Current Posts

When we wrote that Rule 10b5-1 plans were back in the news in our January memo, it turns out that this continues to be accurate even now as the Wall Street Journal recently reported on the Council of Institutional Investors’ follow-up letter urging the SEC to regulate these trading plans. Richard Sandler in our capital markets practice discusses some of the main issues surrounding these plans and the CII proposal. 

• Initial adoption of plans.  What should companies consider in terms of allowing executives to adopt these plans?
  
  Since the benefits of Rule 10b5-1 are only available if an insider adopts a plan while not in possession of any material nonpublic information, the window period immediately after the company announces earnings would be the best time for executives to adopt plans. CII asks that the SEC permit insiders to adopt plans only during open trading windows. In addition, CII would like the SEC to ban the ability to adopt multiple, overlapping plans. 
  
  
  
• Waiting period before first trade. Is a waiting period before the first trade under the plan recommended?
  
  While a delay is not required, a waiting period after adoption, and before the first trade, is viewed as a good risk management strategy. The purpose of the waiting period is to help support a conclusion that no trading took place based on inside information. 
  
  There is some debate as to how long the waiting period needs to be. While the CII recommendation is for three months or more, this is a longer time period than most practitioners would employ. Current practice varies from 10 days to the next open window.
  
  
  
• Modifications to the plans. What are the concerns with permitting modifications or amendments to the plan?
  
  The CII proposal would prohibit frequent modifications or cancellations of 10b5-1 plans.  It is hard to argue that a constant pattern of plan amendments and modification may not be problematic. If the amendments are extensive, consideration should be given as to whether it becomes akin to adopting a new plan that should have the same safeguards discussed above.
  
  
  
• Termination or cancellation of the plans. What if an executive changes his or her mind and would like to terminate a plan?
  
  A plan can be terminated or suspended at any time, even if an insider has material nonpublic information. In our experience, an executive may wish to terminate a plan before impending bad news to avoid looking like his sales were affected by the news, even if his plan was put into place way before. In the event of a termination, companies need to give careful thought as to when it would be appropriate to put another plan in place.   
  
  
  
• Disclosure of the plans.  Should companies disclose that their executives have entered into 10b5-1 plans?
  
  CII would like companies to disclose adoptions, amendments, terminations and transactions. Currently, companies take different approaches as to announcing the initial adoptions of plans. We suggest that Form 4s disclosing sales under the plans indicate that those sales are made pursuant to a 10b5-1 plan.
  
  
  
• Oversight by the company.  What kind of oversight mechanisms should companies have in place?
  
  We believe that at a minimum, most companies require pre-approval of an executive’s entry into a plan, if not pre-approval of the plan itself. Some companies consider imposing certain limits regarding the percentage of holdings that can be subject to the plan, establishing rules for setting price floors, or disallowing certain types of plans that give brokers the ability to determine whether, how and when to make purchases. Not surprisingly, CII is seeking expansive board involvement, including having boards adopt policies covering plan practices, monitor plan transactions and ensure that the policies are consistent with any hedging, holding and ownership requirements.

The resignation of Occidental’s chairman at the company’s annual meeting, which has been widely reported, was subject to an unusual majority vote provision. 76% of the votes cast opposed Mr. Irani’s election to the board. As is fairly common with majority voting, the company’s bylaws require any nominee who receives a greater number of votes against his election than in support of such election to tender his resignation. However, rather than having the board consider whether to accept the director’s resignation and publicly announce its decision within 90 days, Occidental’s bylaws provide that the resignation becomes effective upon the earlier of acceptance by the board or October 31 in the year of election. In other words, the bylaws do not allow the board to reject the resignation, for any reason.

The majority vote bylaw was adopted in 2011 following the outcry over the compensation paid to Mr. Irani, who was then CEO of the company. As a result of the most recent controversy, Occidental made additional governance changes. Some of the more unconventional reforms the board adopted include the rotation of the positions of independent chairman and committee chairs every five years, prohibiting former CEOs of the company from sitting on its board and having the mandatory retirement age for CEOs set at 68. Both executive and director compensation, which had been subject to criticism, were also decreased, with the CEO promising to forego any bonus and certain other compensation during his remaining tenure. In addition, the company pledged to have an independent chairman elected from among the independent directors and create a committee focused on management succession.

In an unusual collaboration, Relational Investors and CalSTRS succeeded this week in having a majority of shareholders support CalSTRS’ shareholder proposal recommending that the board and management "act expeditiously" to engage an investment bank to effectuate a spinoff of Timken's steel business. CalSTRS’ precatory resolution was favored by 53% of the votes cast.  Given that insiders and affiliates own about 15% to 17% of the company, the activists claimed that at least 65% of non-affiliates supported the proposal. 

