Court Criticizes Legal “Racket”

A well-regarded Jurist in the Seventh Circuit issued a ruling which was highly critical of a legal practice (called a “racket”) in which in response to a large public corporation’s filing with the SEC for a strategic transaction, one or more plaintiff’s counsel file suit to challenge the adequacy of document disclosure. Rather than fight the suit, many corporations simply settle paying plaintiff’s counsel a handsome fee while making no substantive modification to the SEC documents in question.

For background, when Wallgreens issued a proxy statement to request a vote to reorganize after its combination with Boots, the UK pharmacy chain, Walgreens was sued for a failure of disclosure.

The court noted that such suits are commonplace because, in recent years, 95% of strategic transactions for public companies with market values over $100 million receive such challenges.

In Wallgreen’s case, the Court responded to what appears a simple payoff to plaintiffs’ counsel who received $370,000 for its one month suit. Walgreens put up no resistance. The Jurist stated that the value of the supplemental disclosure added to the proxy “appears to have been nil”.

The Jurist concluded, “[t]he type of class action illustrated by this case — the class action that yields fees for class counsel and nothing for the class — is no better than a racket.”

Corporations and plaintiffs’ counsel are now on notice that the Seventh Circuit will review settlement cases carefully.

For a good explanation of the practice and the ruling in the Walgreen’s case, please read Sheppard Mullin’s article in its Corporate & Securities Law Blog (click here).

Please contact Monarch Bay to discuss your company’s capital market goals.

Progress on Proxy Access

In a milestone event, ExxonMobil’s shareholders recently approved relatively progressive proxy access board provisions.

Proxy access provisions enable shareholders of a public company to submit director nominees and measures into the corporation’s annual shareholder proxy to be voted on by all shareholders.

The battle to obtain proxy access has been long and contentious (click here for my 2012 post, “Just a Small Leak”).

For an introduction to proxy access, click here for an article by the Council of Institutional Investors.

Excerpt

“Proxy access” is shorthand for a crucial mechanism that gives shareowners a meaningful voice in corporate board elections. It refers to the right of shareowners to place their nominees for director on a company’s proxy card. This lets investors avoid the cost of sending out their own proxy cards when they are dissatisfied with a corporate board and want to run their own candidates for director.

 CII believes that proxy access would invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.

What makes the ExxonMobil vote so momentous is the percentage of the vote in favor and the fact that this vote was tinged with climate change controversy, not just good corporate governance (Click here).

Excerpt

The so-called proxy access measure was the first Exxon shareholder proposal since 2006 to be approved, and it was the only one of 11 proposals related to climate change to pass at meetings held Wednesday by Exxon and fellow U.S. oil giant Chevron Corp.

More than 60 percent of Exxon shareholders backed proxy access, which was narrowly defeated last year.

Perhaps this issue has reached a tipping point as ExxonMobil shareholders got a letter recommending acceptance by two of the largest US institutional shareholders, California’s CALPERS and the Comptroller of the City of New York representing NYC’s pension funds (click to read).

We’ll monitor developments on proxy access and report important milestones.

Please contact me to discuss your capital market goals for raising capital and M&A.

SEC Rethinks Proxy Access Rules

In a surprising action mid-January, the SEC reversed a decision issued in December of last year on what’s known as proxy access rules.

Proxy access rules define who can and how to submit proposals to public companies for inclusion in the company’s proxy statement. They also describe under what circumstances companies can exclude those shareholder proposals which is the specific issue in the SEC decision reversal.

The battle over these rules has been raging for several years as illustrated by my earlier article on this subject (click here).

Corporations and their counsels had declared victory when they defeated an SEC proposal which would have created clear conditions requiring companies to include shareholder proposals in their proxies. This left companies with great discretion over whether to include shareholder proposals.

To further protect companies, many requested “no-action letters” from the SEC indicating that the SEC wouldn’t challenge the company’s decision on its treatment of the specific shareholder proxy submissions.

This was the status quo until last week (January 15) when the SEC withdrew its “no-action letter” issued to Whole Foods and announced that the SEC was re-evaluating its position on proxy access rules and related “no-action letters”.

