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.

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)

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.

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.

Love Letters, They’re Not

CorpDuelTwo well-regarded participants in the corporate governance debate have issued letters to the public recently, defending their views.

In one letter, Carl Icahn, perhaps one of the best known corporate activists, defends his view that corporate management, if left unsupervised by a corporation’s shareholders, would make sub-optimal or perhaps deleterious decisions for the corporation.  Naturally, he sites his current targets, Lions Gate and eBay, as examples.

Excerpt:

“I have made a great deal of money by understanding some simple facts.  Very often assets of significant value are mismanaged by highly-compensated, but less than highly-competent, managers and boards of directors, all whom are protected by highly-compensated lawyers and bankers – with stockholders not only paying the fees of these advisors but also losing out on the returns that they otherwise could be enjoying if they took on their proper role as business owners.   In such situations, if investors can install good managers and elect directors that will hold those managers accountable, then the true value of those assets can be realized.”

Click here or past the link to read the Carl Icahn Letter on the website shareholdersquaretable.com – http://www.shareholderssquaretable.com/a-watershed-moment-for-stockholder-participation/

In the next letter, Leo Strine, Jr., Chancellor of the Delaware Chancery Court and legal scholar affiliated with several universities, addresses and counters a pro-activist essay by Professor Lucian Bebchuck, Professor of Law, Economics and Finance at Harvard Law School (Click here for Prof Bebchuck’s bibliography and links to additional information.)

Excerpt:

“Bebchuk has spent his entire career obsessed with ensuring that stockholders are not harmed by corporate managers, whether intentionally or because those managers have incentives that do not align exactly with those of the stockholders. He has been remarkably successful in seeing his agenda to make corporate managers more directly responsible to
stockholders become the predominant market reality. Fidelity to his own insights would seem to suggest a new agenda, which is ensuring that the entities of which most ordinary Americans are in fact equity investors—money managers in the form of mutual funds and pension funds—are as accountable as the managers of the productive enterprises on which our nation’s economic future is largely dependent. Until he broadens his lens to make sure that all who wield power using the funds of American investors are accountable, Bebchuk is himself fairly labeled an insulation advocate.”

Click here or paste the link to read Chancellor Leo Strine’s letter in the Columbia Law Review –  http://columbialawreview.org/can-we-do-better-by-ordinary-investors-a-pragmatic-reaction-to-the-dueling-ideological-mythologysts-of-corporate-law/

Three Steps to Prepare for Shareholder Activism

Latham & Watkins, the law firm, provides this easy to read series of recommendations for dealing with increasing shareholder activism.  Other valuable articles for corporate executives and board members may be viewed at www.lw.com.

Three Practical Steps to Stay Ahead of Shareholder Activism

by Steven B. Stokdyk, Joel H. Trotter & Patricia Judge

Activist investors continue to shape corporate governance. Last year saw more than 300 activist proxy campaigns, proposals and contests. Activism-focused funds manage over $100 billion in assets.

In this climate, no company is too large to avoid activists’ influence. There is no guaranteed safety — not corporate governance, share price appreciation or outperforming peers. All companies should remain prepared for engagement.

Experience shows that preparation can make a decisive difference. Companies that establish and maintain a good reputation with institutional investors will have an advantage when interacting with activists.

To prepare effectively, we recommend three broad ongoing practices:

  • monitoring exposure to activists;
  • communicating with shareholders and analysts; and
  • planning for activist campaigns.

Monitoring exposure to activists

Companies should continually monitor available information to assess their exposure to activists:

  • Monitor outside groups, including the company’s peer group, sell-side analysts, proxy advisors, pension funds, activist investors, print media and online sources.
  • Understand institutional holdings and the relationships among the holders, especially those who may team up with others, by monitoring Schedule 13G, 13D, 13F and Hart-Scott-Rodino filings, parallel (wolf pack) trading and debt trading patterns.
  • Watch the proxy advisory firms and institutional investor groups, such as Institutional Shareholder Services (ISS), Glass, Lewis & Co., the Council of Institutional Investors  and TIAA-CREF. Although ISS can influence up to 30% of the vote, some investors use ISS’s position only as a starting point. For example, institutional investors such as Fidelity and BlackRock have their own internal proxy departments.
  • Review corporate governance ratings, correct any inaccuracies and identify potential changes that could improve the company’s governance rating.
  • Maintain a feedback loop by monitoring earnings call participants, conference attendees, follow-up requests and other investor contacts, always seeking candid feedback and facilitating open communication.