Timken indicated that its board would evaluate the results and announce its next steps within 45 days. Relational and CalSTRS are threatening a proxy contest if the company does not follow through with the proposal’s request. The two investors reportedly own 7% of the company together, although the company disclosed that CalSTRS’ share ownership represents less than 1%.

While being far short of a proxy contest, the activist campaign was intense, as evidenced by the number of exempt solicitations filed by Relational and CalSTRS beginning in November, and additional soliciting materials submitted by the company in response. Each side also used social media, with dueling websites devoted to its version of the debate (Unlocktimken.com from the activists and TimkenDrivesValue.com by the company.) 

ISS and Glass Lewis both supported the shareholder proposal. CalSTRS also took issue with the election of several director nominees, including the cousin of a founder serving as an independent director of the audit committee. In another example of how the activists’ collaboration shifted the usual allegiances, a union of steelworkers strongly opposed the proposal.

Relational Investors argued that since the proposal is non-binding, a “yes” vote carries “no downside,” but a “no” vote could send share price lower. Since the proposal was announced in November, the stock price has increased by 38%. 

Shareholder proposals on major business strategies is uncommon. According to the Wall Street Journal, only 10 other such proposals to break up a company or divest assets have been made since 2005. Other companies also received proposals calling for board review of major transactions this year, but many were excluded on grounds of vagueness or under the ordinary business exception when the proposals combined both non-extraordinary and extraordinary transactions. The success of this one, however, could inspire other examples that withstand SEC challenge, and generate active campaigns.

A key question under the new standards taking effect July 1 (described in our client memo here) is whether a particular firm or person should be deemed to be serving as an “adviser to the compensation committee” and therefore subject to the requirement that the committee make a prior determination as to independence. Advisers retained directly by the committee are of course covered by this term, but what about advisers to the company who also provide advice to the committee? We think that a company adviser who regularly presents to the committee should be deemed an adviser to the committee, and therefore should be subject to an independence determination now. Companies should also consider making a predetermination as to other advisers who have been retained by the company and who may be called on to provide advice to the committee. The reason to consider predetermining independence now is that the determination should be made prior to the committee receiving the advice. If you would like company advisers to be able to provide advice to the committee if an unplanned situation develops during the year, predetermining independence now could avoid a scramble later.

Remember that the new rules merely require compensation committees to consider the independence of their advisers. They do not provide or imply that committees must or should retain independent advisers. Thus a finding that an adviser is not independent should not of itself impair the committee’s ability to rely upon the advice. Nor is any aspect of the mandated independence review required to be disclosed publicly, other than proxy disclosure concerning compensation consultants. This disclosure requirement does not apply to other advisers such as legal counsel. 

We previously discussed the requirements for NYSE companies here. Today, Cindy Akard talks about the required changes to committee charters for Nasdaq companies.

• Are any charter amendments required by July 1?
  
  No. Compensation committees have additional responsibilities by July 1 related to compensation committee advisers, but they can reflect these in a committee charter, committee resolution or other board action. However, some Nasdaq companies might want to go ahead and amend their charters by this July 1 deadline, because they will eventually have to include these additional responsibilities in the charters by the later deadline in 2014.
  
  
• Can you summarize the resolution, action or the amendments to the charter that are required by July 1?
  
  In a charter, resolution or other board action, Nasdaq-listed companies must provide the compensation committee with the authorization to engage their own advisers and be directly responsible for the appointment, compensation and oversight of their work. The committees must have appropriate funding to pay the advisers. Before engaging these advisers directly, or even receiving advice from any other advisers, the committees must take into account specific independence factors.
  
  
• Are there additional changes to the charter required in the future?
  
  Yes. By the earlier of October 31, 2014, or their first annual meeting after January 15, 2014, Nasdaq rules state that compensation committee charters “must specify” the adviser requirements noted above, as well as the scope of responsibility of the compensation committee and how it is carried out, the committee or board’s responsibility for determining CEO and executive officer compensation and that the CEO may not be present during voting or deliberations on his or her compensation.
  In addition, if a committee charter addresses committee member independence, companies may want to reflect the requirement to evaluate and determine membership under the new independence standards.
  
  
• When is certification to Nasdaq required?
  
  A certification is required within 30 days after the final implementation deadline in 2014. We understand Nasdaq is planning to provide a form of certification.
  
  
• Where can we find these rules?
  
  Nasdaq has updated its Marketplace Rule 5605(d), with the effective dates listed in Rule 5605(d)(6).  

