules violated companies’ free speech rights under the First Amendment, the SEC issued guidance on and a partial stay of portions of those rules. The SEC stated that it expects companies to comply with all disclosure and filing requirements contained in the conflict minerals rules that are not otherwise affected by the court’s ruling. As a result, companies must prepare and file their Form SD by the June 2 deadline. Companies that do not need to file a Form SD should disclose their reasonable country of origin inquiry and briefly describe the inquiry they undertook. Companies required to file a Form SD should include a description of the due diligence undertaken. However, no company is required to describe its products as “DRC conflict free,” having not been found to be “DRC conflict free,” or “DRC conflict undeterminable.” Read the SEC’s press release and guidance.


SEC Scrutiny of Private Equity Firms Uncovers Violations

May 9, 2014

Private equity firms have operated with little regulatory scrutiny for many years. Since 2012, however, the SEC’s Office of Compliance Inspections and Examinations began to examine these firms as part of a Dodd-Frank mandate giving the SEC greater oversight over private funds. This week, the director of the OCIE reported that their examinations so far have uncovered significant concerns. The most common issues identified by the SEC were improper fees and the allocation of expenses to investors that should be paid by the firm. According to the SEC, more than half of the firms inspected had “violations of law or material weaknesses” in one of those areas. Read the SEC speech and analysis.


SEC Charges NYSE with Violating Market Structure Rules

May 9, 2014

The SEC brought an enforcement action against the NYSE and affiliated exchanges for failing to conduct their business operations in accordance with the SEC’s exchange rules and the federal securities laws. Several areas of misconduct were enumerated by the SEC, including the NYSE’s disparate pricing practices, which permitted some trading firms to pay less money than others to place their computer servers inside the exchanges’ data centers. The NYSE agreed to pay $4.5 million to settle the charges without admitting or denying them. In 2012, the NYSE settled SEC charges that it had given certain customers “an improper head start” on trading data. According to Andrew Ceresney of the Division of Enforcement, “We will hold exchanges accountable if they fail to have rules governing their operations or fail to follow them.” Read the SEC’s press release and analysis.


Broadridge Explains Its Policy for Disclosing Interim Vote Tallies

May 9, 2014

Who gets what proxy voting information and when? When it comes to shareholder vote tallies in advance of an annual meeting, there is both a lack of clarity and some controversy. Broadridge recently released a report to clarify its current policies and practices. In the report, Broadridge confirmed that in proxy contests (in which there is more than one proxy card) it will continue to provide all soliciting parties with interim vote information at the same time. However, Broadridge will give vote tallies to third parties conducting an exempt solicitation (e.g., a letter in a “vote no” campaign) only if both the issuer requests it and the third party signs a confidentiality agreement. Under this approach, issuers will need to consider whether to give vote information to someone who is opposing the issuer’s position; something that has been done only once since Broadridge adopted this policy. There are currently no SEC or other rules addressing this issue, but the Council of Institutional Investors has asked the SEC to adopt rules either to prohibit disclosure to anyone (including issuers) or to provide the tallies to any soliciting party. Read the Broadridge report.


Significant Increases in Shareholder Engagement Noted

May 9, 2014

ISS recently released the results of a benchmarking study of engagement between investors and public companies in the United States. According to the study, almost half of issuers, and more than half of investors, initiated numerous engagement efforts, compared with around 30 percent of issuers and investors three years ago. According to ISS, “While engagement was already increasing in frequency and importance three years ago, a variety of factors, the most significant of them the advent in the U.S. of universal say-on-pay votes, has deepened the trend.” Read the ISS Study.


No Reprieve From Conflict Minerals Rules Just Yet

April 25, 2014

Despite a recent federal appeals court ruling that certain aspects of the SEC’s conflict mineral disclosure rules are unconstitutional, companies are still preparing for a June 2 disclosure deadline. The problem: while the court deemed the SEC’s mandate that companies disclose whether their products are “DRC conflict free” to violate the First Amendment, the court also rejected a series of other challenges to the law. This means that affected companies are still required to file their Form SD; it’s just not clear what they are required to say. Now, it’s up to the lower courts or the SEC to help clear up the confusion. The best course for companies appears to be to continue to prepare their disclosures - and stay tuned. Read the ruling and analysis.


SEC Outlines Disclosure Effectiveness Reform

April 25, 2014

Keith Higgins, Director of the SEC’s Division of Corporate Finance, recently outlined the SEC’s disclosure reform efforts. He clarified that reducing the volume of disclosure is not the goal and that many investors have expressed an appetite for more information, not less. Rather, the SEC’s focus is on the effectiveness of the overall disclosure scheme. Mr. Higgins suggested the Division’s priorities, such as reviewing disclosure requirements that result in redundant disclosure and assessing whether a more principles-based approach would be an improvement. In addition, the SEC launched a spotlight page on its website to solicit public input. Read Keith Higgins’ remarks. Visit the SEC’s spotlight page on Disclosure Effectiveness.


Preemption in Regulation A Proposal Questioned

April 25, 2014

In December 2013, the SEC proposed rules to amend Regulation A of the Securities Act as mandated by the JOBS Act. The amendments would permit an offering of up to $50 million of securities within a 12-month period without going through a full-blown registration process. The proposed rule would preempt state securities regulatory review of these larger offerings, a provision that is key to the practical viability of Regulation A for issuers. However, a significant number of state securities regulators and NASAA have objected to this aspect of the proposal. SEC Commissioners Stein and Aguilar have also questioned whether the SEC has the authority to use preemption as proposed, opening a debate whether the preemption provision would withstand a legal challenge. Read SEC speeches by Stein and Aguilar.


Activist Investors Becoming More So

April 25, 2014

Activist investors increasingly have brought their complaints to the management and boards of a wide range of companies. Views are mixed on whether these investors create shareholder value or are merely disruptive. Activist investor William Ackman made headlines this week with a bold effort to buy Allergan (the maker of Botox) in a joint bid with Valeant. According to the New York Times, the bid, if successful, “could provide a new template for how deals are done in an era of increased activity by activist investors.” Read more about the Ackman/Valeant bid for Allergan. Read opinion about how the dialogue between shareholders and companies needs to change and an article discussing the Poison Pill’s Relevance in the Age of Shareholder Activism.


SEC Issues More Conflict Minerals FAQs

April 11, 2014

On April 7, 2014, the SEC provided additional guidance on its rules requiring public companies to disclose their use and sources of “conflict minerals.” This guidance is timely as many companies scramble to complete their first Form SD due on June 2, 2014. The most recent nine FAQs focus on the requirements for an independent private sector audit (IPSA) of an issuer’s conflict minerals report. Read the SEC’s most recent guidance as well as our summary of the original 12 FAQs.


Broadridge’s Essential Role in Corporate Governance

April 11, 2014

According to former NYSE Chair Dick Grasso, “Broadridge is the most important firm on Wall Street that you’ve never heard of.” As reported in Fortune, Broadridge processes 85% of all outstanding shares voted in the United States and 72% of shares voted outside of the United States, thus distributing some 2 billion investor communications in print and electronically each year. Read more in Fortune about Broadridge’s essential role in corporate governance and a report detailing Broadridge’s 2013 Proxy Season Statistics.


Is the IPO Window Still Open?

April 11, 2014

The New York Times reports that, despite a recent surge in IPOs, there are signs that investor interest in new offerings is beginning to wane. Performance among recent new listings is mixed, with some issuers trading below their initial listing prices and other transactions pricing above expectations. Advance preparation and readiness are key to capitalizing on market opportunities. Read more about recent IPO performance and anticipated new listings in the New York Times.


SEMINAR: Practical Perspectives on Designing Executive Compensation Programs – April 24, 2014

April 11, 2014

Tax, employment and securities issues are often in conflict when trying to meet executives’ goals and desires as companies design executive compensation programs. This program will bring together a panel featuring attorneys from Fredrikson & Byron’s Executive Compensation & Benefits and Employment & Labor groups, a compensation consultant, board representative and in-house counsel to address the potential traps in creating these plans, as well as current and future trends in executive compensation. The panelists will also share first-hand experiences in balancing key executive compensation, compliance and investor-relations objectives. Read more and register here.


Disney Amends Governance Guidelines to Avoid Annual Meeting Showdown

March 28, 2014

Disney amended its governance guidelines to address the limited circumstances under which the company may not have an independent board chairman. As a result, a proxy access proposal was withdrawn by the proposing shareholders and not presented at the company’s annual meeting. A group of investors had sought a shareholder vote on a measure to let owners of 3 percent or more of the stock nominate board candidates. That plan was withdrawn after talks with the company, according to Disney’s SEC filing. Read more on Bloomberg.com.


Lawsuit to Exclude Confidential Voting Proposal is Dismissed

March 28, 2014

The U.S. District Court (SDNY) recently dismissed Omnicom’s complaint to exclude John Chevedden’s confidential voting proxy proposal without addressing the substance of the proposal. The court noted that the threat of injury was not “actual or imminent” as necessary to grant the company’s declaratory judgment motion. Omnicom had decided to file suit rather than seek a no-action letter. The company must now decide whether or not to include the proposal, which seeks to prohibit the company from obtaining interim vote tallies during proxy solicitation, in its proxy. The SEC staff recently decided that a number of other companies may exclude the proposal on the grounds of vagueness. Read more at Reuters.com.


Best Practices for Engaging with Shareholders

March 28, 2014

Public companies are engaging more than ever with institutional investors and their advisory firms, even for routine annual meeting matters. This is not surprising given that institutional investors are now the dominant investors in U.S. public companies. But how do you start and develop a productive discussion? Read the recommendations of panelists at our recent program Perspectives on Key Issues for Proxy Season and The Conference Board’s Guidelines For Engagement.