Communicating with shareholders and analysts

Use inbound and outbound communication to build key relationships:

  • Use relationship building to keep your friends close and your major institutional investors closer. Engage regularly with both portfolio managers and proxy departments. Know institutional investors’ guidelines, key decision makers and how to reach them. Establish credibility with shareholders and analysts in advance.
  • Seek out inbound communication and candid feedback. Use ongoing dialogue to ensure that management and the board of directors understand investor sentiment.
  • Use outbound communication as part of a concerted communications strategy. Ensure that communications consistently describe the basic strategic message. Focus especially on relative performance, proactively addressing any shortfalls as compared to peers.

Planning for activist campaigns

Formulate a plan to prepare for an activism crisis:

  • Evaluate protections in the company’s charter, bylaws and applicable laws for potential measures that could be used in response to an activist campaign.
  • Develop and maintain a public communications plan, which should include steps for strategic outreach to the media, regulators, political groups and others. Keep these relationships current to facilitate public messaging.
  • Identify team members and have key players ready in advance to assist quickly in response to emergencies. Identify your lineup of counsel, investment bankers, proxy solicitors and public relations specialists.

Taken together, these three steps — monitoring, communicating and planning — offer concrete actions that companies can use to ensure their preparedness for an activist campaign.

Steven B. Stokdyk
steven.stokdyk@lw.com
+1.213.891.7421

Joel H. Trotter
joel.trotter@lw.com
+1.202.637.2165

Patricia Judge
patricia.judge@lw.com
+1.202.637.3352

Canadian Activist Update Webinar

For my friends at Canadian public companies, here is an upcoming webinar (Oct 16th) recapping 2013 and suggesting what 2014 may hold in store.

Two of the webinar hosts created the following video to promote the webinar.

Click this link to take you to the related blogpost.

Dealing with Greater Shareholder Activistism

Trends suggest that companies, large and small, will encounter greater shareholder activism over the next years and should, therefore, prepare for this.

Skadden, Arps, Slate, Meagher & Flom LLP prepared a valuable article describing the forces at work to support greater activism and certain preparatory actions that companies should undertake.

Click here to take you to the article, or copy and paste the following link in your browser:

http://www.jdsupra.com/legalnews/activist-shareholders-in-the-us-a-ch-83602/

 

Proxy Season 2013 Recap and Alert

Latham & Watkins, the law firm, and Georgeson, the proxy solicitor, have teamed up again to recap the significant events of the 2013 proxy season.  I attended this webinar and, as usual, it was high quality with great information and insights.  The link to the replay is below.

Click here (registration required).

 

 

On-Demand Now Available

 

2013 Proxy Season:
Lessons Learned and Coming Attractions

 

 

 

Program

In this program, halfway through the 2013 proxy season for the Russell 300 companies, Latham & Watkins’ Jim Barrall, Mark Gerstein and Steven Stokdyk, and Georgeson’s  Rhonda Brauer review the 2013 proxy season, including Say on Pay voting results and battleground issues, the impact of executive compensation lawsuits, the positive results of shareholder engagement, increasing shareholder activism, share ownership and voting developments, and look ahead to the prospects for the remainder of the 2013 proxy season, as well as discuss coming attractions on the horizon for the 2014 season. 

Questions

For more information and questions about this webcast, please contact Michele Bravo at michele.bravo@lw.com or +1.213.892.3054.

 

 

To Access the Program

Click here to access the on-demand webcast.

 

You will automatically be directed to the lobby page to launch the webcast.