The SEC has come under increasing criticism for its inaction on the topic since the defeat of its proposal (see article link above). With shareholder activism gaining greater mainstream acceptance, large institutional investors, including the New York City Comptroller’s Office, which oversees funds with $160 billion in assets, have lobbied the SEC to support greater shareholder influence in proxy content.

The decision to reverse the issuance of the Whole Foods “no-action letter” doesn’t indicate how the SEC will decide on the issue of proxy access rules. The SEC has announced, simply, that it is evaluating its position. Companies rightly fear, however, that it may signal that the current environment favorable to companies may change.

The New York Times “Dealbook” has a good article on this topic (click here).

Sheppard Mullin, the law firm, also issued a good article (click here).

A couple public companies have excluded shareholder provisions despite withdrawal of no-action letters by the SEC (click here) for article by Stinson Leonard Street, the law firm.

Proxy Season 2015 Prep

The beginning of the new year signals that it’s time to think about your 2015 proxy.

The last several years have witnessed interesting developments in the topics and trends of proxies and annual meetings.

While distinct but related, shareholder activism has increased, bolstered by several notable victories last year such as Yum! Brands and Bob Evans Farms.

Fortunately for us, Latham & Watkins, the law firm, provides valuable information about the topics and trends for proxy preparation to help us prepare.

Latham & Watkins is offering a free webinar on preparing for the 2015 proxy season (click here – registration required) and provides a useful write-up on proxy supplements (click here).

Please stay tuned for more developments as we move into the new proxy season.

 

 

Public Company SEC Topics Webinar

LathamWebinarLogo

 

 

 

Board members and corporate executives of public companies will find this webinar a valuable discussion of key issues about the new energized SEC enforcement approach.

Latham & Watkin’s webinar covers many issues and examples including:

  • SEC’s greater use of technology to permit investigation and enforcement of infractions previously unobserved;
  • Increasing use of whistleblower incentives to discover and prosecute infractions;
  • Greater coordination between SEC Divisions including Corporation Finance and Enforcement.

It’s better to be forewarned than to remain unaware and vulnerable.

Click on this link to go to the sign-up page for Latham & Watkin’s “Securities and Exchange Commission: Critical Issues Facing Public Companies” (Duration: 60 minutes)

SEC Charges Two Audit Committee Chairs

In another shot across the bow, the SEC has charged two companies’ Audit Committee Chairs for failing to act on obvious red flags of fraudulent accounting and financial reporting.  Both of the companies were primarily operating in China but the Audit Committee Chairs are US citizens.

While some might be inclined to discount this warning signal because of the China connection, Daniel Goelzer, a partner with law firm Baker & McKenzie and former SEC general counsel and former member of the Public Company Accounting Oversight Board suggests otherwise.

Click here to read the article from Baker & McKenzie from which this excerpt is drawn:

“During the past year, the SEC chair and staff have announced a new focus on gatekeepers, such as attorneys, accountants, and directors, and these cases seem to illustrate how the Commission intends to apply its gatekeepers program to audit committee members,”

Coming on the heels of the SEC charging company executives for false certification (click here), this seems to signal the SEC’s serious intent to enforce its rules rather than look the other way.

Below are links to a Compliance Week article and two SEC documents describing the circumstances and charges of the two cases mentioned.

Compliance Week article: http://www.complianceweek.com/blogs/accounting-auditing-update/sec-charges-two-audit-committee-chairs-for-blind-eye#.VAODSWx0wdU

Agfeed’s SEC Complaint: http://www.sec.gov/litigation/complaints/2014/comp-pr2014-47.pdf

L&L Energy Cease and Desist Order: http://www.sec.gov/litigation/admin/2014/34-71824.pdf

Expanding the Compensation Battle

Compensation paid to management has been a source of contention between companies and shareholders for some time.   This year is no exception as described in recent articles in “The Street” and “Forbes”.

The new front in the compensation battle, however, involves payment to non-executive directors or what directors pay themselves.  A recent lawsuit challenging Facebook’s Board compensation policies is a notable example (click for “Reuters” article).