2014 Shareholder Activism Trends

March 28, 2014

The 2014 proxy season already has set new records for the number of shareholder proposals filed. Topics include governance matters, such as separation of CEO/Chair roles, board declassification and board diversity, as well as social and environmental issues, such as corporate political activity and climate change. An emerging new proposal area addresses cybersecurity and consumer data protection. Read about the top 10 most common shareholder proposals in this EY Report or download this comprehensive 2014 Proxy Preview.


Best Practices for Trade Secrets Protection

March 28, 2014

The ability to innovate and protect intellectual property drives business growth, development and investment. However, businesses face increasing threats to their valuable trade secrets and other critical business information. Recent trade secret cases demonstrate that a simple trade secret policy or nondisclosure agreement with employees may not be enough. Companies should take proactive steps to secure trade secrets against theft and consistent action to protect and recover data from departing employees. Read what panelists had to say at our recent program Perspectives on Trade Secret Theft from Prevention to Enforcement.


Stay Tuned for Ruling on Standard for Securities Fraud Lawsuits

March 14, 2014

The U.S. Supreme Court recently heard oral arguments in the Halliburton case, in which the Basic v. Levinson ”fraud on the market” standard for securities fraud lawsuits is at issue. According to Sam Hananel of the Associated Press, the Court “seemed open to the possibility of making it harder for investors to join together to sue corporations for securities fraud - but maybe not as hard as companies that have to defend such lawsuits would like.” Read an analysis in U.S. News and our summary.


SEC Speaks - Expect a Focus on Data

March 14, 2014

At this year’s “SEC Speaks” conference in Washington D.C., SEC leadership said they will use sophisticated analytics on the vast stores of data they collect to enhance examinations, investigations and enforcement. ”We are using powerful new data analytics and technology tools in our National Exam Program to conduct more effective and efficient risk-based examinations of our registrants.” Chairman Mary Jo White said. “This expanded data collection and analysis not only enhances our ability to identify risks more efficiently, it helps our examiners better understand the contours of a firm’s business activities prior to conducting an examination.” Read more in Compliance Week.


Supreme Court Extends SOX Whistleblower Protections to Private Company Employees

March 14, 2014

In a recent ruling, the U.S. Supreme Court expanded the reach of Sarbanes-Oxley whistleblower protections to apply not only to employees of publicly traded companies but also to employees of contractors that do business with them. In Lawson v. FMR, LLC, the Court ruled that two whistleblowers were legally protected against retaliation after they raised concerns to their employer FMR, the parent company of Fidelity Investments, about how some mutual funds were being managed. While the mutual funds are public companies, the employer FMR is privately held. While some argue that the ruling may make sense in the mutual fund industry, where public company funds have few employees and rely on contracted advisers, the ruling is not limited to mutual fund advisers and covers a broad range of businesses, including law and accounting firms. Read more in Compliance Week.


Enlisting Powerful Long-Term Shareholders to Fight Activists

March 14, 2014

When Apple faced off this year with activist investor Carl Icahn over his demands for a repurchase program, it benefited from CalPERS’ public opposition to the proposal. Even ISS sided with Apple, stating ”the board’s latitude should not be constricted by a shareholder resolution that would micromanage the company’s capital allocation process.” In the face of this strong opposition, Icahn dropped his proposal. How did Apple and CalPERS end up on the same side? Did Apple’s decision to adopt CalPERS majority voting standard have any impact? Read more about Apple’s victory over Icahn in Compliance Week.


Are Risk Factors Losing Their Meaning?

March 14, 2014

Chipotle’s latest annual report caught media attention when it disclosed risks related to the raw ingredients for guacamole and salsas in light of climate change. At the same time, Chipotle reassured customers not to panic, guacamole was safe for now, and customers shouldn’t “read too much” into such “routine” risk factor disclosure. This give-and-take is interesting in light of SEC Chair Mary Jo White’s comment regarding detailed and lengthy SEC disclosures stating that, “It is fair to ask whether there is more there than is really needed.” Read more about Chipotle’s warnings followed by reassurance and Chair White’s remarks.


PCAOB Drops Mandatory Auditor Rotation Concept

February 14, 2014

After pursuing the concept of mandatory auditor rotation for several years, PCOAB Chair James Doty told the SEC that “we don’t have an active project or work going on within the board to move forward on a term limit for auditors.” The PCAOB’s concept release for rules that would have required public companies to switch auditors ever few years had met with fierce opposition from audit firms, their clients and the AICPA. Supporters of the proposal touted its impact on increased audit firm independence while critics argued it would erode audit quality and that its costs far outweighed any benefits. Read more in CFO.com.


SEC Issues Whistleblower Report

February 14, 2014

The SEC issued a report on the Dodd-Frank whistleblower program, noting that 2013 was “historic,” with the SEC’s Office of the Whistleblower paying over $14 million to whistleblowers for their roles in successful enforcement actions. The report details the growth in whistleblower complaints (from 334 in 2011 to 3,238 in 2013) and the types of SEC violations that resulted in the most whistleblower activity (with corporate financial statement and other disclosure issues, offering fraud and market manipulation leading the list). Read the SEC report.


Reducing “Effectiveness Gaps” for Boards

February 14, 2014

Boards need current and relevant information to be effective in their oversight role. As a result, companies need to assess whether gaps exist between what management communicates and what the board needs to know. McGladrey recommends opening a dialogue between directors and the C-suite to do so. To this end, McGladrey and the NACD co-hosted several such discussions to find ways to improve communications, and the results are informative. Read McGladrey’s white paper.


SEC Issues Guidance on Unbundling Requirements

January 31, 2014

The SEC’s unbundling rules, which effectively require a distinct shareholder vote on “each separate matter” in a company’s proxy, generally have received little attention. However, last year in a dispute between David Einhorn’s Greenlight Capital and Apple, these rules took center stage when a judge issued a preliminary injunction to a shareholder vote because Apple had bundled several voting items. The SEC has now offered additional interpretations of their rules, providing three circumstances where bundling is permitted: (1) charter amendments that are “inextricably intertwined,” (2) “bundling of any number of immaterial matters with a single material matter” and (3) the “presentation of multiple changes to an equity incentive plan in a single proposal.” Companies should carefully consider the application of these rules when preparing their proxy materials, especially those that may come under attack by shareholder activists. See the most recent SEC interpretations, and a detailed interpretation from 2004. Read about the Einhorn/Apple dispute in The Economist.


SEC Issues Report on Auditor Independence

January 31, 2014

The SEC issued a report of investigation that addresses the scope of the auditor independence rules in connection with a recently settled case involving KPMG. In its report, the SEC cautions auditors not to loan their staff to audit clients such that auditor staff are acting as employees of those companies. In the case of KPMG, the auditor had prohibited most loaned staff engagements with SEC audit clients, but had permitted loaned staff engagements for certain tax services. Read the SEC’s Section 21(a) report.


Observations on the Current Corporate Governance Environment

January 31, 2014

Corporate governance remains a key topic for corporations and their boards of directors, with board composition, shareholder activism and director accountability topping the list of issues. Read John Stout’s take on these matters.


Strong M&A Market Forecasted for 2014

January 31, 2014

Local dealmakers expressed their belief in a strong market for M&A deals in 2014. As reported in the Star Tribune, Fredrikson’s Jamie Snelson notes, “There was a steady stream of deals after the first quarter of 2013...We think 2014 will be another good year.” Read more in the Star Tribune.


Asymmetric Information Risk: What is it? And What Can Be Done?

January 31, 2014

The National Association of Corporate Directors identifies “asymmetric information risk” as the inherent imbalance in the information known by senior management and that known by the board of directors. According to the NACD, these “gaps in critical knowledge sharing...can create pitfalls and missed opportunities.” For example, the JPMorgan Chase “London Whale” debacle demonstrates the damage that asymmetric information risk can cause. Clear lines of communication are crucial, but how best to recognize a problem and achieve this goal? McGladrey has issued a white paper identifying “six warning signs that gaps in the flow of information have become too large and preventative measures a board could take to address the issue.” Read McGladrey’s white paper “Mitigating Board Information Risk.”


Top Priorities for Shareholder Activists in 2014

January 10, 2014

During the 2014 proxy season, institutional investors and activists are expected to continue to focus on executive compensation, board composition and diversity, and social policies. In addition, proxy access remains an ongoing topic of interest and certain activists have expressed a desire for confidential proxy tallying in advance of meetings. Read more about confidential proxy tallying here.

Join the Public Companies Group for a panel discussion, “Anticipating Key Shareholder Issues and Handling Activist and Advisory Firms This Proxy Season” on January 16, 2014, from 7:30-9:30 am at the Minneapolis Club. Read more and register here.


Say-On-Pay Vote Failures - Don’t Let This Happen to You!

January 10, 2014

Since Dodd-Frank gave shareholders the right to vote on executive pay, most companies have received 90 percent or more shareholder approval for their compensation packages. Yet, according to TheCorporateCounsel.net, say-on-pay votes failed at 74 companies in 2013. When a company fails to achieve majority support, the company’s image and potentially its value can sustain damage. As suggested by these Facts Behind 2013 Failed Say-On-Pay Votes, all companies should consider total shareholder return when setting executive compensation and informing shareholders of the rationale behind pay decisions. Shareholder engagement is also key, particularly following a low say-on-pay vote.


Aetna Sued Over Statement in Opposition of Shareholder Proposal

January 10, 2014

In an unusual move, a shareholder of Aetna has filed a complaint against the company, its board and its CEO for misleading disclosure in its proxy statements opposing shareholder demands for enhanced disclosure of political contributions. The shareholder seeks to have the votes rejecting the 2012 and 2013 shareholder resolutions voided, the resolutions resubmitted at the 2014 shareholders meeting, and Aetna’s board of directors ordered to amend its political contribution reports for 2006 through 2012 “to provide full and accurate information regarding all of the company’s political contributions.” Whether the suit represents an oddity or signals a new, more aggressive shareholder trend is yet to be seen. Read the complaint and related news.