Recently, we reminded companies of the upcoming deadlines related to the new listing exchanges' rules on compensation committees in this client alert. In two separate posts, we talk about the required changes to committee charters.  Kyoko Takahashi Lin addresses questions in Part I of this post, which focuses specifically on NYSE listed companies. We will turn our attention to Nasdaq companies in Part II.

• Can you summarize the amendments to the committee charters that are required by July 1?
  
  NYSE listed companies must provide in their compensation committee charters the authorization for the committees to engage their own advisers and be directly responsible for the appointment, compensation and oversight of their work. The committees must have appropriate funding to pay the advisers. Before engaging these advisers directly, or even receiving advice from any other advisers, the committees must take into account specific independence factors.
  
  
• How do the authorizations available for compensation committees differ from the authorizations available for audit committees?
  
  Rule 10A-3 gives audit committees the authority to engage advisers and requires companies to provide for appropriate funding for the advisers and compensation to the outside auditors, as well as administrative expenses of the committee. The audit committee is directly responsible only for the appointment, compensation and oversight of the outside auditors, and must assess only the independence of such auditors.
  
  
• Do you think it is necessary to replicate the NYSE requirements exactly in the charters?  
  
  No, the charters just need to be clear as to the committees’ additional responsibilities and authorizations. Some companies already provide all of their board committees with the ability to engage and pay for advisers, so in those situations companies may only need to make a few adjustments to that language in the charters, and also add the requirement to conduct independence assessments.
  
  
• Are there additional changes to the committee charters effective in the future?
  
  No, although if a committee charter addresses committee member independence, companies may want to update that section at the time the requirement to evaluate members under the new independence standards become effective, which is the earlier of October 31, 2014 or their first annual meeting after January 15, 2014.
  
  
• Where can we find these rules?
  
  The NYSE has updated its listed company manual. Please read carefully as currently both the existing and new provisions (that will be effective later) are in the manual. 

According to a press release from the Association of BellTel Retirees, 53% of shareholders at Verizon supported a proxy access proposal asking the company to amend its bylaws allowing shareholders owning at least 3% of shares for 3 or more years to nominate candidates to the board.

The release indicates that this outcome represents their “10th proxy victory in 15 years” at Verizon of shareholder proposals either receiving majority support or resulting in negotiated changes at the company, including one of the first say-on-pay proposals on the ballot before the advisory vote became law. The company’s press release states that the board will consider the outcome of the vote.

Other upcoming proxy access votes this season include iRobot (May 22), Goldman Sachs (May 23) and Netflix (June 7), but all three have the “retail” versions which are unlikely to fare as well. These proposals seek to give proxy access rights to (a) shareholders owning at least 1% but less than 5% of shares for 2 years and/or (b) 50 or more shareholders who have each held for at least 1 year a number of shares of stock that, at some point within the preceding 60 days, was worth at least $2,000, and collectively at least one half of one percent but less than 5% of shares.  IRobot failed in its attempts to have the proposal excluded by the SEC under Rule 14a-8 on the basis of vagueness and ordinary business.

While the tug-of-war over getting the SEC to adopt future rules requiring companies to disclose political contributions, and dueling legislative initiatives encouraging or prohibiting such disclosure, are making headlines, there has been less attention paid to the very current situation faced by nearly a hundred companies this season in terms of shareholder proposals on the topic. The proposals covering corporate political activities encompass a wide range of focus and, consequently, significant variation among the vote results. 

A shareholder proposal requesting that the company adopt a policy to prohibit the use of funds for political purposes received 4% support at Starbucks, while proposals asking companies to screen their corporate contributions against candidates whose voting records are “inconsistent” with corporate values were favored by only 6% of shareholders at Johnson & Johnson and 5% at Praxair. 

On the other hand, traditional proposals asking companies to report on political contributions, lobbying expenditures, or both, have received much higher support from shareholders. Lobbying proposals won 37% at Visa and 42% at Marathon Oil, while proposals seeking reports on political contributions obtained 39% favorable votes at BB&T and 31% at Northern Trust. At AT&T and Citigroup, however, about 25% of shareholders endorsed the proposals. 

ISS has been making recommendations for proposals requesting disclosures on a case-by-case basis, based largely on whether a company has an existing report that provides certain information, particularly policies and oversight mechanisms. In our experience, if a company meets nearly all of the criteria in the ISS policy statement, the report ISS issues may provide a sense of what additional changes the company can adopt that will cause ISS to recommend against the proposal. These may include additional disclosure, or clarifications, regarding management or board oversight. Having ISS side with a company can decrease support levels substantially. 

Disclosure of political contributions was also part of the groundbreaking News Corp. corporate governance settlement, which has led some to speculate that future shareholder derivative suits may include efforts to obtain this disclosure.    