This battle has been building as described by Michael Melbinger, an attorney with Winston & Strawn on “Lexology” (Click here).  Recent successes by shareholders in shareholder derivative litigation will likely prompt more challenges.

Michael Melbinger notes:

DGCL § 141(h) expressly provides that “Unless otherwise restricted by the certificate of incorporation or bylaws, the board of directors shall have the authority to fix the compensation of directors.” However, that does not prevent shareholders from challenging the amount or form of compensation paid.

Companies are likely to find that when activists challenge management’s compensation, challenging board compensation is likely a next step.

SEC’s Proxy Advisory Guidance Reinforces Current Rules

The SEC’s recently issued guidance regarding investment advisor’s responsibilities in proxy voting and the role of proxy advisory firms disappointed some companies and legal professionals for failing to reign in proxy advisory firms.

Proxy advisory firms have been steadily gaining influence among institutional investors which threatens companies’ longstanding advantage (see my posts – Proxy Advisors’s Success Draws Attention, Silent Majority Speaks and Herding Cats).

The SEC’s guidance reiterated the current rules, not changing them.

The trend, raising proxy advisory firms’ influence in corporate proxy issues, therefore, is likely to continue.

Click on the links below for the SEC Guidance and an article in the online magazine “FierceCFO”.

Click here to go to the SEC Guidance article.

Click here to go to the online magazine “FierceCFO” article.

Proxy Season Recap 2014

There are valuable lessons to be learned from the 2014 proxy season.

Georgeson, the proxy solicitor, and Latham & Watkins, the law firm, have produced a valuable webinar to efficiently inform us of “takeaways” and trends from the proxy season.

LogoGeoLatham

Click here to go to the webcast

Topics

• Executive Compensation Developments, including updates on this year’s Say on Pay votes, proxy injunction and other executive compensation lawsuits, ISS and Glass Lewis practices and SEC rules

• Evolving Trends in Shareholder-Investor Engagement, including newly recommended protocols and differing investor approaches for making a difference over the long term

• Issues of Increasing Concern to Investors, including director qualifications, tenure and board structure; environment and social issues; and the hottest shareholder proposals

• Activist Investors, including preparing for and responding to their latest playbooks

Speakers
Jim Barrall, Partner, Latham & Watkins LLP
Rhonda Brauer, Senior Managing Director – Corporate Governance, Georgeson
Steven Stokdyk, Partner, Latham & Watkins LLP

Sponsors

Latham & Watkins LLP is a leading global law firm dedicated to working with clients to help them achieve their business goals and overcome legal challenges anywhere in the world. The firm has earned considerable market recognition based on a record of landmark matters and a unified culture of innovation and collaboration. From a global platform of offices covering the world’s major financial, business and regulatory centers, the firm’s lawyers help clients succeed. For more information, visit www.lw.com.

Georgeson is the world’s leading provider of strategic proxy and corporate governance advisory services to corporations and shareholder groups working to influence corporate strategy. For over half a century, Georgeson has specialized in complex solicitations such as hostile and friendly acquisitions, proxy contests and takeover defenses. The firm also provides issuers with expertise in corporate events solutions such as post-merger unexchanged holder programs and information agent services. For more information, visit www.georgeson.com.

 

Questions
michele.bravo@lw.com |
+1.213.892.3054

Activist’s Big Ally

BlackrockLogoActivists have an ally in Blackrock Inc., which reportedly manages $4 trillion in assets.

An excerpt from Blackrock’s recent Annual Report,

Better Governance Means Better Performance

Our fiduciary duty to our clients leads us to use the ownership position we hold in companies around the world to protect their interests by advocating for good corporate
governance. Through direct engagement with management teams and effective use of our proxy voting power, we work to ensure the strong leadership and prudent management that we believe ensures sustained performance and better returns on our clients’ investments.”

Blackrock has been using its position as a large corporate shareholder to influence change.  As reported in the New York Times “Dealbook”, Chairman and CEO, Laurence Fink, sent a letter to the heads of the S&P 500 companies recommending that the companies focus on actions to promote sustainable growth vs short-term fixes.

Click here to read the NYTimes “Dealbook” article which includes a link to the Blackrock Annual Report.