SEC Issues Regulation S-K Study

January 10, 2014

The SEC has issued its report on Regulation S-K disclosure requirements as required by the JOBS Act. The report’s contents are further evidence of the SEC’s desire to modernize and simplify requirements and reduce compliance costs for emerging growth companies. After providing an overview of current rules and their evolution, the report suggests a comprehensive, wholesale review of disclosure requirements, including form and substance. “This report provides a framework for disclosure reform,” said SEC Chair Mary Jo White. “As a next step, I have directed the staff to develop specific recommendations for updating the rules that dictate what a company must disclose in its filings. We will seek input from companies about how we can make our disclosure rules work better for them and will solicit the views of investors about what type of information they want and how it can be best presented. The ultimate objective is for the Commission to improve the disclosure regime for both companies and investors.” Read the SEC Press Release with a link to the full staff report.


SEC Proposes Regulation A Amendments

January 10, 2014

As mandated by the JOBS Act, the SEC proposed rules to amend Regulation A to permit an offering of up to $50 million of securities within a 12-month period without going through a full-blown registration process. The much-awaited proposal builds on existing Regulation A, which has been rarely used due to an outdated limitation on the dollar amount that can be raised. Importantly, the proposal provides that state law registration requirements will be preempted in a Regulation A offering, making this rule a much more viable alternative than it has been historically. “This proposal is intended to help increase access of smaller companies to capital,” said SEC Chair Mary Jo White. The proposal is subject to a 60-day public comment period. Read the SEC Proposing Release.


SEC Issues Rule 506 Interpretations for “Bad Actor” Disqualifications

December 20, 2013

The SEC recently issued additional guidance for Regulation D private placements, addressing the “bad actor” disqualification rules under Rule 506(d), which became effective on September 23, 2013. Although the interpretations clarified some questions raised by the rule, they also left some areas murky, making it difficult for offering participants to certify compliance. Under the rule, an offering is disqualified from relying on Rules 506(b) and 506(c) if the issuer or any other covered person has a specified criminal conviction, suspension or other disqualifying event. The interpretations help clarify what offering participants are covered by the rule, what constitutes a disqualifying event and when an issuer is required to determine whether bad actor disqualification applies. See questions 260.14 through 260.27 here. Read our summary of Rule 506(d).


More on Disclosure Reform from the SEC

December 20, 2013

The SEC continues to hint at the possibility of streamlining public company disclosure requirements. Most recently, Commissioner Gallagher addressed concerns previously raised by Chair White about “information overload.” Commissioner Gallagher criticized new disclosure mandated by Dodd-Frank Act (such as pay-ratio calculations) as “a type of disclosure that needlessly clutters disclosure documents, making what is material to investors harder to find.” He further noted that the upcoming Regulation S-K study called for under the JOBS Act will be an important step to possible reform. Commissioner Gallagher made several specific recommendations in his remarks, including that proxy statements move some compensation tables to an appendix and that basic corporate information should be updated as necessary in an online disclosure system, rather than disclosed annually in proxy statements and annual reports. See Commissioner Gallagher’s remarks here.


Engaging With Activist Shareholders More Common Than Ever

December 20, 2013

Activist hedge fund ValueAct made headlines in September 2013 when it signed a “cooperation agreement” with Microsoft resulting in a board seat for ValueAct’s president after threatening a proxy battle. Recently, the Wall Street Journal reported that more companies are deciding to settle with activist shareholders, rather than wage a battle that may cause significant distraction and take an unfortunate toll on both parties. The trend towards more “shareholder engagement” is expected to continue. While some companies fight back successfully against activist shareholders, companies are best advised to avoid disruption in the first place by anticipating and responding to shareholder concerns before they reach the point of a proxy battle. See this NACD article noting that activists have won or settled for board seats in 66 percent of proxy contests in 2013 and this CFO.com article on “How to Prevent a Shareholder Blowup.” Join the Public Companies Group for a panel discussion, “Anticipating Key Shareholder Issues and Handling Activist and Advisory Firms This Proxy Season” on January 16, 2014, from 7:30-9:30 am at the Minneapolis Club. Read more and register here.


Activist-Appointed Directors Receive Activist-Paid Compensation

December 20, 2013

Some activist funds are paying their director nominees to corporate boards in addition to the board fees that director receives from the company. Hedge fund payments to directors in the form of performance bonuses, while not unlawful or fraudulent if they are disclosed, raise issues about conflicts of interest and adherence to fiduciary duties. Read more in the New York Times. In addition, corporate governance guru John Coffee asks “Are shareholder bonuses incentives or bribes?


Emerging Trends in Corporate Governance

December 20, 2013

As companies look ahead to the 2014 proxy season, it is an ideal time for them to examine their governance policies and practices. After all, a realistic assessment of how a company stacks up against critical governance benchmarks can help it best address hot-button issues for ISS and other proxy advisors and potentially avoid trouble down the road. Recent proxy analysis by Spencer Stuart offers timely benchmarking data for board composition, practices and compensation. In addition, PwC recently summarized the results of two surveys, one of public company directors and the other of investors, which spotlight some diverging views on key director attributes, shareholder communication practices and the role of proxy advisors. Read the Spencer Stuart report and the PwC report. Read the full recently released 2014 ISS Proxy Voting Guidelines here.


ISS Releases 2014 U.S. Policy Updates

December 6, 2013

ISS recently released its 2014 voting policy updates for U.S. companies. The new policies will be effective for shareholder meetings held on or after February 1, 2014. The updates relate to board responsiveness and pay for performance. On board responsiveness, ISS has clarified that recommendations on director elections following the board’s failure to act on a majority-supported shareholder proposal will be made on a “fact-specific, case-by-case basis.” Among other factors, ISS will consider “the subject matter of the proposal” and “the board’s rationale as provided in the proxy statement” for any action less than the full implementation of the majority-supported proposal. On pay for performance, ISS will simplify its methodology for calculating the relative degree of alignment (RDA) when evaluating say-on-pay votes. The new methodology will calculate the difference between the company’s total shareholder return (TSR) rank and the CEO’s total pay rank within a peer group, as measured over a three-year period (if available). Read the 2014 ISS U.S. Policy Updates.


Are Boards Becoming Too Independent?

December 6, 2013

Independent directors are required under listing standards, and having a majority of independent directors is believed to improve significantly board oversight. However, no studies have been able to link director independence to better shareholder returns. According to the New York Times, new studies have found that “the good effects from majority independent boards disappear with ‘super independent’ boards.” According to these studies, such companies are often less profitable. Read more in the New York Times.


SEC Issues Interpretations Under Rule 506(c)

December 6, 2013

The SEC issued guidance for Regulation D private placements relying on Rule 506(c), which permits general solicitations when the issuer takes reasonable steps to verify that all purchasers are accredited investors. These additional interpretations generally address issuer efforts to verify accredited investor status, as well as offerings that switch between Rule 506(b) and Rule 506(c) offerings. The SEC also clarified that an offering involving general solicitation, even to the limited extent permitted in Rule 506(c), cannot be exempt under Section 4(a)(2) for issuer transactions “not involving any public offering.” See questions 260.05 through 260.13 here.


U.S. Supreme Court to Consider Standard for Securities Fraud Lawsuits

December 6, 2013

The U.S. Supreme Court has granted certiorari in Halliburton v. Erica P. John Fund, Inc. The Supreme Court is being asked to overturn its Basic v. Levinson decision. That case established the “fraud on the market” standard for securities fraud lawsuits, allowing shareholders to proceed with an action even if they cannot prove they actually read and relied on a false or misleading statement. Under the Basic standard, actual reliance is not required under the theory that a shareholder’s purchase or sale was based on an inaccurate share price, one that incorporated the false or misleading information. If the Supreme Court overturns Basic and requires shareholders to establish actual reliance on the false or misleading statements, it will become considerably more difficult to bring a securities fraud action. Read more in Bloomberg Businessweek.


SEC to Hold Public Roundtable on Proxy Advisory Services

November 15, 2013

On December 5, 2013, the SEC will hold a public roundtable to discuss the use of proxy advisory firm services by institutional investors and investment advisers. The move signals the possibility of clearer SEC guidance as well as reform in this area. SEC Commissioner Gallagher had previously criticized institutional investors and investment advisers for their over-reliance on proxy advisory firms, such as ISS and Glass Lewis. The SEC previously explored the role of proxy advisory firms in a 2010 concept release on the proxy voting system. That release sought public comment on the need for transparency in the proxy advisory industry. See the SEC Press Release (including a link to the 2010 concept release), the U.S. Chamber of Commerce’s Best Practices and Core Principles for the Development, Dispensation and Receipt of Proxy Advice and the Mercatus Center report recommending limitations be imposed on the role of proxy advisory firms.


SAC Capital Pleads Guilty to Insider Trading

November 15, 2013

SAC Capital settled criminal charges of insider trading, pleading guilty to securities fraud, agreeing to fines totaling $1.8 billion and agreeing to close its investment advisory operations. The deal, which is being reviewed by a federal judge, is the biggest insider trading penalty to date and reflects the aggressive approach taken by the Justice Department and the SEC to pursue such wrongdoing. According to James Stewart of the New York Times, the government’s action is “a textbook case” of criminal prosecution of a corporation, rather than an individual. The deal does not resolve a separate SEC civil action against SAC’s founder, Steve Cohen. Read Mr. Stewart’s article and a Bloomberg analysis of the plea agreement. Read a New York Times article discussing the more unusual civil lawsuits against SAC by “victims” of its insider trading.


Delaware Corporations Should Adopt a Forum Selection Bylaw

November 15, 2013

Last month, plaintiffs challenging the forum selection bylaw provisions of Chevron and Fed Ex voluntarily withdrew their appeal of the Delaware Court of Chancery’s decision earlier this year. That decision held that companies can enforce bylaws that require shareholder lawsuits to be brought in Delaware, even if those provisions were adopted without shareholder consent. Although the withdrawal means there will be no “final word” by the Delaware Supreme Court at this time, a significant number of Delaware companies have moved forward with unilaterally-adopted forum selection bylaws based on the Chancery Court decision. With the increase in derivative litigation surrounding company sales and other corporate decisions, forum selection bylaws are one important way for companies to make litigation more predictable and therefore less expensive. Companies incorporated outside of Delaware are also considering whether to implement these provisions, in hopes that their home state will defer to the Delaware decision and their shareholders will appreciate the value of predictable litigation. Read Chancellor Strine’s opinion and a discussion of the enforceability of these provisions.