The Eurozone crisis and ensuing populist resentment over perceived compensation excesses have given rise to a recent wave of compensation measures and restrictions in Europe. As we explain in our memo, the measures range from a cap on financial institution bonuses (the so-called “banker bonus cap”) in the EU, binding say-on-pay votes in several European jurisdictions and even criminal sanctions for violating compensation restrictions and corporate governance requirements in Switzerland. Simon Witty, a partner in our London office, explains the key aspects of these developments.

• What is the banker bonus cap?
  
  Under CRD IV, which is slated to go into effect for credit institutions (including banks) and investment firms (such as broker-dealer or wealth management firms) in January 2014, the basic rule is that bonus payments will be capped at 100% of total fixed pay or, with shareholder approval, 200% of total fixed pay. “Shareholder approval” means approval by either 66% of shareholders owning half the shares represented or, failing that, 75% of all shares represented.  The effective bonus cap can go up by up to 25%, if the pay is in the form of long-term deferred instruments (i.e., instruments deferred for a period of at least five years).
  
  But there is a lot more to the banker bonus cap than just the cap. There are, for example, rules on how much of the bonus must be comprised of equity compensation or certain capital instruments, how much must be deferred and for how long, clawbacks, mandatory deferrals or holdbacks for discretionary pension benefits and the collection of information for individuals who are paid €1,000,000 or more in any given fiscal year.
  
  
• Who will the banker bonus cap apply to?
  
  As to which institutions, the cap will apply to all credit institutions and investment firms in the EU.  The non-EU subsidiaries of institutions headquartered in the EU will also be caught, as will the EU subsidiaries of institutions headquartered outside the EU.
  
  For example, if a financial institution is headquartered in London, all of its relevant employees (including relevant employees located in New York or Hong Kong) will be affected, and, even if a financial institution is headquartered in New York or Hong Kong, its relevant employees working for an EU subsidiary will be affected.
  
  As to which employees at those institutions, the cap will not apply to all employees of a particular entity; rather, it will only affect employees whose professional activities have a material impact on the risk profile of the relevant financial institution. Examples of these employees are senior management; risk-takers; employees engaged in control functions; and employees whose total pay takes them into the same bracket as senior risk management and risk-takers.
  
  
• Which companies will be affected by the proposed say-on-pay requirements?
  
  The EU has announced a proposed mandatory EU-wide say-on-pay initiative. The U.K. is expected to implement a binding say-on-pay vote by October 2013, plus other related requirements. Another country that has received significant press coverage is Switzerland – its “Minder Initiative” introduces a binding say-on-pay vote, together with other executive compensation measures, which will come into force by March 2014. Germany and Spain have also announced say-on-pay initiatives, which will likely be binding.
  
  Our current understanding is that these developments will just affect the companies incorporated in those jurisdictions. In contrast to the CRD IV compensation restrictions, which will apply to non-EU financial institutions (at least partially), we do not have any reason to think for now that the say-on-pay initiatives will apply to, for example, U.S. or Hong Kong companies.
  
  
• How will binding say-on-pay work?
  
  In the U.K., the jurisdiction for which there is currently the most information, a binding shareholder vote will be held at least every three years on a company’s remuneration policy report, which is prospective in that it will set out the company’s future policy regarding the compensation (including “loss of office” payments) of directors, including executive directors. A company will continue to have an advisory shareholder vote each year on its remuneration implementation report, which is retrospective in that it will set out how the company’s compensation policy was implemented in the past fiscal year.

The D.C. Circuit has dismissed for lack of jurisdiction the case brought by the American Petroleum Institute and others against the SEC rules requiring certain companies to disclose payments made to foreign governments relating to the commercial development of oil, natural gas or minerals.  The case will now be decided in the U.S. District Court for the District of Columbia, where the petitioners had also filed suit "out of an abundance of caution.” 

The Commission had not disputed the Circuit Court’s right to hear the petition for review, but intervenor Oxfam America argued that the petitioners must first sue in district court.  Exchange Act Section 25 establishes the framework for initial appellate review of Commission actions.  Congress created original appellate jurisdiction over challenges to certain Commission rules in 1975, because it believed that the district court's factfinding function is rarely necessary in these cases. 

In this case, the D.C. Circuit determined that absent a statutory grant of original appellate jurisdiction under Section 25, a party must first file in district court.  While certain enumerated sections of the Exchange Act specifically give the appellate court jurisdiction, the Commission did not rely on any of those sections when it published the resource extraction rule.  In fact, the Court noted that Section 25 is limited to Exchange Act provisions directly relating to the operation or regulation of the national market system, a national clearing system or the Commission's oversight of the self-regulatory organizations.