The Twitter Effect: On IPOs and Activist Tweets

November 15, 2013

Twitter made headlines as its IPO debuted last week. Breaking the “Facebook curse,” Twitter’s shares performed well during the first week of trading. This initial success has caused speculation about whether technology IPOs will see a resurgence and what consumer technology companies may be next. In the meantime, Twitter is shaking up the way activists communicate with other shareholders in the 24/7 public forum. Read Time.com’s After Twitter: 5 Potentially Blockbuster IPOs Coming Next and When Facing Activist Investors, Fight Has Gone 24/7 in the New York Times.


SEC Proposes Crowdfunding Rules

November 1, 2013

Last week, the SEC proposed rules to regulate equity crowdfunding, or raising small amounts of capital online from many investors to fund a business venture. The proposed rules track the basic parameters previously laid out in the JOBS Act and limit the amount an issuer can raise through crowdfunding transactions to $1 million in any 12-month period. Investors are also limited in the total amount they can invest in such transactions. While the JOBS Act mandated that the SEC make crowdfunding rules, the SEC is clearly concerned that the practice could weaken important investor protections. The proposed rules permit crowdfunding only through a registered broker-dealer or a registered “funding portal." These broker-dealers and funding portals may not solicit investments, offer investment advice or compensate employees based on sales, nor may the issuer advertise the investment opportunity. The proposals also require disclosure documents to be filed with the SEC prior to any sale and require financial disclosures that are scaled to the size of the offering. Read the SEC press release (including a link to the 585-page proposing release) and this New York Times article.


Revisit Risk Factors to Improve Disclosure

November 1, 2013

SEC Chair Mary Jo White's recent comments before the National Association of Corporate Directors suggest that efforts to streamline public company disclosure may be needed. One area identified as having become overly detailed and lengthy is the risk factor disclosure required by Regulation S-K. Over time, risk factor disclosure has expanded considerably. According to Chair White, “It is fair to ask whether there is more there than is really needed.” As new risks are identified and added, old disclosures are seldom edited or removed. Companies can enhance their overall risk disclosures through regular thoughtful review and editing and by avoiding a boilerplate approach. Read more about Chair White's remarks in this Compliance Week article.


Efforts Continue to Get More Women on Corporate Boards

November 1, 2013

When Twitter's IPO filing document became available, the company was criticized for its lack of women board members. "The fact that they went to the IPO without a single woman on the board, how dare they?” asked Standford Professor Vivek Wadhwa. However, Twitter is not alone. According to the New York Times, "the dearth of women on corporate boards has been a persistent issue for decades." A new effort by George Washington University's business school called "On the Board" hopes to change this. The initiative takes a two-pronged approach: (1) getting women on "the short list" to fill open board seats and (2) training women to be ready to step into those posts. Read more in this New York Times article.


Lessons from the JPMorgan Chase Settlement

November 1, 2013

JPMorgan Chase announced that it reached a tentative $13 billion settlement with the Justice Department over a number of investigations related to its mortgage-backed securities business. What transpired and what does this mean for the company? Read "everything you need to know" in the Washington Post.


SEC Expresses Concern Over “Information Overload” in Company Disclosure

October 18, 2013

In a recent speech before the National Association of Corporate Directors, SEC Chair Mary Jo White expressed concern over the “detailed and lengthy disclosures” companies currently provide under SEC rules. Although Chair White was not specific about any reform measures, she indicated that the SEC would soon release a study suggesting that some disclosures should be streamlined. “We must continuously consider whether information overload is occurring as rules proliferate and as we contemplate what should and should not be required to be disclosed going forward.” Read more.


ISS Releases Results of Investor Survey

October 18, 2013

ISS released the results of its most recent annual survey of institutional investors and corporate issuers. Results of the survey will be used to formulate ISS’ policy update for the 2014 proxy season. This year, the survey focused on themes of board responsiveness, director tenure and assessment, boardroom decision-making and other governance-related matters. The survey revealed investor concerns over lengthy director tenure. However, investors seemed less concerned about a lack of board responsiveness to non‐binding shareholder mandates. Investors also indicated that a company’s governance structure was very important when voting on share authorization requests. Review a summary of the ISS policy outreach process.


Effort to Overturn Standard for Securities Fraud Lawsuits

October 18, 2013

In connection with a securities fraud lawsuit originating in 2002, Halliburton has petitioned the Supreme Court to overturn its 1986 Basic v. Levinson decision. That case established the “fraud on the market” standard for such lawsuits, allowing shareholders to proceed with an action even if they can’t prove they actually read and relied on a false or misleading statement. Under the Basic standard, actual reliance isn’t required under the theory that a shareholder’s purchase or sale was based on an inaccurate share price, one that incorporated the false or misleading information. It’s uncertain if the Supreme Court will take the case, but there may be four justices willing to overturn Basic, based on their 2012 dissent in a case involving Amgen. If the Supreme Court agrees to hear the case and a fifth justice is persuaded to overturn Basic, it would be considerably more difficult to bring a securities fraud action. Read more in the New York Times.


Mark Cuban Found Not Guilty of Insider Trading

October 18, 2013

A Texas jury found Mark Cuban, the owner of the Dallas Mavericks, not guilty of civil charges of insider trading brought by the SEC. In a blow to its enforcement efforts, the SEC failed to prove that Cuban traded on non-public information. The SEC had sought to recoup gains, impose civil fines and obtain a permanent injunction to bar Cuban from similar alleged misconduct. The trial culminated a lengthy battle over Cuban’s sale of Mamma.com stock in June 2004. In a statement, the SEC said, “While the verdict in this particular case is not the one we sought, it will not deter us from bringing and trying cases where we believe defendants have violated the federal securities laws.” Read our summary of SEC insider trading enforcement and what companies can do now to avoid trouble.


SEC Stays Open...For Now

October 4, 2013

The SEC posted about its operating status on its website saying, “The SEC will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1. Any changes to the SEC’s operational status after October 1 will be announced on [our] website.” If the SEC determines to shut down at a later date, its operational plan notes that EDGAR filings would continue to be accepted; however, review and approval of applications for registration would be discontinued. Check for announcements by the SEC on its website. Review an SEC shutdown plan here.


Mark Cuban’s Insider Trading Trial Begins

October 4, 2013

The SEC’s civil insider trading trial against Mark Cuban, the owner of the Dallas Mavericks, opened in a federal courtroom in Dallas on Monday. The SEC is seeking to recoup gains, impose civil fines and obtain a permanent injunction to bar Cuban from similar alleged misconduct. The trial demonstrates the SEC’s aggressive pursuit of illegal insider trading and culminates a five-year battle with Mr. Cuban. Read our summary of SEC insider trading enforcement and what companies can do now to avoid trouble. Read the New York Times account of the Mark Cuban case.


Can a Better Peer Group Analysis Improve CEO Pay Disclosure?

October 4, 2013

Critics of the SEC’s recent pay ratio disclosure proposal note that the new rule, if adopted, will do little to help investors assess whether CEO pay is appropriate. A more meaningful comparison may lie in the peer groups that public companies choose as benchmarks when setting their pay packages. While over 80 percent of companies disclose the use of peer groups to set executive compensation, these peer groups are often comprised of much larger companies, thereby skewing pay higher. In response, many institutional investors look to Equilar to generate an alternative peer group for a particular company that uses much more comparably sized peers. Read a New York Times article to learn more about Equilar’s approach. Read our summary of the SEC’s proposed pay ratio disclosure rule.


Debate Continues in Regulation D Reform

October 4, 2013

In July, the SEC proposed rules to impose additional safeguards in offerings that rely on Rule 506 of Regulation D and require issuers to provide additional information about these offerings. The proposal has been the subject of much comment and concern, and the SEC has extended the comment period. In a September 20 letter, the SEC’s Advisory Committee on Small and Emerging Companies expressed its concern that “the proposed amendments, if adopted, could have a significant negative impact on the 506 market by discouraging some investors from participating in Rule 506 offerings, adversely affecting capital raising and job creation.” The committee further suggested key aspects of the proposal meriting additional review. Read the committee’s letter and the SEC release re-opening the comment period. Read our summary of the SEC proposals here.


SEC Promotes Voluntary Submissions for Rule 506(c) Offerings

October 4, 2013

In a puzzling move, the SEC created a portal on its website for voluntary submission of general solicitation materials used in Rule 506(c) offerings. While SEC proposals had contemplated the possibility of such filings, there is no such filing requirement in final Rule 506(c) that became effective on September 23, 2013. Meanwhile, the SEC issued investor alerts relating to advertising and accredited investors in 506 offerings. The SEC’s page announcing the voluntary submission portal also notes, “If you have information about possible violations of the U.S. securities laws, please submit the information using the Tips, Complaints and Referrals portal.” Read more on the SEC’s website here. Read our summary of new Rule 506(c) permitting general solicitation.


Companies Beef Up Disclosure of Political Contributions

October 4, 2013

Activist demand for greater transparency about corporate political activity is increasing, and shareholder proposals requiring companies to adopt contribution policies are becoming more prevalent. The SEC staff has said it’s considering a rule proposal requiring public companies to disclose their political donations in SEC filings. Some companies are getting in front of the issue by beefing up their disclosure in this area. The Center for Political Accountability (CPA) found that 78 percent of the 195 corporations it tracks have improved their political spending disclosures in 2013. Read more in this Washington Post article.