In another case, the U.S. District Court for the Southern District of New York found that the 2010 amendment to Rule 14a-8(i)(8) did not change its original holding in Lucian Bebchuk against Electronic Arts, Inc.  In February 2008, the plaintiff submitted a shareholder proposal to the company to amend its bylaws and require management to allow shareholders to vote on all "qualified proposals."  Qualified proposals include all submissions made on behalf of any shareholders owing at least 5% of stock that are valid under state law and did not deal with ordinary business operations.  Before the SEC could respond to a no-action letter request from the company, plaintiff filed suit.

In November 2008, the district court held that the proposal was contrary to the proxy rules because it eliminated the discretion of the company and dismissed the complaint under Rule 14a-8(i)(3).  The court found that the plaintiff’s proposal contradicts the purpose of Rule 14a-8 given that different grounds are available for exclusion of shareholder proposals, which the plaintiff’s proposal would not recognize.

Plaintiff appealed and while appeal was pending, the SEC adopted the proxy access rules in 2010 and amended Rule 14a-8(i)(8).  The Second Circuit then remanded to the district court to determine the relevance of the proxy rule changes to this case.   

With over 50 S&P 500 meetings scheduled for this week, the proxy season begins in earnest.  Similar to last year, the Wells Fargo meeting on Tuesday appears to be one of the first targets of protestors. Reports indicate that while many proclaimed their grievances outside, the meeting was disrupted by dozens who had to be removed, in particular one individual who tried to make a citizen’s arrest of the CEO. The demonstrators complained about the bank’s consumer lending and mortgage practices. There was also some grumbling about the location of the meeting site being in Salt Lake City, after 15 years in San Francisco. Goldman Sachs is also holding its meeting in Salt Lake City this year. 

In Pittsburgh, a group of Quakers asked PNC Financial to cease providing financing for projects that use mountaintop removal to produce coal. News reports indicate that they heckled the CEO about a dozen times and tried to interrupt the meeting, which ended after a brief 20 minutes. US Bancorp shareholders gathered in Boise to protest the bank’s foreclosure practices and payday loans. 

This “week of action” for 99% Power is focused on Wells Fargo, Sallie Mae, WalMart and Bank of America with a full schedule of events, so more demonstrations may be planned.

Meanwhile, other high-profile meetings proceeded rather peaceably. The big news for the 850 attendees at Coca-Cola’s annual meeting was the surprise appearance of Warren Buffet, the company’s largest shareholder. At GE, a shareholder proposal seeking an independent chairman only received 25% in support. The proposal also failed at Wells Fargo. 

The NYSE has removed its proposed rule filing to the SEC to eliminate its separate voting standard for matters requiring shareholder approval from its website, which we had previously discussed here. 

Under Nasdaq, Rule 5635(e)(4) indicates that a “majority of the votes cast on the proposal must be voted in favor of the proposal” where Nasdaq requires shareholder approval. An FAQ indicates, however, that Nasdaq does not define the term “votes cast.” It expects companies to calculate the “votes cast” in accordance with its governing documents and any applicable state law.   

Perhaps owing to more controversy than expected, the SEC has filed a notice to solicit additional comments on Nasdaq's proposal to require that listed companies establish and maintain an internal audit function. The Commission had until April 22 to approve or disapprove the proposal, but has delayed that decision until June 6 in order to consider the 38 comments that were received and seek more comments.

The majority of the comment letters came from CFOs of Nasdaq-listed companies, who complained about the cost burden. Several sought an exemption based on market cap, noting that compliance with SOX already requires the maintenance of effective internal controls with oversight by independent auditors, making this proposal redundant. Many of these companies indicated that compliance with regulatory requirements currently constitutes a significant expense to their relatively modest revenue base, and that this additional requirement is particularly unnecessary for companies that do not have complex businesses. Some of the smaller reporting companies noted that this proposal would defeat the purpose of the exemption available from SOX 404(b) requirements. The biotechnology industry was heavily represented in the comments.

There was also criticism that the requirement to provide management and the audit committee with ongoing assessment of the company's risk management process and system of internal controls was particularly inflexible and likely to increase expenses. In addition, some commenters believe that the outside auditors should not play a role in budgetary and staffing discussions for internal audit functions. The Society of Corporate Secretaries and Governance Professionals recommended that the proposed rule apply only to financial reporting risk, and that Nasdaq increase the implementation period and include a cost-benefit analysis, particularly with respect to the impact on smaller companies.

The Institute of Internal Auditors, however, fully supports the proposal, and in fact suggested that Nasdaq require internal audit functions to follow globally recognized professional standards.

Following up on our earlier report, yet another group is determined to require public companies to disclose sustainability issues in SEC filings. The Sustainability Accounting Standards Board (SASB) held a conference recently to discuss its standard-setting process. While its name invokes an immediate similarity to FASB, SASB has no official designation, although its advisory council includes an impressive list of industry, sustainability and financial professionals affiliated with Deutsche Bank, ISS, J.P. Morgan, Goldman Sachs, Morgan Stanley, BlackRock, AllianceBernstein, CalPERS, Ernst & Young, PwC and McKinsey, among others.

After being informed by the SEC of its reluctance to consider a separate line item requirement for environmental, social and governance (ESG) disclosure because of differences among industry sectors, SASB has begun drafting, and plans to adopt by the second quarter of 2015, ESG disclosure standards for 88 different industries in 10 sectors: (i) health care; (ii) financials; (iii) technology & communications; (iv) non-renewable resources; (v) transportation; (vi) services; (vii) resource transformation; (viii) consumption; (ix) renewable resources & alternative energy; and (x) infrastructure. Once released, SASB will request that the SEC adopt these standards, with the goal of requiring this disclosure in MD&As for Form 10-Ks and Form 20-Fs. 

Conference panelists included Sandy Frucher, Vice Chairman of the NASDAQ OMX Group, and Bob Herz, FASB Chairman.  NASDAQ is also involved with similar attempts by the Ceres-led investor group working to effect listing standards. Mr. Frucher stressed that “nonfinancial [ESG disclosure] is essential for investors to make a decision” and that there is a need for a “uniform standard.”

SASB reportedly meets with the SEC quarterly, and is also working with the PCAOB to devise standards to develop external auditing of sustainability disclosure. Lest companies think that these efforts will not have any impact, companies may recall that the 2010 SEC interpretive guidance on climate change disclosure was largely driven by Ceres.

SASB invites interested companies to join their industry standards working groups, and has published a timeline of its plans for releasing exposure drafts by industry for public comment. The current financials industry working group represent companies with more than $1.3 trillion market cap, including Morgan Stanley, Bank of America and Citigroup, and investors with more than $5 trillion in assets under management. 

Companies seeking approval of equity compensation plans as required under NYSE rules have often struggled to understand, and describe in proxy statements, the application of the NYSE voting standard alongside the state law provisions, for determining approval of the plan. The NYSE has now proposed to eliminate its own separate voting standard.

Where the NYSE makes shareholder approval a prerequisite to the listing of any additional or new securities, Section 312.07 mandates that the proposal obtain a minimum vote of a majority of votes cast, provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal. This provision can be baffling, for example, if the treatment of abstentions under applicable state law differs from how abstentions are calculated under the NYSE voting standard. In some states, a “votes cast” standard would not include abstentions. In addition, the 50% requirement layers another level of complexity with respect to broker non-votes, which would be applied toward state law quorum obligations. 

The NYSE proposal to remove its own voting requirement, which will also affect other NYSE-required votes, including issuances of over 20% or more of a listed company’s outstanding common stock or voting power, recognizes that it is unnecessary and confusing to mandate two separate voting standards to any proposal subject to the NYSE rules, while applying only the state law requirement for all the other proposals. Nasdaq does not have a similar requirement. 

The NYSE has requested that the SEC approve the proposed rule change on an accelerated basis so that, in the case of companies holding shareholder votes on proposals currently subject to Section 312.07, such proposals would be subject only to the requirements of state law. 

Recent controversy surrounding Hewlett-Packard’s board elections have put the spotlight on referendums for directors, with the New York Times alone running three stories on the subject over two weeks. The first article complained about the difficulty of removing directors after HP’s board members all received majority support even in the face of several active and well-publicized “vote no” campaigns. The article blamed large shareholders, intimating that they tend to be mutual funds and asset management companies that may have inherent conflicts of interest, and criticized HP’s biggest shareholder for supporting management’s recommendation on directors 100% of the time from January 2009 to June 2012. 

Then, after the announcement that two HP directors are leaving the board and a third is stepping down as chairman, additional articles focused on other boards where directors did not actually receive majority support from shareholders, but continued to govern. Only a small number of directors receive less than majority support, .36% last year (or 61 directors out of over 17,000 up for election). Of those 61 directors, 51 remained on their boards, according to ISS. This time, the plurality voting system came under attack as “an electoral system unworthy of Soviet-era sham democracies.” 78% of S&P 500 companies have majority voting for uncontested board elections, while overall only 45% of the S&P 1500 have joined the movement. Prior efforts by the Council of Institutional Investors to provoke the Delaware legislature to amend its corporation laws were mentioned. Apparently, North Dakota is the only state that bars plurality voting. No major company is incorporated in that state.  