SEC Proposes Pay Ratio Disclosure Rule

September 20, 2013

As expected, on September 18, the SEC proposed a rule to implement a Dodd-Frank mandate that companies disclose the ratio of median pay of all employees to a CEO’s total compensation. The proposal was approved over strong objection by two of the five SEC commissioners. The SEC’s proposed rule purports to offer companies a flexible approach to compliance, allowing them to select their own method for calculating median pay, including statistical sampling. The SEC noted that its proposal attempts to address concerns about the cost of compliance. Additional concerns raised by dissenting commissioners were that median pay calculations included seasonal, part-time and off-shore employees and that the politically-motivated rule did not serve to protect investors.

Read our summary and the SEC press release, including a fact sheet and a link to the proposed rule.


Twitter Tweets News of Confidential IPO

September 20, 2013

Last week, Twitter tweeted, “We’ve confidentially submitted an S-1 to the SEC for a planned IPO,” and further noted that, “This Tweet does not constitute an offer of any securities for sale.” Thus evolves the permitted Rule 135 press release in a post-JOBS Act/140-character-limit world. Since first permitted by the JOBS Act in 2012, many emerging growth companies (EGCs) have submitted their IPO filings on a confidential basis with the SEC. This is an attractive option because the EGC can keep their financial and compensation information confidential until they are sure the IPO will launch. The SEC’s comments and the company’s responses also remain confidential until the filing is made public. An EGC is generally an issuer that has less than $1 billion in total annual gross revenues. Read the SEC’s guidance on how to file IPO documents confidentially here. Read more about the Twitter announcement here.


Will Twitter Ignite Technology IPOs and What Will They Look Like?

September 20, 2013

According to the New York Times, technology deals represent about 17 percent of all IPOs so far this year, the lowest share since 2008, despite growing IPO activity in other sectors. This could be fallout from the botched Facebook IPO, or perhaps the use of confidential SEC filings (like Twitter’s) is keeping a potential wave of technology IPOs under wraps. However, many hope that Twitter’s IPO announcement will lead to more. Although the structure of a Twitter deal is not yet known, it may follow the Silicon Valley pattern of dual-class ownership structures that keep founders in total control and public shareholders on the sidelines. According to the New York Times, “studies have shown that in general, this type of dual-class structure does not perform as well as traditional arrangements.” Read about the potential for a technology IPO uptick and the dual class stock structures often used.


SEC Brings Rare Regulation FD Case Against IR Professional

September 20, 2013

Earlier this month, the SEC brought an enforcement action against the former head of investor relations at First Solar, Lawrence Polizzotto, for his selective disclosure about the loss of a loan guarantee from the Department of Energy. Broad disclosure of this information in a company press release the next morning resulted in a stock price drop of six percent. The SEC did not bring an enforcement action against First Solar, however, due to the company’s “extraordinary cooperation with the investigation” and because First Solar “cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Regulation FD.” Read the SEC press release and an article in Compliance Week.


Lessons From the Dell Transaction

September 20, 2013

The shareholders of Dell finally approved the buyout by CEO Michael Dell and Silver Lake Partners after the parties renegotiated the voting standard. The transaction provides important lessons for boards that walk a fine line between protecting a company from deal-related litigation and getting a deal done for the benefit of shareholders. The deal ultimately was approved by a majority of disinterested shares actually voting in the matter. The original voting standard, essentially a majority-of-the-minority requirement, was deemed too stringent for a transaction that did not involve a controlling shareholder. Read more “Lessons from the Dell Deal” in the New York Times.


SEC’s “Pay Gap” Disclosure Rule Expected in September

September 6, 2013

According to the Wall Street Journal, the SEC is expected this month to propose a controversial rule requiring public companies to disclose how much more their CEOs are paid than their rank-and-file workers. However, the SEC’s rule proposal is expected to be somewhat less onerous than previously expected, allowing companies to compare CEO pay to the median pay of a specified sample group rather than all employees. Any proposed rule is likely to receive significant comments from public companies, their counsel, labor unions and the public. Read more in Forbes and at CNBC.com. The Wall Street Journal report available here requires a subscription.


Nasdaq Trading Halt Reignites Criticism

September 6, 2013

The SEC has summoned stock exchange executives to a private meeting on September 12 to discuss the adequacy of their technology and procedures. In August, Nasdaq trading was interrupted for several hours due to a systems glitch of disputed origin. The incident is described in more detail here. According to Nasdaq’s explanation, the August shutdown related to “a sequence of events [that] combined to create an unprecedented volume of message traffic...well beyond the system’s tested capacity.” The incident follows Nasdaq’s $10 million SEC settlement relating to disruption of the Facebook IPO, and occurred at a time when competition for issuers’ listings is as fierce as ever. Last week, the New York Times reported that rival exchanges BATS and Direct Edge proposed a merger that could further decrease Nasdaq’s market share.


Activist Investors with Vast Resources Wield Significant Power

September 6, 2013

Activist hedge fund investors with significant assets may wield influence much greater than their relatively small stakes in large public companies would suggest. Case-in-point: ValueAct’s one percent stake in Microsoft resulted in significant company concessions, including allowing ValueAct representatives to meet regularly with Microsoft directors and a potential board seat. As previously noted in The Ticker, activist hedge funds appear to be pursuing more than a quick stock price increase, looking instead to long-term fixes like new strategies or board overhauls. Read a New York Times article exploring this phenomenon.


How Maximizing Shareholder Value Changed Corporate America

September 6, 2013

According to the Washington Post, the now-accepted mantra of maximizing shareholder value is “the goal that changed corporate America.” When companies focus on shareholders, the interests of employees and communities may suffer. Read more about how efforts to maximize shareholder value at IBM had an impact on its employees and communities over the last several decades.


What Proxy Access Might Look Like

September 6, 2013

Since the U.S. Court of Appeals for the D.C. Circuit vacated SEC Rule 14a-11 in 2011, proxy access has not been a factor for U.S. public companies. However, the concept is alive and well in Israel, which affects some U.S.-listed companies and could prove informative if proxy access concepts re-emerged in the United States. The recent experience of Israeli company Taro Pharmaceuticals provides some insight into the impact such a rule has in a proxy fight. Read this New York Times article for a glimpse into the specifics.


Director Disagreements - When Things Get Really Ugly

August 23, 2013

J.C. Penney has received its share of unflattering press as it struggles through leadership changes, failed strategies and poor financial results. Recently, things got even uglier when one of its directors, hedge fund activist Bill Ackman, made public his disagreements with the board and resigned, triggering a rarely seen Form 8-K filing highlighting the disagreement that gave rise to Ackman's departure. The company previously had considered taking action against Ackman for his release of confidential boardroom deliberations. Case law regarding a director’s duty of confidentiality is sparse. However, courts, including the Delaware Court of Chancery, have recognized the general principle that directors owe a duty of confidentiality as part of their duty of loyalty. Read more about Penney's claimsAckman's resignation and an agreement ultimately reached by the parties. Read a New Yorker article suggesting that the Penney-Ackman saga illustrates the negative impacts that can occur "when [hedge fund] shareholder activism goes to far." Read more about a director's duty of confidentiality in this Harvard Law School blog.


PCAOB Proposals Could Substantially Change Auditor's Reports

August 23, 2013

Last week, the PCAOB proposed two new audit standards that dramatically expand an auditor's responsibilities. The first proposed standard would require auditors to include a discussion of "critical audit matters" specific to the audit. The second proposed standard would require auditors to provide their evaluation of "other information" (such as the MD&A and selected financial information) that is in a company's annual report filed with the SEC. PCAOB Chairman James Doty said these proposed standards are a "watershed moment" for U.S. financial audits. The proposals are expected to generate significant comments before final standards are adopted. "Critical audit matters" are those that (1) involved the most difficult, subjective or complex auditor judgments, or (2) posed the most difficulty to the auditor in obtaining appropriate evidence or forming an opinion on the financial statements. The new standard is expected to result in the disclosure of information about the audit "that could enable investors to analyze more closely any related financial statement accounts and disclosures." Auditor reports on "other information" would need to include a statement as to whether the auditor identified a material inconsistency or a material misstatement of fact in the other information. The PCAOB proposals could result in significant increases to the timing and costs associated with an audit. Read the PCAOB Fact Sheet on the proposals.


Is the Wall Between Analysts and Investment Bankers Beginning to Crumble?

August 23, 2013

The New York Times reported that Wall Street's self-regulator, FINRA, is investigating whether research analysts are participating in pitches to win investment banking business underwriting IPOs, despite rules barring such activity. According to the report, "Wall Street is slipping back into its old ways." Since 2003, investment bankers have been restricted from arranging communications between the analysts who provide recommendations to investors and the companies from which the bankers are seeking business. The JOBS Act loosened those regulations somewhat with respect to companies with less than $1 billion in annual revenue. Read more in the New York Times.


Cybersecurity and the Board

August 23, 2013

Serious data breaches at U.S. companies are reported almost daily. What responsibilities does a director have to assess whether a company's cybersecurity measures are adequate? Good governance practices suggest that managing cyber risks requires directors to understand their company’s cybersecurity risk profile and the options available for mitigating the risk. Read an article discussing some best practices to consider.


What Constitutes Material Nonpublic Information for Purposes of Insider Trading?

August 9, 2013

Illegal insider trading involves buying or selling a security while in possession of material nonpublic information about the security or tipping such information to another who trades on the basis of it. The recent insider trading charges against Sandeep Aggarwal for tipping off an SAC portfolio manager raise the question of when information is sufficiently material and nonpublic that its use constitutes insider trading. Information is nonpublic if it has yet to be disclosed to the general marketplace. Generally, information that has been selectively disclosed to a few remains nonpublic. In the case of Mr. Aggarwal, the information tipped involved insight into the revival of deal talks between Microsoft and Yahoo, information that Mr. Aggarwal had shared with at least 14 other traders and portfolio managers before sharing it with SAC. Whether Aggarwal’s tip constituted insider trading will likely be determined under standards set in United States v. Contorinis. The Contornis court stated that “information is not necessarily nonpublic simply because there has been no formal announcement.” However, the court also noted that information that “is sufficiently more detailed and/or reliable than publicly available information” may be material and nonpublic. Read more in the New York Times.