Several companies were highlighted in this article, but the most interesting may be Iris International in confronting the “what-if” scenario that is often considered by companies debating whether to adopt majority voting. After adopting a resignation policy coupled with plurality voting in January 2010, the entire board received more “withhold” than “for” votes at the May 2011 meeting when ISS recommended against board members for deciding earlier in the year to retain a poison pill without subjecting it to shareholder approval. Pursuant to their majority voting policy, all nine directors tendered their resignations. At the same time that they announced the meeting results, the board firmly rejected those resignations, attributing the outcome to ISS influence. Later that year, the company terminated its rights plan. The company has since been acquired. 

Finally, a DealBook article cites to a study that found that director turnover does not depend on company performance, as there was less than a percentage point difference between companies that were deemed to have performed well or poorly. The biggest driver causing new faces on boards is mandatory retirement age.

Directed by Ceres, the Investor Network on Climate Risk (INCR) has published a consultation paper (free registration required) with recommendations for integrating sustainability disclosure requirements into listing rules. INCR includes notable investors such as BlackRock and others traditionally associated with being active on corporate social issues, including Boston Common Asset Management and the AFL-CIO.

The group is concerned that the ability to factor sustainability issues into investment decisions is difficult due to what they perceive as inconsistent and insufficient corporate reporting. In addition, INCR members have heard from companies that have been reluctant to report on sustainability that they are not certain what specific information investors need and how it will be used. INCR members have been in discussions with NASDAQ OMX and several other stock exchanges, and the paper is in response to those exchanges urging INCR to develop more clarity and consensus on “a unified sustainability disclosure listing standard that could be adopted by all stock exchanges.” 

The three segments of a listing requirement being proposed for listed issuers globally include:

• Materiality assessment in annual financial filings where management is expected to discuss its approach to determining the company’s material environmental, social and governance (ESG) issues, with key components that include: (a) how the company determined its material ESG issues; (b) who was involved in that determination; (c) which ESG issues were determined to be material and why, including a discussion of risks and opportunities related to each issue and the connection to financial performance and business strategy; and finally (d) a periodic review of the assessment and reporting on the frequency of scheduled reviews.
• A Global Reporting Initiative (GRI) content index, with every company providing a hyperlink in its annual financial filings to such an index, which will inform investors about the availability and location of a company’s ESG data.
•  Corporate ESG disclosure about the following categories of issues, using a “comply or explain” approach: climate change; diversity; employee relations; environmental impact; government relations; human rights; product impact; and safety and supply chain.

The consultation paper notes that about 3,400 companies published a sustainability report as of 2011, and few companies discuss material ESG information in their financial filings. Bloomberg published corporate ESG data for over 5,000 companies in 2011, with more than 120 ESG indicators on display. 

The paper contains a number of questions seeking feedback. The initial comment, or consultation, period ends on May 1, 2013. INCR intends to host meetings to discuss the comments with other investors, and Nasdaq has committed to engage in discussions with other stock exchanges as well as the International Organization of Securities Commissions (IOSCO).

As companies prepare for annual meetings, they should consider in advance their preferred approach if the proponent or a designated representative does not attend the meeting to properly present the shareholder proposal that it submitted. 

Rule 14a-8(h)(3) permits a company to exclude, for two years, any shareholder proposals from a proponent who fails to appear and put forward the proposal at the annual meeting, unless the proponent can demonstrate good cause. As evident in a recent SEC staff decision disagreeing with Sprint's argument to exclude a proposal on this basis, any ambiguities are likely to be viewed in the proponent's favor.

At the 2012 annual meeting, Sprint's ballot included a shareholder proposal from the AFL-CIO and another from the Office of the New York Comptroller on behalf of several New York City pension funds. Several days prior to the meeting, the New York City pension funds informed the company that the same representative designated to present the AFL-CIO proposal would also be presenting the funds' proposal at the company's meeting. 

According to transcripts, after the AFL-CIO representative made a lengthy statement about the union's proposal, the Chairman then called upon him to present the New York City pension funds' proposal. The representative responded, "Well, actually I was only here to present the first one." The Chairman stated, "But you're tagged with this one too, buddy," after which the representative agreed that he was indeed "tagged with this one. I'll just stand here and introduce myself again and say that the AFL-CIO urges you to support this proposal." He did not name the pension funds' proposal, read the resolution or mention the pension funds. He later informed the company that he was surprised and unaware that he was responsible for presenting more than one proposal.