Compensation Clawbacks Rarely Used

August 9, 2013

According to Equilar, over 85 percent of Fortune 100 companies have disclosed clawback policies to recoup incentive compensation erroneously awarded to executives. Despite the widespread disclosure of clawbacks, however, use of them to recover pay is rare. A Wal-Mart shareholder proposal demanded that the company disclose whether any clawbacks have occurred under its policy, and a McKesson shareholder proposal asked for both a stronger policy and disclosure of use. Clawbacks may be a policy or a contractual provision and generally allow a company to recover compensation in the case of a financial restatement, an executive’s ethical misconduct, or a combination of both. Dodd-Frank requires the SEC to direct the exchanges to prohibit listing securities of issuers that have not developed and implemented clawback policies, but no rules have been proposed or become effective. Any proposed rules would go beyond the current requirements under Sarbanes-Oxley, which require a CEO or CFO to return incentive-based compensation to an issuer when a financial restatement occurs as a result of misconduct. Read a New York Times article discussing the limited use of clawbacks to date and other press about the results of the proposals at Wal-Mart and McKesson.


Board Tenure - How Long is Too Long?

August 9, 2013

In a recent Directors & Boards article, the author asked, “Shouldn’t we be fostering a freshening up of a board of directors, not a locking up of board seats?” The question of how long is too long to serve as a director has not been much discussed, but it becomes an important issue as companies evaluate the independence and diversity of their boards. In addition, when ISS recently launched its annual survey seeking feedback from institutional investors and issuers, it specifically asked whether long director tenure is problematic. Read Directors & Boards and the Wall Street Journal on the problem of directors serving too long.


Dell Special Committee Agrees to Voting Standard Change for Buyout

August 9, 2013

In the continuing saga of the proposed buyout of Dell by CEO Michael Dell and Silver Lake Partners, Dell’s special committee agreed to a higher purchase price in exchange for a revised shareholder voting standard. Before the change, the buyout needed the favorable vote from a majority of outstanding shares. Given that Michael Dell could not vote his 15 percent stake, strong opposition by Carl Icahn and others, and the reportedly 23 percent of shares not voted, the deal has been unable to secure shareholder approval. The previous voting standard was considered too stringent under Delaware standards, however, since it essentially invoked a majority-of-the-minority vote standard used as a procedural safeguard in controlling shareholder transactions. However, Michael Dell’s 15 percent stake fell well below controlling shareholder levels. Under the new standard, the deal requires “approval by the majority of disinterested shares actually voting on the matter.” Read the Dell press release of new deal terms and this New York Times analysis.


The Continuing Evolution of the Earnings Call

July 26, 2013

Netflix abandoned the traditional earnings conference call this week and instead hosted a live video chat moderated by BTIG analyst Rich Greenfield and CNBC reporter Julia Boorstin. This follows a similar approach taken by Yahoo earlier this month. Although the format is a logical innovation for two internet companies, the end result got mixed reviews. Read analysis in ForbesBuzzFeed and IR Magazine.


No Reprieve From Conflict Minerals Rules - Yet Slow Progress on Compliance Noted

July 26, 2013

On July 23, the U.S. District Court for the District of Columbia rejected a lawsuit seeking to invalidate the SEC’s conflict minerals rules under a variety of theories. The court concluded the claims brought by the National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable lack merit. As a result, the rules are most likely here to stay. However, two-thirds of respondents to a new PwC survey say their companies have not yet started or are early in the process of compiling information they will need to meet the SEC’s conflict minerals rules. A significant number of executives surveyed said they still are trying to figure out if the reporting requirements apply to their businesses. As the May 2014 reporting deadline looms, companies should not delay conducting an internal analysis to determine if any of their products fall within the scope of the rules and would trigger a reporting obligation. Read the PwC Report here and the court's opinion here.


Force-the-Vote Provision Combined with Voting Agreement Used to Lock Up M&A Deal

July 26, 2013

Over the years, M&A deal protections have gotten stronger and more intricate. In AT&T’s acquisition of Leap Wireless, the parties used two key deal protections that combine effectively to preclude a successful competing bid. The parties agreed to a “force-the-vote” provision, used infrequently in M&A transactions, that requires Leap to bring the deal to its shareholders even if a better one emerges. This provision, combined with a voting agreement from a 30% shareholder of Leap, should effectively lock up the AT&T deal by deterring any other bidder from making an offer. Read more about the AT&T/Leap deal protections here.


SEC May Issue a “Pay Gap” Disclosure Rule in August

July 26, 2013

According to Bloomberg BusinessWeek, the SEC may propose a rule in the next month that would require public companies to disclose how much more their CEOs are paid than rank-and-file workers. This is one of the more controversial provisions mandated by the Dodd-Frank overhaul, and the House Financial Services Committee has voted to repeal it. Any proposed rule will receive significant comments from public companies, their counsel, labor unions and the public. Chief among the criticisms are that the costs involved in complying with any such requirement would outweigh any benefit. Read the Bloomberg article.


SEC Lifts Ban on General Solicitation in Private Placements

July 19, 2013

In a move that will significantly change offering practices, the SEC approved final rules allowing general solicitation or advertising in private securities offerings to accredited investors, as previously mandated by the JOBS Act. The SEC also adopted final rules that disqualify felons and other bad actors from participating in these private offerings, as required by the Dodd-Frank Act. In addition, the SEC proposed rules requiring issuers to provide additional information about these offerings and to impose additional safeguards. Issuers relying on Rule 506 of Regulation D must “take reasonable steps to verify” that purchasers are accredited investors. Although issuers should take a principles-based approach when verifying the accredited investor status of a purchaser, the final rules provide a nonexclusive list of methods that may be used. Although an effective date is not yet certain, the final rules lifting the advertising ban from Rule 506 and disqualifying bad actors should become effective in September 2013. Read our summary of the new rules. Also read the SEC’s press release (including links to fact sheets and final and proposed rules) and this New York Times analysis.


SEC Commissioner Shares His Concerns About the Influence of Proxy Advisory Firms

July 19, 2013

At a recent meeting of the Society of Corporate Secretaries & Governance Professionals, SEC Commissioner Daniel Gallagher criticized institutional shareholders for their over-reliance on proxy advisory firms. He noted that these shareholders must exercise their fiduciary duties and must not blindly rely on recommendations from advisory firms, such as ISS and Glass Lewis. Commissioner Gallagher noted the “remarkable transformation” in shareholder voting in recent decades and called for clearer SEC guidance as well as reform. He noted, “The rise of institutional shareholders as the majority owners of public company shares as well as the increased desire of some policy makers to give shareholders greater influence and power in corporate governance has led to the current dynamic.” Read Mr. Gallagher’s full remarks here.


Shareholders’ Say on Pay - Is It Effective?

July 19, 2013

According to the New York Times, “the ’say on pay’ experiment is a bust.” Since Dodd-Frank gave shareholders the right to vote on executive pay, a growing number of companies have received 90 percent or more shareholder approval for their compensation packages. Yet some companies have engaged shareholders to reform their executive compensation programs in response to low say-on-pay votes. Read the New York Times article. This Forbes article notes how Johnson & Johnson revamped its executive pay practices with shareholder input.


Are Staggered Boards a Thing of the Past?

July 19, 2013

Shareholder efforts at corporate governance reform have met with mixed results. However, the effort to eliminate classified or staggered boards has been a resounding success. Spurred by numerous shareholder proposals each year to require annual election of all directors, a gradual move toward eliminating staggered boards began roughly a decade ago. According to ISS, as of 2012 less than half of S&P 1500 companies had staggered boards, while more than half of the MidCap and SmallCap companies did. Most recently, the Harvard Law School’s Shareholder Rights Project has focused on requiring annual election for all directors. So far this year, 35 companies targeted by the group have agreed to eliminate classified boards. Read more.


Activist Shareholders and the Long Term

July 19, 2013

When a hedge fund takes an activist role against a company in which it’s invested, the assumption is that it is looking for a quick stock price increase. The traditional company response is that the hedge fund is not interested in the company’s long-term success. However, recent reports suggest that activist strategies by hedge funds appear to create long-term value. In one study of 2,000 hedge fund activist events from 1994 to 2007, the authors found that hedge fund interventions produced a 6 percent rise in stock prices that held for a five-year period without underperforming peers. Read this New York Times article.


SEC to Require Admission of Wrongdoing in Some Settlements

June 28, 2013

SEC Chair Mary Jo White stated that the Commission plans to change existing policy and require some defendants in enforcement actions to admit wrongdoing as a condition of settlement, rather than permitting a defendant to “neither admit nor deny” the allegations. When applied, this new policy will significantly increase the cost of settling with the SEC and may result in additional litigation. Read articles in the New York Times and the Washington Post.


Forum Selection Bylaws Upheld in Delaware

June 28, 2013

Companies can enforce bylaws that require shareholder lawsuits to be brought in Delaware, according to a decision by the Delaware Court of Chancery on June 25. Delaware’s Chancellor Strine held that the forum selection bylaws adopted by Chevron and Fed Ex are contractually valid even though adopted without shareholder consent. With the increase in derivative litigation surrounding company sales and other corporate decisions, forum selection bylaws are one important way for companies to make litigation more predictable and therefore less expensive. Read the decision, which is likely to be appealed to the Delaware Supreme Court.


Proxy Voting by Retail Shareholders Remains Low

June 28, 2013

According to a recent joint report from Broadridge and PwC, there remain challenges in turning out the retail shareholder vote at annual meetings. Yet retail votes, if obtained, generally support management’s voting recommendations at high rates. As noted in this ProxyPulse report, only 30 percent of retail shares were voted in meetings this year through April 23, 2013. The report cites Notice & Access - the SEC’s rule addressing internet availability of proxy materials - as a factor in the drop. The Notice & Access option gives companies the ability to publish proxy materials on a public website and then mail shareholders a notice of where they can access these materials. While companies realize printing and postage cost savings through Notice & Access, the approach has resulted in reduced retail voting participation. According to Broadridge, only about 17 percent of the retail shares receiving a notice of internet availability were voted over the last six years (compared to 36 percent of shares who received full paper packages). As a result, companies should evaluate and understand the costs and benefits of using a notice-only approach if they are concerned about shareholder participation.


Reminder: July 1 Deadline for New Compensation Committee Requirements

June 28, 2013

Under NYSE and Nasdaq rules approved by the SEC in January, listed companies must comply by July 1, 2013 with new requirements for compensation committees. In general, compensation committees must have the authority and sole discretion to retain and pay (with company funds) outside consultants, legal counsel and other advisers, and compensation committees have the responsibility to consider the independence of an adviser before retaining it or soliciting its advice. Compensation committees of NYSE-listed companies must amend their charters to provide for this authority and responsibility by the deadline. Companies listed on Nasdaq also are required to give their compensation committees this authority and responsibility by the deadline, but charter amendments can wait until 2014. In evaluating the independence of advisers selected or giving advice going forward, compensation committees should consider the various factors affecting independence specified by the applicable exchange. Exemptions are available for certain foreign issuers and smaller reporting companies. See this Nasdaq Rule Update and the NYSE Rule Change.


Revlon Settles Charges That It Misled Investors When Going Private

June 21, 2013

On June 13, the SEC announced its charges against and settlement with Revlon for the company’s misleading disclosure in a going private transaction. The charges stem from Revlon’s failure to tell independent directors and shareholders that a third party financial adviser to its 401(k) plan found the consideration offered in the transaction to be inadequate. Revlon had restructured its 401(k) plan to prevent the trustee from disclosing the financial adviser’s determination. The SEC is wary of going private transactions, which can be coercive to minority shareholders, and takes a close look at related filings. Shareholder litigation is also common in such transactions. This SEC action, however, may signal greater SEC scrutiny and future plans by the SEC to use Rule 13e-3(b)(1) to prosecute fraud. See the SEC press release and this New York Times analysis.


SEC Orders Whistleblower Award and Suggests More to Come

June 21, 2013

On June 12, the SEC issued its second-ever whistleblower award to three unnamed individuals for their role in reporting an alleged fraud by hedge fund manager Locust Offshore Management LLC and its CEO, Andrey Hicks. So far, the SEC’s whistleblower program has yielded only one other award in 2012, in connection with a Ponzi-scheme in Texas. Each of the whistleblowers in the recent case will receive 5 percent of the monetary sanctions ultimately collected in the action case against Locust and Hicks, together ordered to pay $7.5 million in disgorgement and penalties. The SEC’s Division of Enforcement recently has indicated that more whistleblower cases and significant awards are on the way. Read the SEC press release and a related Compliance Week article.


JOBS Act Assessment: Limited Impact on Jump-Starting IPOs

June 21, 2013

The JOBS Act, enacted just over a year ago, was intended to help spur the market for smaller IPOs, but there have been fewer small offerings (less than $100 million) following enactment. According to Dealogic, there were an average of 15 IPOs under $100 million per quarter in the year before the new law versus an average of 13 per quarter in the year after. Many IPO companies qualify for the disclosure advantages of being an “emerging growth company” under the law, including confidential filings, limited executive compensation disclosure, delay in holding a “say on pay” vote, and two years of financials vs. three. Read this New York Times article critiquing the effectiveness of the JOBS Act and suggesting that it may be bad for investors.


When Companies Go Dark

June 21, 2013

Many companies have left the world of public reporting. Some have accomplished this through a buyout of public shareholders in a going private transaction. Others are able to simply “go dark” because they have a small enough number of shareholders to exit the SEC’s reporting requirements. Not surprisingly, investors may not view going dark with favor. Read this New York Times article about how going dark has affected investors of the former Equity Inns.


Will Google’s Purchase of Waze Draw Regulatory Review?

June 21, 2013

Last week, Google announced its acquisition of Waze, an Israeli company with headquarters in Silicon Valley that offers a crowd-sourced, mobile-oriented navigation application. Google didn’t offer details, but the rumored price tag is over $1 billion. So, it is surprising that Google did not file a Hart-Scott-Rodino notification for the transaction. HSR filings provide the Justice Department or Federal Trade Commission an opportunity to review the transaction for antitrust issues during a required waiting period prior to closing. Google’s decision not to file an HSR notification appears to be an aggressive approach to an exemption available for acquisitions of foreign companies with minimal assets in the United States. Speculation, however, is that the transaction will nonetheless draw post-closing regulatory review. Read more in this New York Times article.


More on Whether to Split the CEO and Board Chair Roles

June 14, 2013

To split or not to split? That is the question. While shareholders continue frequently to demand that the CEO and board chair roles be separated, a report from The Conference Board says, “if it ain’t broke, don’t fix it.” The recent Conference Board Report suggests that it is not necessarily a “best practice” to separate the CEO and board chair positions. It examines three possible types of CEO/board chair separation arrangements and their performance consequences.


Governance Practices of Small- and Mid-Cap Companies

June 14, 2013

Ernst & Young recently released its report on the governance and compensation practices of small- and mid-cap companies. As noted in E&Y’s report, “Often, companies of all sizes are held to the governance standards and practices of the largest companies. These standards...may not always be appropriate.”


Another Risk to Manage: Anticipating Shareholder Concerns

June 14, 2013

Activist shareholders increasingly are bringing their complaints to the boards of a wide range of companies. But can a disruption be prevented by anticipating and responding to those concerns before they get ugly? This CFO.com article suggests ways a company can keep shareholder activism from turning into an all-out war. The best defense appears to be a good offense. If a company takes care to assess vulnerabilities and consider a response, “that same rationale should also be an effective defense against shareholder activists.”


Board Evaluation of Managers Found Lacking

June 14, 2013

Are boards effective in evaluating CEOs? New research suggests that boards are not very good at assessing the non-financial skills of their managers, such as conflict management, innovation, customer service, workplace safety, and listening. Most companies would benefit from better assessing these skills, but this requires thoughtful board analysis. Read here for research and tips on improving the CEO evaluation process. When a company is troubled, however, most CEOs are given little time to fix results, as reported in this article.


Getting the Long Term into Pay-for-Performance

June 14, 2013

Executive pay has been in the cross-hairs, as say-on-pay votes at shareholder meetings this year have shown. Critics argue that most compensation practices still focus on the short term, with increases to shareholder value over time getting too little attention. The key is finding the right performance measures. Read here for tips on using pay structure to encourage long-term performance. Getting it right is increasingly important, as smaller companies are seeing more say-on-pay failures, as noted here.


Activist Hedge Funds Set Sites on Big Companies

May 31, 2013

Hedge funds have played an activist role with smaller companies for many years, using a variety of shareholder campaigns against management in the hope of achieving a stock price bump. Now, some of the largest global companies are getting hit too. The latest examples include Sony, Apple, UBS, PepsiCo, Netflix, Dell and Microsoft. Read an analysis in the Economist.


ISS Settles With SEC on Charge of Voting Data Leak

May 31, 2013

The SEC disclosed an investigation of and settlement with ISS, relating to a charge that an ISS employee sold confidential information on how more than 100 clients voted from 2007-2012. According to the SEC, “The internal controls at ISS did not adequately address the potential misuse of confidential proxy voting information by firm employees.” ISS will pay a $300,000 fine, engage an independent compliance consultant, and refrain from future violations, without admitting any wrongdoing. Read a New York Times article and the SEC release.


SEC Fines Nasdaq $10 Million for Facebook Blunders

May 31, 2013

Nasdaq’s “poorly designed systems and hasty decision-making” during the Facebook IPO and subsequent secondary market trading have resulted in charges of securities laws violations and a $10 million settlement with the SEC. The penalty, which is the largest ever assessed against an exchange, follows Nasdaq’s previously-announced $62 million settlement with affected brokers. The SEC’s report asserts that technical “glitches” are not the most concerning component of recent market disruptions, and reveals that Nasdaq executives committed a number of previously-unknown errors that prevented prompt execution of trades during the Facebook IPO. Read a New York Times article and the SEC release.


SAC Won’t Cooperate with SEC’s Aggressive Approach to Insider Trading Investigations

May 31, 2013

The SEC has made it clear that insider trading continues to be a high enforcement priority and that it will pursue criminal trading aggressively. Its investigation of executives at hedge fund SAC Capital Advisors is no exception. But in a rare move, SAC signaled its lack of cooperation in the SEC’s inquiry. Over the last three years, the SEC has filed more insider trading actions than in any three-year period in its history. Yet it’s unusual for a targeted company to decide not to cooperate with the SEC. See this New York Times article.


Nasdaq Withdraws Proposal to Require Internal Audit Function

May 31, 2013

Nasdaq has withdrawn a proposed rule that would have required listed companies to establish and maintain an internal audit function. Read the terse Nasdaq release and a Compliance Week article.


SEC Clarifies Rule 144 Requirements for Donees of Control Stock

May 31, 2013

The SEC clarified a rule quirk that had previously triggered Rule 144 resale restrictions for the recipient of an affiliate’s gift of securities that were otherwise not restricted by Rule 144 (“control stock”). This was among several tweaks to the SEC’s Compliance and Disclosure Interpretations in mid-May. According to the SEC, “If the donee [of non-restricted securities by an affiliate donor] is a non-affiliate and has not been an affiliate during the preceding three months, then the donee may resell the securities pursuant to Rule 144(b)(1) subject only to the current public information requirement in Rule 144(c)(1).” See the SEC’s new Q&A 129.03 here. Check out other mid-May revisions here.