Recently, Sprint submitted a no-action letter to exclude another proposal that the New York City pension funds submitted to the company for the 2013 meeting, on the basis that no representative attended the 2012 meeting to present their 2012 proposal. In its response letter arguing that the 2012 proposal was properly presented, the pension funds used the transcript records to note that the Chairman had specifically called upon the AFL-CIO representative to present the pension funds' proposal, and the Chairman then reminded the representative of this when he indicated no awareness of the proposal. In addition, the pension funds pointed out that the company's Form 8-K announcing the 2012 meeting results reported the votes for the pension funds' proposal, without asserting that the proposal had not been properly introduced.

Companies may want to anticipate in their annual meeting scripts the possibility that the appropriate representative of a shareholder proposal may not be present at the annual meeting, and provide the chair of the meeting with explicit statements that could preserve their ability to make Rule 14a-8(h)(3) arguments in the future.

When the SEC began an investigation of whether a Facebook post by the Netflix CEO violated Regulation FD, companies became alarmed that it represented the regulator's views that social media should not be used to disclose important information to the market. As we explain in our memo, the SEC has recently issued a report that affirmed the availability of social media as an appropriate channel of dissemination, but only in accordance with specific principles that builds on its prior guidance from 2008. Joe Hall, a partner in our capital markets group, explains the key aspects of how companies can avail themselves of this benefit without tripping the regulatory requirements.

• What is most helpful about the new guidance that the SEC has given companies about Regulation FD compliance in the context of social media?
  
  The SEC has now said that the key to satisfying Regulation FD depends on whether the company has adequately informed investors, the market and the media that it will use social media to communicate information. This emphasis on advance notice takes us away from the prior focus on whether a company's website was already a recognized channel. Companies can now take concrete steps to take advantage of social media for this purpose.

• What's the first step a company should take if it decides that it wants social media to be a Regulation FD distribution source? 
  
  Companies need to decide which channels they want to use and be specific in identifying the precise location where material information will appear, such as the specific URL, Twitter handle or Facebook pages, rather than generic home pages. It can also be helpful to tell investors when you will provide information in some cases, such as an upcoming earnings release, as well as where.

• Once a company identifies the social media venues, how should they communicate that to investors?
  
  Companies should prepare a brief statement explaining what they plan to disclose, and where they plan to disclose it. This paragraph should be published regularly in annual and quarterly reports, as part of press releases (perhaps in "about the company") and on the home page of the corporate website. Changes should be publicized well in advance. 

• Given that many companies may be adding to the number of different places that investors are expected to find information, can "push" technology help alleviate the possible burden to investors in terms of keeping track?
  
  It would be ideal for companies to have mechanisms available for investors to receive alerts when there is new information, such as the ability to subscribe to RSS or other feeds. Companies should make clear what feeds are available and how to subscribe, and give sufficient time to investors to do so before using the particular channel.

• What are your thoughts on whether companies will start using social media to comply with Regulation FD?
  
  We expect that practice will continue to vary on whether companies will use social media this way and for what types of information. An important point to keep in mind is that once a company has announced to the market that it will be using, for example, the CEO's Facebook page to distribute important information, the company needs to use it the way it described. Sporadic or inconsistent use may prevent the development of the kind of market following that the SEC is clearly looking for.

Glass Lewis is often criticized for its lack of transparency, which is wanting even by the standards of proxy advisory firms. It does not provide companies with a free copy of its own voting report, which can lead companies to be completely unaware of Glass Lewis negative recommendations and confused about the cause of a downturn in votes, never mind giving draft copies in advance to the S&P 500 companies like their rival ISS. It only makes available a brief version of its policies that is so condensed and vague in parts that it is difficult to determine with any certainty exactly when, for example, the proxy adviser will recommend against a director’s election. 

The Glass Lewis blog, however, can be a source of governance information and even the barest of insight on the firm's perspectives. Examples of Proxy Talk, where a company's representatives explain its positions on proxy voting items for annual meetings and proxy contests, is now available for those issuers who are considering whether this would be a useful means of shareholder engagement. "Proxy Season Insider" highlights the key issues for major upcoming annual meetings, and also gives a sense of where Glass Lewis stands, such as “we believe careful consideration should be given to Kforce’s shareholder outreach activity during the past year and the program modifications intended to reign in pay levels in future years.”

As these meeting summaries and perspectives are public, unlike many other proxy commentary which are available only to subscribers of the information, companies should also be aware of any Glass Lewis abstract on their meetings that may be picked up by other media. 

Another useful resource for tracking the proxy season as it gets underway is the Annual Meeting Calendar for S&P 500 companies run by Bloomberg.