Directors Under Fire This Proxy Season

May 17, 2013

Hewlett-Packard, JPMorgan Chase and J.C. Penney are just a few examples where proxy advisory firms waged campaigns against director re-election. Investor concerns run the gamut from poor financial or risk oversight to CEO succession planning and executive pay practices. The gripes are many, but the question remains: will these “vote no” campaigns succeed? See this New York Times article.


IPOs Rebound in 2013

May 17, 2013

According to a Dealogic report, U.S. companies are in for the best year in initial public offerings since 2007. And PitchBook’s survey of 130 respondents in the private equity and venture capital industries predicted a bright outlook for VC and PE-backed IPOs in 2013. So far this year, 64 companies have raised a total of $16.8 billion in IPOs in the United States. The potential boon for the economy signaled by this IPO recovery remains uncertain, however. According to MarketWatch, “A return of stock-market volatility could quickly slam shut the IPO window, as could a crisis or unexpected event.” Read the 2013 Private Equity & Venture Capital IPO Sentiment Survey (download required) and the MarketWatch Report.


Credit Ratings Reform Appears Stalled

May 17, 2013

On May 14, the SEC held a Credit Ratings Roundtable to follow up on reforms proposed by Senators Al Franken and Roger Wicker. Despite mandates in the Dodd-Frank Act for the SEC to adopt rules applicable to nationally recognized statistical rating organizations (NRSROs), efforts to reform the rating agency system appear stalled. Discussion Tuesday focused on whether and how to change the ratings agency assignment system and reviewed alternatives to the compensation models now in use. The roundtable followed on the SEC’s 105-page report issued in December 2012 suggesting a number of problems inherent in the Franken-Wicker proposal. Read the SEC’s opening remarks and Star Tribune coverage of the roundtable.


Still Hoping for a Medical Device Tax Repeal

May 17, 2013

At a recent medical device industry conference, Senator Amy Klobuchar expressed continued confidence that Congress will repeal the 2.3 percent tax on medical devices. She noted that the best prospect for repeal lies in tying it to tax reform or other legislation unlikely to trigger a presidential veto and referenced Senator Max Baucus’ tax reform efforts as a possible catalyst. Read more.


SEC’s White Wants a Bigger Budget to Grow Staff

May 17, 2013

Signaling her goal to step up SEC enforcement and investor protection, SEC Chair Mary Jo White recently testified before Congress on the need for greater funding to continue the SEC’s overhaul of financial regulation and to police fraud. Under President Obama’s budget plan, the SEC’s 2014 budget would grow by $1.67 billion or about 26 percent. The SEC’s goal is to add 676 staff members, including 131 to the enforcement division. The increased funds would come from higher fees. Read more.


Social Media is Here to Stay, But Risks and Rewards Must be Evaluated Carefully

May 3, 2013

The SEC has OK’d using social media for Regulation FD disclosures, and some companies have designated Facebook and Twitter accounts for future disclosures. However, the New York Times quotes noted securities law commentator Broc Romanek describing the current social media terrain as “the Wild West.” This environment means that public companies should proceed carefully when using Facebook and Twitter, even as they embrace these tools to reach a broader audience. The biggest issue for many companies and investors: monitoring the wide variety of potential blogs, feeds and pages that may be a source of information. As a result, most companies will proceed with caution when using social media to disseminate material information. Read the New York Times article and some recommendations for directors reviewing these issues by Deloitte and PwC.


Will the SEC Propose a Rule Requiring Disclosure of Corporate Political Contributions?

May 3, 2013

A request asking the SEC to propose rules requiring public companies to disclose their political donations in SEC filings has been the most commented-upon petition in SEC history. The SEC staff has said it’s considering a rule proposal this year. Despite widespread public outcry for such disclosure requirements, however, there is plenty of political pressure on the SEC to refrain from doing so. House Republicans introduced legislation that would make it illegal for the SEC to issue any political disclosure regulations. The only certainty is that any rule proposal will be hotly debated. Read this New York Times article.


Boardroom Briefing: Top Director Concerns

May 3, 2013

Directors are working harder than ever but spending less time on crisis management. Topping the list of director worries are shareholder proposals for proxy access and proposed rules on CEO/median worker pay ratio disclosure. These are among the results of the recently-released PwC annual directors survey, which surveyed 860 public company directors. One interesting finding: “Dissatisfaction with the performance of an individual fellow board member is fairly common and presents an ongoing challenge—with aging and lack of expertise cited as the key reasons.” Read the PwC Survey Results and Jack Welch’s analysis of “5 Types of Directors Who Don’t Deliver.”


The Dark Side of Shareholder Activism - Activists Pay Bonuses to Dissident Directors

May 3, 2013

Some activist funds are offering performance-based bonuses to director nominees on their dissident slates, which creates conflict and independence issues. This article by corporate governance guru John Coffee asks “Are shareholder bonuses incentives or bribes?”


Can Tweets Improve Liquidity?

April 26, 2013

A Stanford Business School study suggests that tweeting investor information may improve market liquidity, particularly for smaller company stocks. In light of this and SEC guidance that social media releases can satisfy Regulation FD, Twitter may become an effective way for public companies to share information with investors. The study considered companies tweeting information linking to a more detailed press release over 40 times per month. The impact was most noticeable among smaller and lesser-known companies more likely to benefit from an increase in visibility. Read the Stanford study and the SEC’s guidance on social media.


Shareholders Demand Separate CEO and Chairman Roles

April 26, 2013

Boeing is giving more authority to its lead independent director in advance of vote on a shareholder proposal to split the role of chairman and CEO. Meanwhile, JPMorgan Chase defends its decision to keep CEO Jamie Dimon in a dual role despite shareholder demands for an independent chairman again this year. While shareholder proposals calling for independent board chairs have become increasingly common, it is not clear that the separation of these roles improves governance or adds value to shareholders. However, this Business Week study showed that "CEO-chairman separation tends to reverse a company’s performance: Low-performing firms benefit from a separation event, while high-performing firms suffer." For a review of the issues, see Directors & Boards, as well as this Deloitte study and the ISS policy (at page 19). Read the change to Boeing’s governance policies here. This New York Times list of 100 highest paid CEOs reveals that 75 percent are also the board chair.


Calls for Transparency at Proxy Advisory Firms

April 26, 2013

Proxy advisory firms like ISS and Glass Lewis play an increasingly significant role in shaping corporate governance. Yet these firms’ voting guidelines are often opaque and inflexible, forcing public companies to engage in costly analysis and negotiation with them to assess or resolve investor dissatisfaction. The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness recently released its Best Practices and Core Principles for the Development, Dispensation and Receipt of Proxy Advice. The report calls for greater transparency in how these firms develop and recommend voting policies. In addition, the Mercatus Center published its own report suggesting that shareholders and companies will be better off if limitations are imposed on the role of proxy advisory firms. The New York TImes notes studies finding that ISS and Glass Lewis can sway 10 percent or more of the vote.


Rethinking Bonuses in Executive Compensation

April 26, 2013

Compensation committees (with the help of their consultants) are busy setting annual compensation for executives. But what best practices are emerging? Read commentary on why companies should consider separating management’s budget forecasting process from a compensation committee’s incentive compensation goal-setting process and CFO.com’s query “Are Bonuses an Obstacle to Shareholder Value?“ contending that many annual bonus plans do not encourage long-term value growth.


Compliance Best Practices

April 26, 2013

JP Morgan Chase appointed a chief compliance officer, removing the compliance function from the general counsel’s office. Companies continue to struggle to determine how best to manage risk internally and where to house compliance responsibility. Read this Harvard Law School article arguing that compliance belongs in the general counsel’s office and suggesting the key is a culture of compliance.


Emerging Growth Companies Take Advantage of Confidential SEC Submission Process for IPOs

April 17, 2013

According to the Wall Street Journal, 63 percent of emerging growth companies submitted their IPO filings on a confidential basis with the SEC since first permitted by the JOBS Act one year ago. The confidential filing process allows qualifying emerging growth companies (EGCs) to submit IPO registration statements and subsequent amendments to the SEC on a confidential basis. This is an attractive option because it permits EGCs to keep their financial and compensation information confidential until they are sure the IPO will launch. The SEC’s comments and the company’s responses also remain confidential until the filing is made public. An EGC is generally an issuer that has less than $1 billion in total annual gross revenues. Read the SEC’s guidance on how to file IPO documents confidentially here.


Annual Meetings Elicit Governance Commentary

April 17, 2013

Shareholders disgruntled by poor performance at Hewlett-Packard spurred a shake-up in the HP board. Meanwhile CalPERS identified 52 “zombie” directors targeted for withhold campaigns. Read commentary on the difficulty of ousting bad directors here, and CalPERS campaign here.


Time to Revisit Risk Disclosures

April 17, 2013

Correspondence between the SEC and JPMorgan Chase reveals SEC concerns about whether risk disclosures are adequate. The back-and-forth serves as a reminder that all companies should review their risk disclosures regularly and avoid a boilerplate approach. Read more.


Executive Compensation Sees Growth in Perks and CEO Pay

April 17, 2013

A stronger economy may have made boards more generous with perquisites last year. Fewer than 50 percent of Oracle’s stockholders voted “yes” on say-on-pay, and it will be interesting to see whether there are any changes this year. Read more.

In addition, compensation committees find it difficult to rein in pay when the CEO has been with the company for several years. Read more. And ISS provides its analysis on how director tenure may play a role.


Companies Respond to Top Shareholder Concerns

April 17, 2013

In the face of ever-increasing shareholder proposals, companies are seeking SEC no-action relief, negotiating with proponents and proactively changing policies and compensation arrangements. Some top issues for shareholders: putting an end to staggered boards, naming an independent chairman and eliminating supermajority votes. Read more.


Time to Consider a Political Contributions Policy

April 17, 2013

Activist demand for greater transparency about corporate political activity is increasing, and shareholder proposals requiring companies to adopt contribution policies are becoming more prevalent. Companies should consider whether to adopt a policy and discuss this with the board. Read recent news and opinion, or see this 2010 Conference Board Report.